The dilutive effect of stock-based compensation arrangements is accounted for using the treasury stock method. The Company includes as assumed proceeds the amount of compensation cost attributed to future services and not yet recognized. For the twenty-six weeks ended August 3, 2019 and August 4, 2018, there were 135,000 and 118,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution. For the thirteen weeks ended August 3, 2019 and August 4, 2018, there were 143,000 and 127,000 shares of nonvested restricted stock, respectively, excluded from the calculation of diluted earnings per share because of antidilution.
The following table provides a reconciliation of the weighted average number of common shares outstanding used to calculate basic earnings per share to the weighted average number of common shares and common stock equivalents outstanding used in calculating diluted earnings per share for the twenty-six and thirteen week periods ended August 3, 2019 and August 4, 2018:
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
August 3, 2019
|
|
August 4, 2018
|
Weighted average number of common shares outstanding
|
|
11,929,019
|
|
13,446,285
|
Incremental shares from assumed vesting of nonvested restricted stock
|
|
15,082
|
|
45,009
|
Weighted average number of common shares and common stock equivalents outstanding
|
|
11,944,101
|
|
13,491,294
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
August 3, 2019
|
|
August 4, 2018
|
Weighted average number of common shares outstanding
|
|
11,881,896
|
|
13,314,470
|
Incremental shares from assumed vesting of nonvested restricted stock
|
|
—
|
|
36,851
|
Weighted average number of common shares and common stock equivalents outstanding
|
|
11,881,896
|
|
13,351,321
|
5. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market at the measurement date. Fair value is established according to a hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. Level 3 inputs are given the lowest priority in the fair value hierarchy.
As of August 3, 2019, the Company’s investment securities are classified as held-to-maturity since the Company has the intent and ability to hold the investments to maturity. Such securities are carried at amortized cost plus accrued interest and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair Market
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury and U.S. government agencies (Level 1)
|
|
$
|
30,630
|
|
$
|
19
|
|
$
|
(1)
|
|
$
|
30,648
|
|
Bank certificates of deposit (Level 2)
|
|
|
7,146
|
|
|
—
|
|
|
—
|
|
|
7,146
|
|
|
|
$
|
37,776
|
|
$
|
19
|
|
$
|
(1)
|
|
$
|
37,794
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury (Level 1)
|
|
$
|
2,485
|
|
$
|
6
|
|
$
|
—
|
|
$
|
2,491
|
|
Bank certificates of deposit (Level 2)
|
|
|
14,491
|
|
|
—
|
|
|
—
|
|
|
14,491
|
|
|
|
$
|
16,976
|
|
$
|
6
|
|
$
|
—
|
|
$
|
16,982
|
|
The amortized cost and fair market value of investment securities as of August 3, 2019 by contractual maturity are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Amortized
|
|
Market
|
|
|
|
Cost
|
|
Value
|
|
Mature in one year or less
|
|
$
|
37,776
|
|
$
|
37,794
|
|
Mature after one year through five years
|
|
|
16,976
|
|
|
16,982
|
|
|
|
$
|
54,752
|
|
$
|
54,776
|
|
As of February 2, 2019, the Company’s investment securities were classified as held-to-maturity and consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair Market
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Short-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury and U.S. government agencies (Level 1)
|
|
$
|
38,706
|
|
$
|
4
|
|
$
|
(37)
|
|
$
|
38,673
|
|
Obligations of states and municipalities (Level 2)
|
|
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Bank certificates of deposit (Level 2)
|
|
|
11,549
|
|
|
—
|
|
|
—
|
|
|
11,549
|
|
|
|
$
|
50,350
|
|
$
|
4
|
|
$
|
(37)
|
|
$
|
50,317
|
|
Long-term:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of the U.S. Treasury (Level 1)
|
|
$
|
4,956
|
|
$
|
—
|
|
$
|
(16)
|
|
$
|
4,940
|
|
Bank certificates of deposit (Level 2)
|
|
|
3,927
|
|
|
—
|
|
|
—
|
|
|
3,927
|
|
|
|
$
|
8,883
|
|
$
|
—
|
|
$
|
(16)
|
|
$
|
8,867
|
|
The amortized cost and fair market value of investment securities as of February 2, 2019 by contractual maturity were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
Amortized
|
|
Market
|
|
|
|
Cost
|
|
Value
|
|
Mature in one year or less
|
|
$
|
50,350
|
|
$
|
50,317
|
|
Mature after one year through five years
|
|
|
8,883
|
|
|
8,867
|
|
|
|
$
|
59,233
|
|
$
|
59,184
|
|
There were no changes among the levels in the twenty-six weeks ended August 3, 2019.
Fair market values of Level 2 investments are determined by management with the assistance of a third party pricing service. Because quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.
6. Impairment of Assets
If facts and circumstances indicate that a long-lived asset or operating lease right-of-use asset may be impaired, the carrying value is reviewed. If this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of the asset is reduced to its estimated fair value. In the twenty-six and thirteen weeks ended August 3, 2019, non-cash impairment expense related to an underperforming store totaled $0.5 million, comprised of $0.3 million for leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset. In the twenty-six and thirteen weeks ended August 4, 2018, non-cash impairment expense related to underperforming stores totaled $0.9 million, comprised entirely of leasehold improvements and fixtures and equipment.
7. Revolving Line of Credit
On October 27, 2011, the Company entered into a five-year, $50 million credit facility with Bank of America. The facility was amended on August 18, 2015, extending the maturity date to August 18, 2020. The amended facility provides a $50 million credit commitment and a $25 million uncommitted “accordion” feature that under certain circumstances could allow the Company to increase the size of the facility to $75 million. Borrowings, if any, under the facility will bear interest (a) for LIBOR Rate Loans, at LIBOR plus either 1.25% or 1.5%, or (b) for Base Rate Loans, at a rate equal to the highest of (i) the prime rate plus either 0.25% or 0.5%, (ii) the Federal Funds Rate plus either 0.75% or 1.0%, or (iii) LIBOR plus either 1.25% or 1.5%, based in any such case on the average daily availability for borrowings under the facility. The facility continues to be secured by the Company’s inventory, accounts receivable and related assets, but not its real estate, fixtures and equipment, and it contains one financial covenant, a fixed charge coverage ratio, which is applicable and tested only in certain circumstances. The facility has an unused commitment fee of 0.25% and permits the payment of cash dividends subject to certain limitations, including a requirement that there were no borrowings outstanding in the 30 days prior to the dividend payment and no borrowings are expected in the 30 days subsequent to the payment. The Company has had no borrowings under the credit facility.
8. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
U.S. GAAP requires companies to calculate income taxes by applying their estimated full-year tax rate in each interim period unless the estimated full-year tax rate is not reliably predictable. For the twenty-six weeks ended August 3, 2019 and August 4, 2018, the Company utilized this annual effective tax rate method to calculate income taxes.
For the twenty-six weeks ended August 3, 2019, the effective income tax rate was 14.9%. This compares with a rate of 18.9% for the twenty-six weeks ended August 4, 2018. The decrease in the effective income tax rate was due primarily to the combination of lower pretax income and higher federal and state tax credits this year.
9. Other Long-Term Liabilities
The components of other long-term liabilities as of August 3, 2019 and February 2, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
August 3,
|
|
February 2,
|
|
|
|
2019
|
|
2019
|
|
Deferred rent
|
|
$
|
—
|
(1)
|
$
|
2,344
|
|
Tenant improvement allowances
|
|
|
—
|
(1)
|
|
4,037
|
|
Other
|
|
|
1,869
|
|
|
1,814
|
|
|
|
$
|
1,869
|
|
$
|
8,195
|
|
|
(1)
|
|
Commencing February 3, 2019, deferred rent and tenant improvement allowances are included as part of the Company’s operating lease right of use assets (see Note 12 regarding the Company’s adoption of the lease accounting standard).
|
.
10. Commitments and Contingencies
The Company from time to time is involved in various legal proceedings incidental to the conduct of its business, including claims by customers, employees or former employees. Once it becomes probable that the Company will incur costs in connection with a legal proceeding and such costs can be reasonably estimated, it establishes appropriate reserves. While legal proceedings are subject to
uncertainties and the outcome of any such matter is not predictable, the Company is not aware of any legal proceedings pending or threatened against it that it expects to have a material adverse effect on its financial condition, results of operations or liquidity.
11. Stock Repurchase Program and Cash Dividends
Repurchases of Common Stock
On November 28, 2018, the Company’s Board of Directors approved a program that authorized the purchase of up to $25.0 million in shares of the Company’s common stock. During the twenty-six weeks ended August 3, 2019, the Company repurchased 272,600 shares of its common stock at an aggregate cost of $4.5 million. During the thirteen weeks ended August 3, 2019, the Company repurchased 190,288 shares of its common stock at an aggregate cost of $2.9 million. At August 3, 2019, $5.1 million remained available for purchase under this program.
Dividends
On February 12, 2019, the Company’s Board of Directors declared a dividend of $0.08 per common share, which was paid on March 19, 2019 to stockholders of record as of March 5, 2019. On May 21, 2019, the Company’s Board of Directors declared a dividend of $0.08 per common share, which was paid on June 18, 2019 to stockholders of record as of June 4, 2019. On August 20, 2019, the Company’s Board of Directors declared a dividend of $0.08 per common share payable on September 17, 2019 to stockholders of record as of September 3, 2019. Any determination to declare and pay cash dividends for future quarters will be made by the Company’s Board of Directors.
12. Recent Accounting Pronouncements
Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016–02” or “Topic 842”) which replaced the existing guidance in ASC 840, Leases. The new standard established a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASU 2016-02 on February 3, 2019, the first day of fiscal 2019. As part of the implementation process, the Company assessed its lease arrangements, evaluated practical expedient and accounting policy elections and implemented necessary modifications to its existing lease system. In adopting the new lease standard, the Company elected the optional transition method which applied the standard as of the effective date but did not apply the standard to the comparative periods previously presented in the consolidated financial statements. The new standard also provided optional practical expedients for transition, which the Company elected, which permitted it to not reassess prior conclusions regarding lease classification, identification or initial direct costs. Further, the Company elected a short-term lease exception policy which permitted it to not apply the recognition requirements of the new standard to short-term leases (leases with terms of 12 months or less). The Company also elected an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The Company did not elect an optional hindsight practical expedient.
The Company leases all of its retail store locations and certain office space and equipment. All leases are classified as operating leases. Under the new guidance, right–of-use assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term. The Company uses its incremental borrowing rate as the discount rate which approximates the rate of interest the Company would have to pay on a collateralized basis to borrow an amount equal to the total lease payments under similar terms. The incremental borrowing rate for existing leases as of the opening balance sheet date was based on the remaining terms of the leases. The incremental borrowing rate for all new or amended leases is based upon the lease terms which include the contractual period obligated by the leases plus any additional periods covered by options available to extend the leases if the Company is reasonably certain to exercise such options. Lease expense for fixed lease payments is recognized on a straight-line basis over the lease term and is included in selling, general and administrative expenses. Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities of approximately $133.6 million and $141.0 million, respectively, as of February 3, 2019. The difference between the lease assets and lease liabilities was primarily due to reclassification of lease incentives, as well as impairment of operating lease right-of-use assets for stores previously impaired as of the effective date. Lease impairment, net of the related deferred taxes, totaled approximately $2.1 million and is reflected as an adjustment to retained earnings at the transition date.
13. Revenue
Revenue Recognition
The Company’s primary source of revenue is derived from the sale of clothing and accessories to its customers with the Company’s performance obligations satisfied immediately when the customer pays for their purchase and receives the merchandise. Sales taxes collected by the Company from customers are excluded from revenue. Revenue from layaway sales is recognized at the point in time when the merchandise is paid for and control of the goods is transferred to the customer, thereby satisfying the Company’s performance obligation. Non-refundable layaway service fees are recognized in revenue when collected by the Company from customers. The Company defers revenue from the sale of gift cards and recognizes the associated revenue upon the redemption of the cards by customers to purchase merchandise.
Sales Returns
The Company allows customers to return merchandise for up to thirty days after the date of sale. Expected refunds to customers are recorded based on estimated margin using historical return information. The refund liability for merchandise returns is included in “Accrued expenses” on the condensed consolidated balance sheet and totaled $0.5 million and $0.3 million as of August 3, 2019 and February 2, 2019, respectively. The corresponding asset for the recoverable cost of expected refunds is included in “Prepaid and other current assets” and totaled $0.3 million and $0.2 million as of August 3, 2019 and February 2, 2019, respectively.
Disaggregation of Revenue
The Company’s retail operations represent a single operating segment based on the way the Company manages its business. Operating decisions and resource allocation decisions are made at the Company level in order to maintain a consistent retail store presentation. The Company’s retail stores sell similar products, use similar processes to sell those products, and sell their products to similar classes of customers.
In the following table, the Company’s revenue from contracts with customers is disaggregated by major product line. The percentage of net sales related to each classification of its merchandise assortment for the twenty-six and thirteen week periods ended August 3, 2019 and August 4, 2018 was approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
Thirteen Weeks Ended
|
|
|
August 3,
|
|
August 4,
|
|
August 3,
|
|
August 4,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Accessories
|
34
|
%
|
|
32
|
%
|
|
34
|
%
|
|
33
|
%
|
|
Ladies'
|
23
|
%
|
|
24
|
%
|
|
23
|
%
|
|
23
|
%
|
|
Children's
|
21
|
%
|
|
22
|
%
|
|
21
|
%
|
|
22
|
%
|
|
Men's
|
16
|
%
|
|
17
|
%
|
|
17
|
%
|
|
17
|
%
|
|
Home
|
6
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
14. Leases
The Company leases its retail store locations and certain office space and equipment. The Company analyzes all leases at inception to determine if a right-of-use asset and lease liability should be recognized. Leases with an initial term of 12 months or less and leases with mutual termination clauses are not included on the condensed consolidated balance sheet. The lease liability is measured at the present value of future lease payments as of the lease commencement date, or as of the date of adoption of ASU 2016-02 for leases existing at the adoption date. The right-of-use asset recognized is based on the lease liability adjusted for prepaid and deferred rent and unamortized lease incentives.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, statements of plans and objectives for future operations, growth or initiatives, statements of future economic performance, capital allocation expectations or statements regarding the outcome or impact of pending or threatened litigation. These, and similar statements, are forward-looking statements concerning matters that involve risks, uncertainties and other factors that may cause the actual performance of the Company to differ materially from those expressed or implied by these statements. All forward-looking information should be evaluated in the context of these risks, uncertainties and other factors. The words “believe,” “anticipate,” “project,” “plan,” “expect,” “estimate,” “objective,” “forecast,” “goal,” “intend,” “could,” “will likely result,” or “will continue” and similar words and expressions generally identify forward-looking statements, although not all forward-looking statements contain such language. The Company believes the assumptions underlying these forward-looking statements are reasonable; however, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in the forward-looking statements.
The factors that may result in actual results differing from such forward-looking information include, but are not limited to: transportation and distribution delays or interruptions; changes in freight rates; the Company’s ability to negotiate effectively the cost and purchase of merchandise; inventory risks due to shifts in market demand; the Company’s ability to gauge fashion trends and changing consumer preferences; changes in consumer spending on apparel; changes in product mix; interruptions in suppliers’ businesses; a deterioration in general economic conditions caused by acts of war or terrorism or other factors; the results of pending or threatened litigation; temporary changes in demand due to weather patterns; seasonality of the Company’s business; delays associated with building, opening and operating new stores; delays associated with building, opening or expanding new or existing distribution centers; and other factors described in the section titled “Item 1A. Risk Factors” and elsewhere in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2019 and in Part II, “Item 1A. Risk Factors” and elsewhere in the Company’s Quarterly Reports on Form 10-Q and any amendments thereto and in the other documents the Company files with the SEC, including reports on Form 8-K.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Except as may be required by law, the Company undertakes no obligation to update or revise publicly any forward-looking statements contained herein to reflect events or circumstances occurring after the date of this Form 10-Q or to reflect the occurrence of unanticipated events. Readers are advised, however, to read any further disclosures the Company may make on related subjects in its public disclosures or documents filed with the SEC, including reports on Form 8-K.
Overview
We are a value-priced retailer of urban fashion apparel and accessories for the entire family. Our merchandise offerings are designed to appeal to the fashion preferences of value-conscious consumers, particularly African-Americans. We operated 562 stores in both urban and rural markets in 32 states as of August 3, 2019.
Accounting Periods
The following discussion contains references to fiscal years 2019 and 2018, which represent fiscal years ending or ended on February 1, 2020 and February 2, 2019, respectively. Fiscal 2019 and fiscal 2018 both have 52-week accounting periods. This discussion and analysis should be read with the unaudited condensed consolidated financial statements and the notes thereto contained in Part 1, Item 1 of this report.
Results of Operations
The following discussion of the Company’s financial performance is based on the unaudited condensed consolidated financial statements set forth herein. The nature of the Company’s business is seasonal. Historically, sales in the first and fourth quarters have been higher than sales achieved in the second and third quarters of the fiscal year. Expenses and, to a greater extent, operating income, vary by quarter. Results of a period shorter than a full year may not be indicative of results expected for the entire year. Furthermore, the seasonal nature of the Company’s business may affect comparisons between periods.
Key Operating Statistics
We measure performance using key operating statistics. One of the main performance measures we use is comparable store sales growth. We define a comparable store as a store that has been opened for an entire fiscal year. Therefore, a store will not be considered a comparable store until its 13th month of operation at the earliest or until its 24th month at the latest. As an example, stores opened in fiscal 2018 and fiscal 2019 are not considered comparable stores in fiscal 2019. Relocated and expanded stores are included in the comparable store sales results. We also use other operating statistics, most notably average sales per store, to measure our performance. As we typically occupy existing space in established shopping centers rather than sites built specifically for our stores, store square footage (and therefore sales per square foot) varies by store. We focus on overall store sales volume as the critical driver of profitability.
In addition to sales, we measure cost of sales as a percentage of sales and store operating expenses, with a particular focus on labor, as a percentage of sales. These results translate into store level contribution, which we use to evaluate overall performance of each individual store. Finally, we monitor corporate expenses against budgeted amounts. All of the statistics discussed above are critical components of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Adjusted EBITDA (comprised of EBITDA, as adjusted for non-cash asset impairment expense and expenses related to our proxy contest), which are considered our most important operating statistics. We believe that excluding non-cash impairment expense and proxy contest expenses from our financial results reflects operating results that are more indicative of our ongoing operating performance while improving comparability to prior and future periods, and as such, provides an enhanced understanding of our past financial performance and prospects for the future.
Although non-GAAP measures such as EBITDA and Adjusted EBITDA provide useful information on an operating cash flow basis, they are limited measures in that they exclude the impact of cash requirements for capital expenditures, income taxes and interest expense. Therefore, EBITDA and Adjusted EBITDA should be used as supplements to results of operations and cash flows as reported under U.S. GAAP and should not be used as a singular measure of operating performance or as a substitute for U.S. GAAP results. Furthermore, such non-GAAP measures may not be comparable to similarly titled measures of other companies.
Provided below is a reconciliation of net income to EBITDA and to Adjusted EBITDA for the twenty-six and thirteen week periods ended August 3, 2019 and August 4, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
Thirteen Weeks Ended
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,165
|
|
$
|
14,532
|
|
$
|
377
|
|
$
|
3,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
78
|
|
|
75
|
|
|
40
|
|
|
38
|
|
Income tax expense
|
|
|
1,433
|
|
|
3,389
|
|
|
147
|
|
|
788
|
|
Depreciation
|
|
|
9,221
|
|
|
9,650
|
|
|
4,607
|
|
|
4,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(793)
|
|
|
(658)
|
|
|
(414)
|
|
|
(363)
|
|
EBITDA
|
|
|
18,104
|
|
|
26,988
|
|
|
4,757
|
|
|
8,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment
|
|
|
472
|
|
|
942
|
|
|
472
|
|
|
942
|
|
Proxy contest expenses
|
|
|
1,042
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Adjusted EBITDA
|
|
$
|
19,618
|
|
$
|
27,930
|
|
$
|
5,229
|
|
$
|
9,316
|
|
Twenty-Six Weeks Ended August 3, 2019 and August 4, 2018
Net Sales. Net sales decreased $5.1 million, or 1.3%, to $387.9 million in the twenty-six weeks ended August 3, 2019 from $393.0 million in the twenty-six weeks ended August 4, 2018. The decrease in sales was due to a 2.9% decrease in comparable store sales and the impact of closing eight stores since the second quarter of last year, partially offset by the opening of 16 new stores since the second quarter of last year. The decrease in comparable store sales was reflected in a decrease in customer transactions of more than 3%, while both the average number of items per transaction and the average unit sale remained virtually unchanged. Comparable store sales changes by major merchandise class were as follows in the first twenty-six weeks of fiscal 2019: Home +5%; Accessories +3%; Men’s -5%; Ladies’ -7%; and Children’s -8%.
The 2.9% decrease in comparable store sales totaled $11.3 million, while store opening and closing activity resulted in a net sales increase of $6.2 million.
Cost of Sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $3.1 million, or 1.3%, to $242.9 million in the twenty-six weeks ended August 3, 2019 from $239.8 million in the twenty-six weeks ended August 4, 2018. Cost of sales as a percentage of sales increased to 62.6% in the twenty-six weeks ended August 3, 2019 from 61.0% in the twenty-six weeks ended August 4, 2018 due primarily to a 130 basis points increase in merchandise markdowns in response to the challenging sales environment. In addition, freight costs increased 30 basis points as a result of continued pressures in the trucking industry.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.1 million, or 0.9%, to $126.4 million in the twenty-six weeks ended August 3, 2019 from $125.3 million in the twenty-six weeks ended August 4, 2018 due primarily to $1.0 million of expenses incurred in connection with a proxy contest, together with the impact on expenses of opening 16 new stores since the second quarter of last year and normal inflationary pressure on expenses such as rent and payroll. These increases were partially offset by a $2.0 million decrease in incentive compensation expense resulting from less favorable earnings results in relation to target, as well as a $1.2 million gain on insurance claims received in fiscal 2019. As a percentage of sales, selling, general and administrative expenses increased to 32.6% in the first twenty-six weeks of fiscal 2019 from 31.9% in the first twenty-six weeks of fiscal 2018 due primarily to the deleveraging effect resulting from declining comparable store sales.
Depreciation. Depreciation expense decreased $0.5 million, or 4.4%, to $9.2 million in the first twenty-six weeks of fiscal 2019 from $9.7 million in the first twenty-six weeks of fiscal 2018.
Asset Impairment. Impairment charges related to an underperforming store totaled $0.5 million in the first twenty-six weeks of fiscal 2019, comprised of $0.3 million for leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset. In the first twenty-six weeks of fiscal 2018, impairment charges related to underperforming stores totaled $0.9 million, comprised entirely of leasehold improvements and fixtures and equipment.
Income Tax Expense. Income tax expense decreased $2.0 million, or 57.7%, to $1.4 million in the first twenty-six weeks of fiscal 2019 from $3.4 million in the first twenty-six weeks of fiscal 2018 due to a decrease in pretax income and a decrease in the effective income tax rate from 18.9% to 14.9%.
Net Income. Net income decreased $6.3 million, or 43.8%, to $8.2 million in the first twenty-six weeks of fiscal 2019 from $14.5 million in the first twenty-six weeks of fiscal 2018 due to the factors discussed above.
Thirteen Weeks Ended August 3, 2019 and August 4, 2018
Net Sales. Net sales increased $0.8 million, or 0.5%, to $182.8 million in the thirteen weeks ended August 3, 2019 from $182.0 million in the thirteen weeks ended August 4, 2018. The increase in sales was due to the opening of 16 stores since the second quarter of last year, partially offset by a 1.2% decrease in comparable store sales and the impact of closing eight stores since the second quarter of last year. The decrease in comparable store sales was reflected in a 1.5% decrease in the average unit sale, along with a decrease in the number of customer transactions of more than 1%, partially offset by an increase in the average number of items per transaction of nearly 2%. Comparable store sales changes by major merchandise class were as follows in the second quarter of 2019: Home +5%; Accessories +4%; Ladies’ -2%; Men’s -5%; and Children’s -6%.
Store opening and closing activity resulted in a net increase of $2.9 million in sales, and the 1.2% decrease in comparable store sales totaled $2.1 million.
Cost of sales (exclusive of depreciation). Cost of sales (exclusive of depreciation) increased $4.2 million, or 3.8%, to $114.6 million in the second quarter of 2019 from $110.4 million in last year’s second quarter. Cost of sales as a percentage of sales increased to 62.7% in the second quarter of 2019 from 60.7% in the second quarter of 2018 due primarily to a 180 basis points increase in markdowns in response to the challenging sales environment. In addition, freight costs increased 40 basis points as a result of continued pressures on the trucking industry.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $0.7 million, or 1.1%, to $63.0 million in the second quarter of 2019 from $62.3 million in last year’s second quarter due primarily to the impact on expenses of opening 16 new stores since the second quarter of last year, together with normal inflationary pressure on expenses such as rent and payroll, partially offset by a $1.2 million gain on insurance claims received in the second quarter of 2019 and a $1.0 million decrease in incentive compensation expense resulting from less favorable earnings results in relation to target. As a percentage of sales, selling, general and administrative expenses increased to 34.5% in the second quarter of 2019 from 34.2% in the second quarter of 2018 due primarily to the deleveraging effect resulting from declining comparable store sales.
Depreciation. Depreciation expense decreased $0.1 million, or 1.5%, to $4.6 million in the second quarter of 2019 from $4.7 million in the second quarter of 2018.
Asset Impairment. Impairment charges related to an underperforming store totaled $0.5 million in the second quarter of 2019, comprised of $0.3 million for leasehold improvements and fixtures and equipment, and $0.2 million for an operating lease right-of-use asset. In the second quarter of 2018, impairment charges related to underperforming stores totaled $0.9 million, comprised entirely of leasehold improvements and fixtures and equipment.
Income Tax Expense. Income tax expense decreased $0.7 million, or 81.3%, to $0.1 million in the second quarter of 2019 from $0.8 million in the second quarter of 2018 due to a decrease in pretax income.
Net Income. Net income decreased to $0.4 million in the second quarter of 2019 from $3.2 million in the second quarter of 2018 due to the factors discussed above.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital and capital expenditures for new and existing stores, distribution infrastructure and information systems. In addition, in November 2018, we initiated a share repurchase program of up to $25.0 million and, in the first twenty-six weeks of fiscal 2019, repurchased shares of our common stock at an aggregate cost of $4.5 million. In addition, during the first twenty-six weeks of fiscal 2019, we paid dividends of $1.9 million. In recent years, we have met these cash requirements using cash flow from operations and short-term trade credit. We expect to be able to meet future cash requirements with cash flow from operations, short-term trade credit, existing balances of cash and investment securities and, if necessary, borrowings under our revolving credit facility described in Note 7 to the condensed consolidated financial statements included in Part I, Item 1 of this report.
Current Financial Condition. As of August 3, 2019, we had total cash and cash equivalents of $27.4 million compared to $17.9 million as of February 2, 2019. Additionally, we had $37.8 million and $17.0 million of short-term and long-term investment securities, respectively, as of August 3, 2019, compared with $50.4 million and $8.9 million, respectively, as of February 2, 2019. These securities are comprised of bank certificates of deposit and obligations of the U.S. Treasury, states and municipalities. Inventory represented 29.5% of our total assets as of August 3, 2019, compared to 46.9% as of February 2, 2019. Management’s ability to manage our inventory can have a significant impact on our cash flows from operations during a given interim period or fiscal year. In addition, inventory purchases can be seasonal in nature, such as the purchase of warm-weather or Christmas-related merchandise.
Cash Flows From Operating Activities. Net cash provided by operating activities was $20.1 million in the twenty-six weeks ended August 3, 2019 compared to $14.3 million in the twenty-six weeks ended August 4, 2018. Sources of cash provided during the first half of 2019 included net income adjusted for noncash expenses such as depreciation, amortization of operating lease right of use assets, asset impairment, loss on disposal of property and equipment, insurance proceeds from operating activities, deferred income taxes and stock-based compensation expense, totaling $43.1 million (compared to $26.2 million in the first half of 2018). Other significant sources of cash in the first half of 2019 included (1) a $7.4 million decrease in inventory (compared with a $1.3 million
increase in the first half of 2018) due to efforts to improve inventory turns and maintain as much inventory liquidity as possible in order to take advantage of opportunistic deals and trend changes; and (2) a $1.1 million increase in layaway deposits (compared to a $1.2 million increase in the first half of 2018) because layaways are higher at the end of the second quarter when they include merchandise put on layaway in advance of the back-to-school season than at the end of the fourth quarter after merchandise put on layaway for Christmas has been picked up.
Significant uses of cash from operating activities in the first half of 2019 were (1) a $22.6 million decrease in accrued expenses and other long-term liabilities (compared to a $0.2 million increase in the first half of 2018) due primarily to payments of operating lease liabilities recorded due to the adoption of ASU 2016-02; (2) a $2.8 million increase in prepaid and other current assets (compared to a $2.3 million increase in the first half of 2018) due primarily to an increase in charge card receivables attributable to a greater percentage of customers paying with charge cards; (3) a $2.5 million change in the income tax payable/receivable (compared to a $1.6 million change in the first half of 2018) due to estimated tax payments made during the year; (4) a $2.2 million decrease in accounts payable (compared to a $3.9 million decrease in the first half of 2018) due to the decrease in inventory discussed above; and (5) a $1.5 million decrease in accrued compensation (compared to a $4.2 million increase in the first half of 2018) due to the payment in the first half of 2019 of incentive compensation accrued in fiscal 2018.
Cash Flows From Investing Activities. Cash used in investing activities was $3.3 million in the twenty-six weeks ended August 3, 2019 compared to cash provided of $2.4 million in the twenty-six weeks ended August 4, 2018. Cash used for purchases of property and equipment totaled $8.4 million and $5.7 million in the first half of 2019 and 2018, respectively. Sales/redemptions of investment securities, net of purchases, provided cash of $4.5 million and $7.9 million in the first half of 2019 and 2018, respectively.
Cash Flows From Financing Activities. Cash used in financing activities was $7.2 million in the twenty-six weeks ended August 3, 2019 compared to $24.1 million in the twenty-six weeks ended August 4, 2018. Cash used for the repurchase of common stock totaled $4.5 million and $21.0 million in the first half of 2019 and 2018, respectively. Dividends paid to stockholders used cash of $1.9 million and $2.2 million in the first half of 2019 and 2018, respectively.
Cash Requirements
Our principal sources of liquidity consist of: (i) cash and cash equivalents (which equaled $27.4 million as of August 3, 2019); (ii) short-term and long-term investment securities (which equaled $37.8 million and $17.0 million, respectively, as of August 3, 2019); (iii) short-term trade credit; (iv) cash generated from operations on an ongoing basis as we sell our merchandise inventory; and (v) a $50.0 million revolving credit facility (under which we have no borrowings outstanding). Trade credit represents a significant source of financing for inventory purchases and arises from customary payment terms and trade practices with our vendors. Historically, our principal liquidity requirements have been for working capital and capital expenditure needs.
We believe that our existing sources of liquidity will be sufficient to fund our operations and anticipated capital expenditures for at least the next 12 months.
Recent Accounting Pronouncements
See the discussion of Recent Accounting Pronouncements in Note 12 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this report.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
On February 3, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). For additional information, see Note 14 to the unaudited condensed consolidated financial statements included in Part 1, Item 1 of this report.
There have been no other material changes to the Critical Accounting Policies outlined in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our market risk during the twenty-six weeks ended August 3, 2019 compared to the disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the year ended February 2, 2019.
Item 4. Controls and Procedures.
We have carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of August 3, 2019 pursuant to Rules 13a-15 and 15d-15 of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information has been accumulated and communicated to our management, including the officers who certify our financial reports, as appropriate, to allow timely decisions regarding the required disclosures.
Our disclosure controls and procedures are designed to provide reasonable assurance that the controls and procedures will meet their objectives. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
During the twenty-six weeks ended August 3, 2019, we implemented ASU No. 2016-02, Leases (Topic 842). In connection with its adoption, we implemented changes to our accounting policies, operational processes and internal controls to ensure compliance with the new standard.
There were no other changes in our internal control over financial reporting that occurred during the fiscal quarter ended August 3, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.