| | PAGE | | | | | | | | PART I | | FINANCIAL INFORMATION | | | | | | | | | Item 1. | | Condensed Consolidated Financial Statements (Unaudited):
| | | | | | | | | | | Condensed Consolidated Balance Sheets at NovemberAugust 3, 2018,2019, February 3,2, 2019 and August 4, 2018 and October 28, 2017
| | | 3 | | | | | | | | Condensed Consolidated Statements of Operations for the 13 and 39 weeks26 Weeks Ended November August 3, 20182019 and October 28, 2017August 4, 2018
| | | 4 | | | | | | | | Condensed Consolidated Statements of Comprehensive Loss(Loss) Income for the 13 and 39 weeks26 Weeks Ended NovemberAugust 3, 20182019 and October 28, 2017August 4, 2018
| | | 5 | | | | | | | Consolidated Statements of Shareholders’ Equity for the 13 and 26 Weeks Ended August 3, 2019 and August 4, 2018 | | 6 | | | | | | Condensed Consolidated Statements of Cash Flows for the 39 weeks26 Weeks Ended NovemberAugust 3, 20182019 and October 28, 2017August 4, 2018
| | | 6 | 7 | | | | | | | Notes to Condensed Consolidated Financial Statements (Unaudited) | | | 7 | 8 | | | | | Item 2. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 15 | 18 | | | | | Item 4. | | Controls and Procedures | | | 21 | 26 | | | | | PART II | | OTHER INFORMATION | | | | | | | | | Item 1. | | Legal Proceedings | | | 21 | 27 | | | | | Item 1A. | | Risk Factors | | | 21 | 27 | | | | | Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds | | | 22 | 27 | | | | | Item 3. | | Defaults upon Senior Securities | | | 22 | 27 | | | | | Item 4. | | Mine Safety Disclosures | | | 22 | | | | 28 | Item 5.
| | Other Information | | | 22 | | | | | Item 6. | | Exhibits | | | 22 | | | 29 |
| | | SIGNATURES | | | 23 | 30 |
PART I – FINANCIAL INFORMATION Item 1. Consolidated Financial Statements 2
Stein Mart, Inc. Condensed Consolidated Balance Sheets
(Unaudited) (In thousands, except for share and per share data) | | | November 3, 2018 | | As Adjusted February 3, 2018 | | As Adjusted October 28, 2017 | | | August 3, 2019 | | | February 2, 2019 | | | August 4, 2018 | | ASSETS | | | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 13,884 | | | $ | 10,400 | | | $ | 13,230 | | | $ | 9,481 | | | $ | 9,049 | | | $ | 10,030 | | Inventories | | | 305,010 | | | 270,237 | | | 311,255 | | | | 238,433 | | | | 255,884 | | | | 240,813 | | Prepaid expenses and other current assets | | | 35,638 | | | 26,620 | | | 33,265 | | | | 30,817 | | | | 28,326 | | | | 34,215 | | | | | | | | Total current assets | | | 354,532 | | | 307,257 | | | 357,750 | | | | 278,731 | | | | 293,259 | | | | 285,058 | | Property and equipment, net of accumulated depreciation and amortization of $250,418, $231,997 and $236,623, respectively | | | 133,094 | | | 151,128 | | | 159,006 | | | Property and equipment, net of accumulated depreciation and amortization of $263,109, $251,793 and $243,500, respectively | | | | 110,344 | | | | 119,740 | | | | 134,930 | | Operating lease assets | | | | 362,244 | | | | - | | | | - | | Other assets | | | 24,594 | | | 24,973 | | | 30,192 | | | | 23,910 | | | | 24,108 | | | | 24,970 | | | | | | | | Total assets | | $ | 512,220 | | | $ | 483,358 | | | $ | 546,948 | | | $ | 775,229 | | | $ | 437,107 | | | $ | 444,958 | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | | | Accounts payable | | $ | 122,019 | | | $ | 119,388 | | | $ | 179,666 | | | $ | 87,301 | | | $ | 89,646 | | | $ | 66,272 | | Current portion of long-term debt | | | - | | | 13,738 | | | 3,333 | | | Current portion of debt | | | | - | | | | - | | | | 125,253 | | Current portion of operating lease liabilities | | | | 80,300 | | | | - | | | | - | | Accrued expenses and other current liabilities | | | 82,043 | | | 78,453 | | | 80,458 | | | | 75,861 | | | | 77,650 | | | | 73,741 | | | | | | | | Total current liabilities | | | 204,062 | | | 211,579 | | | 263,457 | | | | 243,462 | | | | 167,296 | | | | 265,266 | | Long-term debt, net of current portion | | | 190,657 | | | 142,387 | | | 147,472 | | | | 137,762 | | | | 153,253 | | | | 49,286 | | Deferred rent | | | 40,558 | | | 40,860 | | | 41,592 | | | | - | | | | 39,708 | | | | 40,814 | | Noncurrent operating lease liabilities | | | | 319,150 | | | | - | | | | - | | Other liabilities | | | 35,982 | | | 40,214 | | | 47,219 | | | | 31,138 | | | | 33,897 | | | | 36,881 | | | | | | | | Total liabilities | | | 471,259 | | | 435,040 | | | 499,740 | | | | 731,512 | | | | 394,154 | | | | 392,247 | | | | | | | | COMMITMENTS AND CONTINGENCIES | | | | | | | | COMMITMENTS AND CONTINGENCIES (Note 9) | | | | | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | | | | | | | | | | Preferred stock - $0.01 par value, 1,000,000 shares authorized; no shares issued or outstanding | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock - $0.01 par value; 100,000,000 shares authorized; 47,898,068, 47,978,275 and 47,867,630 shares issued and outstanding, respectively | | | 479 | | | 480 | | | 479 | | | Common stock - $0.01 par value; 100,000,000 shares authorized; 48,225,585, 47,874,286 and 47,937,786 shares issued and outstanding, respectively | | | | 482 | | | | 479 | | | | 479 | | Additionalpaid-in capital | | | 59,009 | | | 56,002 | | | 54,528 | | | | 61,208 | | | | 60,172 | | | | 57,888 | | Retained deficit | | | (18,295 | ) | | (7,918 | ) | | (7,521) | | | | (18,194 | ) | | | (17,951 | ) | | | (5,419 | ) | Accumulated other comprehensive loss | | | (232 | ) | | (246 | ) | | (278) | | | | | | | | | Accumulated other comprehensive income (loss) | | | | 221 | | | | 253 | | | | (237 | ) | Total shareholders’ equity | | $ | 40,961 | | | $ | 48,318 | | | $ | 47,208 | | | | 43,717 | | | | 42,953 | | | | 52,711 | | | | | | | | Total liabilities and shareholders’ equity | | $ | 512,220 | | | $ | 483,358 | | | $ | 546,948 | | | $ | 775,229 | | | $ | 437,107 | | | $ | 444,958 | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Stein Mart, Inc. Condensed Consolidated Statements of Operations
(Unaudited) (In thousands, except per share data) | | | 13 Weeks Ended November 3, 2018 | | As Adjusted 13 Weeks Ended October 28, 2017 | | 39 Weeks Ended November 3, 2018 | | As Adjusted 39 Weeks Ended October 28, 2017 | | | | | | | | | 13 Weeks Ended August 3, 2019 | | | 13 Weeks Ended August 4, 2018 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Net sales | | $ | 279,127 | | | $ | 285,395 | | | $ | 916,751 | | | $ | 933,766 | | | $ | 292,369 | | | $ | 310,859 | | | $ | 606,526 | | | $ | 637,464 | | Other revenue | | | 3,734 | | | 3,516 | | | 11,525 | | | 10,728 | | | | 3,963 | | | | 3,569 | | | | 9,188 | | | | 7,951 | | | | | | | | Total revenue | | | 282,861 | | | 288,911 | | | 928,276 | | | 944,494 | | | | 296,332 | | | | 314,428 | | | | 615,714 | | | | 645,415 | | Cost of merchandise sold | | | 209,286 | | | 217,126 | | | 671,427 | | | 705,273 | | | | 217,703 | | | | 231,519 | | | | 444,401 | | | | 462,140 | | Selling, general and administrative expenses | | | 86,948 | | | 95,674 | | | 258,584 | | | 274,581 | | | | 78,470 | | | | 80,936 | | | | 164,606 | | | | 171,445 | | | | | | | | Operating loss | | | (13,373 | ) | | (23,889 | ) | | (1,735 | ) | | (35,360) | | | Operating income | | | | 159 | | | | 1,973 | | | | 6,707 | | | | 11,830 | | Interest expense, net | | | 3,078 | | | 1,156 | | | 8,406 | | | 3,437 | | | | 2,192 | | | | 2,865 | | | | 4,718 | | | | 5,328 | | | | | | | | Loss income before income taxes | | | (16,451 | ) | | (25,045 | ) | | (10,141 | ) | | (38,797) | | | Income tax expense (benefit) | | | 171 | | | (10,429 | ) | | 291 | | | (14,888) | | | | | | | | | Net loss | | $ | (16,622 | ) | | $ | (14,616 | ) | | $ | (10,432 | ) | | $ | (23,909) | | | | | | | | | Net loss per common share: | | | | | | | | | | (Loss) income before income taxes | | | | (2,033 | ) | | | (892 | ) | | | 1,989 | | | | 6,502 | | Income tax expense | | | | 52 | | | | 60 | | | | 105 | | | | 120 | | Net (loss) income | | | $ | (2,085 | ) | | $ | (952 | ) | | $ | 1,884 | | | $ | 6,382 | | Net (loss) earnings per common share: | | | | | | | | | | | | | | | | | | Basic | | $ | (0.36) | | | $ | (0.31) | | | $ | (0.22) | | | $ | (0.52) | | | $ | (0.04 | ) | | $ | (0.02 | ) | | $ | 0.04 | | | $ | 0.14 | | | | | | | | Diluted | | $ | (0.36) | | | $ | (0.31) | | | $ | (0.22) | | | $ | (0.52) | | | $ | (0.04 | ) | | $ | (0.02 | ) | | $ | 0.04 | | | $ | 0.14 | | | | | | | | Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 46,743 | | | 46,447 | | | 46,674 | | | 46,292 | | | | 47,406 | | | | 46,669 | | | | 47,258 | | | | 46,639 | | | | | | | | Diluted | | | 46,743 | | | 46,447 | | | 46,674 | | | 46,292 | | | | 47,406 | | | | 46,669 | | | | 47,581 | | | | 47,139 | | | | | | | | Dividends declared per common share | | $ | - | | | $ | - | | | $ | - | | | $ | 0.075 | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Stein Mart, Inc. Condensed Consolidated Statements of Comprehensive Loss(Loss) Income
(Unaudited) (In thousands) | | | | | | | | | | | | | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | | | | | Net loss | | $ | (16,622) | | | $ | (14,616) | | | $ | (10,432) | | | $ | (23,909) | | Other comprehensive income, net of tax: | | | | | | | | | | | | | | | | | Amounts reclassified from accumulated other comprehensive loss | | | 5 | | | | 9 | | | | 14 | | | | 26 | | | | | | | Comprehensive loss | | $ | (16,617) | | | $ | (14,607) | | | $ | (10,418) | | | $ | (23,883) | | | | | | |
| | 13 Weeks Ended August 3, 2019 | | | 13 Weeks Ended August 4, 2018 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Net (loss) income | | $ | (2,085 | ) | | $ | (952 | ) | | $ | 1,884 | | | $ | 6,382 | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | Amounts reclassified from accumulated other comprehensive income (loss) | | | (16 | ) | | | 5 | | | | (32 | ) | | | 9 | | Comprehensive (loss) income | | $ | (2,101 | ) | | $ | (947 | ) | | $ | 1,852 | | | $ | 6,391 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Stein Mart, Inc. Condensed Consolidated Statements of Cash FlowsShareholders’ Equity
(Unaudited) (In thousands) | | | | | | | | | | | 39 Weeks Ended November 3, 2018 | | | As Adjusted 39 Weeks Ended October 28, 2017 | | | | | | | Cash flows from operating activities: | | | | | | | | | Net loss | | $ | (10,432) | | | $ | (23,909) | | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | | Depreciation and amortization | | | 24,513 | | | | 24,254 | | Share-based compensation | | | 2,973 | | | | 4,194 | | Store closing (benefit) charge | | | (180) | | | | 97 | | Impairment of property and other assets | | | 491 | | | | 640 | | Loss on disposal of property and equipment | | | 139 | | | | 287 | | Deferred income taxes | | | - | | | | 1,900 | | Changes in assets and liabilities: | | | | | | | | | Inventories | | | (34,773) | | | | (20,145) | | Prepaid expenses and other current assets | | | (9,018) | | | | (207) | | Other assets | | | (1,882) | | | | (820) | | Accounts payable | | | 2,559 | | | | 65,298 | | Accrued expenses and other current liabilities | | | 3,977 | | | | 3,781 | | Other liabilities | | | (3,928) | | | | (2,566) | | | | | | | Net cash (used in) provided by operating activities | | | (25,561) | | | | 52,804 | | | | | | | Cash flows from investing activities: | | | | | | | | | Net acquisition of property and equipment | | | (7,379) | | | | (17,168) | | Proceeds from cancelled corporate owned life insurance policies | | | 2,514 | | | | 1,504 | | Proceeds from insurance claims | | | 296 | | | | - | | | | | | | Net cash used in investing activities | | | (4,569) | | | | (15,664) | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from borrowings | | | 1,033,415 | | | | 290,169 | | Repayments of debt | | | (997,990) | | | | (321,187) | | Debt issuance costs | | | (1,146) | | | | - | | Cash dividends paid | | | (147) | | | | (3,597) | | Capital lease payments | | | (551) | | | | (1) | | Proceeds from exercise of stock options and other | | | 90 | | | | 328 | | Repurchase of common stock | | | (57) | | | | (226) | | | | | | | Net cash provided by (used in) financing activities | | | 33,614 | | | | (34,514) | | | | | | | Net increase in cash and cash equivalents | | | 3,484 | | | | 2,626 | | Cash and cash equivalents at beginning of year | | | 10,400 | | | | 10,604 | | | | | | | Cash and cash equivalents at end of period | | $ | 13,884 | | | $ | 13,230 | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | | | Income taxes received | | $ | (332) | | | $ | (18,103) | | Interest paid | | | 7,758 | | | | 3,340 | | Accruals and accounts payable for capital expenditures | | | 324 | | | | 2,479 | |
| | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | Additional | | | | | | | Other | | | Total | | | | Common Stock | | | Paid-in | | | Retained | | | Comprehensive | | | Shareholders’ | | | | Shares | | | Amount | | | Capital | | | Deficit | | | Income (Loss) | | | Equity | | Balance on February 2, 2019 | | | 47,874 | | | $ | 479 | | | $ | 60,172 | | | $ | (17,951 | ) | | $ | 253 | | | $ | 42,953 | | Net income | | | - | | | | - | | | | - | | | | 3,969 | | | | - | | | | 3,969 | | Other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | - | | | | (16 | ) | | | (16 | ) | Reacquired shares, net | | | (87 | ) | | | (1 | ) | | | (102 | ) | | | - | | | | - | | | | (103 | ) | Issuance of restricted stock, net | | | 278 | | | | 3 | | | | (3 | ) | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | - | | | | 730 | | | | - | | | | - | | | | 730 | | Dividends, net of forfeitures | | | - | | | | - | | | | - | | | | 5 | | | | - | | | | 5 | | Adjustment for adoption of accounting standard | | | - | | | | - | | | | - | | | | (2,133 | ) | | | - | | | | (2,133 | ) | Balance on May 4, 2019 | | | 48,065 | | | | 481 | | | | 60,797 | | | | (16,110 | ) | | | 237 | | | | 45,405 | | Net loss | | | - | | | | - | | | | - | | | | (2,085 | ) | | | - | | | | (2,085 | ) | Other comprehensive loss, net of tax | | | - | | | | - | | | | - | | | | - | | | | (16 | ) | | | (16 | ) | Common shares issued under employee stock purchase plan | | | 147 | | | | 1 | | | | 106 | | | | - | | | | - | | | | 107 | | Reacquired shares, net | | | (12 | ) | | | - | | | | (11 | ) | | | - | | | | - | | | | (11 | ) | Issuance of restricted stock, net | | | 26 | | | | - | | | | - | | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | - | | | | 316 | | | | - | | | | - | | | | 316 | | Dividends, net of forfeitures | | | - | | | | - | | | | - | | | | 1 | | | | - | | | | 1 | | Balance on August 3, 2019 | | | 48,226 | | | $ | 482 | | | $ | 61,208 | | | $ | (18,194 | ) | | $ | 221 | | | $ | 43,717 | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance on February 3, 2018 | | | 47,978 | | | $ | 480 | | | $ | 56,002 | | | $ | (11,843 | ) | | $ | (246 | ) | | $ | 44,393 | | Net income | | | - | | | | - | | | | - | | | | 7,334 | | | | - | | | | 7,334 | | Other comprehensive income, net of tax | | | - | | | | - | | | | - | | | | - | | | | 4 | | | | 4 | | Reacquired shares | | | (45 | ) | | | (1 | ) | | | (36 | ) | | | - | | | | - | | | | (37 | ) | Issuance of restricted stock, net | | | (23 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | - | | | | 995 | | | | - | | | | - | | | | 995 | | Dividends, net of forfeitures | | | - | | | | - | | | | - | | | | 8 | | | | - | | | | 8 | | Balance on May 5, 2018 | | | 47,910 | | | | 479 | | | | 56,961 | | | | (4,501 | ) | | | (242 | ) | | | 52,697 | | Net loss | | | - | | | | - | | | | - | | | | (952 | ) | | | - | | | | (952 | ) | Other comprehensive income, net of tax | | | - | | | | - | | | | - | | | | - | | | | 5 | | | | 5 | | Common shares issued under employee stock purchase plan | | | 92 | | | | 1 | | | | 89 | | | | - | | | | - | | | | 90 | | Reacquired shares | | | (3 | ) | | | - | | | | (10 | ) | | | - | | | | - | | | | (10 | ) | Issuance of restricted stock, net | | | (61 | ) | | | (1 | ) | | | 1 | | | | - | | | | - | | | | - | | Share-based compensation | | | - | | | | - | | | | 847 | | | | - | | | | - | | | | 847 | | Dividends, net of forfeitures | | | - | | | | - | | | | - | | | | 34 | | | | - | | | | 34 | | Balance on August 4, 2018 | | | 47,938 | | | $ | 479 | | | $ | 57,888 | | | $ | (5,419 | ) | | $ | (237 | ) | | $ | 52,711 | |
The accompanying notes are an integral part of these condensedconsolidated financial statements.
Stein Mart, Inc. Consolidated Statements of Cash Flows (Unaudited) (In thousands) | | 26 Weeks Ended | | | 26 Weeks Ended | | | | August 3, 2019 | | | August 4, 2018 | | Cash flows from operating activities: | | | | | | | | | Net income | | $ | 1,884 | | | $ | 6,382 | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | Depreciation and amortization | | | 14,123 | | | | 15,824 | | Share-based compensation | | | 1,046 | | | | 1,842 | | Store closing benefits | | | (101 | ) | | | (92 | ) | Impairment of property and other assets | | | 11 | | | | 689 | | Loss on disposal of property and equipment | | | 43 | | | | 102 | | Changes in assets and liabilities: | | | | | | | | | Inventories | | | 17,451 | | | | 29,424 | | Prepaid expenses and other current assets | | | (3,290 | ) | | | (7,595 | ) | Other assets | | | (456 | ) | | | (2,329 | ) | Accounts payable | | | (2,400 | ) | | | (53,528 | ) | Accrued expenses and other current liabilities | | | (2,196 | ) | | | (4,619 | ) | Operating lease assets and liabilities, net | | | (3,092 | ) | | | — | | Other liabilities | | | (3,189 | ) | | | (2,984 | ) | Net cash provided by (used in) operating activities | | | 19,834 | | | | (16,884 | ) | Cash flows from investing activities: | | | | | | | | | Net acquisition of property and equipment | | | (3,458 | ) | | | (4,082 | ) | Proceeds from canceled corporate owned life insurance policies | | | - | | | | 2,514 | | Proceeds from insurance claims | | | 82 | | | | 296 | | Net cash used in investing activities | | | (3,376 | ) | | | (1,272 | ) | Cash flows from financing activities: | | | | | | | | | Proceeds from borrowings | | | 185,288 | | | | 781,051 | | Repayments of debt | | | (200,871 | ) | | | (761,923 | ) | Debt issuance costs | | | - | | | | (896 | ) | Cash dividends paid | | | (70 | ) | | | (122 | ) | Capital lease payments | | | (366 | ) | | | (367 | ) | Proceeds from exercise of stock options | | | 107 | | | | 90 | | Repurchase of common stock | | | (114 | ) | | | (47 | ) | Net cash (used in) provided by financing activities | | | (16,026 | ) | | | 17,786 | | Net increase (decrease) in cash and cash equivalents | | | 432 | | | | (370 | ) | Cash and cash equivalents at beginning of year | | | 9,049 | | | | 10,400 | | Cash and cash equivalents at end of period | | $ | 9,481 | | | $ | 10,030 | | Supplemental disclosures of cash flow information: | | | | | | | | | Income taxes paid (received) | | $ | 82 | | | $ | (295 | ) | Interest paid | | | 4,559 | | | | 4,976 | | Accruals and accounts payable for capital expenditures | | | 569 | | | | 854 | |
The accompanying notes are an integral part of these consolidated financial statements. 67
Stein Mart, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual audited financial statements. In our opinion, all adjustments (consisting primarily of normal and recurring adjustments) considered necessary for a fair presentation have been included. Due to the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. These Condensed Consolidated Financial Statements (Unaudited) should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form10-K for the year ended February 3, 2018,2, 2019, filed with the Securities and Exchange Commission (“SEC”) on May 4, 2018.March 28, 2019. As used herein, the terms “we,” “our,” “us” and “Stein Mart” refer to Stein Mart, Inc. and its wholly-owned subsidiaries. Revenue RecognitionRecently Adopted Accounting Standards
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU")No. 2014-09,2016-02, LeasesRevenue from Contracts with Customers (Topic 606) (“ASUNo. 2014-09”). This update provides a single, comprehensive model for entities, to use in accounting for revenue arising from contracts with customersincrease transparency and supersedes most current revenue recognition guidance, including industry-specific guidance. ASUNo. 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflectscomparability among organizations by recognizing lease assets and liabilities on the consideration to which the entity expects to be entitled in exchange for those goods or services.balance sheet and disclosing key information about leasing arrangements. We adopted this ASU and the related amendments as of February 3, 2019. At transition, we elected the package of practical expedients, which allowed us to carry forward the historical lease classification, to not reassess prior conclusions related to initial direct costs, and to not reassess whether any expired or existing contracts are or contain leases. We did not elect the use of hindsight to determine the term of our leases at transition. We also elected the practical expedient to not separate non-lease components from the lease components to which they relate and instead to combine them and account for them as a single lease component. We made an accounting policy election not to capitalize leases with an initial term of twelve months or less. Adoption of the new standard had a significant effect on our Consolidated Balance Sheets due to the addition of operating lease assets of $382.5 million and operating lease liabilities of $422.7 million, as of February 4, 2018, for all revenue contracts with our customers using the full retrospective approach and3, 2019. We also recognized a cumulative effect adjustment that increased retained earnings asdeficit by $2.1 million for transition impairments related to previously impaired leased locations. The standard did not have a significant effect on our results of January 28, 2017, by less than $0.1 million as we now recognize Ecommerce sales when orders are delivered tooperations or cash flows. Consistent with the carrier and no longer reserve for ordersoptional effective date transition method, the financial information in transit. Priorthe Consolidated Balance Sheets prior to the adoption of ASUNo. 2014-09, our sales return liability was recorded as a net liability on the Condensed Consolidated Balance Sheets (Unaudited). We now recognize a gross return liability for the sales amounts expected to be refunded to customersthis new lease accounting guidance has not been adjusted and a corresponding asset for the recoverable cost of the merchandise expected to be returned by customers in other current assets and other current liabilities on the Condensed Consolidated Balance Sheets (Unaudited). Other changes relate primarilyis therefore not comparable to the presentationcurrent period presented. See Note 8 “Leases” for additional information. Recent Accounting Standards Not Yet Adopted In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update provides additional guidance to ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which was issued in April 2015. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning on or after December 15, 2019, and interim periods within those annual periods with early adoption permitted in any interim period for which financial statements have not yet been issued. We are in the process of revenue. Revenue associated withevaluating the effect that this ASU will have on our credit card programfinancial condition, results of operations and breakage revenue has been retrospectively reclassifiedcash flows. 8
Stein Mart, Inc. Notes to presentConsolidated Financial Statements - Continued 2. Revision of Previously Issued Financial Statements During the revenuequarter ended May 4, 2019, we identified a financial statement misstatement related to previous impairment calculations, which resulted in other revenues, rather thanan overstatement of property and equipment, net, and an understatement of retained deficit of $4.1 million and $3.7 million as of February 2, 2019 and August 4, 2018, respectively. The error also resulted in an offset tounderstatement of selling, general and administrative expenses of $0.2 million and $0.2 million for the year ended February 2, 2019 and 26 weeks ended August 4, 2018, respectively. Based on an analysis of quantitative and qualitative factors, we determined that the Condensederror was not material to our prior interim and annual financial statements. To correct this error, we revised the accompanying Consolidated StatementsBalance Sheets as of Income (Unaudited)February 2, 2019 and August 4, 2018 and the Statement of Operations for all periods presented.the 26 weeks ended August 4, 2018. 3. Revenue Recognition Revenue from sales of our merchandise is recognized at the time of sale net of any returns, discountsand percentage-off coupons. Our Ecommerce operation records revenue as orders are fulfilled and provided to a carrier for delivery. Shipping and handling fees charged to customers are also included in total net sales with corresponding costs recorded as cost of goods sold as they are considered a fulfillment cost. Future merchandise returns are estimated based on historical experience. Sales tax collected from customers is not recognized as revenue and is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets (Unaudited) until paid. Our shoe department and vintage luxury handbag department inventories are each owned by separate single suppliers under supply agreements. Our commissions from the sales in these areas are included in net sales on the Condensed Consolidated Statements of Operations (Unaudited).Operations. We offer gift and merchandise return cards to our customers. Some cards are electronic and none have expiration dates. At the time gift cards are sold, the issuance is recorded as a liability to customers, and no revenue is recognized. At the time merchandise return cards are issued for returned merchandise, the sale is reversed and a liability to customers is recorded. These card liabilities are reduced and sales revenue is recognized when they are redeemed for merchandise. Card liabilities are included in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets (Unaudited).Sheets. Our gift and merchandise return cards may not ultimately be redeemed either in full or partially. We account for this “breakage” of unused amounts as revenue in proportion to the pattern of rights exercised by the customer. With the adoption of ASUNo. 2014-09, breakageBreakage revenue is recorded within other revenue in the Condensed Consolidated Statements of Operations (Unaudited).Operations. During the 13 weeks ended NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, we recognized $0.2 million and $0.3 million, respectively, of breakage revenue on unused gift and merchandise return cards. During the 3926 weeks ended NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, we recognized $1.1$0.8 million and $0.8$0.9 million, respectively, of breakage revenue on unused gift and merchandise return cards. Stein Mart Credit CardCards We offerco-branded and private label credit cards under the Stein Mart brand. These cards are issued by Synchrony Bank (“Synchrony”) in accordance with our Amended and Restated Co-Brand and Private Label Credit Card Consumer Program Agreement (the “Agreement”). Synchrony extends credit directly to card holders, provides all servicing for the credit card accounts and bears all risk of credit and fraud losses. We receive royalty revenue from Synchrony based on card usage in our stores and at other retailers for the Stein Mart Mastercard. We also receive revenues for new accounts and gain share based on the profitability of the overall program. Credit card revenue is recorded within 7
Stein Mart, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
other revenue in the Condensed Consolidated Statements of Operations (Unaudited).Operations. These revenues are recorded as they are earned based on the occurrence of the various program activities and represent the majority of other revenue. Subsequent to quarter-end on August 21, 2019, we entered into an amendment to our Agreement with Synchrony whereby Synchrony waived its rights to require us to post cash reserves to cure our failure to satisfy one or more of the quarterly financial covenants specified in the Agreement for periods through October 31, 2020 (the “Exemption Period”). As consideration for Synchrony’s entry into this amendment, we agreed to reduce the amount of fees paid to us by Synchrony under the Agreement from September 1, 2019 through the end of the Exemption Period. Once a card is activated, the cardCard holders are eligible to participate in the credit card rewards program, which provides for an incentive to card holders in the form of reward points for which certificates are issued in $10 increments, which is equivalent to 1,000 points. Points are valued at the stand-alone selling price of the certificates issued.certificates. We defer a portion of our revenue for loyalty points earned by customers using theco-branded and private label cards and recognize the revenue as the certificates earned are used to purchase merchandise by our customers. This revenue is recorded within other revenue in the Condensed Consolidated Statements of Operations (Unaudited). Stein Mart card holders also receive special promotional offers and advance notice ofin-store sales events.Operations.
Adjustments to Previously Reported Financial Statements9
The following tables set forth the adjustments made to our financial statements for the adoption of ASUNo. 2014-09,Revenue from Contracts with Customers (in thousands):
Condensed Consolidated Balance Sheets
| | | | | | | | | | | | | | | February 3, 2018 | | | | As Reported | | | Adjustment | | | As Adjusted | | Prepaid expenses and other current assets | | $ | 24,194 | | | $ | 2,426 | | | $ | 26,620 | | Accrued expenses and other current liabilities | | | 76,058 | | | | 2,395 | | | | 78,453 | | Retained deficit | | | (7,949 | ) | | | 31 | | | | (7,918 | ) | | | | | October 28, 2017 | | | | As Reported | | | Adjustment | | | As Adjusted | | Prepaid expenses and other current assets | | $ | 31,371 | | | $ | 1,894 | | | $ | 33,265 | | Accrued expenses and other current liabilities | | | 78,595 | | | | 1,863 | | | | 80,458 | | Retained deficit | | | (7,552 | ) | | | 31 | | | | (7,521 | ) | | | | | Condensed Consolidated Statements of Operations | | | | | | | | | | | | | | | | | 13 Weeks Ended October 28, 2017 | | | | As Reported | | | Adjustment | | | As Adjusted | | Other revenue | | $ | - | | | $ | 3,516 | | | $ | 3,516 | | Selling, general and administrative expenses | | | 92,158 | | | | 3,516 | | | | 95,674 | | | | | | 39 Weeks Ended October 28, 2017 | | | | As Reported | | | Adjustment | | | As Adjusted | | Other revenue | | $ | - | | | $ | 10,728 | | | $ | 10,728 | | Selling, general and administrative expenses | | | 263,853 | | | | 10,728 | | | | 274,581 | | | | | | Condensed Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | 39 Weeks Ended October 28, 2017 | | | | As Reported | | | Adjustment | | | As Adjusted | | Prepaid expenses and other current assets | | $ | (1,122 | ) | | $ | 915 | | | $ | (207 | ) | Accrued expenses and other current liabilities | | | 4,696 | | | | (915 | ) | | | 3,781 | |
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Stein Mart, Inc. Notes to Condensed Consolidated Financial Statements - Continued (Unaudited)
Certificates may not ultimately be redeemed either in full or partially. We account for this “breakage” of unused amounts as revenue in proportion to the pattern of rights exercised by the customer. Breakage revenue is recorded within other revenue in the Consolidated Statements of Operations. During the 13 weeks ended August 3, 2019 and August 4, 2018, we recognized $1.9 million and $0.9 million, respectively, of breakage revenue on unused credit card reward certificates and points. During the 26 weeks ended August 3, 2019 and August 4, 2018, we recognized $3.8 million and $2.4 million, respectively, of breakage revenue on unused credit card reward certificates and points. Revenue The following table sets forth our revenue by type of contract (in thousands): | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | 13 Weeks Ended August 3, 2019 | | | 13 Weeks Ended August 4, 2018 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Store sales (1) | | $ | 261,138 | | | $ | 271,836 | | | $ | 860,143 | | | $ | 891,792 | | | | $ | 273,025 | | | $ | 292,014 | | | | $ | 566,314 | | | $ | 598,845 | | Ecommerce sales (1) | | | 11,897 | | | | 8,172 | | | | 37,728 | | | | 24,663 | | | | | 13,462 | | | | 13,017 | | | | | 27,206 | | | | 25,831 | | Licensed department commissions (2) | | | 6,092 | | | | 5,387 | | | | 18,880 | | | | 17,311 | | | Licensee commissions (2) | | | | | 5,882 | | | | 5,828 | | | | | 13,006 | | | | 12,788 | | Net sales | | $ | 279,127 | | | $ | 285,395 | | | $ | 916,751 | | | $ | 933,766 | | | | $ | 292,369 | | | $ | 310,859 | | | | $ | 606,526 | | | $ | 637,464 | | | Credit card revenue (3) | | | 1,754 | | | | 2,230 | | | | 6,243 | | | | 7,596 | | | | | 1,791 | | | | 2,221 | | | | | 4,355 | | | | 4,489 | | Breakage revenue (4) | | | 1,930 | | | | 1,242 | | | | 5,146 | | | | 3,018 | | | | | 2,077 | | | | 1,221 | | | | | 4,615 | | | | 3,216 | | Other | | | 50 | | | | 44 | | | | 136 | | | | 114 | | | | | 95 | | | | 127 | | | | | 218 | | | | 246 | | Other revenue | | | 3,734 | | | | 3,516 | | | | 11,525 | | | | 10,728 | | | | | 3,963 | | | | 3,569 | | | | | 9,188 | | | | 7,951 | | Total revenue | | $ | 282,861 | | | $ | 288,911 | | | $ | 928,276 | | | $ | 944,494 | | | | $ | 296,332 | | | $ | 314,428 | | | | $ | 615,714 | | | $ | 645,415 | |
| (1) | Store and Ecommerce sales are net of any returns, discounts andpercentage-off coupons. |
| (2) | Licensed department commissions are licensed department commissions received net of any returns. |
| (3) | Credit card revenue earned from Synchrony programs. |
| (4) | Breakage revenue earned on unused gift and merchandise return cards and unused certificates and loyalty reward points. |
The following table sets forth the gross upgross-up of the sales return reserve (in thousands): | | | | | | | | | | | | | | | November 3, 2018 | | | February 3, 2018 | | | October 28, 2017 | | Reserve for sales returns | | $ | (4,888 | ) | | $ | (4,094 | ) | | $ | (3,189 | ) | Cost of inventory returns | | | 1,919 | | | | 2,426 | | | | 1,894 | | | The following table sets forth the contract liabilities and their relationship to revenue (in thousands): | | | | | | | | November 3, 2018 | | | February 3, 2018 | | | October 28, 2017 | | Deferred revenue contracts | | $ | (11,417 | ) | | $ | (12,512 | ) | | $ | (12,909 | ) | Gift card liability | | | (8,774 | ) | | | (12,180 | ) | | | (8,799 | ) | Credit card reward liability | | | (4,972 | ) | | | (4,689 | ) | | | (3,224 | ) | Liability for deferred revenue | | $ | (25,163 | ) | | $ | (29,381 | ) | | $ | (24,932 | ) |
| | August 3, 2019 | | | February 2, 2019 | | | August 4, 2018 | | Reserve for sales returns | | | $ | (3,603 | ) | | $ | (3,469 | ) | | $ | (3,756 | ) | Cost of inventory returns | | | | 1,994 | | | | 1,984 | | | | 1,976 | |
Contract
The following table sets forth the contract liabilities include consideration received for gift card and loyalty related performance obligations which have not been satisfied as of the dates presented above.their relationship to revenue (in thousands): | | August 3, 2019 | | | February 2, 2019 | | | August 4, 2018 | | Deferred revenue contracts | | | $ | (10,217 | ) | | $ | (11,017 | ) | | $ | (11,817 | ) | Gift card liability | | | | (9,287 | ) | | | (12,246 | ) | | | (9,328 | ) | Credit card reward liability | | | | (5,615 | ) | | | (5,583 | ) | | | (5,034 | ) | Liability for deferred revenue | | | $ | (25,119 | ) | | $ | (28,846 | ) | | $ | (26,179 | ) |
The following table sets forth a rollforward of the amounts included in contract liabilities for the periods presented (in thousands): | | | 39 Weeks Ended November 3, 2018 | | 39 Weeks Ended October 28, 2017 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Beginning balance | | $ | 29,381 | | | $ | 29,412 | | | | $ | 28,846 | | | $ | 29,381 | | Current period gift cards sold and loyalty reward points earned | | | 23,287 | | | 20,212 | | | | | 16,970 | | | | 16,311 | | Net sales from redemptions (1) | | | (21,164 | ) | | (20,483 | ) | | | | (15,282 | ) | | | (15,503 | ) | Breakage and amortization (2) | | | (6,341 | ) | | (4,209 | ) | | | | (5,415 | ) | | | (4,010 | ) | Ending balance | | $ | 25,163 | | | $ | 24,932 | | | | $ | 25,119 | | | $ | 26,179 | |
| (1) | $1.0 million6.2 and $0.9$6.4 million in net sales from redemptions were included in the beginning balance of contract liabilities for the 1326 weeks ended NovemberAugust 3, 20182019 and October 28, 2017, respectively. $7.4 and $7.3 million in net sales from redemptions were included in the beginning balance of contract liabilities for the 39 weeks ended November 3,August 4, 2018, and October 28, 2017, respectively. |
| (2) | $0.43.0 million and $2.7 million in breakage and amortization were included in the beginning balance of contract liabilities for the 1326 weeks ended NovemberAugust 3, 20182019 and October 28, 2017, respectively. $3.1 million and $2.1 million in breakage and amortization were included in the beginning balance of contract liabilities for the 39 weeks ended November 3,August 4, 2018, and October 28, 2017, respectively. |
9
10
Stein Mart, Inc. Notes to Condensed Consolidated Financial Statements - Continued (Unaudited)
4. Accrued Expenses and Other Current Liabilities The following table sets forth the major components of accrued expenses and other current liabilities (in thousands): | | | November 3, 2018 | | | February 3, 2018 | | | October 28, 2017 | | | August 3, 2019 | | | February 2, 2019 | | | August 4, 2018 | | Property taxes | | $ | 18,424 | | | $ | 17,451 | | | $ | 17,364 | | | | $ | 16,534 | | | $ | 18,852 | | | $ | 14,950 | | Unredeemed gift and merchandise return cards | | | 8,734 | | | | 12,150 | | | | 8,777 | | | | | 9,287 | | | | 12,246 | | | | 9,328 | | Compensation and employee benefits | | | 8,649 | | | | 7,732 | | | | 7,944 | | | | | 7,240 | | | | 9,271 | | | | 8,613 | | Accrued vacation | | | 7,632 | | | | 7,632 | | | | 7,715 | | | | | 4,266 | | | | 4,365 | | | | 7,632 | | Other | | | 38,604 | | | | 33,488 | | | | 38,658 | | | | | 38,534 | | | | 32,916 | | | | 33,218 | | Accrued expenses and other current liabilities | | $ | 82,043 | | | $ | 78,453 | | | $ | 80,458 | | | | $ | 75,861 | | | $ | 77,650 | | | $ | 73,741 | |
Recent Accounting Pronouncements
In February 2016, the FASB issued ASUNo. 2016-02, Leases (Topic 842). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. The main provisions of the new standard include: clarifications to the definitions of a lease, components of leases and criteria for determining lease classification; requiring virtually all leased assets, including operating leases and related liabilities, to be reflected on the lessee’s balance sheet; and expanding and adding to the required disclosures for lessees. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. This guidance was additionally updated by ASUNo. 2018-11 in July 2018. This update, among other things, added a transition option for lessees. Under the transition option, entities can choose to continue to apply the legacy guidance and make only annual disclosures for the comparative periods or, for those who elect the transition option, can recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. We plan to adopt these ASU’s in fiscal 2019 using the effective date transition method. The effective date transition method allows us to initially apply the new leases standard at the application date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, we have elected to apply the package of practical expedients at the transition that allows us to forgo reassessing certain conclusions reached under Accounting Standards Codification (“ASC”) 840. We do not need to assess whether any expired or existing contracts are leases or contain leases under ASC 842, classification of any expired or existing leases under ASC 842, and whether unamortized initial direct costs for existing leases meet the definition of initial direct costs under ASC 840. We currently believe the adoption of this ASU will have a significant effect on our Consolidated Balance Sheets due to the addition of our applicable leased assets and related liabilities. We do not believe the adoption of this ASU will have a significant effect on our results of operations as the lease expense under the new standard will approximate our rent expense as it is currently being recorded.
In August 2018, the FASB issued ASUNo. 2018-15,Intangibles—Goodwill and Other—Internal-Use Software (Subtopic350-40).This update provides additional guidance to ASUNo. 2015-05,Intangibles—Goodwill andOther—Internal-Use Software (Subtopic350-40, which was issued in April 2015. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning on or after December 15, 2019, and interim periods within those annual periods with early adoption permitted in any interim period for which financial statements have not yet been issued. We are in the process of evaluating the effect that this ASU will have on our financial condition, results of operations and cash flows.
2.5. Shareholders’ Equity
Dividends During the 3926 weeks ended NovemberAugust 3, 2019 and August 4, 2018, there were no cash dividends declared. We paid $0.1 million in accrued dividends on restricted shares that vested during the period. During the 39 weeks ended October 28, 2017, we paid one quarterly cash dividend of $0.075 per common share on April 14, 2017. Stock Repurchase Plan During the 13 weeks ended NovemberAugust 3, 2019 and August 4, 2018, we repurchased 3,83211,886 shares and 3,306 shares, respectively, of our common stock in the open market at a total cost of less than $0.1 million.million, respectively. During the 1326 weeks ended October 28, 2017,August 3, 2019 and August 4, 2018, we repurchased 5,636114,429 shares and 48,409 shares, respectively, of our common stock in the open market at a total cost of $0.1 million and less than $0.1 million. During the 39 weeks ended November 3, 2018, we repurchased 52,241 shares of our common stock at a total cost of less than $0.1 million. During the 39 weeks ended October 28, 2017, we repurchased 69,122 shares of our common stock at a total cost of approximately $0.2 million.million, respectively. Stock repurchases were for tax withholding amounts due on employee stock awards and during 2018 and 2017, included no shares purchased on the open market, under our previouslya Board of Directors authorized plan, were for taxes due on the vesting of employee stock repurchase plan.awards. As of NovemberAugust 3, 2018,2019, there are 366,889 shares thatwhich can be repurchased pursuant to the Board of Directors’ current authorization. 10
Stein Mart, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
3.6. Earnings (Loss) per Share
Our restricted stock awards granted in 2013 containnon-forfeitable rights to dividends and, as such, are considered participating securities. Participating securities are to be included in the calculation ofBasic earnings (loss) per share under("EPS”) is computed by dividing net income (loss) by thetwo-class method. In applying thetwo-class method, income is allocated to both basic weighted-average number of common shares and participating securities based on their respective weighted-average shares outstanding for the period. Diluted EPS is calculated by also considering the impact of potential common stock equivalents on both net income (loss) and weighted-average number of common shares outstanding. We no longer compute EPS under the two-class method since we do not have any remaining participating securities containing non-forfeitable rights to dividends.
The following table sets forth the calculationa reconciliation of basic andweighted-average number of common shares to diluted loss perweighted-average number of common shareshares (in thousands, except per share data)thousands): | | | | | | | | | | | | | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | Basic: | | | | | | | | | | | | | | | | | Net loss | | | $ (16,622) | | | | $ (14,616) | | | | $ (10,432) | | | | $ (23,909) | | Income allocated to participating securities | | | - | | | | - | | | | - | | | | 2 | | Net loss available to common shareholders | | | $ (16,622) | | | | $ (14,616) | | | | $ (10,432) | | | | $ (23,911) | | | | | | | Basic weighted-average shares outstanding | | | 46,743 | | | | 46,447 | | | | 46,674 | | | | 46,292 | | Basic loss per common share | | | $ (0.36) | | | | $ (0.31) | | | | $ (0.22) | | | | $ (0.52) | | | | | | | Diluted: | | | | | | | | | | | | | | | | | Net loss | | | $ (16,622) | | | | $ (14,616) | | | | $ (10,432) | | | | $ (23,909) | | Income allocated to diluted participating securities | | | - | | | | - | | | | - | | | | 2 | | Net loss available to common shareholders | | | $ (16,622) | | | | $ (14,616) | | | | $ (10,432) | | | | $ (23,911) | | | | | | | Basic weighted-average shares outstanding | | | 46,743 | | | | 46,447 | | | | 46,674 | | | | 46,292 | | Incremental shares from share-based compensation plans | | | - | | | | - | | | | - | | | | - | | Diluted weighted-average shares outstanding | | | 46,743 | | | | 46,447 | | | | 46,674 | | | | 46,292 | | Diluted loss per common share | | | $ (0.36) | | | | $ (0.31) | | | | $ (0.22) | | | | $ (0.52) | |
| | 13 Weeks Ended August 3, 2019 | | | 13 Weeks Ended August 4, 2018 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Basic weighted-average shares outstanding | | | 47,406 | | | | 46,669 | | | | 47,258 | | | | 46,639 | | Incremental shares from share-based compensation plans | | | - | | | | - | | | | 323 | | | | 500 | | Diluted weighted-average shares outstanding | | | 47,406 | | | | 46,669 | | | | 47,581 | | | | 47,139 | |
Diluted weighted-average shares outstanding exclude approximately 2.32.4 million shares and 2.92.3 million shares during the 13 weeks ended NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, respectively, which are anti-dilutive for the periods presented. Diluted weighted-average shares outstanding exclude approximately 2.72.6 million shares and 2.93.0 million shares during the 3926 weeks ended NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, respectively, which are anti-dilutive for the periods presented. These shares are comprised of a mix of stock options, performance awards and restricted stock.stock units. Stock options excluded were those that had exercise prices greater than the average market price of the common shares such that inclusion would have been anti-dilutive. Restricted stock units and performance shares excluded were shares that were anti-dilutive as calculated using the treasury stock method. 4.11
Stein Mart, Inc. Notes to Consolidated Financial Statements - Continued 7. Debt The following table sets forth our debt (in thousands): | | | November 3, 2018 | | | February 3, 2018 | | | October 28, 2017 | | | August 3, 2019 | | | February 2, 2019 | | | August 4, 2018 | | Revolving credit facility | | $ | 156,551 | | | $ | 142,387 | | | $ | 147,483 | | | | $ | 103,517 | | | $ | 119,100 | | | $ | 112,253 | | Term loan | | | 35,000 | | | | - | | | | - | | | | | 35,000 | | | | 35,000 | | | | 50,000 | | Promissory note | | | - | | | | 13,738 | | | | - | | | | | - | | | | - | | | | 13,000 | | Equipment term loan | | | - | | | | - | | | | 3,333 | | | Total debt | | | 191,551 | | | | 156,125 | | | | 150,816 | | | | | 138,517 | | | | 154,100 | | | | 175,253 | | Current portion | | | - | | | | (13,738) | | | | (3,333) | | | | | - | | | | - | | | | (125,253 | ) | Debt issuance costs | | | (894) | | | | - | | | | (11) | | | | | (755 | ) | | | (847 | ) | | | (714 | ) | Long-term debt | | $ | 190,657 | | | $ | 142,387 | | | $ | 147,472 | | | | $ | 137,762 | | | $ | 153,253 | | | $ | 49,286 | |
11
Stein Mart, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Revolving Credit Facility and Equipment Term Loan On February 3, 2015, we entered into a $250.0 million senior secured revolving credit facility pursuant to a second amended and restated credit agreement (the “Credit Agreement”) with Wells Fargo Bank (“Wells Fargo”) that will mature in, with an original maturity of February 2020 (the “Revolving Credit Facility”) and a secured $25.0 million master loan agreement with Wells Fargo Equipment Finance, Inc. (the “Equipment Term Loan”) with an original maturity inof February 2018. Borrowings under the Revolving Credit Facility were initially used for a special dividend but are subsequently being used for working capital, capital expenditures and other general corporate purposes. During 2015, debt issuance costs of $0.4 million were associated with the Revolving Credit Facility and the Equipment Term Loan. Debt issuance costs associated with the Revolving Credit Facility areAgreement were being amortized over its respective term. We repaid the Equipment Term Loan in full on January 22, 2018, at which time the associated debt issuance costs were fully amortized. On February 19, 2018, we entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Credit Agreement Amendment providesprovided for, among other things, an Accommodation Period (as defined in the Credit Agreement Amendment) during which we were not required to meet the Fixed Charge Coverage Ratio (as defined in the Credit Agreement). This change permitted us to borrow the full amount of the then applicable borrowing base until we delivered our financial statements for the Measurement Period (as defined in the Credit Agreement) ended February 28, 2018. Pursuant to the Credit Agreement Amendment, a Cash Dominion Event (as defined in the Credit Agreement Amendment) occurred as of the effective date of the Credit Agreement Amendment and at all times thereafter. As a resultBecause of the Cash Dominion Event, all of our cash receipts were swept daily to repay outstanding borrowings under the Credit Agreement and the amount outstanding under the Credit Agreement was classified as a short-term obligation. SeeAs noted below, for discussion of the Third Credit Agreement and the removal ofAmendment removed the Cash Dominion Event effective September 18, 2018. On March 14, 2018, we entered into Amendment No. 2 (the “Second Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Second Credit Agreement Amendment provided for, among other things, the following: (1) the $25.0 million TrancheA-1 Revolving Loans (as defined in the Second Credit Agreement Amendment) waswere repaid in full with the proceeds of the Term Loan (as defined below); (2) the entry into the Intercreditor Agreement (as defined below); and (3) certain other modifications and updates to coordinate the Revolving Credit Facility with the Term Loan. On September 18, 2018, we entered into Amendment No. 3 the (the “Third Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Third Credit Agreement Amendment providesprovided for, among other things, the following: (1) the increase of Aggregate Tranche A Revolving Loan Commitments (as defined in the Second Credit Agreement Amendment) from $225.0 million to $240.0 million; (2) an extension of the Maturity Datematurity date of the Revolving Credit Facility to the earlier of (a) the maturity date of the Term Loan Agreement (as defined below) or (b) September 18, 2023; and (3) the elimination of Cash Dominion Event status and a change in Cash Dominion to be triggered only in the event of (a) the occurrence and continuance of any Event of Default or (b) Excess Availability of less than (A) 10.0% of the loan cap at any time or (B) 12.5% of the loan cap for 3three consecutive business days. During 2018, debt issuance costs of less than $0.1 million were associated with the Third Credit Agreement Amendment and are being amortized over its respective term. Debt issuance costs of $0.1 million remaining under the initial Credit Agreement will also beare being amortized over the new term of the Third Credit Agreement.Agreement Amendment. The elimination of cash dominion status changed the debt classification from a short-term to long-term obligation. 12
Stein Mart, Inc. Notes to Consolidated Financial Statements - Continued On February 26, 2019, we entered into Amendment No. 4 (the “Fourth Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Fourth Credit Agreement Amendment provided for, among other things, a modification to the definition of “Capital Expenditures” and “Permitted Indebtedness” as defined in the Fourth Credit Agreement Amendment. The total amount available for borrowings under the Credit Agreement is the lesser of $240.0 million or 100 percent of eligible credit card receivables and the net recovery percentage of eligible inventories less reserves. On NovemberAugust 3, 2018,2019, in addition to outstanding borrowings under the Credit Agreement, we had $8.5$8.0 million of outstanding letters of credit and our unused availability underExcess Availability (as defined in the Credit AgreementAgreement) was $74.9$61.9 million. The amount outstanding under the Credit Agreement has been classified as a long-term obligation. The Credit Agreement contains customary representations and warranties, affirmative and negative covenants (including the requirement of a 1.0 to 1.0 consolidated Fixed Charge Coverage Ratio upon the occurrence and during the continuance of any Covenant Compliance Event, as defined in the Credit Agreement), and events of default for facilities of this type and is cross-collateralized and cross-defaulted. Collateral for the Revolving Credit Facility and the Equipment Term Loan consists of substantially all of our personal property. Wells Fargo has a first lien on all collateral other than equipment. Wells Fargo Equipment Finance had a first lien on equipment through January 22, 2018, when we repaid the Equipment Term Loan in full. Borrowings under the Credit Agreement are either base rate loans or London Interbank Offered Rate (“LIBOR”) loans. LIBOR loans bear interest equal to the adjusted LIBOR plus the applicable margin (125 to 175 basis points) depending on the quarterly average excess availability. Base Rate Loans bear interest equal to the highest of (a) the Federal Funds Rate plus 0.50 percent, (b) the adjusted LIBOR plus 1.00 percent, or (c) the Wells Fargo “prime rate,” plus the Applicable Margin (25 to 75 basis points). The weighted average interest rate for the amount outstanding under the Credit Agreement was 4.103.87 percent as of NovemberAugust 3, 2018.2019. 12
Stein Mart, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Promissory Note
On February 2, 2018, we executed a promissory note under which we borrowed approximately $13.7 million (the “Promissory Note”) from SunTrust Bank (the “Trustee”) in its capacity as the trustee under a trust agreement (the “Trust Agreement”) dated September 1, 1999. The trust established by the Trust Agreement (the “Trust”) holds certain life insurance policies related to our executive deferred compensation plans. The Trustee obtained loans from the insurance policies held in the Trust in an amount not less than the amount of the Promissory Note. The Promissory Note is a short-term obligation and the proceeds were used to pay down borrowings under the existing Credit Agreement which provided additional availability under that agreement.
The Promissory Note had a fixed interest rate of 3.58 percent per annum and an original maturity date of April 1, 2018. On March 7, 2018, we executed an amendment to the Promissory Note under which the Trustee extended the maturity date of the note from April 1, 2018, to July 1, 2018 (the “Maturity Date”). The amendment did not alter the short-term nature of the Promissory Note. The Promissory Note could be prepaid in whole or in part at any time. All unpaid principal and accrued interest on the Promissory Note would have become due and payable on the Maturity Date. The Trustee could offset payments due under the Promissory Note against amounts we would otherwise be entitled to withdraw from the Trust under the terms of the Trust Agreement. On June 29, 2018, we repaid the outstanding balance of the Promissory Note.
On July 31, 2018, we executed a second promissory note from SunTrust Bank for $13.0 million which carries a fixed interest rate of 3.58 percent per annum and an original maturity date of September 10, 2018. This note is under the same terms as the Promissory Note executed on February 2, 2018. On September 10, 2018, we repaid the outstanding balance of the Promissory Note.
We believe we are able to borrow, on a short-term basis and subject to the formal agreement of the lender, amounts up to the cash surrender value of the life insurance policies related to our executive deferred compensation plans to provide additional liquidity if needed. At November 3, 2018, the cash surrender value of our life insurance policies was $12.8 million.
Term Loan On March 14, 2018, we entered into a Term Loan Credit Agreement with Gordon Brothers Finance Company, as administrative agent (in such capacity, the “Term Loan Agent”), and Gordon Brothers Finance Company, LLC, as lender (the “Term Loan Agreement”). The Term Loan Agreement provided for a term loan in the amount of $50.0 million (the “Term Loan”) and paid in full the existing $25.0 million TrancheA-1 Revolving Loan (as defined in the Credit Agreement) under the Credit Agreement.. Debt issuance costs associated with the Term Loan were capitalized in the amount of $0.9 million and will beare being amortized over the term of the Term Loan. The net proceeds of $49.1 million from the Term Loan were used to permanently pay off the $25.0 million TrancheA-1 Revolving Loan (as defined in the Credit Agreement) and to pay down the Revolving Credit Agreement.Facility. After utilizing proceeds from the Term Loan Agreement for repayment of amounts outstanding under the existing TrancheA-1 Revolving Loans, the Term Loan resulted in an increase in our Excess Availability of approximately $25.0 million under the Credit Agreement. The Term Loan originally matured on the earlier of (1) the termination date specified in our Credit Agreement, as such date may be extended with the consent of the Term Loan Agent or in accordance with the Intercreditor Agreement (defined below), and (2) March 14, 2020. On September 18, 2018, we entered into Amendment No. 2 (the “Second Term Loan Amendment”) to the Term Loan with Gordon Brothers Finance Company. The Second Term Loan Amendment provided for, among other things, the following: (1) the reduction of the maximum amount of the Term Loan to $35.0 million; (2) an extension of the maturity date of the Term Loan Agreement to the earlier of (a) the termination date specified in the Revolving Credit Facility (as defined in the Third Credit Agreement)Agreement Amendment), and (b) September 18, 2023; (3) the reduction of thenon-default interest rate applicable to the Term Loan under the Term Loan Agreement to a fluctuating rate of interest equal to three-month LIBOR (with a floor of 1.5%) plus 8.25% per annum; and (4) the elimination of Cash Dominion Event status and a change in Cash Dominion to be triggered only in the event of (a) the occurrence and continuance of any Event of Default or (b) Excess Availability of less than (A) 10.0% of the Revolving Loan Cap at any time or (B) 12.5% of the Revolving Loan Cap for 3three consecutive Business Days. During 2018, debt issuance costs of approximately $0.3 million were associated with the Term Loan and are being amortized over its respective term. The elimination of cash dominion status changed the debt classification from a short-term to long-term obligation. On February 26, 2019, we entered into Amendment No. 3 (the “Third Term Loan Amendment”) to the Term Loan Agreement. The Third Term Loan Amendment provided for, among other things, a modification to the definition of “Capital Expenditures” and “Permitted Indebtedness” as defined in the Third Term Loan Amendment. 13
Stein Mart, Inc. Notes to Consolidated Financial Statements - Continued The Term Loan Agreement contains customary representations and warranties, events of default, and affirmative and negative covenants, includingwhich include the retention of the existing minimum 1.0 to 1.0 consolidated fixed charge coverage ratio under the Credit Agreement which limits borrowing availability if not met during periods where Revolving Excess Availability (as defined in the Term Loan Agreement) is less than the greater of $20.0 million or 10.0 percent of Combined Loan Cap (as defined in the Term Loan Agreement) for four consecutive business days and eventsor during the occurrence of default for a facilityan Event of this type. Default (as defined in the Term Loan Agreement. The Term Loan is secured by a second lien security interest (subordinate only to the liens securing the Credit 13
Stein Mart, Inc.
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Agreement) on all assets securing the Credit Agreement (which consist of substantially all of our personal property), except furniture, fixtures and equipment and intellectual property, upon which the Term Loan lenders will have a first lien security interest. If at any time prior to the first anniversary date of the Term Loan, the Revolving Excess Availability is less than $20.0 million, if requested by the Term Loan Agent, the Term Loan will also be secured by a first lien on leasehold interests in real property with an aggregate value of not less than $10.0 million, and the Credit Agreement will be secured by a second lien on such leasehold interests. The Term Loan is subject to certain mandatory prepayments if an Event of Default (as defined in the Term Loan Agreement) exists. If no such Event of Default exists, proceeds of the Term Loan priority collateral are to be applied to amounts outstanding under the Credit Agreement. The Term Loan Agent and Wells Fargo have entered into an Intercreditor Agreement dated as of March 14, 2018 (the “Intercreditor Agreement”), acknowledged by us under the Term Loan and the Credit Agreement. The Intercreditor Agreement was also amended on September 18, 2018 to incorporate the amendment to the Revolving Credit Facility and the Term Loan Agreement. The weighted average interest rate for the amount outstanding under the Term Loan was 10.6510.57 percent as of NovemberAugust 3, 2018.2019. Promissory Note We believe we can borrow, on a short-term basis and subject to the formal agreement of the lender, amounts up to the cash surrender value of the life insurance policies related to our executive deferred compensation plans to provide additional liquidity if needed. At August 3, 2019, the cash surrender value of our life insurance policies was $15.5 million. On February 2, 2018, we executed a promissory note under which we borrowed approximately $13.7 million (the “Promissory Note”) from SunTrust Bank (the “Trustee”) in its capacity as the trustee under a trust agreement (the “Trust Agreement”) dated September 1, 1999. The trust established by the Trust Agreement (the “Trust”) holds certain life insurance policies related to our executive deferred compensation plans. The Trustee obtained loans from the insurance policies held in the Trust in an amount not less than the amount of the Promissory Note. The Promissory Note was a short-term obligation and the proceeds were used to pay down borrowings under the existing Credit Agreement which provided additional availability under that agreement. The Promissory Note had a fixed interest rate of 3.58 percent per annum and an original maturity date of April 1, 2018. On March 7, 2018, we executed an amendment to the Promissory Note under which the Trustee extended the maturity date of the note from April 1, 2018, to July 1, 2018 (the “Maturity Date”). The amendment did not alter the short-term nature of the Promissory Note. The Promissory Note could be prepaid in whole or in part at any time. All unpaid principal and accrued interest on the Promissory Note would have become due and payable on the Maturity Date. The Trustee could offset payments due under the Promissory Note against amounts we would otherwise be entitled to withdraw from the Trust under the terms of the Trust Agreement. On June 29, 2018, we repaid the outstanding balance of the second promissory note. On July 31, 2018, we executed a second promissory note from SunTrust Bank for $13.0 million, which carried a fixed interest rate of 3.58 percent per annum and an original maturity date of September 10, 2018. This note included the same terms as the Promissory Note executed on February 2, 2018. On September 10, 2018, we repaid the outstanding balance of the Promissory Note. 14
Stein Mart, Inc. Notes to Consolidated Financial Statements - Continued The following table sets forth the aggregate maturities of our long-term debt at NovemberAugust 3, 2018,2019, for the following fiscal years (in thousands): | 2019 | | $ | - | | | 2020 | | | - | | | $ | | - | | 2021 | | | - | | | | - | | 2022 | | | - | | | | - | | 2023 | | | 191,551 | | | | 138,517 | | 2024 | | | | - | | Thereafter | | | - | | | | | - | | | | | | | Total | | $ | 191,551 | | | $ | | 138,517 | | | | | | |
5.
8. Leases We lease all our retail store locations, support facilities and certain equipment under operating leases. Our store leases have varying terms and are generally for 10 years with options to extend the lease term for two or more 5-year periods. Annual store rent is generally comprised of a fixed minimum amount plus an insignificant contingent amount based on a percentage of sales in excess of specified levels. Most store leases also require additional payments covering real estate taxes, common area costs and insurance. Certain lease agreements contain rent holidays, and/or rent escalation clauses. Except for contingent rent, we recognize rent expense on a straight-line basis over the lease term. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when achievement of the specified sales that triggers the contingent rent is probable. Construction allowances and other such lease incentives are recorded on the Consolidated Balance Sheets and are amortized on a straight-line basis as a reduction of rent expense. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement or modification date in determining the present value of lease payments. In addition to the operating lease assets presented on the Consolidated Balance Sheets, assets under finance leases of $3.0 million are included in property and equipment, net on the Consolidated Balance Sheets as of August 3, 2019. The remaining finance lease obligation is split between accrued expenses and other current liabilities for the short-term portion and other liabilities for the long-term portion on the Consolidated Balance Sheets. The following table summarizes our classification of lease cost (in thousands): | | | | 13 Weeks Ended | | | 26 Weeks Ended | | | | Statement of Operations Location | | August 3, 2019 | | | August 3, 2019 | | Operating lease cost (1) | | Selling, general and administrative expenses | | $ | 24,149 | | | $ | 47,676 | | Finance lease cost: | | | | | | | | | | | Amortization of finance lease assets | | Selling, general and administrative expenses | | | 160 | | | | 312 | | Interest on lease liabilities | | Interest expense, net | | | 17 | | | | 33 | | Variable lease cost | | Selling, general and administrative expenses | | | 9,330 | | | | 19,260 | | Net lease cost | | | | $ | 33,656 | | | $ | 67,281 | |
(1) | Includes lease costs for short-term leases, which are immaterial. |
15
Stein Mart, Inc. Notes to Consolidated Financial Statements - Continued As of August 3, 2019, the following table summarizes the maturity of the company’s lease liabilities (in thousands): | | Operating | | | Finance | | | | | | | | Leases | | | Leases | | | Total | | Remainder of 2019 | | $ | 50,047 | | | $ | 487 | | | $ | 50,534 | | 2020 | | | 96,054 | | | | 855 | | | | 96,909 | | 2021 | | | 85,561 | | | | 282 | | | | 85,843 | | 2022 | | | 70,371 | | | | 281 | | | | 70,652 | | 2023 | | | 55,309 | | | | 151 | | | | 55,460 | | After 2023 | | | 107,324 | | | | 1 | | | | 107,325 | | Total lease payments | | | 464,666 | | | | 2,057 | | | | 466,723 | | Less: Interest | | | (65,216 | ) | | | (182 | ) | | | (65,398 | ) | Present value of lease liabilities | | $ | 399,450 | | | $ | 1,875 | | | $ | 401,325 | |
The following table summarizes our lease term and discount rate: | | | | | | | | | | | August 3, 2019 | | Weighted-average remaining lease term (years): | | | | | | | Operating leases | | | | 5.7 years | | Finance leases | | | | 2.7 years | | Weighted-average discount rate: | | | | | | | Operating leases | | | | | 5.4 | % | Finance leases | | | | | 6.4 | % |
The following table summarizes the other information related to our lease liabilities (in thousands): | | 13 Weeks Ended | | | 26 Weeks Ended | | | | August 3, 2019 | | | August 3, 2019 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | Operating cash flows from operating leases | | $ | 25,480 | | | $ | 50,697 | | Operating cash flows from finance leases | | | 17 | | | | 33 | | Financing cash flows from finance leases | | | 199 | | | | 367 | |
As of February 2, 2019, in accordance with ASC 840, Leases, the aggregate minimum non-cancelable lease payments under operating leases were as follows (in thousands): | | Operating | | | Finance | | | | Leases | | | Leases | | 2019 | | $ | 101,139 | | | $ | 738 | | 2020 | | | 93,190 | | | | 574 | | 2021 | | | 82,324 | | | | 1 | | 2022 | | | 66,820 | | | | - | | 2023 | | | 50,697 | | | | - | | Thereafter | | | 102,550 | | | | - | | Total minimum lease payments | | $ | 496,720 | | | | 1,313 | | Amount representing interest | | | | | | | (67 | ) | Present value of minimum lease payments | | | | | | | 1,246 | | Less: current portion | | | | | | | (685 | ) | Long-term capital lease obligations | | | | | | $ | 561 | |
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Stein Mart, Inc. Notes to Consolidated Financial Statements - Continued 9. Commitments and Contingencies We are involved in various routine legal proceedings incidental to the conduct of our business. During both the 13 and 39 weeks ended November 3, 2018 and October 28, 2017, we did not accrue for any actual or anticipated loss contingencies. While some of these matters could be material to our results of operations or cash flows for any particular period if an unfavorable outcome results, we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our overall financial condition. During both the 13 and 26 weeks ended August 3, 2019 and August 4, 2018, we did not accrue for any actual or anticipated loss contingencies. 6.10. Income Taxes
The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Our effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items, and the mix of earnings. Our income tax expense for both the 13 and 3926 weeks ended NovemberAugust 3, 2018,2019, reflects our net operating loss carryforward position along withestimated taxable income for the valuation allowance established against deferred tax assets during the fourth quarter of 2017. The 2017 Tax Act changed the carryback rules for 2018 and future years. As a result, we are unable to carry back our 2018 losses. The 39 weeks of 2018 expense represents certain state income tax expense.year. The effective tax rate will be close to zero percent for all of 2018.2019.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As used herein, the terms “we,” “our,” “us” and “Stein Mart” refer to Stein Mart, Inc. and its wholly-owned subsidiaries. Forward-Looking Statements This Quarterly Report on Form10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to certain risks, uncertainties or assumptions and may be affected by certain factors including, but not limited to, the matters discussed in “Item 1A. Risk Factors” of our Annual Report on Form10-K for the fiscal year ended February 3, 2018,2, 2019, filed with the Securities and Exchange Commission (“SEC”) on May 4, 2018.March 28, 2019. Wherever used, the words “plan,” “expect,” “anticipate,” “believe,” “estimate” and similar expressions identify forward-looking statements. Should one or more of these risks, uncertainties or other factors materialize, or should underlying assumptions prove incorrect, actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on beliefs and assumptions of our management and on information currently available to such management. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to publicly update or revise our forward-looking statements in light of new information or future events. Undue reliance should not be placed on such forward-looking statements, which are based on current expectations. Forward-looking statements are not guarantees of performance. The following discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form10-K for the year ended February 3, 2018,2, 2019, filed with the SEC on May 4, 2018.March 28, 2019. Overview We are a nationalspecialty off-price retailer offering designer and name-brand fashion apparel, home décor, accessories and shoes at everyday discount prices. We currently operate 288283 stores across 30 states. Financial Overview for the 13 and 3926 weeks Ended NovemberAugust 3, 20182019 ● | | Net sales were $279.1$292.4 million for the 13 weeks ended NovemberAugust 3, 2018,2019, compared to $285.4$310.9 million for the 13 weeks ended October 28, 2017,August 4, 2018, and $916.8$606.5 million for the 3926 weeks ended NovemberAugust 3, 2018,2019, compared to $933.8$637.5 million for the 3926 weeks ended October 28, 2017.August 4, 2018. |
● | | Comparable sales for the 13 weeks ended NovemberAugust 3, 2018, increased 1.42019, decreased 3.6 percent compared to the 13 weeks ended October 28, 2017,August 4, 2018, and for the 3926 weeks ended NovemberAugust 3, 2018, increased 0.42019, decreased 2.6 percent compared to the 3926 weeks ended October 28, 2017.August 4, 2018. |
● | | Net loss for the 13 weeks ended NovemberAugust 3, 2018,2019 was $16.6$2.1 million, or $0.36$0.04 per share, compared to net loss of $1.0 million, or $0.02 per share, during the 13 weeks ended August 4, 2018. |
● | Net income for the 26 weeks ended August 3, 2019 was $1.9 million, or $0.04 per diluted share, compared to net lossincome of $14.6$6.4 million, or $0.31$0.14 per diluted share, during the 1326 weeks ended October 28, 2017.August 4, 2018. |
● | | Net loss for the 39 weeks ended November 3, 2018, was $10.4 million, or $0.22 per diluted share, compared to net loss of $23.9 million, or $0.52 per diluted share, during the 39 weeks ended October 28, 2017.
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● | | We had $190.7$138.5 million, $156.1$154.1 million and $150.8$175.3 million of direct borrowings onfrom our credit facilities as of NovemberAugust 3, 2018,2019, February 3,2, 2019, and August 4, 2018, and October 28, 2017, respectively. |
Stores The following table sets forth the stores activity for the 13 and 3926 weeks ended NovemberAugust 3, 20182019 and October 28, 2017:August 4, 2018: | | | 13 Weeks Ended November 3, 2018 | | 13 Weeks Ended October 28, 2017 | | 39 Weeks Ended November 3, 2018 | | 39 Weeks Ended October 28, 2017 | | | 13 Weeks Ended August 3, 2019 | | | 13 Weeks Ended August 4, 2018 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Stores at beginning of period | | | 289 | | | 292 | | | 293 | | | 290 | | | | 283 | | | | 289 | | | 287 | | | | 293 | | Stores opened during the period | | | 2 | | | 4 | | | 2 | | | 9 | | | Stores closed during the period | | | (3 | ) | | (3 | ) | | (7 | ) | | (6 | ) | | | - | | | | - | | | (4) | | | | (4 | ) | Stores at the end of period | | | 288 | | | 293 | | | 288 | | | 293 | | | | 283 | | | | 289 | | | | 283 | | | | 289 | |
Inventories Inventory levels were $305.0$238.4 million as of NovemberAugust 3, 2018,2019, compared to $270.2$255.9 million as of February 3, 2018,2, 2019 and $311.3$240.8 million as of October 28, 2017. AverageAugust 4, 2018. Total inventories decreased due to fewer stores and lower average inventories per store at the end of the second quarter of 2019 versus 2018, partially offset by planned acceleration of receipts for categories that were trending, as of November 3, 2018, decreased 2.9 percent from October 28, 2017. We have intentionally operated with lower inventory levels during 2018, mainly by planningwell as amounts to turn faster and leaving a percentage of receipt dollars open to spend closer to actual delivery dates.support our recently launched Kids department.
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Results of Operations The following table sets forth each line item of our Condensed Consolidated Statements of Operations (Unaudited) expressed as a percentage of net sales (1): | | | 13 Weeks Ended November 3, 2018 | | As Adjusted 13 Weeks Ended October 28, 2017 | | 39 Weeks Ended November 3, 2018 | | As Adjusted 39 Weeks Ended October 28, 2017 | | | 13 Weeks Ended August 3, 2019 | | | 13 Weeks Ended August 4, 2018 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Net sales | | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | Other revenue | | | 1.3 | % | | 1.2 | % | | 1.3 | % | | 1.2 | % | | | 1.4 | % | | | 1.1 | % | | | 1.5 | % | | | 1.2 | % | Total revenue | | | 101.3 | % | | 101.2 | % | | 101.3 | % | | 101.2 | % | | | 101.4 | % | | | 101.1 | % | | | 101.5 | % | | | 101.2 | % | Cost of merchandise sold | | | 75.0 | % | | 76.1 | % | | 73.2 | % | | 75.5 | % | | | 74.5 | % | | | 74.5 | % | | | 73.3 | % | | | 72.5 | % | Selling, general and administrative expenses | | | 31.2 | % | | 33.5 | % | | 28.2 | % | | 29.4 | % | | | 26.8 | % | | | 26.0 | % | | | 27.1 | % | | | 26.9 | % | Operating loss | | | -4.8 | % | | -8.4 | % | | -0.2 | % | | -3.8 | % | | Operating income | | | | 0.1 | % | | | 0.6 | % | | | 1.1 | % | | | 1.8 | % | Interest expense, net | | | 1.1 | % | | 0.4 | % | | 0.9 | % | | 0.4 | % | | | 0.8 | % | | | 0.9 | % | | | 0.8 | % | | | 0.8 | % | Loss before income taxes | | | -5.9 | % | | -8.8 | % | | -1.1 | % | | -4.2 | % | | Income tax expense (benefit) | | | 0.1 | % | | -3.7 | % | | 0.0 | % | | -1.6 | % | | Net loss | | | -6.0 | % | | -5.1 | % | | -1.1 | % | | -2.6 | % | | (Loss) income before income taxes | | | | (0.7 | )% | | | (0.3 | )% | | | 0.3 | % | | | 1.0 | % | Income tax expense | | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | Net (loss) income | | | | (0.7 | )% | | | (0.3 | )% | | | 0.3 | % | | | 1.0 | % |
| (1) | Table may not foot due to rounding. |
Stein Mart Credit Cards
Stein Mart has both co-branded MasterCard and Private Label Credit Cards available for our customers based on credit approvals in accordance with our Amended and Restated Co-Brand and Private Label Credit Card Consumer Program Agreement (the “Agreement”). These cards are issued by our business partner, Synchrony Bank (“Synchrony”), who bears all credit risk associated with the cards. Synchrony provides us certain direct financial benefits based on sales on the cards and other factors. Subsequent to quarter-end on August 21, 2019, we entered into an amendment to our Agreement with Synchrony whereby Synchrony waived its rights to require us to post cash reserves to cure our failure to satisfy one or more of the quarterly financial covenants specified in the Agreement for periods through October 31, 2020 (the “Exemption Period”). As consideration for Synchrony’s entry into this amendment, we agreed to reduce the amount of fees paid to us by Synchrony under the Agreement from September 1, 2019 through the end of the Exemption Period. We expect the average reduction in monthly fees receivable will be approximately $0.1 million. The Company has obtained waivers for its failure to satisfy these covenants in the past and would not have expected to satisfy these covenants for at least the next five fiscal quarters had they not been exempted. Important Information RegardingNon-GAAP Financial Measures We report our financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, we believe that certainnon-GAAP financial measures provide users of our financial information with additional useful information in evaluating operating performance.Non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, financial results prepared in accordance with GAAP. Items excluded from or included innon-GAAP financial measures may be significant and should be considered in assessing our financial condition and performance. The methods we used to calculate thesenon-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, thenon-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies.
Calculations of our comparable sales including sales from licensed departments arenon-GAAP financial measures. We believe that providing calculations of changes in comparable sales, both including and excluding sales from licensed departments, assists in evaluating our ability to generate sales growth, whether through owned businesses or departments licensed to third parties. The following table sets forth these calculations. | | | | | | | | | | | | | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | Decrease in comparable sales excluding sales from licensed departments (1) | | | (0.2)% | | | | (6.9)% | | | | (0.8)% | | | | (6.5)% | | Effect of growth in comparable sales of licensed departments (2) | | | 1.6 % | | | | 0.6 % | | | | 1.2 % | | | | 0.5 % | | Increase (decrease) in comparable sales including sales from licensed departments | | | 1.4 % | | | | (6.3)% | | | | 0.4 % | | | | (6.0)% | |
| | 13 Weeks Ended August 3, 2019 | | | 13 Weeks Ended August 4, 2018 | | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | Decrease in comparable sales excluding sales from leased departments (1) | | | (4.4 | )% | | | (0.4 | )% | | | (3.4 | )% | | | (1.1 | )% | Effect of growth in comparable sales of leased departments (2) | | | 0.8 | % | | | 1.1 | % | | | 0.8 | % | | | 1.1 | % | Increase (decrease) in comparable sales including sales from leased departments | | | (3.6 | )% | | | 0.7 | % | | | (2.6 | )% | | | 0.0 | % |
| (1) | Represents theperiod-to-period percentage change in net sales from stores open throughout the period presented and the same period in the prior year and all online sales of steinmart.com, excluding commissions from departments licensed to third parties. |
| (2) | Represents the effect impact of including the full sales amounts for departments licensed to third parties throughout the period presented and the same period in the prior year on the calculation of comparable sales. We license our shoe and vintage handbag departments to third parties and receive a commission from these third parties based on a percentage of their sales. In our financial statements prepared in conformity with GAAP, we include commissions (rather than sales of the departments licensed to third parties) in our net sales. We do not include the commission amounts from licensed department sales in our comparable sales calculation. |
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13 and 39 weeks26 Weeks Ended NovemberAugust 3, 2018,2019, Compared to the 13 and 39 weeks26 Weeks Ended October 28, 2017August 4, 2018 (tables presented in thousands): Net Sales | | | | | | | | | | | | | | 13 Weeks Ended | | | 13 Weeks Ended | | | | | | 26 Weeks Ended | | | 26 Weeks Ended | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | (Decrease)/ Increase | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | (Decrease)/ Increase | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | Net sales | | $ | 279,127 | | | $ | 285,395 | | | $ | (6,268) | | | $ | 916,751 | | | $ | 933,766 | | | $ | (17,015) | | | | $ | 292,369 | | | $ | 310,859 | | | $ | | (18,490 | ) | | $ | 606,526 | | | $ | 637,464 | | | $ | | (30,938 | ) | Sales percent change: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total net sales | | | | | | | (2.2)% | | | | | | | | (1.8)% | | | | | | | | | | | | | (5.9 | )% | | | | | | | | | | | (4.9 | )% | Comparable store sales including | | | | | | | 1.4% | | | | | | | | 0.4% | | | sales from leased departments | | | | | | | | | | | | | | Comparable store sales including sales from leased departments | | | | | | | | | | | | | (3.6 | )% | | | | | | | | | | | (2.6 | )% |
Net
The 5.9 percent decrease in net sales reflects lower comparable store sales, including the shift of a 12-Hour Sale event from the second quarter to the first, and fewer stores for the 13 weeks ended NovemberAugust 3, 2018, decreased2019, compared to the 13 weeks ended October 28, 2017.August 4, 2018. The 2.23.6 percent decrease in net sales is primarily due to closing underperformingcomparable stores in 2018 and lower traffic in the Southeast andMid-Atlantic states from hurricanes. The 1.4 percent increase in comparable sales on an owned plus licensed basis for the 13 weeks ended NovemberAugust 3, 2018,2019, was primarily driven by higher regular-priced selling compared to last year’s higher clearance selling. Higher regular-priced selling fora decrease in the 13 weeks ended November 3, 2018, increased the average unit retail price, which was partially offsetnumber of transactions driven by lower store traffic and lower units per transaction, and number of transactions, primarily due to lower clearance selling.somewhat offset by higher average unit retail dollars. Comparable store sales reflect stores open throughout the period and prior fiscal year and include Ecommerce. Ecommerce sales were up 76.1approximately 6.1 percent in the 13 weeks ended November 3, 2018, which includeof net sales. Ecommerce sales increased 7.2 percent, including online orders shipped from our stores, and contributed approximately a210-basis point increasepositively affected our total comparable store sales by 40 basis points for the 13 weeks ended August 3, 2019. The 4.9 percent decrease in net sales reflects lower comparable store sales and fewer stores for the 26 weeks ended August 3, 2019, compared to the 26 weeks ended August 4, 2018. The 2.6 percent decrease in comparable sales in the same period. Comparablestores sales on an owned plus licensed basis for the 3926 weeks ended NovemberAugust 3, 2018, increased 0.4 percent compared to the 39 weeks ended October 28, 2017. The 1.8 percent2019, was primarily driven by a decrease in net sales is due to closing underperforming stores.the number of transactions driven by lower store traffic. Ecommerce sales were up 95.6approximately 5.8 percent of net sales. Ecommerce sales increased 10.6 percent, including online orders shipped from our stores, and contributed approximately a240-basis point increase topositively affected our total comparable store sales by 40 basis points for the 3926 weeks ended NovemberAugust 3, 2018.2019. Other Revenue | | | | | | | | | | | | | | 13 Weeks Ended | | | 13 Weeks Ended | | | | | | 26 Weeks Ended | | | 26 Weeks Ended | | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | Increase | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | Increase | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | Other revenue | | $ | 3,734 | | | $ | 3,516 | | | $ | 218 | | | $ | 11,525 | | | $ | 10,728 | | | $ | 797 | | | | $ | 3,963 | | | $ | 3,569 | | | $ | | 394 | | | | $ | 9,188 | | | $ | 7,951 | | | $ | 1,237 | | Percentage of net sales | | | 1.3% | | | | 1.2% | | | | 0.1% | | | | 1.3% | | | | 1.1% | | | | 0.2% | | | | | 1.4 | % | | | 1.1 | % | | | 0.3 | % | | | | 1.5 | % | | | 1.2 | % | | | 0.3 | % |
Other revenue for the 13 and 39 weeks ended November 3, 2018, increased compared to the 13 and 39 weeks ended October 28, 2017.
The slight increase in other revenue for the 13 and 3926 weeks ended NovemberAugust 3, 2018,2019, is the result of higher penetration from our growing credit card program.program, which has increased royalty, breakage and bounty income, partially offset by higher accrual of customer loyalty points.
Gross Profit Gross profit is determined as follows: | | | | | | | | | | | | | | 13 Weeks Ended | | | 13 Weeks Ended | | | | | | 26 Weeks Ended | | | 26 Weeks Ended | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | (Decrease)/ Increase | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | (Decrease)/ Increase | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | Net sales | | $ | 279,127 | | | $ | 285,395 | | | $ | (6,268 | ) | | $ | 916,751 | | | $ | 933,766 | | | $ | (17,015 | ) | | | $ | 292,369 | | | $ | 310,859 | | | $ | | (18,490 | ) | | | $ | 606,526 | | | $ | 637,464 | | | $ | | (30,938 | ) | Cost of merchandise sold | | | 209,286 | | | | 217,126 | | | | (7,840 | ) | | 671,427 | | | | 705,273 | | | | (33,846 | ) | | | | 217,703 | | | | 231,519 | | | | (13,816 | ) | | | | 444,401 | | | | 462,140 | | | | (17,739 | ) | Gross profit | | $ | 69,841 | | | $ | 68,269 | | | $ | 1,572 | | | $ | 245,324 | | | $ | 228,493 | | | $ | 16,831 | | | | $ | 74,666 | | | $ | 79,340 | | | $ | | (4,674 | ) | | | $ | 162,125 | | | $ | 175,324 | | | $ | | (13,199 | ) | Percentage of net sales | | | 25.0% | | | | 23.9% | | | | 1.1% | | | 26.8% | | | | 24.5% | | | | 2.3% | | | | | 25.5 | % | | | 25.5 | % | | | 0.0 | % | | | | 26.7 | % | | | 27.5 | % | | | (0.8 | )% |
The gross profit rate increase for the 13 and 39 weeks ended NovemberAugust 3, 2018,2019 was flat compared to the 13 weeks ended August 4, 2018. The decrease in gross profit rate for the 26 weeks ended August 3, 2019 reflects higher markdowns as a percentage of sales, as well as the deleverage of occupancy costs on lower sales. Markdowns were higher as a percent of sales primarily due to a higher merchandise margin rate. The higher merchandise margin rate was driven by lower markdowns, partially offset by higher Ecommerce fulfillment and shipping costs which were higher due to an increase in online orders.planned accelerated markdown cadence. 17
Selling, General and Administrative Expenses (“SG&A”) | | | | | | | | | | | | | | 13 Weeks Ended | | | 13 Weeks Ended | | | | | | 26 Weeks Ended | | | 26 Weeks Ended | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | Decrease | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | Decrease | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | Selling, general and administrative expenses | | $ | 86,948 | | | $ | 95,674 | | | $ | (8,726) | | | $ | 258,584 | | | $ | 274,581 | | | $ | (15,997) | | | | $ | 78,470 | | | $ | 80,936 | | | $ | | (2,466 | ) | | | $ | 164,606 | | | $ | 171,445 | | | $ | | (6,839 | ) | Percentage of net sales | | | 31.1% | | | | 33.5% | | | | (2.4)% | | | | 28.2% | | | | 29.4% | | | | (1.2)% | | | | | 26.8 | % | | | 26.0 | % | | | 0.8 | % | | | | 27.1 | % | | | 26.9 | % | | | 0.2 | % |
The decrease in SG&A decrease for the 13 and 26 weeks ended NovemberAugust 3, 2018, was2019, is primarily the result of cost savings initiatives, lower advertising expense andstore-related expenses, including the impact of closing underperformingclosed stores. Decreases are partially offset by $1.1 million in advisory fees for capital alternatives that resulted in the extension of our credit agreements and $0.7 million in hurricane-related expenses, which we expect to be recovered from insurance in future quarters. The SG&A decrease for the 39 weeks ended November 3, 2018, was primarily the result of cost savings, including closing underperforming stores, partially offset by $1.1 million in advisory fees for capital alternatives that resulted in the extension of our credit agreements, $0.7 million in hurricane-related expenses which will be recovered from insurance in future quarters and increased Ecommerce expenses of $3.5 million. Ecommerce expenses were higher to support the additional sales volume. Interest Expense, Net | | | | | | | | | | | | | | 13 Weeks Ended | | | 13 Weeks Ended | | | | | | | 26 Weeks Ended | | | 26 Weeks Ended | | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | Increase | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | Increase | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | Interest expense, net | | $ | 3,078 | | | $ | 1,156 | | | $ | 1,922 | | | $ | 8,406 | | | $ | 3,437 | | | $ | 4,969 | | | | $ | 2,192 | | | $ | 2,865 | | | $ | (673 | ) | | | $ | 4,718 | | | $ | 5,328 | | | $ | (610 | ) | Percentage of net sales | | | 1.1% | | | | 0.4% | | | | 0.7% | | | | 0.9% | | | | 0.4% | | | | 0.5% | | | | | 0.8 | % | | | 0.9 | % | | | (0.2 | )% | | | | 0.8 | % | | | 0.8 | % | | | 0.0 | % |
The increase in interest
Interest expense decreased by $0.7 million and $0.6 million, respectively, for the 13 and 3926 weeks ended NovemberAugust 3, 2018,2019, compared to the 13 and 26 weeks ended August 4, 2018. The decrease in interest expense is primarily due to higher borrowing levels and higher interest rates, plus $0.3 million from the early termination of a portion of the Term Loan (as defined in Note 4 “Debt”lower average debt amounts compared to the Notes to Condensed Consolidated Financial Statements (Unaudited)) in connection with the extension and amendment of our credit agreements in September.last year. Income Taxes | | | | | | | | | | | | | | 13 Weeks Ended | | | 13 Weeks Ended | | | | | | | 26 Weeks Ended | | | 26 Weeks Ended | | | | | | | | 13 Weeks Ended November 3, 2018 | | | 13 Weeks Ended October 28, 2017 | | | Increase/ (Decrease) | | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | Increase/ (Decrease) | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | | August 3, 2019 | | | August 4, 2018 | | | Variance | | Income tax expense (benefit) | | $ | 171 | | | $ | (10,429) | | | $ | 10,600 | | | $ | 291 | | | $ | (14,888) | | | $ | 15,179 | | | Income tax expense | | | | $ | 52 | | | $ | 60 | | | $ | (8 | ) | | | $ | 105 | | | $ | 120 | | | $ | (15 | ) | Effective tax rate | | | (1.0)% | | | | 41.6% | | | | (42.6)% | | | | -2.9% | | | | 38.4% | | | | (41.3)% | | | | | (2.6 | )% | | | (6.7 | )% | | | 4.1 | % | | | | 5.3 | % | | | 1.8 | % | | | 3.5 | % |
Our effective tax rate represents the applicable combined federal and state statutory rates reduced by the federal benefit
The small amount of state taxes deductible on federal returns, adjusted for the effect of permanent differences. The decrease in the effectiveincome tax rate for the 13 and 3926 weeks ended NovemberAugust 3, 2018, was primarily driven by2019, reflects our net operating loss carryforward position and our valuation allowance against all net deferred tax assets established during the fourth quarter of 2017. We expect that our effective tax rate will remain near zero percentestimated taxable income for the rest of fiscal 2018.year. Liquidity and Capital Resources Capital requirements and working capital needs are funded through a combination of internally generated funds, available cash, credit terms from vendors, our $240.0 million senior secured revolving credit facility pursuant to a second amended and restated credit agreement with Wells Fargo Bank (“Credit Agreement”) and our $35.0 million Term Loan (as discussed below).
Revolving Credit Facility and Equipment Term Loan On February 3, 2015, we entered into a $250.0 million senior secured revolving credit facility pursuant to a second amended and restated credit agreement (the “Credit Agreement”) with Wells Fargo Bank (“Wells Fargo”) with an original maturity of February 2020 (the “Revolving Credit Facility”) and a secured $25.0 million master loan agreement with Wells Fargo Equipment Finance, Inc. (the “Equipment Term Loan”) with an original maturity of February 2018. Borrowings under the Revolving Credit Facility were initially used for a special dividend but are subsequently being used for working capital, capital expenditures and other general corporate purposes. During 2015, debt issuance costs of $0.4 million were associated with the Revolving Credit Facility and the Equipment Term Loan. Debt issuance costs associated with the Credit Agreement were being amortized over its term. We repaid the Equipment Term Loan in full on January 22, 2018, at which time the associated debt issuance costs were fully amortized. On February 19, 2018, we entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Credit Agreement Amendment providesprovided for, among other things, an Accommodation Period (as defined in the Credit Agreement Amendment) during which we were not required to meet the Fixed Charge Coverage Ratio (as defined in the Credit Agreement). This change permitted us to borrow the full amount of the then applicable borrowing base until we delivered our financial statements for the Measurement Period (as defined in the Credit Agreement) ended February 28, 2018. Pursuant to the Credit Agreement Amendment, a Cash Dominion Event (as defined in the Credit Agreement Amendment) occurred as of the effective date of the Credit Agreement Amendment and at all times thereafter. As a resultBecause of the Cash Dominion Event, all of our cash receipts were swept daily to repay outstanding borrowings under the Credit Agreement and the amount outstanding under the Credit Agreement was classified as a short-term obligation on the Condensed Consolidated Balance Sheets (Unaudited). Seeobligation. As noted below, for discussion of the Third Credit Agreement Amendment and the removal ofremoved the Cash Dominion Event effective September 18, 2018. 18
On March 14, 2018, we entered into the Term Loan Agreement (as defined in Note 4 “Debt” in the Notes to Condensed Consolidated Financial Statements (Unaudited)), which provided for a term loan in the amount of $50.0 million. At the same time, we entered into Amendment No. 2 (the “Second Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Second Credit Agreement Amendment provided for, among other things, the following: (1) the permanent repayment in full of $25.0 million of TrancheA-1 Revolving Loans (as defined in the Second Credit Agreement Amendment) were repaid in full with the proceeds of the Term Loan (as defined below), thereby reducing the maximum amount of the revolving credit facility under the Credit Agreement to $225.0 million;; (2) the entry into the Intercreditor Agreement (as defined in Note 4 “Debt” in the Notes to Condensed Consolidated Financial Statements (Unaudited)) between Wells Fargo Bank and Gordon Brothers Finance Company, LLC;below); and (3) certain other modifications and updates to coordinate the Revolving Credit AgreementFacility with the Term Loan. The net proceeds of $49.1 million from the Term Loan were used to permanently pay off the $25.0 million TrancheA-1 Revolving Loan Commitment (as defined in Note 4 “Debt” in the Notes to Condensed Consolidated Financial Statements (Unaudited)) and to pay down the outstanding TrancheA-1 Revolving Loans (as defined in the Credit Agreement). After utilizing proceeds from the Term Loan Agreement for repayment of amounts outstanding under the Credit Agreement, the Term Loan increased our total borrowing availability under the combination of the Credit Agreement and Term Loan to $275 million and increased our Excess Availability by approximately $25.0 million. See Note 4 “Debt” of the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion. On September 18, 2018, we entered into Amendment No. 3 (the “Third Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Third Credit Agreement Amendment providesprovided for, among other things, the following: (1) the increase of Aggregate Tranche A Revolving Loan Commitments (as defined in Note 4 “Debt” in the Notes to Condensed Consolidated Financial Statements (Unaudited))Second Credit Agreement Amendment) from $225.0 million to $240.0 million; (2) an extension of the Maturity Datematurity date of the Revolving Credit AgreementFacility to the earlier of (a) the maturity date of the Term Loan Agreement (as defined below) or (b) September 18, 2023; and (3) the elimination of Cash Dominion Event status and a change in the definition of Cash Dominion Event to be triggered only in the event of (a) the occurrence and continuance of any Event of Default or (b) Excess Availability of less than (A) 10.0% of the Loan Caploan cap at any time or (B) 12.5% of the loan cap for three consecutive business days. During 2018, debt issuance costs of less than $0.1 million were associated with the Third Credit Agreement Amendment and are being amortized over its respective term. Debt issuance costs of $0.1 million remaining under the initial Credit Agreement will also be amortized over the new term of the Third Credit Agreement Amendment. The elimination of cash dominion status changed the debt classification from a short-term to long-term obligation. On February 26, 2019, we entered into Amendment No. 4 (the “Fourth Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Fourth Credit Agreement Amendment provided for, among other things, a modification to the definition of “Capital Expenditures” and “Permitted Indebtedness” as defined in the Fourth Credit Agreement Amendment. The Credit Agreement contains customary representations and warranties, affirmative and negative covenants (including the requirement of a 1.0 to 1.0 consolidated Fixed Charge Coverage Ratio upon the occurrence and during the continuance of any Covenant Compliance Event, as defined in the Credit Agreement), and events of default for facilities of this type and is cross-collateralized and cross-defaulted. Collateral for the Revolving Credit Facility consists of substantially all of our personal property. Wells Fargo has a first lien on all collateral other than equipment. Borrowings under the Credit Agreement are either base rate loans or London Interbank Offered Rate (“LIBOR”) loans. LIBOR loans bear interest equal to the adjusted LIBOR plus the applicable margin (125 to 175 basis points) depending on the quarterly average excess availability. Base Rate Loans bear interest equal to the highest of (a) the Federal Funds Rate plus 0.50 percent, (b) the adjusted LIBOR plus 1.00 percent, or (c) the Wells Fargo “prime rate,” plus the Applicable Margin (25 to 75 basis points).
The weighted average interest rate for the amount outstanding under the Credit Agreement was 3.87 percent as of August 3, 2019. Term Loan On March 14, 2018, we entered into a Term Loan CapCredit Agreement with Gordon Brothers Finance Company, as administrative agent (in such capacity, the “Term Loan Agent”), and Gordon Brothers Finance Company, LLC, as lender (the “Term Loan Agreement”). The Term Loan Agreement provided for 3 consecutive Business Days. Ata term loan in the same time,amount of $50.0 million (the “Term Loan”). Debt issuance costs associated with the Term Loan were capitalized in the amount of $0.9 million and is being amortized over the term of the Term Loan. The net proceeds of $49.1 million from the Term Loan were used to permanently pay off the $25.0 million Tranche A-1 Revolving Loan (as defined in the Credit Agreement) and to pay down the Revolving Credit Facility. After utilizing proceeds from the Term Loan for repayment of amounts outstanding under the existing Tranche A-1 Revolving Loans, the Term Loan resulted in an increase in our Excess Availability of approximately $25.0 million under the Credit Agreement. The Term Loan originally matured on the earlier of (1) the termination date specified in our Credit Agreement, as such date may be extended with the consent of the Term Loan Agent or in accordance with the Intercreditor Agreement (defined below), and (2) March 14, 2020. On September 18, 2018, we entered into Amendment No. 2 (the “Second Term Loan Amendment”) to the Term Loan with Gordon Brothers Finance Company. The Second Term Loan Amendment providesprovided for, among other things, the following: (1) the reduction of the maximum amount of the Term Loan to $35.0 million; (2) an extension of the maturity date of the Term Loan Agreement to the earlier of (a) the termination date specified in the Revolving Credit AgreementFacility (as defined in the Third Credit Agreement)Agreement Amendment), and (b) September 18, 2023; (3) the reduction of thenon-default interest rate applicable to the Term Loan under the Term Loan Agreement to a fluctuating rate of interest equal to three-month LIBOR (with a floor of 1.5%) plus 8.25% per annum; and (4) the elimination of Cash Dominion Event status and a change in Cash Dominion to be triggered only in the event of (a) the occurrence and continuance of any Event of Default or (b) Excess Availability of less than (A) 10.0% of the Revolving Loan Cap at any time or (B) 12.5% of the Revolving Loan Cap for 3three consecutive Business Days. AsDuring 2018, debt issuance costs of approximately $0.3 million were associated with the Term Loan and are being amortized over its term. The elimination of cash dominion status changed the debt classification from a short-term to long-term obligation. On February 26, 2019, we entered into Amendment No. 3 (the “Third Term Loan Amendment”) to the Term Loan Agreement. The Third Term Loan Amendment provided for, among other things, a modification to the definition of “Capital Expenditures” and “Permitted Indebtedness” as defined in the Third Term Loan Amendment. The Term Loan Agreement contains customary representations and warranties, events of default, and affirmative and negative covenants, which include the retention of the existing minimum 1.0 to 1.0 consolidated fixed charge coverage ratio under the Credit Agreement during periods where Revolving Excess Availability (as defined in the Term Loan Agreement) is less than the greater of $20.0 million or 10.0 percent of Combined Loan Cap (as defined in the Term Loan Agreement) for four consecutive business days during the occurrence of an Event of Default (as defined in the Term Loan Agreement). The Term Loan is secured by a second lien security interest (subordinate only to the liens securing the Credit Agreement) on all assets securing the Credit Agreement (which consist of substantially all of our personal property), except furniture, fixtures and equipment and intellectual property, upon which the Term Loan lenders have a first lien security interest. The Term Loan is subject to certain mandatory prepayments if an Event of Default (as defined in the Term Loan Agreement) exists. If no such Event of Default exists, proceeds of the Term Loan priority collateral are no longer in Cash Dominion Event status,to be applied to amounts outstanding under the Credit Agreement. The Term Loan Agent and Wells Fargo have entered into an Intercreditor Agreement dated as of March 14, 2018 (the “Intercreditor Agreement”), acknowledged by us under the Term Loan and the Credit Agreement. The Intercreditor Agreement was also amended on September 18, 2018 to incorporate the amendment to the Revolving Credit Facility and the Term Loan Agreement.
The weighted average interest rate for the amount outstanding under the Credit Agreement is classifiedTerm Loan was 10.57 percent as a long-term obligation on the Condensed Consolidated Balance Sheets (Unaudited).of August 3, 2019. On February 2, 2018, we executed a short-term promissory note under which we borrowed approximately $13.7 million (the “Promissory Note”) from SunTrust Bank in its capacity as trustee under a trust agreement dated September 1, 1999. The proceeds from the Promissory Note were used to pay down borrowings under the Credit Agreement to provide additional availability under the Credit Agreement to assist us during our February low working capital period following the holiday selling season. In March 2018, we extended the due date of the Promissory Note to July 1, 2018. On June 29, 2018, we repaid the outstanding balance of the Promissory Note. On July 31, 2018, we borrowed $13.0 million under a new promissory note from SunTrust Bank. The proceeds were used to provide additional availability as we begin to purchase inventory for the second half of 2018. See Note 4 “Debt” of the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion. On September 10, 2018, we repaid the outstanding balance of the Promissory Note.
We believe we are able tocan borrow, on a short-term basis and subject to the formal agreement withof the lender, amounts up to the cash surrender value of the life insurance policies related to our executive deferred compensation plans to provide additional liquidity if needed. At NovemberAugust 3, 2018,2019, the cash surrender value of our life insurance policies was $12.8$15.5 million. On February 2, 2018, we executed a promissory note under which we borrowed approximately $13.7 million (the “Promissory Note”) from SunTrust Bank (the “Trustee”) in its capacity as the trustee under a trust agreement (the “Trust Agreement”) dated September 1, 1999. The trust established by the Trust Agreement (the “Trust”) holds certain life insurance policies related to our executive deferred compensation plans. The Trustee obtained loans from the insurance policies held in the Trust in an amount not less than the amount of the Promissory Note. The Promissory Note was a short-term obligation and the proceeds were used to pay down borrowings under the existing Credit Agreement which provided additional availability under that agreement. The Promissory Note had a fixed interest rate of 3.58 percent per annum and an original maturity date of April 1, 2018. On March 7, 2018, we executed an amendment to the Promissory Note under which the Trustee extended the maturity date of the note from April 1, 2018, to July 1, 2018 (the “Maturity Date”). The amendment did not alter the short-term nature of the Promissory Note. The Promissory Note could be prepaid in whole or in part at any time. All unpaid principal and accrued interest on the Promissory Note would have become due and payable on the Maturity Date. The Trustee could offset payments due under the Promissory Note against amounts we would otherwise be entitled to withdraw from the Trust under the terms of the Trust Agreement. On June 29, 2018, we repaid the outstanding balance of the Promissory Note. On July 31, 2018, we executed a second promissory note from SunTrust Bank for $13.0 million, which carried a fixed interest rate of 3.58 percent per annum and an original maturity date of September 10, 2018. This note included the same terms as the Promissory Note executed on February 2, 2018. On September 10, 2018, we repaid the outstanding balance of the second promissory note. Cash flows from operations are driven by sales as well as the credit terms available to us from our vendors and their factors. Our sales generate cash almost immediately and are affected by customer traffic to our stores and the desirability of our merchandise forto those customers. Customer traffic is in turn affected by our marketing and advertising, general economic and business conditions, and weather. Changes in these factors could have a material effect on our ability to generate sales and thus cash inflows to operate our business. Our cash outflows can be materially affected by changes in credit terms and availability from our vendors and their factors. During the first quarter of 2018, our vendors and factors constricted our credit terms and limits significantly. This was a reaction to our 2017 third-quarter results, as well as concern about the general retail environment at the time, which included multiple bankruptcies and restructurings by other retailers in the same business. This constriction caused us to make payments to our vendors and factors more quickly than in prior periods, thus increasing our debt levels during that period. The added availability from the Term Loan Agreement was a key part of our ability to fund the accelerated payments. During this time, we successfully managed our vendor and factor relationships to maintain the flow of our 19
merchandise during the key early spring selling period. Throughout all periods, we made our payments to vendors and their factors on a timely basis in accordance with our negotiated terms.
After we announced our fourth quarter 2017 results and outlook for spring 2018, in March our terms with the vendors and their factors began to be less constricted. At that same time, we also announced our Term Loan Agreement. We havenon-disclosure agreements with the major factors, credit insurers and several of our largest vendors whichthat allow us to communicate our operating results and cash flows to them on a regular basis. Additionally,During 2018, we made periodic presentations to larger groups of our key vendors just after our fourth quarter results were announced, in March 2018. Weand factors and we continue to communicate our operating results and cash flows to our large vendors and factors with whom we havenon-disclosure agreements in place.them. These steps have contributed to the positive movement in their credit arrangements.arrangements with us, which has continued through the second quarter of 2019.
Our working capital fluctuates with seasonal variations, which affect our borrowings and availability. Our availability is highest just after our strong seasonal spring and holiday selling seasons and is lowest just before those seasons as we build inventory levels. Working capital is also used to support capital investments for maintenance of our existing stores, system improvements and new store openings. We have reduced our capital investments to enhance our cash flows. These reduced levels of investment can be sustained for the foreseeable future as prior to this our store base and systems have been well maintained. Positive operating results and cash flows will help us preserve satisfactory credit terms and allow us to operate within the borrowing availability under our Credit Agreement and Term Loan Agreement. Based on our current expectations regarding our operating results, we consider our resources adequate to satisfy our cash needs for at least the next 12 months.
In January 2018, we announced that we hired PJ Solomon to help us evaluate strategic and capital alternatives. We hired Alvarez & Marsal as advisors in 2017 to assist in evaluating our forecasting and strategic communications with our vendors and their factors. Alvarez & Marsal also advised us on cost savings and cash flow initiatives and assisted with evaluating capital alternatives which resulted in the Term Loan Agreement. It is possible that additional strategic alternatives will arise from these efforts.
As of NovemberAugust 3, 2018,2019, we had cash and cash equivalents of $13.9$9.5 million and $156.6$103.5 million in borrowings under our Credit Agreement and $35.0 million in borrowings under the Term Loan, for a total of $190.7$137.8 million in outstanding borrowings, net of $0.9$0.8 million in unamortized debt issuance costs. As of February 3,2, 2019, we had cash and cash equivalents of $9.0 million and $119.1 million in borrowings under our Credit Agreement and $35.0 million in borrowings under the Term Loan, for a total of $153.3 million in outstanding borrowings, net of $0.8 million in unamortized debt issuance costs. As of August 4, 2018, we had cash and cash equivalents of $10.4,$10.0 million and $112.3 million in borrowings under our credit facilities of $142.4Credit Agreement, $50.0 million in borrowings under the Term Loan and $13.7$13.0 million in borrowings under the Promissory Note, for a total of $156.1$174.5 million in outstanding borrowings. Asborrowings, net of October 28, 2017, we had cash and cash equivalents of $13.2$0.7 million and borrowings under our credit facilities were $150.8 million.in unamortized debt issuance costs. The total amount available for borrowings and letters of credit under our Credit Agreement is the lesser of $240.0 million or 100 percent of eligible credit card receivables and the net recovery percentage value of inventories less reserves. On NovemberAugust 3, 2018,2019, in addition to outstanding borrowings under the Credit Agreement and Term Loan, and Promissory Note, we had $8.5$8.0 million of outstanding letters of credit. Our Excess Availability (as defined in the Credit Agreement) was $74.9$61.9 million on NovemberAugust 3, 2018. See Note 4 “Debt”2019. As of August 3, 2019, we had $15.5 million available to borrow, on a short-term basis and subject to the formal agreement of the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.lender, which would be collateralized by life insurance policies. Cash Flows | | 26 Weeks Ended August 3, 2019 | | | 26 Weeks Ended August 4, 2018 | | | Change | | Cash provided by (used in): | | | | | | | | | | | | | | | Operating activities | | | $ | 19,834 | | | $ | (16,884 | ) | | $ | | 36,718 | | Investing activities | | | | (3,376 | ) | | | (1,272 | ) | | | | (2,104 | ) | Financing activities | | | | (16,026 | ) | | | 17,786 | | | | | (33,812 | ) | Net increase (decrease) in cash and cash equivalents | | | $ | 432 | | | $ | (370 | ) | | $ | | 802 | |
| | | | | | | | | | | | | Cash (used in) provided by : | | 39 Weeks Ended November 3, 2018 | | | 39 Weeks Ended October 28, 2017 | | | Change | | | | | | | | | | | | | | | Operating activities | | $ | (25,561 | ) | | $ | 52,804 | | | $ | (78,365 | ) | Investing activities | | | (4,569 | ) | | | (15,664 | ) | | | 11,095 | | Financing activities | | | 33,614 | | | | (34,514 | ) | | | 68,128 | | | | | | | | | | | | | | | Net increase in cash and cash equivalents | | $ | 3,484 | | | $ | 2,626 | | | $ | 858 | | | | | | | | | | | | | | |
Net cash provided by operating activities was $19.8 million for the 26 weeks ended August 3, 2019, compared to net cash used in operating activities was $25.6of $16.9 million for the 3926 weeks ended November 3, 2018, compared to net cash provided by operating activities of $52.8 million for the 39 weeks ended October 28, 2017.August 4, 2018. The decreaseincrease in cash provided by operating activities was mainlyprimarily due to improved credit terms from vendors and factors since the accelerationsecond quarter of vendor payments during the 39 weeks ended November 3, 2018, which significantly reduced our accounts payable balance compared to the 39 weeks ended October 28, 2017. Also affecting operating cash flows was increased2018. Our decreased inventory purchases over last year. Due to improved management, our beginning inventory levels were lower this year requiring the purchase of more inventory leading into the holiday season.also affected operating cash flows. Net cash used in investing activities was primarily from capital expenditures offset by proceeds from canceled corporate-owned life insurance policies and was $4.6$3.4 million for the 3926 weeks ended NovemberAugust 3, 2018,2019, compared to net cash used in investing activities of $15.7$1.3 million for the 3926 weeks ended October 28, 2017, primarily for capital expenditures.August 4, 2018. The decrease in capital expenditures waschange is primarily due to lower investmentlast year’s proceeds from cancelled corporate-owned life insurance policies. Net cash used in technologies, fewer remodels to existing stores and fewer tenant improvementsfinancing activities was $16.0 million during the 3926 weeks ended NovemberAugust 3, 2018. We expect lower capital expenditures2019, compared to continue through the end of fiscal 2018. 20
Net cash provided by financing activities was $33.6of $17.8 million during the 3926 weeks ended November 3, 2018, compared to cash used in financing activities of $34.5 million duringAugust 4, 2018. During the 3926 weeks ended October 28, 2017.August 3, 2019, we had net repayments of debt of $15.6 million. During the 3926 weeks ended November 3,August 4, 2018, we had net proceeds of debt of $35.4$19.1 million, primarily used to pay vendors due to accelerated payment terms mostly in the first quarter. We paid debt issuance costs of $1.1 million, cash dividends of $0.1half. The increase in borrowings and capital lease payments of $0.6 million. In addition, we repurchased 52,241 shares of common stock for less than $0.1 million. We also received $0.1 million from our Employee Share Purchase Plan. During the 39 weeks ended October 28, 2017, we had net repayments of debt of $31.0 million. We also paid cash dividends of $3.6 million and capital lease payments of $1.0 million. We did not pay any debt issuance costs. In addition, we repurchased 69,122 shares of common stock for $0.2 million. We also received $0.3 million from our Employee Share Purchase Plan. See Note 2 “Shareholders’ Equity”was a result of the Notes to Condensed Consolidated Financial Statements (Unaudited) for further discussion.cash dominion discussed above.
Critical Accounting Policies and Estimates We discuss our critical accounting policies and estimates in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form10-K for the year ended February 3, 2018,2, 2019 and filed with the SEC on May 4, 2018. WeMarch 28, 2019. Except for the adoption of the lease accounting standard (Topic 842), we have made no significant changes in our critical accounting policies and estimates since February 3, 2018.2, 2019. Recent Accounting Pronouncements Recently issued accounting pronouncements are discussed in Note 1 “Basis of Presentation” of the Notes to Condensed Consolidated Financial Statements (Unaudited).Statements. Seasonality and Inflation Our business is seasonal. Sales and profitability are historically higher in the first and fourth quarters of the fiscal year, which include the spring and holiday seasons. Therefore, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Although we expect that our income will be influenced by general economic conditions, 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 materially by inflation in the future.
ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of NovemberAugust 3, 2018,2019, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting (as that term is defined in Rules13a-15(f) and15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHEROTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See the discussion of legal proceedings in Note 59 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in Item 1 of Part I of this Quarterly Report, which is incorporated by reference into this Item 1 of Part II. ITEM 1A. RISK FACTORS ThereOther than noted below, there have been no material changes in our risk factors from those described in our Annual Report on Form10-K for the year ended February 3, 2018.2, 2019.
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We recently received a notice from Nasdaq advising us that we do not meet the continued listing standards of The Nasdaq Global Market. If we are unable to maintain a listing on a national securities exchange, it could negatively impact the price and liquidity of our common stock, which could impair the value of your investment.
Our common stock is currently listed on The Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum financial and other listing requirements. On July 8, 2019, the Nasdaq Listing Qualifications Department notified us that we did not meet the $1.00 minimum bid price for the last 30 consecutive business days as required by Rule 5450(a)(1). In accordance with Rule 5810(c)(3)(A), we have 180 calendar days, or until January 6, 2020, to regain compliance with the bid price requirement. If we are unable to comply with the bid price requirement during the applicable grace period, an additional 180 days may be granted to regain compliance if we (i) meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Global Market (except for the bid price requirement) and (ii) provide written notice of our intention to cure the deficiency during the second 180-day compliance period.Although no determination regarding our response has been made at this time, we intend to take any reasonable actions to resolve our noncompliance with the minimum bid price requirement as may be necessary. However, there can be no assurance that we will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria. The delisting of our common stock from The Nasdaq Global Market could adversely affect the market liquidity of our common stock and could result in other negative implications, including the potential loss of confidence by suppliers, customers and employees, and fewer business development opportunities. Any such developments could impair the value of your investment. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth information regarding repurchases of our common stock during the quarter ended NovemberAugust 3, 2018:2019: | ISSUER PURCHASES OF EQUITY SECURITIES | ISSUER PURCHASES OF EQUITY SECURITIES | | ISSUER PURCHASES OF EQUITY SECURITIES | | Period | | Total number of shares purchased | | | Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs (1) | | | Maximum number of shares that may yet be purchased under the plans or programs (1) | | | Total number of shares purchased | | | Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs (1) | | | Maximum number of shares that may yet be purchased under the plans or programs (1) (2) | | | | | | | | | | | | August 5, 2018 - September 1, 2018 | | | 457 | | | $ | 2.71 | | | | 457 | | | | 366,889 | | | September 2, 2018 - October 6, 2018 | | | 990 | | | | 2.24 | | | | 990 | | | | 366,889 | | | October 7, 2018 - November 3, 2018 | | | 2,385 | | | | 2.14 | | | | 2,385 | | | | 366,889 | | | | | | | | | | | | | May 5, 2019 – June 1, 2019 | | | | 1,264 | | | $ | | 0.92 | | | | - | | | | 366,889 | | June 2, 2019 – July 6, 2019 | | | | 9,450 | | | | 0.92 | | | | - | | | | 366,889 | | July 7, 2019 – August 3, 2019 | | | | 1,172 | | | | 0.73 | | | | - | | | | 366,889 | | Total | | | 3,832 | | | $ | 2.24 | | | | 3,832 | | | | 366,889 | | | | 11,886 | | | $ | | 0.90 | | | | - | | | | 366,889 | | | | | | | | | | | |
(1) | All stock repurchases were for tax withholding amounts due on employee stock awards. No shares were purchased on the open market pursuant to our open market repurchase program. Our open market repurchase programOpen Market Repurchase Program is conducted pursuant to authorizations made from time to time by our Board of Directors, including the most recent authorization of an additional 500,000 shares byDirectors.
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(2) | On November 30, 2015, the Board of Directors on November 24, 2015, and announced on November 30, 2015.that it had authorized the repurchase of 500,000 shares of our common stock in addition to amounts previously authorized. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4. MINE SAFETYSAFETY DISCLOSURES Not applicable. ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS | | | 10.1 | | Second Amendment to Term Loan Credit Agreement dated as of September 18, 2018, by and among Gordon Brothers Finance Company, as administrative agent, Gordon Brothers Finance Company LLC, as lender, Stein Mart, Inc., Stein Mart Buying Corp. and Stein Mart Holding Corp., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form8-K filed on September 19, 2018
| 10.2 | | Amendment No. 3 to Second Amended and Restated Credit Agreement, dated as of September 18, 2018, by and among Wells Fargo Bank, National Association, as administrative agent, the lenders party thereto, Stein Mart, Inc., Stein Mart Buying Corp. and Stein Mart Holding Corp., incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form8-K filed on September 19, 2018
| 10.3 | | Amendment No. 1 to Intercreditor Agreement, dated September 18, 2018, by and among Wells Fargo Bank, National Association and Gordon Brothers Finance Company., incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form10-K filed on September 19, 201831.1+
| 10.4+ | | Second Amendment to the Amended and RestatedCo-Brand and Private Label Credit Card Consumer Program Agreement with Synchrony Bank
| 31.1+ | | Certification of Chief Executive Officer Pursuant to Rule13a-14(a) or15d-14(a) | 31.2+ | | 31.2+ | Certification of Chief Financial Officer Pursuant to Rule13a-14(a) or15d-14(a) | 32.1+ | | 32.1+ | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | 32.2+ | | 32.2+ | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | 101 | | 101 | Interactive data files from Stein Mart, Inc.’s Quarterly Report on Form10-Q for the quarter ended NovemberAugust 3, 2018,2019, formatted in XBRL (extensible(eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (Unaudited), (ii) the Condensed Consolidated Statements of Operations, (Unaudited), (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (Unaudited), (iv) the CondensedConsolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, (Unaudited), and (v)(vi) the Notes to Condensed Consolidated Financial Statements (Unaudited) | | | +* | Management contract or compensatory plan or arrangements. | | | + | Filed herewith. |
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SIGNATURESSIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Form10-Q to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | STEIN MART, INC. | | | | | | Date: December 4, 2018September 9, 2019 | | By: | | By: | | /s/ D. Hunt Hawkins | | | | | | | D. Hunt Hawkins | | | | | | | Chief Executive Officer | | | | | | | | | | | | | | | | | | | /s/ Gregory W. KleffnerJames B. Brown | | | | | | | Gregory W. KleffnerJames B. Brown | | | | | | | Executive Vice President and Chief Financial Officer |
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