UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 3, 2019
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number 1-14035
Stage Stores, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 91-1826900 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||
2425 West Loop South | 77027 | ||
Houston, | Texas | (Zip Code) | |
(Address of principal executive offices) |
(800) 579-2302
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock ($0.01 par value) | SSI | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☑ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☑ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of September 4, 2019, there were 28,876,878 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS | |||
Page No. | |||
Item 1. | |||
August 3, 2019, February 2, 2019 and August 4, 2018 | |||
Three and Six Months Ended August 3, 2019 and August 4, 2018 | |||
Six Months Ended August 3, 2019 and August 4, 2018 | |||
Three and Six Months Ended August 3, 2019 and August 4, 2018 | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Stage Stores, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
(Unaudited)
August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||
ASSETS | |||||||||||
Cash and cash equivalents | $ | 25,418 | $ | 15,830 | $ | 26,573 | |||||
Merchandise inventories, net | 499,001 | 424,555 | 476,883 | ||||||||
Prepaid expenses and other current assets | 50,138 | 52,518 | 48,525 | ||||||||
Total current assets | 574,557 | 492,903 | 551,981 | ||||||||
Property, equipment and leasehold improvements, net of accumulated depreciation of $757,296, $733,366 and $722,938, respectively | 201,928 | 224,803 | 236,151 | ||||||||
Operating lease assets | 321,982 | — | — | ||||||||
Intangible assets | 2,225 | 2,225 | 17,135 | ||||||||
Other non-current assets, net | 21,354 | 24,230 | 24,409 | ||||||||
Total assets | $ | 1,122,046 | $ | 744,161 | $ | 829,676 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Accounts payable | $ | 155,865 | $ | 106,825 | $ | 122,680 | |||||
Current portion of debt obligations | 5,000 | 4,812 | 3,542 | ||||||||
Current portion of operating lease liabilities | 74,906 | — | — | ||||||||
Accrued expenses and other current liabilities | 76,455 | 65,715 | 73,506 | ||||||||
Total current liabilities | 312,226 | 177,352 | 199,728 | ||||||||
Long-term debt obligations | 318,775 | 250,294 | 268,682 | ||||||||
Long-term operating lease liabilities | 279,009 | — | — | ||||||||
Other long-term liabilities | 32,213 | 61,990 | 65,431 | ||||||||
Total liabilities | 942,223 | 489,636 | 533,841 | ||||||||
Commitments and contingencies | |||||||||||
Common stock, par value $0.01, 100,000 shares authorized, 34,052, 33,469 and 33,418 shares issued, respectively | 341 | 335 | 334 | ||||||||
Additional paid-in capital | 425,033 | 423,535 | 421,621 | ||||||||
Treasury stock, at cost, 5,175 shares, respectively | (43,546 | ) | (43,579 | ) | (43,388 | ) | |||||
Accumulated other comprehensive loss | (5,485 | ) | (5,857 | ) | (4,823 | ) | |||||
Accumulated deficit | (196,520 | ) | (119,909 | ) | (77,909 | ) | |||||
Total stockholders' equity | 179,823 | 254,525 | 295,835 | ||||||||
Total liabilities and stockholders' equity | $ | 1,122,046 | $ | 744,161 | $ | 829,676 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Stage Stores, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Net sales | $ | 367,865 | $ | 369,294 | $ | 695,586 | $ | 713,523 | |||||||
Credit income | 13,988 | 14,305 | 27,096 | 29,819 | |||||||||||
Total revenues | 381,853 | 383,599 | 722,682 | 743,342 | |||||||||||
Cost of sales and related buying, occupancy and distribution expenses | 295,204 | 286,807 | 572,803 | 568,548 | |||||||||||
Selling, general and administrative expenses | 106,310 | 110,914 | 212,886 | 218,191 | |||||||||||
Interest expense | 4,123 | 2,650 | 8,117 | 4,903 | |||||||||||
Loss before income tax | (23,784 | ) | (16,772 | ) | (71,124 | ) | (48,300 | ) | |||||||
Income tax expense | 150 | 150 | 300 | 300 | |||||||||||
Net loss | $ | (23,934 | ) | $ | (16,922 | ) | $ | (71,424 | ) | $ | (48,600 | ) | |||
Other comprehensive income: | |||||||||||||||
Amortization of employee benefit related costs, net of tax of $0, respectively | $ | 202 | $ | 155 | $ | 372 | $ | 354 | |||||||
Total other comprehensive income | 202 | 155 | 372 | 354 | |||||||||||
Comprehensive loss | $ | (23,732 | ) | $ | (16,767 | ) | $ | (71,052 | ) | $ | (48,246 | ) | |||
Net loss per share: | |||||||||||||||
Basic | $ | (0.83 | ) | $ | (0.60 | ) | $ | (2.50 | ) | $ | (1.74 | ) | |||
Diluted | $ | (0.83 | ) | $ | (0.60 | ) | $ | (2.50 | ) | $ | (1.74 | ) | |||
Weighted average shares outstanding: | |||||||||||||||
Basic | 28,791 | 28,152 | 28,616 | 27,959 | |||||||||||
Diluted | 28,791 | 28,152 | 28,616 | 27,959 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Stage Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended | |||||||
August 3, 2019 | August 4, 2018 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (71,424 | ) | $ | (48,600 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization of long-lived assets | 29,872 | 30,147 | |||||
Impairment of long-lived assets | 1,615 | 1,070 | |||||
(Gain) loss on retirements of property, equipment and leasehold improvements | (678 | ) | 17 | ||||
Non-cash operating lease expense | 34,919 | — | |||||
Stock-based compensation expense | 1,585 | 3,049 | |||||
Dividends charged to compensation expense | 21 | — | |||||
Amortization of debt issuance costs | 341 | 148 | |||||
Deferred compensation obligation | (33 | ) | 90 | ||||
Amortization of employee benefit related costs | 372 | 354 | |||||
Construction allowances from landlords | 3,553 | 757 | |||||
Other changes in operating assets and liabilities: | |||||||
Increase in merchandise inventories | (74,446 | ) | (38,506 | ) | |||
Decrease in other assets | 8,464 | 2,412 | |||||
Decrease in operating lease liabilities | (37,601 | ) | — | ||||
Increase (decrease) in accounts payable and other liabilities | 61,788 | (19,958 | ) | ||||
Net cash used in operating activities | (41,652 | ) | (69,020 | ) | |||
Cash flows from investing activities: | |||||||
Additions to property, equipment and leasehold improvements | (18,610 | ) | (12,822 | ) | |||
Proceeds from insurance and disposal of assets | 678 | 1,802 | |||||
Net cash used in investing activities | (17,932 | ) | (11,020 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from revolving credit facility borrowings | 257,426 | 298,509 | |||||
Payments of revolving credit facility borrowings | (186,445 | ) | (233,148 | ) | |||
Proceeds from long-term debt obligation | — | 25,000 | |||||
Payments of long-term debt obligations | (1,758 | ) | (1,472 | ) | |||
Payments of debt issuance costs | (36 | ) | (354 | ) | |||
Payments for stock related compensation | (15 | ) | (260 | ) | |||
Cash dividends paid | — | (2,912 | ) | ||||
Net cash provided by financing activities | 69,172 | 85,363 | |||||
Net increase in cash and cash equivalents | 9,588 | 5,323 | |||||
Cash and cash equivalents: | |||||||
Beginning of period | 15,830 | 21,250 | |||||
End of period | $ | 25,418 | $ | 26,573 | |||
Supplemental disclosures including non-cash investing and financing activities: | |||||||
Interest paid | $ | 7,726 | $ | 4,866 | |||
Income taxes paid | $ | 473 | $ | 14 | |||
Unpaid liabilities for capital expenditures | $ | 4,166 | $ | 4,798 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Stage Stores, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except per share amounts)
(Unaudited)
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||
Balance at May 4, 2019 | 33,805 | $ | 338 | $ | 424,407 | (5,175 | ) | $ | (43,552 | ) | $ | (5,687 | ) | $ | (172,607 | ) | $ | 202,899 | |||||||||||
Net loss | — | — | — | — | — | — | (23,934 | ) | (23,934 | ) | |||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 202 | — | 202 | |||||||||||||||||||||
Deferred compensation | — | — | (6 | ) | — | 6 | — | — | — | ||||||||||||||||||||
Issuance of equity awards, net | 247 | 3 | (3 | ) | — | — | — | — | — | ||||||||||||||||||||
Tax withholdings paid for net settlement of stock awards | — | — | (1 | ) | — | — | — | — | (1 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | 636 | — | — | — | — | 636 | |||||||||||||||||||||
Dividends on forfeited stock awards charged to compensation expense | — | — | — | — | — | — | 21 | 21 | |||||||||||||||||||||
Balance at August 3, 2019 | 34,052 | $ | 341 | $ | 425,033 | (5,175 | ) | $ | (43,546 | ) | $ | (5,485 | ) | $ | (196,520 | ) | $ | 179,823 | |||||||||||
�� | |||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||
Balance at May 5, 2018 | 33,111 | 331 | 420,091 | (5,175 | ) | (43,339 | ) | (4,978 | ) | (59,520 | ) | 312,585 | |||||||||||||||||
Net loss | — | — | — | — | — | — | (16,922 | ) | (16,922 | ) | |||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 155 | — | 155 | |||||||||||||||||||||
Dividends on common stock, $0.05 per share | — | — | — | — | — | — | (1,467 | ) | (1,467 | ) | |||||||||||||||||||
Deferred compensation | — | — | 49 | — | (49 | ) | — | — | — | ||||||||||||||||||||
Issuance of equity awards, net | 307 | 3 | (3 | ) | — | — | — | — | — | ||||||||||||||||||||
Tax withholdings paid for net settlement of stock awards | — | — | (7 | ) | — | — | — | — | (7 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | 1,491 | — | — | — | — | 1,491 | |||||||||||||||||||||
Balance at August 4, 2018 | 33,418 | $ | 334 | $ | 421,621 | (5,175 | ) | $ | (43,388 | ) | $ | (4,823 | ) | $ | (77,909 | ) | $ | 295,835 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Stage Stores, Inc.
Condensed Consolidated Statements of Stockholders’ Equity - continued
(in thousands, except per share amounts)
(Unaudited)
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||
Balance at February 2, 2019 | 33,469 | $ | 335 | $ | 423,535 | (5,175 | ) | $ | (43,579 | ) | $ | (5,857 | ) | $ | (119,909 | ) | $ | 254,525 | |||||||||||
Cumulative-effect adjustment (a) | — | — | — | — | — | — | (5,208 | ) | (5,208 | ) | |||||||||||||||||||
Net loss | — | — | — | — | — | — | (71,424 | ) | (71,424 | ) | |||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 372 | — | 372 | |||||||||||||||||||||
Deferred compensation | — | — | (33 | ) | — | 33 | — | — | — | ||||||||||||||||||||
Issuance of equity awards, net | 583 | 6 | (6 | ) | — | — | — | — | — | ||||||||||||||||||||
Tax withholdings paid for net settlement of stock awards | — | — | (48 | ) | — | — | — | — | (48 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | 1,585 | — | — | — | — | 1,585 | |||||||||||||||||||||
Dividends on forfeited stock awards charged to compensation expense | — | — | — | — | — | — | 21 | 21 | |||||||||||||||||||||
Balance at August 3, 2019 | 34,052 | $ | 341 | $ | 425,033 | (5,175 | ) | $ | (43,546 | ) | $ | (5,485 | ) | $ | (196,520 | ) | $ | 179,823 | |||||||||||
(a) Related to the adoption of the new lease accounting standard. See Note 1 for further disclosures regarding the adoption impact. | |||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Accumulated Deficit | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||
Balance at February 3, 2018 | 32,806 | $ | 328 | $ | 418,658 | (5,175 | ) | $ | (43,298 | ) | $ | (5,177 | ) | $ | (26,397 | ) | $ | 344,114 | |||||||||||
Net loss | — | — | — | — | — | — | (48,600 | ) | (48,600 | ) | |||||||||||||||||||
Other comprehensive income | — | — | — | — | — | 354 | — | 354 | |||||||||||||||||||||
Dividends on common stock, $0.10 per share | — | — | — | — | — | — | (2,912 | ) | (2,912 | ) | |||||||||||||||||||
Deferred compensation | — | — | 90 | — | (90 | ) | — | — | — | ||||||||||||||||||||
Issuance of equity awards, net | 612 | 6 | (6 | ) | — | — | — | — | — | ||||||||||||||||||||
Tax withholdings paid for net settlement of stock awards | — | — | (170 | ) | — | — | — | — | (170 | ) | |||||||||||||||||||
Stock-based compensation expense | — | — | 3,049 | — | — | — | — | 3,049 | |||||||||||||||||||||
Balance at August 4, 2018 | 33,418 | $ | 334 | $ | 421,621 | (5,175 | ) | $ | (43,388 | ) | $ | (4,823 | ) | $ | (77,909 | ) | $ | 295,835 | |||||||||||
Stage Stores, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Stage Stores, Inc. and its subsidiary (“we,” “us” or “our”) have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Those adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods have been made. Results of operations for such interim periods are not necessarily indicative of the results of operations for a full year due to seasonality and other factors. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto filed with our Annual Report on Form 10-K for the year ended February 2, 2019 (“Form 10-K”).
We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of August 3, 2019, we operated in 42 states through 645 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 141 GORDMANS off-price stores, as well as an e-commerce website (www.stage.com). Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized markets in the Midwest.
References to a particular year are to our fiscal year, which is the 52- or 53-week period ending on the Saturday closest to January 31st of the following calendar year. For example, a reference to “2019” is a reference to the fiscal year ending February 1, 2020, and “2018” is a reference to the fiscal year ended February 2, 2019. Fiscal years 2019 and 2018 are comprised of 52 weeks. References to the “three months ended August 3, 2019” and “three months ended August 4, 2018” are for the respective 13-week fiscal quarters. References to quarters relate to our fiscal quarters. References to the “six months ended August 3, 2019” and “six months ended August 4, 2018” are for the respective 26-week fiscal periods.
Recently Adopted Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (“ASU”) 2016-02, Leases (Topic 842), and subsequently issued related ASUs, which were incorporated into Topic 842. Under the new standard, lessees are required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the later of the lease commencement date and the date of adoption. The guidance also requires qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. We adopted the new standard on February 3, 2019, the first day of fiscal 2019.
Transition elections:
• | We elected to apply the effective date transition method as of the February 3, 2019 adoption date. Comparative periods prior to the adoption of the new standard have not been restated and are reported under the legacy guidance in Accounting Standards Codification (“ASC”) Topic 840, Leases. |
• | We elected the package of practical expedients in the transition guidance, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. |
• | We elected not to use the practical expedient of using hindsight to determine the lease term and in assessing impairment of the right-of-use assets. |
Accounting policy elections:
• | We elected the short-term lease exemption for leases that have a lease term of twelve months or less. For leases that qualify for the short-term exemption, we will not recognize a right-of-use asset or liability and will recognize those lease expenses on a straight-line basis over the lease term. |
• | We elected to not separate lease and non-lease components for all of our current lease classes. |
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
The adoption of the standard resulted in the recognition of operating lease assets and liabilities of $344.2 million and $375.8 million, respectively, as of February 3, 2019. Included in the measurement of the operating lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and deferred rent tenant allowances. We also recognized a cumulative effect charge of $5.2 million, net of tax, to the opening accumulated deficit balance. This adjustment reflects $5.8 million in depreciation of leasehold improvements associated with conforming the asset useful life to the remaining lease life as of the transition date. It also reflects $0.6 million associated with the derecognition of lease obligations that had been classified as finance obligations under the former failed sale-leaseback guidance applied to build-to-suit arrangements. Under the new standard, these leases are classified as operating leases. The adoption of the standard did not have a material impact on our results of operations or cash flows. In addition, our bank covenants under our Credit Facility were not affected by the adoption of the standard. See Note 5 for further disclosures regarding leases.
Recent Accounting Pronouncements Not Yet Adopted. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires disclosure of the nature of hosting arrangements that are service contracts. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and disclosures.
NOTE 2 - FAIR VALUE MEASUREMENTS
We recognize or disclose the fair value of our financial and non-financial assets and liabilities on a recurring and non-recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.
We applied the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 – | Quoted prices in active markets for identical assets or liabilities. |
Level 2 – | Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 – | Inputs that are both unobservable and significant to the overall fair value measurement reflect our estimates of assumptions that market participants would use in pricing the asset or liability. |
9
Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
August 3, 2019 | |||||||||||||||
Balance | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Other assets: | |||||||||||||||
Securities held in grantor trust for deferred compensation plans (a)(b) | $ | 16,763 | $ | 16,763 | $ | — | $ | — | |||||||
February 2, 2019 | |||||||||||||||
Balance | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Other assets: | |||||||||||||||
Securities held in grantor trust for deferred compensation plans (a)(b) | $ | 19,536 | $ | 19,536 | $ | — | $ | — | |||||||
August 4, 2018 | |||||||||||||||
Balance | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Other assets: | |||||||||||||||
Securities held in grantor trust for deferred compensation plans (a)(b) | $ | 20,188 | $ | 20,188 | $ | — | $ | — | |||||||
(a) The liability for the amount due to participants corresponding in value to the securities held in the grantor trust is recorded in other long-term liabilities.
(b) Using the market approach, the fair values of these securities represent quoted market prices multiplied by the quantities held. Net gains and losses related to the changes in fair value in the assets and liabilities under the various deferred compensation plans are recorded in selling, general and administrative expenses and were nil for the six months ended August 3, 2019 and August 4, 2018, and for the fiscal year ended February 2, 2019.
10
Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
August 3, 2019 | |||||||||||||||
Balance | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | |||||||||||||||
Assets held for sale (a) | $ | 2,799 | $ | — | $ | — | $ | 2,799 | |||||||
Operating lease assets (b) | 4,585 | — | — | 4,585 | |||||||||||
Store property, equipment and leasehold improvements (b) | 629 | — | — | 629 | |||||||||||
Total Assets | $ | 8,013 | $ | — | $ | — | $ | 8,013 | |||||||
February 2, 2019 | |||||||||||||||
Balance | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | |||||||||||||||
Store property, equipment and leasehold improvements (a) | $ | 1,583 | $ | — | $ | — | $ | 1,583 | |||||||
August 4, 2018 | |||||||||||||||
Balance | Quoted Prices in Active Markets for Identical Instruments (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Assets: | |||||||||||||||
Store property, equipment and leasehold improvements (a) | $ | 1,101 | $ | — | $ | — | $ | 1,101 |
(a) Assets held for sale are recorded at the asset’s fair value less estimated costs to sell and are reflected in prepaid expenses and other current assets. For the six months ended August 3, 2019, we recognized impairment charges of $1.0 million based on a third party valuation of the underlying assets. These impairment charges are recorded in selling, general and administrative expenses.
(b) Using an undiscounted cash flow model, we evaluate the cash flow trends of our stores at least annually and when events or changes in circumstances, such as a store closure, indicate that the asset group may not be fully recoverable. When a store’s projected undiscounted cash flows indicate its asset carrying value may not be recoverable, we use a discounted cash flow model to estimate the fair value of the underlying asset group. An impairment write-down is recorded if the carrying value of an asset exceeds its fair value. Key assumptions in estimating future cash flows include, among other things, expected future operating performance, including expected closure date and lease term, and changes in economic conditions. We believe estimated future cash flows are sufficient to support the carrying value of our right-of-use operating lease and long-lived assets. Significant changes in the key assumptions used in our cash flow projections may result in additional asset impairments. For the six months ended August 3, 2019 and August 4, 2018 and during fiscal year 2018, we recognized impairment charges of $0.6 million, $1.1 million, and $2.8 million, respectively. Impairment charges related to store property, equipment and leasehold improvements are recorded in cost of sales and related buying, occupancy and distribution expenses.
Due to the short-term nature of cash and cash equivalents, payables and short-term debt obligations, the carrying value approximates the fair value of these instruments. In addition, we believe that the credit facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.
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NOTE 3 - DEBT OBLIGATIONS
Debt obligations for each period presented consisted of the following (in thousands):
August 3, 2019 | February 2, 2019 | August 4, 2018 | |||||||||
Revolving loan | $ | 275,025 | $ | 204,044 | $ | 244,649 | |||||
Term loan | 48,750 | 50,000 | 25,000 | ||||||||
Finance obligations | — | 554 | 1,064 | ||||||||
Other financing | — | 508 | 1,511 | ||||||||
Total debt obligations | 323,775 | 255,106 | 272,224 | ||||||||
Less: Current portion of debt obligations | 5,000 | 4,812 | 3,542 | ||||||||
Long-term debt obligations | $ | 318,775 | $ | 250,294 | $ | 268,682 |
We have total availability of $448.7 million with a seasonal increase to $473.7 million under our senior secured revolving credit facility agreement including a revolving loan (“Revolving Loan”) and term loans (“Term Loan”), jointly referred to as the “Credit Facility”. Additionally, we have a $25.0 million letter of credit sublimit. The Term Loan is payable in quarterly installments of $1.3 million that began on June 15, 2019, with the remaining balance due upon maturity. The Credit Facility matures on December 16, 2021.
We use the Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings under the Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Credit Facility agreement. The Credit Facility is secured by our inventory, cash, cash equivalents, and substantially all of our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the Credit Facility agreement. For the six months ended August 3, 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the Credit Facility, were 4.7% and $309.9 million, respectively.
Letters of credit issued under the Credit Facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At August 3, 2019, outstanding letters of credit totaled approximately $8.6 million. These letters of credit expire within 12 months of issuance and may be renewed.
The Credit Facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The Credit Facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At August 3, 2019, we were in compliance with the debt covenants of the Credit Facility agreement and we expect to remain in compliance. Excess availability under the Credit Facility at August 3, 2019 was $66.1 million.
We derecognized finance obligations of $0.6 million upon adoption of ASC Topic 842, Leases, on February 3, 2019. See Note 1 for further disclosures regarding the adoption impact.
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NOTE 4 - REVENUE
Net Sales
We recognize revenue for merchandise sales, net of expected returns and sales tax, at the time of in-store purchase or delivery of the product to our guest. When merchandise is shipped to our guests, we estimate receipt based on historical experience. Revenue is deferred and a liability is established for sales returns based on historical return rates and sales for the return period. We recognize an asset and corresponding adjustment to cost of sales for our right to recover returned merchandise. At each financial reporting date, we assess our estimates of expected returns, refund liabilities and return assets. For merchandise sold in our stores and online, tender is accepted at the point of sale. When we receive payment before the guest has taken possession of the merchandise, the amount received is recorded as deferred revenue until the transaction is complete. Our performance obligations for unfulfilled merchandise orders are typically satisfied within one week. Shipping and handling fees charged to guests relate to fulfillment activities and are included in net sales with the corresponding costs recorded in cost of sales.
We record deferred revenue for the sale of gift cards and merchandise credits issued for returned merchandise, and we recognize revenue in net sales upon redemption. Gift card and merchandise credit redemptions typically occur within 12 months of the date of issuance with the majority redeemed within the first three months. Our gift cards and merchandise credits do not expire. Based on historical redemption rates, a small percentage of gift cards and merchandise credits will never be redeemed. We recognize estimated breakage income for gift cards and merchandise credits that will never be redeemed in proportion to actual historical redemption patterns.
Under our loyalty program, members can accumulate points, based on their spending, toward earning a reward certificate that can be redeemed for future merchandise purchases. Points earned by loyalty members reset to zero at the end of each calendar year. Reward certificates expire 30 days after the date of issuance. We allocate and defer a portion of our sales to reward certificates expected to be earned, based on the relative stand-alone sales transaction price and reward certificate value, and recognize the reward certificate as a net sale when it is redeemed.
The following table presents the composition of net sales by merchandise category (in thousands):
Three Months Ended | ||||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | |||||||||||||||||||||||
Merchandise Category | Department Stores | Off-price Stores | Total Company | Department Stores | Off-price Stores | Total Company | ||||||||||||||||||
Women’s | $ | 100,639 | $ | 24,954 | $ | 125,593 | $ | 117,209 | $ | 19,264 | $ | 136,473 | ||||||||||||
Men’s | 49,582 | 11,534 | 61,116 | 53,124 | 8,913 | 62,037 | ||||||||||||||||||
Children's | 25,198 | 9,870 | 35,068 | 29,400 | 7,530 | 36,930 | ||||||||||||||||||
Apparel | 175,419 | 46,358 | 221,777 | 199,733 | 35,707 | 235,440 | ||||||||||||||||||
Footwear | 39,227 | 6,097 | 45,324 | 45,141 | 4,505 | 49,646 | ||||||||||||||||||
Accessories | 17,988 | 3,865 | 21,853 | 18,426 | 3,889 | 22,315 | ||||||||||||||||||
Cosmetics/Fragrances | 27,188 | 2,856 | 30,044 | 31,287 | 2,428 | 33,715 | ||||||||||||||||||
Home/Gifts | 25,539 | 20,708 | 46,247 | 10,950 | 15,939 | 26,889 | ||||||||||||||||||
Other | 2,859 | 651 | 3,510 | 1,039 | 807 | 1,846 | ||||||||||||||||||
Non-apparel | 112,801 | 34,177 | 146,978 | 106,843 | 27,568 | 134,411 | ||||||||||||||||||
Revenue adjustments not allocated (a) | (347 | ) | (543 | ) | (890 | ) | (281 | ) | (276 | ) | (557 | ) | ||||||||||||
Net sales | $ | 287,873 | $ | 79,992 | $ | 367,865 | $ | 306,295 | $ | 62,999 | $ | 369,294 | ||||||||||||
(a) Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories. |
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Six Months Ended | ||||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | |||||||||||||||||||||||
Merchandise Category | Department Stores | Off-price Stores | Total Company | Department Stores | Off-price Stores | Total Company | ||||||||||||||||||
Women’s | $ | 184,254 | $ | 45,815 | $ | 230,069 | $ | 220,696 | $ | 39,231 | $ | 259,927 | ||||||||||||
Men’s | 88,690 | 20,048 | 108,738 | 94,460 | 16,458 | 110,918 | ||||||||||||||||||
Children's | 50,336 | 19,750 | 70,086 | 58,478 | 15,626 | 74,104 | ||||||||||||||||||
Apparel | 323,280 | 85,613 | 408,893 | 373,634 | 71,315 | 444,949 | ||||||||||||||||||
Footwear | 79,498 | 11,171 | 90,669 | 89,624 | 9,324 | 98,948 | ||||||||||||||||||
Accessories | 34,702 | 8,209 | 42,911 | 37,298 | 8,255 | 45,553 | ||||||||||||||||||
Cosmetics/Fragrances | 55,057 | 5,669 | 60,726 | 62,473 | 4,910 | 67,383 | ||||||||||||||||||
Home/Gifts | 45,865 | 40,561 | 86,426 | 19,794 | 33,822 | 53,616 | ||||||||||||||||||
Other | 7,687 | 1,503 | 9,190 | 5,004 | 1,431 | 6,435 | ||||||||||||||||||
Non-apparel | 222,809 | 67,113 | 289,922 | 214,193 | 57,742 | 271,935 | ||||||||||||||||||
Revenue adjustments not allocated (a) | (2,259 | ) | (970 | ) | (3,229 | ) | (3,169 | ) | (192 | ) | (3,361 | ) | ||||||||||||
Net sales | $ | 543,830 | $ | 151,756 | $ | 695,586 | $ | 584,658 | $ | 128,865 | $ | 713,523 | ||||||||||||
(a) Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories. |
Contract Liabilities
Contract liabilities reflect our performance obligations related to gift cards, merchandise credits, loyalty program rewards and merchandise orders that have not been satisfied as of a given date, and therefore, revenue recognition has been deferred. Contract liabilities (recorded in accrued expenses and other current liabilities) for each period presented were as follows (in thousands):
August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||
Gift cards and merchandise credits, net | $ | 9,759 | $ | 12,433 | $ | 9,657 | ||||||
Loyalty program rewards, net | 5,147 | 1,484 | 4,612 | |||||||||
Merchandise fulfillment liability | 859 | 488 | 850 | |||||||||
Total contract liabilities | $ | 15,765 | $ | 14,405 | $ | 15,119 |
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The following table summarizes contract liability activity for each period presented (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||
Beginning balance | $ | 14,440 | $ | 14,028 | $ | 14,405 | $ | 13,474 | ||||||||
Net sales recognized during the period from amounts included in contract liability balances at the beginning of the period | (5,522 | ) | (5,484 | ) | (6,571 | ) | (6,284 | ) | ||||||||
Current period additions to contract liability balances included in contract liability balances at the end of the period | 6,847 | 6,575 | 7,931 | 7,929 | ||||||||||||
Ending balance | $ | 15,765 | $ | 15,119 | $ | 15,765 | $ | 15,119 |
Credit Income
We earn credit income from our private label credit card (“PLCC”) through a profit-sharing arrangement with Comenity Bank, an affiliate of Alliance Data Systems Corporation. Comenity Bank owns the PLCC portfolio and manages the account activation, receivables funding, card authorization, card issuance, statement generation, remittance processing and guest service functions for our PLCC program. We perform certain duties, including electronic processing and transmitting of transaction records, and executing marketing promotions designed to increase card usage. We also accept payments in our stores from cardholders on behalf of Comenity Bank. We receive a monthly net portfolio yield payment from Comenity Bank, and we can potentially earn an annual bonus based upon the performance of the PLCC portfolio. The receivable for credit income, which is recorded in prepaid expenses and other current assets, was $4.5 million, $4.9 million and $4.7 million as of August 3, 2019, February 2, 2019 and August 4, 2018, respectively.
On April 11, 2019, we entered into an amendment to our profit-sharing arrangement with Comenity Bank. The amendment extended the term of the arrangement from July 31, 2021 to July 31, 2024.
We recorded deferred revenue for certain upfront payments received from Comenity Bank associated with the execution of the PLCC agreement. The amounts recognized in credit income related to these upfront payments for each period presented were as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | |||||||||||||
Upfront payments recognized in credit income | $ | 250 | $ | 438 | $ | 875 | $ | 875 |
As of August 3, 2019, deferred revenue of $7.0 million remained to be amortized.
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NOTE 5 - LEASES
Our lease agreements include leases for our retail stores, distribution centers and corporate headquarters. As of August 3, 2019, all of our leases were classified as operating leases. Our store leases typically have an initial term of 10 years and often have 2 renewal options of five years each. The exercise of a lease renewal option is at our sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that we will exercise that option. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.
We recognize a lease liability for our obligation to make lease payments arising from the lease and a related asset for our right to use the underlying asset for the lease term. The lease liability is measured based on the present value of lease payments over the lease term, and the asset is measured based on the value of the lease liability, net of landlord allowances. As the implicit interest rate in our lease agreements is not readily identifiable, we use our estimated collateralized incremental borrowing rate in determining the present value of lease payments. For all current lease classes, we made an accounting policy election not to separate lease and non-lease components.
The majority of our leases include fixed rent payments. A number of store leases provide for escalating minimum rent payments at pre-determined dates. Certain store leases provide for contingent rent payments based on a percentage of retail sales over contractual levels. Some of our leases include variable payments for maintenance, taxes and insurance.
Operating lease payments are expensed on a straight-line basis over the lease term. Variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred.
We sublease our former corporate office building to a third party and recognize sublease income on a straight-line basis over the lease term.
ASC 842 Disclosures
Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost were as follows (in thousands):
Three Months Ended | Six Months Ended | ||||||
August 3, 2019 | August 3, 2019 | ||||||
Operating lease cost | $ | 26,163 | $ | 52,457 | |||
Variable lease cost | 9,784 | 19,441 | |||||
Short-term lease cost | 24 | 24 | |||||
Sublease income | (369 | ) | (737 | ) | |||
Total net lease cost | $ | 35,602 | $ | 71,185 | |||
Net lease cost in cost of sales and related buying, occupancy and distribution expenses | $ | 34,818 | $ | 68,876 | |||
Net lease cost in selling, general and administrative expenses | 784 | 2,309 | |||||
Total net lease cost | $ | 35,602 | $ | 71,185 |
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Cash and non-cash activities associated with our leases were as follows (in thousands):
Six Months Ended | |||
August 3, 2019 | |||
Cash paid for operating leases | $ | 55,139 | |
Cash received from sublease | 724 | ||
Lease assets obtained in exchange for lease liabilities (a) | 12,701 |
(a) Excludes operating lease assets of $344.2 million recognized on February 3, 2019 as a result of the adoption of ASU 2016-02, Leases (Topic 842). See Note 1 for further disclosures regarding the adoption impact.
The weighted average remaining lease term and weighted-average discount rate associated with our leases as of August 3, 2019 were as follows:
Weighted average remaining lease term | 5.3 years | |
Weighted average discount rate | 10.1 | % |
Maturities of operating leases as of August 3, 2019 were as follows (in thousands):
Fiscal Year | Operating Leases | Sublease | ||||||
2019 (remainder of year) | $ | 54,535 | $ | (723 | ) | |||
2020 | 102,731 | (1,492 | ) | |||||
2021 | 87,965 | (1,582 | ) | |||||
2022 | 71,781 | (1,582 | ) | |||||
2023 | 50,986 | (1,054 | ) | |||||
2024 | 33,063 | — | ||||||
Thereafter | 59,818 | — | ||||||
Total lease payments | 460,879 | $ | (6,433 | ) | ||||
Less: Effects of discounting | 106,964 | |||||||
Present value of lease liabilities | 353,915 | |||||||
Less: Current portion of lease liabilities | 74,906 | |||||||
Long-term lease liabilities | $ | 279,009 | ||||||
As of August 3, 2019, there were no leases that had not yet commenced.
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Comparative Period Disclosures Reported Under ASC 840
Future minimum rental commitments on long-term, non-cancelable operating leases at February 2, 2019, were as follows (in thousands):
Fiscal Year | Commitments | Sublease Income | Net Minimum Lease Commitments | |||||||||
2019 | $ | 108,541 | $ | (1,447 | ) | $ | 107,094 | |||||
2020 | 98,859 | (1,492 | ) | 97,367 | ||||||||
2021 | 83,377 | (1,582 | ) | 81,795 | ||||||||
2022 | 67,447 | (1,582 | ) | 65,865 | ||||||||
2023 | 46,887 | (1,054 | ) | 45,833 | ||||||||
Thereafter | 77,910 | — | 77,910 | |||||||||
Total | $ | 483,021 | $ | (7,157 | ) | $ | 475,864 |
While infrequent in occurrence, occasionally we are responsible for the construction of leased stores and for paying project costs. ASC 840-40-55, The Effect of Lessee Involvement in Asset Construction, requires us to be considered the owner (for accounting purposes) of such build-to-suit arrangements during the construction period. The leases are accounted for as finance obligations with the amounts received from the landlord being recorded in debt obligations. Interest expense is recognized at a rate that will amortize the finance obligation over the initial term of the lease. Where ASC 840-40-55 was applicable, we have recorded finance obligations with interest rates of 6.1% and 12.3% on our condensed consolidated financial statements related to 2 store leases as of February 2, 2019.
Future minimum annual payments required under existing finance obligations as of February 2, 2019 were as follows (in thousands):
Fiscal Year | Minimum Payments | Less: Interest | Principal Payments | |||||||||
2019 | $ | 580 | $ | 26 | $ | 554 |
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NOTE 6 - STOCK-BASED COMPENSATION
Stock-based compensation expense by type of grant for each period presented was as follows (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Non-vested stock | $ | 515 | $ | 1,079 | $ | 1,296 | $ | 2,266 | |||||||
Restricted stock units | 68 | 259 | 246 | 751 | |||||||||||
Stock-settled performance share units | 121 | 412 | 289 | 783 | |||||||||||
Cash-settled performance share units | (51 | ) | 96 | 28 | 150 | ||||||||||
Total stock-based compensation expense | 653 | 1,846 | 1,859 | 3,950 | |||||||||||
Related tax benefit | — | — | — | — | |||||||||||
Stock-based compensation expense, net of tax | $ | 653 | $ | 1,846 | $ | 1,859 | $ | 3,950 |
As of August 3, 2019, we have estimated unrecognized compensation cost of $5.5 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.3 years.
Non-vested Stock
We grant shares of non-vested stock to our employees and non-employee directors. Shares of non-vested stock awarded to employees vest 25% annually over a period of four years from the grant date. Shares of non-vested stock awarded to non-employee directors cliff vest after one year. At the end of the vesting period, shares of non-vested stock convert one-for-one to common stock. Certain non-vested stock awards have shareholder rights, including the right to vote and to receive dividends. The fair value of non-vested stock awards with dividend rights is based on the closing share price of our common stock on the grant date. The fair value of non-vested stock awards that do not have dividend rights is discounted for the present value of expected dividends during the vesting period. Compensation expense is recognized ratably over the vesting period.
The following table summarizes non-vested stock activity for the six months ended August 3, 2019:
Non-vested Stock | Number of Shares | Weighted Average Grant Date Fair Value | |||||
Outstanding at February 2, 2019 | 1,379,616 | $ | 4.43 | ||||
Granted | 954,670 | 0.96 | |||||
Vested | (630,901 | ) | 5.40 | ||||
Forfeited | (39,664 | ) | 6.89 | ||||
Outstanding at August 3, 2019 | 1,663,721 | 2.01 |
The weighted-average grant date fair value for non-vested stock granted during the six months ended August 3, 2019 and August 4, 2018 was $0.96 and $2.41, respectively. The aggregate intrinsic value of non-vested stock that vested during the six months ended August 3, 2019 and August 4, 2018, was $0.4 million and $1.6 million, respectively. The payment of employees’ tax liabilities for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liabilities. As a result, the actual number of shares issued during the six months ended August 3, 2019 was 582,980.
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Restricted Stock Units (“RSUs”)
We grant RSUs to our employees, which vest 25% annually over a period of four years from the grant date. Each vested RSU is settled in cash in an amount equal to the fair market value of one share of our common stock on the vesting date, not to exceed five times the per share fair market value of our common stock on the grant date. Unvested RSUs have the right to receive a dividend equivalent payment equal to cash dividends paid on our common stock. RSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for RSUs is remeasured based on the closing share price of our common stock at each reporting period until the award vests. Compensation expense is recognized ratably over the vesting period and adjusted with changes in the fair value of the liability.
The following table summarizes RSU activity for the six months ended August 3, 2019:
Restricted Stock Units | Number of Units | Weighted Average Grant Date Fair Value | |||||
Outstanding at February 2, 2019 | 1,740,314 | $ | 2.16 | ||||
Granted | 1,615,000 | 0.98 | |||||
Vested | (482,814 | ) | 2.17 | ||||
Forfeited | (562,500 | ) | 1.61 | ||||
Outstanding at August 3, 2019 | 2,310,000 | 1.47 |
Stock-settled Performance Share Units (“Stock-settled PSUs”)
We grant stock-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a performance cycle of three years. These awards cliff vest following a performance cycle of three years, and if earned, are settled in shares of our common stock, unless otherwise determined by our Board of Directors (“Board”), or its Compensation Committee. The actual number of shares of our common stock that may be earned ranges from 0 to a maximum of twice the number of target units awarded to the recipient. Grant recipients do not have any shareholder rights on unvested or unearned stock-settled PSUs. The fair value of these PSUs is estimated using a Monte Carlo simulation, based on the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period for stock-settled PSUs.
The following table summarizes stock-settled PSU activity for the six months ended August 3, 2019:
Period Granted | Target PSUs Outstanding at February 2, 2019 | Target PSUs Granted | Target PSUs Forfeited | Target PSUs Outstanding at August 3, 2019 | Weighted Average Grant Date Fair Value per Target PSU | |||||||||||
2017 | 470,000 | — | (50,000 | ) | 420,000 | $ | 1.80 | |||||||||
2018 | 280,000 | — | — | 280,000 | 3.05 | |||||||||||
2019 | — | 375,000 | — | 375,000 | 1.39 | |||||||||||
Total | 750,000 | 375,000 | (50,000 | ) | 1,075,000 | 1.98 |
The weighted-average grant date fair value for stock-settled PSUs granted during the six months ended August 3, 2019 and August 4, 2018 was $1.39 and $3.05, respectively. No stock-settled PSUs vested during the six months ended August 3, 2019 and August 4, 2018.
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Cash-settled Performance Share Units (“Cash-settled PSUs”)
We grant cash-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a performance cycle of three years. These awards cliff vest following a performance cycle of three years, and if earned, are settled in cash. The amount of settlement ranges from 0 to a maximum of twice the number of target units awarded multiplied by the fair market value of one share of our common stock on the vesting date. Grant recipients do not have any shareholder rights on unvested or unearned cash-settled PSUs. Cash-settled PSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for cash-settled PSUs is remeasured based on their fair value at each reporting period until the award vests, which is estimated using a Monte Carlo simulation. Assumptions used in the valuation include the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period and adjusted with changes in the fair value of the liability.
The following table summarizes cash-settled PSU activity six months ended August 3, 2019:
Period Granted | Target PSUs Outstanding at February 2, 2019 | Target PSUs Granted | Target PSUs Forfeited | Target PSUs Outstanding at August 3, 2019 | Weighted Average Grant Date Fair Value per Target PSU | |||||||||||
2018 | 300,000 | — | (50,000 | ) | 250,000 | $ | 3.05 | |||||||||
2019 | — | 530,000 | (50,000 | ) | 480,000 | $ | 1.39 | |||||||||
Total | 300,000 | 530,000 | (100,000 | ) | 730,000 | $ | 1.96 |
NOTE 7 - PENSION PLAN
We sponsor a frozen defined benefit pension plan. The components of net periodic pension cost, which were recognized in selling, general and administrative expenses, were as follows (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Employer service cost | $ | 135 | $ | 133 | $ | 270 | $ | 256 | |||||||
Interest cost on pension benefit obligation | 317 | 317 | 644 | 675 | |||||||||||
Expected return on plan assets | (359 | ) | (456 | ) | (727 | ) | (870 | ) | |||||||
Amortization of net loss | 202 | 155 | 372 | 354 | |||||||||||
Net periodic pension cost | $ | 295 | $ | 149 | $ | 559 | $ | 415 |
Our funding policy is to make contributions to maintain the minimum funding requirements for our pension obligations in accordance with the Employee Retirement Income Security Act. We may elect to contribute additional amounts to maintain a level of funding to minimize the Pension Benefit Guaranty Corporation premium costs or to cover the short-term liquidity needs of the plan in order to maintain current invested positions. We contributed $0.5 million during the six months ended August 3, 2019, and we expect to contribute an additional $0.8 million in 2019.
NOTE 8 - EARNINGS PER SHARE
For the three and six months ended August 3, 2019 and August 4, 2018, respectively, participating securities had no impact on loss per common share and there were no anti-dilutive securities.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Statement Concerning Forward-Looking Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.
Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words “anticipate,” “estimate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy.
Forward-looking statements are based upon a number of assumptions and factors concerning future conditions that may ultimately prove to be inaccurate and could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements that are made herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors. These factors include, but are not limited to, the ability for us to maintain normal trade terms with vendors, the ability for us to comply with the various covenant requirements contained in the credit facility agreement, the demand for apparel, and other factors. The demand for apparel and sales volume can be affected by significant changes in economic conditions, including an economic downturn, employment levels in our markets, consumer confidence, energy and gasoline prices, the value of the Mexican peso, and other factors influencing discretionary consumer spending. Other factors affecting the demand for apparel and sales volume include unusual weather patterns, an increase in the level of competition in our market areas, competitors’ marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of our merchandising and marketing plans as well as our store opening or relocation plans. Additional assumptions, factors and risks concerning future conditions are discussed in the Risk Factors section of the Form 10-K, and may be discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Most of these factors are difficult to predict accurately and are generally beyond our control.
Forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although management believes the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.
Readers should carefully review the Form 10-K in its entirety including, but not limited to, our financial statements and the notes thereto and the risks and uncertainties described in Part I, Item 1A (Risk Factors) of the Form 10-K. This report should be read in conjunction with the Form 10-K, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.
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For purposes of the following discussion, all references to the “second quarter 2019” and the “second quarter 2018” are for the 13-week fiscal periods ended August 3, 2019 and August 4, 2018, respectively, and all references to the “year-to-date 2019” and the “year-to-date 2018” are for the 26-week fiscal periods ended August 3, 2019 and August 4, 2018, respectively
The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in this Form 10-Q as well as the financial and other information included in the Form 10-K.
Our Business
We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of August 3, 2019, we operated in 42 states through 645 specialty department stores under the BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE nameplates and 141 GORDMANS off-price stores. We also operate an e-commerce website. Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized markets in the Midwest.
Second Quarter 2019 Financial Overview
Select financial results for the second quarter 2019 were as follows (comparisons are to the second quarter 2018):
• | Net sales decreased $1.4 million, or 0.4%. |
• | Comparable sales increased 1.8%. Comparable sales consist of store sales after a store has been in operation for 14 full months, including stores converted to off-price stores, and e-commerce sales. |
• | Net loss was $23.9 million compared to $16.9 million. |
• | Loss per common share was $0.83, compared to a loss per common share of $0.60. |
• | Adjusted EBITDA was $(0.1) million compared to adjusted EBITDA of $2.0 million (see the reconciliation of non-GAAP financial measures on page 25). |
2019 Outlook and Strategy
For 2019, we are focused on growing our off-price stores, emphasizing trending merchandise to drive sales, and exiting underperforming department stores. Our off-price store conversions and expansion of the home category within our department stores during the current year contributed to the 1.8% increase in comparable sales for the second quarter 2019. We expect these initiatives, along with additional off-price store conversions scheduled for the second half of the year, to generate positive comparable sales for 2019.
Store counts at the end of the second quarter 2019 and second quarter 2018 were as follows:
August 3, 2019 | August 4, 2018 | ||||
Department stores | 645 | 764 | |||
Off-price stores | 141 | 59 | |||
Total stores | 786 | 823 |
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Our 2019 and long-term strategic objectives are to:
• | Broaden our presence in the off-price sector with the conversion of approximately 89 department stores to off-price in 2019, and another 250 stores in the first half of 2020. Following the 2020 conversions, we will have more than 400 off-price stores, representing approximately 60% of our total sales volume in 2020. During the year-to-date 2019, we completed 72 store conversions and opened one new off-price store. |
• | Close between 55 to 60 underperforming department stores in 2019. During the year-to-date 2019, we permanently closed 11 department stores. The majority of the remaining closures are planned for the fourth quarter 2019. |
• | Expand the home department in our department stores to drive sales in this trending category. During the first quarter 2019, we relocated the home department to the store front and added new high capacity home fixtures in the majority of our department stores. This, along with expanded merchandise assortments, drove home department sales up by more than 100% in our department stores for the year-to-date 2019. We expect home department sales as a percent of total sales to increase in penetration throughout the year with the greatest benefit to sales during the fourth quarter holiday gift period. |
• | Promote brand recognition of our nameplates through our private label credit card and loyalty program, which guests can use across all our stores and online. In March 2019, we rebranded our Gordmans loyalty program and integrated it with our existing department store multi-tender loyalty program, Style Circle Rewards®. In July 2019, we reissued our existing credit cards as a combined off-price and department store branded credit card to more than 2 million cardholders. |
• | Optimize our supply chain through capital investments and by engaging outside expertise to mitigate higher supply chain costs and prepare us for future off-price store growth. |
Non-GAAP Financial Measures
The following table presents earnings (loss) before interest, taxes, depreciation and amortization (“EBITDA”) and adjusted EBITDA, non-GAAP financial measures. We believe the presentation of these supplemental non-GAAP financial measures helps facilitate comparisons of our operating performance across periods. In addition, management uses these non-GAAP financial measures to assess the results of our operations. Non-GAAP financial information should not be considered in isolation or viewed as a substitute for net income, cash flow from operations, diluted earnings per common share or other measures of performance as defined by GAAP. Moreover, the inclusion of non-GAAP financial information as used herein is not necessarily comparable to other similarly titled measures of other companies due to the potential inconsistencies in the method of presentation and items considered. The following table sets forth the supplemental financial information and the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||||
August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||
Net loss (GAAP) | $ | (23,934 | ) | $ | (16,922 | ) | $ | (71,424 | ) | $ | (48,600 | ) | |||
Interest expense | 4,123 | 2,650 | 8,117 | 4,903 | |||||||||||
Income tax expense | 150 | 150 | 300 | 300 | |||||||||||
Depreciation and amortization | 14,528 | 14,997 | 29,872 | 30,147 | |||||||||||
EBITDA (non-GAAP) | (5,133 | ) | 875 | (33,135 | ) | (13,250 | ) | ||||||||
Impairment of long-lived assets | 1,096 | 1,070 | 1,615 | 1,070 | |||||||||||
Severance | 1,467 | 72 | 2,503 | 119 | |||||||||||
Pre-opening expenses | 1,295 | — | 2,897 | — | |||||||||||
Store closing services | 1,178 | — | 1,178 | — | |||||||||||
Adjusted EBITDA (non-GAAP) | $ | (97 | ) | $ | 2,017 | $ | (24,942 | ) | $ | (12,061 | ) |
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Results of Operations
Second Quarter 2019 compared to Second Quarter 2018 and Year-to-Date 2019 compared to Year-to-Date 2018 (amounts in thousands, except percentages):
Net Sales
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||
Net sales | $ | 367,865 | $ | 369,294 | $ | (1,429 | ) | $ | 695,586 | $ | 713,523 | $ | (17,937 | ) | |||||||||
Sales percent change: | |||||||||||||||||||||||
Total net sales | (0.4 | )% | (2.5 | )% | |||||||||||||||||||
Comparable sales | 1.8 | % | (0.6 | )% |
Net sales for the second quarter 2019 decreased compared to the second quarter 2018 primarily due to store closures, partially offset by an increase in comparable sales. Our off-price store conversions and strong performance of our home category contributed to the comparable sales increase. The increase in comparable sales reflects increases in transaction count and units per transaction, partially offset by a decrease in average unit retail.
Net sales for the year-to-date 2019 decreased compared to the year-to-date 2018 primarily due to store closures and a decrease in comparable sales. Sales for the year-to-date 2019 were negatively impacted by disruptions from temporary store closures associated with the off-price store conversions and the installation of high capacity home fixtures in our department stores during the first quarter. However, sales benefited from the strong performance of our converted off-price stores and home category later in the period as a result of these initiatives.
Credit Income
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||
Credit Income | $ | 13,988 | $ | 14,305 | $ | (317 | ) | $ | 27,096 | $ | 29,819 | $ | (2,723 | ) | |||||||||
As a percent of net sales | 3.8 | % | 3.9 | % | (0.1 | )% | 3.9 | % | 4.2 | % | (0.3 | )% |
The decrease in credit income for the year-to-date 2019 compared to the year-to-date 2018 is primarily due to the off-price store conversions. Off-price store credit sales are generally underpenetrated as compared to department stores. However, we expect off-price credit sales as a percentage of total off-price sales to continue to grow in 2019 as compared to 2018. For the year-to-date 2019 compared to the year-to-date 2018, the credit sales penetration rate in our off-price stores increased by 240 basis points.
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Cost of Sales and Gross Margin
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||
Net sales | $ | 367,865 | $ | 369,294 | $ | (1,429 | ) | $ | 695,586 | $ | 713,523 | $ | (17,937 | ) | |||||||||
Cost of sales and related buying, occupancy and distribution expenses | 295,204 | 286,807 | 8,397 | 572,803 | 568,548 | 4,255 | |||||||||||||||||
Gross profit | $ | 72,661 | $ | 82,487 | $ | (9,826 | ) | $ | 122,783 | $ | 144,975 | $ | (22,192 | ) | |||||||||
As a percent of net sales | 19.8 | % | 22.3 | % | (2.5 | )% | 17.7 | % | 20.3 | % | (2.6 | )% |
The decrease in gross profit rate for the second quarter 2019 compared to the second quarter 2018 and the year-to-date 2019 compared to the year-to-date 2018 is primarily due to increased supply chain costs associated with our off-price stores.
Selling, General and Administrative Expenses (“SG&A Expenses”)
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||
SG&A Expenses | $ | 106,310 | $ | 110,914 | $ | (4,604 | ) | $ | 212,886 | $ | 218,191 | $ | (5,305 | ) | |||||||||
As a percent of net sales | 28.9 | % | 30.0 | % | (1.1 | )% | 30.6 | % | 30.6 | % | — | % |
The decrease in SG&A expenses for the second quarter 2019 compared to the second quarter 2018 is primarily due to lower marketing costs associated with operating our off-price stores and planned reductions in department store advertising. The decrease in SG&A expenses for the year-to-date 2019 compared to the year-to-date 2018 is primarily due to lower store expenses driven by a reduction in number of stores compared to year-to-date 2018, lower marketing costs associated with operating our off-price stores and planned reductions in department store advertising, partially offset by pre-opening expenses associated with conversion stores in the year-to-date 2019 and insurance casualty gains realized in the year-to-date 2018.
Interest Expense
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||
Interest Expense | $ | 4,123 | $ | 2,650 | $ | 1,473 | $ | 8,117 | $ | 4,903 | $ | 3,214 | |||||||||||
As a percent of net sales | 1.1 | % | 0.7 | % | 0.4 | % | 1.2 | % | 0.7 | % | 0.5 | % |
Interest expense is comprised of interest on borrowings under the Credit Facility, related letters of credit and commitment fees, amortization of debt issuance costs and interest on finance obligations. The increase in interest expense is primarily due to an increase in average borrowings and higher interest rates under the Credit Facility for the second quarter 2019 compared to the second quarter 2018 and for the year-to-date 2019 compared to the year-to-date 2018. For the second quarter 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 4.7% and $320.7 million, respectively, as compared to 3.4% and $272.4 million for the second quarter 2018. For the year-to-date 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 4.7% and $309.9 million, respectively, as compared to 3.3% and $259.9 million for the year-to-date 2018.
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Income Taxes
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||
Income tax expense | $ | 150 | $ | 150 | $ | — | $ | 300 | $ | 300 | $ | — | |||||||||||
Effective tax rate | (0.6 | )% | (0.9 | )% | 0.3 | % | (0.4 | )% | (0.6 | )% | 0.2 | % |
The effective income tax rate for the second quarter and year-to-date 2019 and the second quarter and year-to-date 2018, was approximately 0%. A valuation allowance has been recognized for substantially all tax benefits generated by tax losses in each period due to the uncertainly of realization, which is dependent upon generation of future taxable income. We expect our effective income tax rate to be approximately 0% percent for 2019.
Loss Before Income Tax and Net Loss
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||
Loss before income tax | $ | (23,784 | ) | $ | (16,772 | ) | $ | (7,012 | ) | $ | (71,124 | ) | $ | (48,300 | ) | $ | (22,824 | ) | |||||
Net loss | (23,934 | ) | (16,922 | ) | (7,012 | ) | (71,424 | ) | (48,600 | ) | (22,824 | ) |
Seasonality and Inflation
Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year. Working capital requirements fluctuate during the year and generally reach their highest levels during the third and fourth quarters. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.
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Liquidity and Capital Resources
Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows, (iii) trade credit terms from our vendors and their factors and (iv) the Credit Facility. The loss of key vendors, or material changes in support by our vendors or their factors, can have a material impact on our business and liquidity. To date, we have successfully managed our vendor relationships to maintain inventory purchases at planned levels on acceptable payment terms. However, if we fail to meet our performance objectives, we may experience a tightening of credit or payment terms from our vendors or their factors. Our primary cash requirements are for operational needs, including rent and salaries, inventory purchases, and capital investments in our stores, supply chain and information technology.
Our working capital fluctuates with seasonal variations which affect our borrowings and availability under the Credit Facility. Our availability under the Credit Facility is generally highest after the holiday selling season and is lowest just before this season as we build inventory levels. Based on our current expectations regarding our operating results, we believe that our sources of liquidity will be sufficient to cover working capital needs, planned capital expenditures and debt service requirements for at least the next 12 months.
Key components of our cash flow are summarized below (in thousands):
Six Months Ended | |||||||||||
August 3, 2019 | August 4, 2018 | Change | |||||||||
Net cash (used in) provided by: | |||||||||||
Operating activities | $ | (41,652 | ) | $ | (69,020 | ) | $ | 27,368 | |||
Investing activities | (17,932 | ) | (11,020 | ) | (6,912 | ) | |||||
Financing activities | 69,172 | 85,363 | (16,191 | ) |
Operating Activities
During the year-to-date 2019, we used $41.7 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $3.4 million, including non-cash operating lease expense of $34.9 million. Changes in operating assets and liabilities used net cash of approximately $41.8 million, which included a $74.4 million increase in merchandise inventories, primarily due to the seasonal build of inventories and accelerated merchandise receipts in the second quarter 2019 to reduce peak period shipping costs, and a $37.6 million decrease in operating lease liabilities, partially offset by an $8.5 million decrease in other assets and a $61.8 million increase in accounts payable and other liabilities. Additionally, cash flows from operating activities included construction allowances from landlords of $3.6 million, which funded a portion of the capital expenditures in investing activities.
During the year-to-date 2018, we used $69.0 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $13.7 million. Changes in operating assets and liabilities used net cash of approximately $56.1 million, which included a $38.5 million increase in merchandise inventories, primarily due to the seasonal build of inventories, and a $20.0 million decrease in accounts payable and other liabilities, partially offset by a $2.4 million decrease in other assets. Additionally, cash flows from operating activities included construction allowances from landlords of $0.8 million, which funded a portion of the capital expenditures in investing activities.
The year-over-year change primarily reflects a $51.9 million increase in cash flow from working capital, offset by a higher net loss of $22.8 million. The increase in cash flow from working capital was largely due to an $81.7 million favorable change in cash flows from accounts payable and other liabilities driven by accelerated merchandise receipts in the second quarter 2019 and paying down our elevated payables balance at the end of 2017 in 2018, partially offset by a $35.9 million unfavorable change in cash flows from inventories attributable to accelerated merchandise receipts in the second quarter 2019.
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Investing Activities
Net cash used in investing activities increased $6.9 million to $17.9 million for the year-to-date 2019, compared to $11.0 million for the year-to-date 2018.
Capital expenditures were $18.6 million for the year-to-date 2019, compared to $12.8 million for the year-to-date 2018. The increase in capital expenditures reflect our investments in converting stores to off-price and adding high capacity home fixtures in our department stores. We received construction allowances from landlords of $3.6 million in the year-to-date 2019, which are included in cash flows from operating activities, and were used to fund a portion of the capital expenditures. These funds are recorded as a reduction from our operating lease assets on the balance sheet and are recognized as an offset to rent expense over the lease term commencing with the date the allowances are earned.
We estimate that capital expenditures in 2019, net of construction allowances to be received from landlords, will be approximately $30.0 million. The expenditures will principally be for investments in our stores, supply chain and technology.
Financing Activities
Net cash provided by financing activities decreased $16.2 million to $69.2 million for the year-to-date 2019, compared to $85.4 million for the year-to-date 2018, primarily due to lower net borrowings during the current year under the Credit Facility.
We use the Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Credit Facility agreement. The Credit Facility is secured by our inventory, cash, cash equivalents, and substantially all of our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the credit facility agreement. For the six months ended August 3, 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were 4.7% and $309.9 million, respectively, compared to 3.3% and $259.9 million for the year-to-date 2018.
Letters of credit issued under the credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At August 3, 2019, outstanding letters of credit totaled approximately $8.6 million. These letters of credit expire within 12 months of issuance and may be renewed.
The Credit Facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The Credit Facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At August 3, 2019, we were in compliance with the debt covenants of the credit facility agreement and we expect to remain in compliance for the next 12 months. Excess availability under the credit facility at August 3, 2019 was $66.1 million.
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Recent Accounting Standards
Disclosure concerning recent accounting standards is incorporated by reference to Note 1 of our Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No response is required under Item 305 of Regulation S-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.
Internal Control Over Financial Reporting
As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term “internal control over financial reporting” means a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; |
(2) | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and |
(3) | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material adverse effect on the financial statements. |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in our internal control over financial reporting during the three months ended August 3, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No response is required under Item 103 of Regulation S-K.
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ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, readers should carefully consider the factors discussed in Part I, Item 1A (Risk Factors) of the Form 10-K. There have not been any material changes from the risk factors as previously disclosed in the Form 10-K, except updates to the following risk factors:
Risks associated with our vendors from whom our products are sourced may have a material adverse effect on our business and financial condition. Our merchandise is sourced from a variety of domestic and international vendors. All our vendors must comply with applicable laws, including our required standards of conduct. Political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade, the ability to access suitable merchandise on acceptable terms and the financial viability of our vendors are beyond our control and may adversely impact our performance.
We are evaluating the expected impact of the current U.S. Administration’s recently imposed and planned tariffs on imports from China, including a potential continued escalation of retaliatory tariffs, as well as other recent changes in foreign trade policy on our supply chain, costs, sales and profitability. We are actively working through strategies to mitigate such impact, including reviewing sourcing options and working with our vendors and merchants. At this time, it is unknown how long U.S. tariffs on Chinese goods will remain in effect or whether additional tariffs will be imposed. While it is too early to predict how these changes in foreign trade policy and any recently enacted, proposed and future tariffs on products imported by us from China will affect our business, these changes could negatively impact our business and results of operations if they seriously disrupt the movement of products through our supply chain or increase their cost. In addition, while we may be able to shift our sourcing options, executing such a shift would be time consuming and would be difficult or impracticable for many products and may result in an increase in our merchandise costs. The adoption and expansion of trade restrictions, retaliatory tariffs, or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and/or the U.S. economy, which in turn could adversely impact our results of operations and business.
If we cannot meet the continued listing requirements of the New York Stock Exchange (“NYSE”), the NYSE may delist our common stock. On June 20, 2019, we received written notice from the NYSE that we are no longer in compliance with the NYSE continued listing standard set forth in Section 802.01C of the NYSE Listed Company Manual, which requires that the average closing price of our common stock be above $1.00 over 30 consecutive trading days.
To regain compliance with the minimum share price requirement, we have a six-month cure period, ending on December 20, 2019, subject to extension if we determine to remedy the non-compliance by taking action that will require shareholder approval. We can also demonstrate compliance at any time during the cure period, if on the last trading day of any calendar month during the cure period, our common stock has a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. We notified the NYSE of our intent to cure the deficiency and return to compliance with the NYSE continued listing requirements by December 20, 2019 and if we determine that we will cure the non-compliance by taking action that will require shareholder approval, we will obtain shareholder approval by no later than our next annual meeting and will implement the action promptly thereafter.
Our common stock will continue to be listed and traded on the NYSE during the cure period, subject to continued compliance with the other listing requirements. However, our common stock trading symbol “SSI” will be assigned a “.BC” indicator by the NYSE to signify that the status of the stock is “below compliance” with the NYSE continued listing requirements. The “.BC” indicator will be removed when we regain compliance.
If we are unable to satisfy the NYSE’s criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; reducing the liquidity and market price of the common stock; decreasing the amount of news coverage of us; and limiting our ability to issue additional securities or obtain additional financing in the future. If our stock price does not increase as a result of normal market fluctuation based on our results of operation and financial condition, it may be necessary to effect a reverse stock split in order to raise our average closing stock price back above $1.00. The number of shares available on the public market following a reverse stock split will be reduced significantly, which may affect the volume and liquidity of our common stock. In addition, delisting from the NYSE might negatively impact our reputation and, as a consequence, our business.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 7, 2011, our Board approved a stock repurchase program (“2011 Stock Repurchase Program”), which authorized us to repurchase up to $200.0 million of our outstanding common stock. The 2011 Stock Repurchase Program will expire when we have exhausted the authorization, unless terminated earlier by our Board. Through August 3, 2019, we repurchased approximately $141.6 million of our outstanding common shares under the 2011 Stock Repurchase Program. Also in March 2011, our Board authorized us to repurchase shares of our outstanding common stock equal to the amount of the proceeds and related tax benefits from the exercise of stock options, stock appreciation rights and other equity grants. Purchases of shares of our common stock may be made from time to time, either on the open market or through privately negotiated transactions and are financed by our existing cash, cash flow and other liquidity sources, as appropriate.
The table below sets forth information regarding our repurchases of common stock during the three months ended August 3, 2019:
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||
Period | Total Number of Shares Purchased (a) | Average Price Paid Per Share (a) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (b) | ||||||||||
May 5, 2019 to June 1, 2019 | 8,737 | $ | 1.07 | — | $ | 58,351,202 | ||||||||
June 2, 2019 to July 6, 2019 | 11,663 | 0.83 | — | $ | 58,351,202 | |||||||||
July 7, 2019 to August 3, 2019 | 12,554 | 0.76 | — | $ | 58,351,202 | |||||||||
Total | 32,954 | $ | 0.87 | — |
(a) Although we did not repurchase any of our common stock during the three months ended August 3, 2019 under the 2011 Stock Repurchase Program:
• | We reacquired 689 shares of common stock from certain employees to cover tax withholding obligations from the vesting of restricted stock at a weighted average acquisition price of $0.76 per common share; and |
• | The trustee of the grantor trust established by us for the purpose of holding assets under our deferred compensation plan purchased an aggregate of 32,265 shares of our common stock in the open market at a weighted average price of $0.87 in connection with the option to invest in our stock under the deferred compensation plan and reinvestment of dividends paid on our common stock held in trust in the deferred compensation plan. |
(b) Reflects the $200.0 million authorized under the 2011 Stock Purchase Program, less the $141.6 million repurchased as of August 3, 2019 using our existing cash, cash flow and other liquidity sources since March 2011.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following documents are the exhibits to this Form 10-Q. For convenient reference, each exhibit is listed according to the Exhibit Table of Item 601 of Regulation S-K.
Exhibit Number | Description |
10.1* | |
31.1* | |
31.2* | |
32* | |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
_______________________________________
* | Filed electronically herewith. |
# | Certain confidential portions with a [****] have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STAGE STORES, INC. | |
Dated: September 12, 2019 | /s/ Michael L. Glazer |
Michael L. Glazer | |
President and Chief Executive Officer | |
(Principal Executive Officer) | |
Dated: September 12, 2019 | /s/ Jason T. Curtis |
Jason T. Curtis | |
Executive Vice President, Chief Financial Officer and Treasurer | |
(Principal Financial Officer) | |
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