Item 2 - Management’s Discussion
and Analysis of Financial Condition and
Results of Operations
November 3, 2018 and October 28, 2017
Overview
Management’s Discussion and Analysis of Financial Condition
and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding
of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a
historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include,
but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships,
general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s
filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition
and results of operations should be read in conjunction with the interim condensed consolidated financial statements and related
notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended February 3, 2018.
The Company operates in two reportable segments: fye and etailz.
The fye segment operates a chain of retail entertainment stores and e-commerce sites,
www.fye.com
and
www.secondspin.com
.
As of November 3, 2018, the fye segment operated 227 stores totaling approximately 1.3 million square feet in the United States,
the District of Columbia and the U.S. Virgin Islands. fye stores offer predominantly entertainment products. The etailz segment
is a leading digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s
business is seasonal in nature, for both segments, with the peak selling period being the holiday season which falls in the Company’s
fourth fiscal quarter.
The Company’s results have been, and will continue to
be, contingent upon management’s ability to understand trends and to manage the business in response to those trends and
general economic trends. Management monitors a number of key performance indicators to evaluate its performance, including:
Net sales and comparable store net sales:
The fye segment
measures the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the
beginning of its thirteenth full month of operation. Stores relocated, expanded or downsized are excluded from comparable store
sales if the change in square footage is greater than 20% until the thirteenth full month following relocation, expansion or downsizing.
Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately
preceding the month of closing. The fye segment further analyzes net sales by store format and by product category. The etailz
segment measures total year over year sales growth by product category and evaluates product sales by supplier.
Cost of Sales and Gross Profit
: Gross profit is calculated
based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales
levels, mix of products sold, vendor discounts and allowances, shrinkage, obsolescence and distribution costs. Distribution expenses
include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and costs associated
with product returns to vendors.
Selling, General and Administrative (“SG&A”)
Expenses:
Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses
and depreciation charges (excluding those related to distribution operations, see Note 5 to the Condensed Consolidated Financial
Statements in this Form 10-Q). SG&A expenses also include fixed assets write-offs associated with store closures, if any,
and miscellaneous income and expense items, other than interest.
Balance Sheet and Ratios:
The Company views cash and
working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and
Capital Resources for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen and Thirty-nine Weeks Ended
November 3, 2018
Compared to the Thirteen and Thirty-nine
Weeks Ended October 28, 2017
Segment Highlights
($ in thousands):
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
November 3, 2018
|
|
|
October 28, 2017
|
|
|
November 3, 2018
|
|
|
October 28, 2017
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
47,865
|
|
|
$
|
52,105
|
|
|
$
|
152,473
|
|
|
$
|
176,006
|
|
etailz
|
|
|
44,119
|
|
|
|
40,896
|
|
|
|
138,288
|
|
|
|
121,440
|
|
Total Company
|
|
$
|
91,984
|
|
|
$
|
93,001
|
|
|
$
|
290,761
|
|
|
$
|
297,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
18,276
|
|
|
$
|
21,347
|
|
|
$
|
61,181
|
|
|
$
|
73,342
|
|
etailz
|
|
|
9,110
|
|
|
|
10,234
|
|
|
|
30,066
|
|
|
|
29,714
|
|
Total Company
|
|
$
|
27,386
|
|
|
$
|
31,581
|
|
|
$
|
91,247
|
|
|
$
|
103,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
(9,493
|
)
|
|
$
|
(7,858
|
)
|
|
$
|
(21,495
|
)
|
|
$
|
(17,703
|
)
|
etailz
|
|
|
(4,261
|
)
|
|
|
(253
|
)
|
|
|
(9,808
|
)
|
|
|
(966
|
)
|
Total Company
|
|
$
|
(13,754
|
)
|
|
$
|
(8,111
|
)
|
|
$
|
(31,303
|
)
|
|
$
|
(18,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of etailz Loss from Operations to etailz Adjusted (Loss) Income from Operations
|
|
|
|
etailz loss fom operations
|
|
$
|
(4,261
|
)
|
|
$
|
(253
|
)
|
|
$
|
(9,808
|
)
|
|
$
|
(966
|
)
|
Acquisition related intangibles amortization
|
|
|
972
|
|
|
|
969
|
|
|
|
2,915
|
|
|
|
2,905
|
|
Acquisition related compensation expense, net of contingency benefit
|
|
|
750
|
|
|
|
1,118
|
|
|
|
2,991
|
|
|
|
1,708
|
|
etailz adjusted (loss) income from operations
(1)
|
|
$
|
(2,539
|
)
|
|
$
|
1,834
|
|
|
$
|
(3,902
|
)
|
|
$
|
3,647
|
|
(1)
In addition to the results of operations determined
in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we reported non-GAAP
adjusted operating (loss) income for the etailz segment as shown above.
Total Revenue.
The following table
sets forth a year-over-year comparison of the Company’s total revenue:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
Thirty-nine Weeks Ended
|
|
|
Change
|
|
|
|
November 3,
2018
|
|
|
October 28,
2017
|
|
|
$
|
|
|
%
|
|
|
November 3,
2018
|
|
|
October 28,
2017
|
|
|
$
|
|
|
%
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye revenue
|
|
$
|
47,865
|
|
|
|
52,105
|
|
|
$
|
(4,240
|
)
|
|
|
-8.1
|
%
|
|
$
|
152,473
|
|
|
|
176,006
|
|
|
$
|
(23,533
|
)
|
|
|
-13.4
|
%
|
etailz revenue
|
|
|
44,119
|
|
|
|
40,896
|
|
|
|
3,223
|
|
|
|
7.9
|
%
|
|
|
138,288
|
|
|
|
121,440
|
|
|
|
16,848
|
|
|
|
13.9
|
%
|
Total revenue
|
|
$
|
91,984
|
|
|
$
|
93,001
|
|
|
$
|
(1,017
|
)
|
|
|
-1.1
|
%
|
|
$
|
290,761
|
|
|
$
|
297,446
|
|
|
$
|
(6,685
|
)
|
|
|
-2.2
|
%
|
Total revenue decreased 1.1% and 2.2% for the thirteen and
thirty-nine weeks ended November 3, 2018 as compared to the same period last year.
fye Segment
The following table sets forth a period over period comparison
of net fye sales by merchandise category:
|
|
Thirteen Weeks Ended
|
|
Change
|
|
|
|
Thirty-nine Weeks Ended
|
|
Change
|
|
|
|
|
|
November 3,
2018
|
|
October 28,
2017
|
|
$
|
|
%
|
|
Comp
Store Net
Sales
|
|
November 3,
2018
|
|
October 28,
2017
|
|
$
|
|
%
|
|
Comp
Store Net
Sales
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye net sales
|
|
$
|
46,758
|
|
$
|
50,970
|
|
$
|
(4,212
|
)
|
|
|
-8.3
|
%
|
|
|
3.8
|
%
|
|
$
|
148,860
|
|
$
|
172,042
|
|
$
|
(23,182
|
)
|
|
|
-13.5
|
%
|
|
|
-4.3
|
%
|
Other revenue
|
|
|
1,107
|
|
|
1,135
|
|
|
(28
|
)
|
|
|
-2.5
|
%
|
|
|
|
|
|
|
3,613
|
|
|
3,964
|
|
|
(351
|
)
|
|
|
-8.9
|
%
|
|
|
|
|
Total revenue
|
|
$
|
47,865
|
|
$
|
52,105
|
|
$
|
(4,240
|
)
|
|
|
-8.1
|
%
|
|
|
|
|
|
$
|
152,473
|
|
$
|
176,006
|
|
$
|
(23,533
|
)
|
|
|
-13.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of fye net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trend/Lifestyle
|
|
|
41.9%
|
|
|
38.0%
|
|
|
|
|
|
|
|
|
|
|
13.3
|
%
|
|
|
40.1%
|
|
|
35.4%
|
|
|
|
|
|
|
|
|
|
|
4.3
|
%
|
Video
(1)
|
|
|
29.6%
|
|
|
32.7%
|
|
|
|
|
|
|
|
|
|
|
-4.0
|
%
|
|
|
30.2%
|
|
|
33.4%
|
|
|
|
|
|
|
|
|
|
|
-10.1
|
%
|
Music
|
|
|
17.9%
|
|
|
18.9%
|
|
|
|
|
|
|
|
|
|
|
-0.3
|
%
|
|
|
18.4%
|
|
|
20.4%
|
|
|
|
|
|
|
|
|
|
|
-12.8
|
%
|
Electronics
|
|
|
10.6%
|
|
|
10.4%
|
|
|
|
|
|
|
|
|
|
|
3.0
|
%
|
|
|
11.3%
|
|
|
10.8%
|
|
|
|
|
|
|
|
|
|
|
2.5
|
%
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Count:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227
|
|
|
268
|
|
|
(41
|
)
|
|
|
-15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Square footage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,268,231
|
|
|
1,490,816
|
|
|
(222,585
|
)
|
|
|
-14.9
|
%
|
|
|
|
|
|
(1)
|
Includes Video Games category, which represented 0.1% of fye fiscal third quarter
net sales. Fiscal 2017 data was adjusted to include this immaterial reclassification.
|
Net sales.
Net sales decreased 8.3% and 13.5% during
the thirteen and thirty-nine weeks ended November 3, 2018, respectively, as compared to the same periods last year. The decline
in net sales primarily resulted from a 15.3% decline in total stores in operation for the thirty-nine weeks ended November 3,
2018.
Trend/Lifestyle:
Comparable store net sales in the trend/lifestyle category
increased 13.3% and 4.3% during the thirteen and thirty-nine weeks ended November 3, 2018, respectively. Trend/lifestyle products
represented 41.9% and 40.1% of total net sales for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, compared
to 38.0% and 35.4% in the comparable periods last year. The Company continues to take advantage of opportunities to strengthen
its selection and shift product mix to growing categories of entertainment-related merchandise.
Video:
Comparable store sales in the video category decreased 4.0%
and 10.1% during the thirteen and thirty-nine week periods ended November 3, 2018, respectively. The video category represented
29.6% and 30.2% of total net sales for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, compared to 32.7%
and 33.4% in the comparable periods last year due to continued industry-wide decline in physical media sales.
Music:
During the thirteen and thirty-nine weeks ended November 3,
2018, music sales in comparable stores decreased 0.3% and 12.8%, respectively. The music category represented 17.9% and 18.4%
of total net sales for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, compared to 18.9% and 20.4% for
the thirteen and thirty-nine weeks ended October 28, 2017 due to continued industry-wide decline in physical media sales.
Electronics:
Comparable store net sales in the electronics
category increased 3.0% and 2.5% during the thirteen and thirty-nine weeks ended November 3, 2018, respectively. Electronics net
sales represented 10.6% and 11.3% of total net sales for the thirteen and thirty-nine weeks ended November 3, 2018, respectively,
compared to 10.4% and 10.8% in the comparable periods last year. The Company continues to take advantage of opportunities to strengthen
its selection and shift product mix to growing categories of electronics.
Other Revenue.
Other revenue,
which was primarily related to commissions and fees earned from third parties, was approximately $1.1 million and $3.6 million
for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, compared to $1.1 million and $4.0 million in the
comparable periods last year. The decline in other revenue for the thirty-nine weeks ended November 3, 2018 was due to lower number
of stores in operation.
etailz Segment
etailz reported net sales of $44.1
million and $138.3 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively, compared to $40.9 million
and $121.4 million net sales for the thirteen and thirty-nine weeks ended October 28, 2017. etailz generates revenue across a
broad array of product lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics,
health & personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the thirty-nine weeks ended November
3, 2018, etailz sold approximately 38,000 SKUs from approximately 2,100 suppliers, compared to approximately 33,000 SKUs from
approximately 1,700 suppliers during the thirty-nine weeks ended October 28, 2017.
Gross Profit.
The following table sets forth a year-over-year comparison of the Company’s gross profit:
|
|
Thirteen
Weeks Ended
|
|
|
Change
|
|
|
Thirty-nine
Weeks Ended
|
|
|
Change
|
|
|
|
November
3,
2018
|
|
|
October
28,
2017
|
|
|
$
|
|
|
%
|
|
|
November
3,
2018
|
|
|
October
28,
2017
|
|
|
$
|
|
|
%
|
|
($in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
gross profit
|
|
$
|
18,276
|
|
|
$
|
21,347
|
|
|
$
|
(3,071
|
)
|
|
|
-14.4
|
%
|
|
$
|
61,181
|
|
|
$
|
73,342
|
|
|
$
|
(12,161)
|
|
|
|
-16.6
|
%
|
etailz
gross profit
|
|
|
9,110
|
|
|
|
10,234
|
|
|
|
(1,124
|
)
|
|
|
-11.0
|
%
|
|
|
30,066
|
|
|
|
29,714
|
|
|
|
352
|
|
|
|
1.2
|
%
|
Total
gross profit
|
|
$
|
27,386
|
|
|
$
|
31,581
|
|
|
$
|
(4,195
|
)
|
|
|
-13.3
|
%
|
|
$
|
91,247
|
|
|
$
|
103,056
|
|
|
$
|
(11,809)
|
|
|
|
-11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross
profit as a % of fye revenue
|
|
|
38.2%
|
|
|
|
41.0%
|
|
|
|
|
|
|
|
|
|
|
|
40.1%
|
|
|
|
41.7%
|
|
|
|
|
|
|
|
|
|
etailz
gross profit as a % of etailz revenue
|
|
|
20.6%
|
|
|
|
25.0%
|
|
|
|
|
|
|
|
|
|
|
|
21.7%
|
|
|
|
24.5%
|
|
|
|
|
|
|
|
|
|
Total gross
profit as a % of total revenue
|
|
|
29.8%
|
|
|
|
34.0%
|
|
|
|
|
|
|
|
|
|
|
|
31.4%
|
|
|
|
34.6%
|
|
|
|
|
|
|
|
|
|
Gross profit decreased 13.3% to $27.4
million for the thirteen weeks ended November 3, 2018 compared to $31.6 million for the thirteen weeks ended October 28, 2017.
For the thirty-nine weeks ended November 3, 2018, gross profit decreased 11.5% to $91.2 million compared to $103.1 million for
the comparable period last year.
fye Segment
fye gross profit
as a percentage of total revenue for the thirteen and thirty-nine weeks ended November 3, 2018 was 38.2% and 40.1%, respectively,
compared to 41.0% and 41.7% for the comparable periods last year. The decline in rate was primarily driven by a higher number
of closing stores during the quarter this year.
etailz Segment
etailz gross profit
as a percentage of total revenue for the thirteen and thirty-nine weeks ended November 3, 2018 was 20.6% and 21.7%, respectively,
compared to 25.0% and 24.5% for the comparable periods last year. The decline in the gross profit rate was primarily due to higher
marketplace fulfillment and warehousing fees.
SG&A Expenses.
The following
table sets forth a period over period comparison of the Company’s SG&A expenses:
|
|
Thirteen Weeks Ended
|
|
Change
|
|
Thirty-nine Weeks Ended
|
|
Change
|
($ in thousands)
|
|
November 3,
2018
|
|
October 28,
2017
|
|
$
|
|
%
|
|
November 3,
2018
|
|
October 28,
2017
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye SG&A, excluding depreciation and amortization
|
|
$
|
26,620
|
|
|
$
|
26,790
|
|
|
|
($170
|
)
|
|
|
-0.6
|
%
|
|
$
|
79,214
|
|
|
$
|
84,102
|
|
|
|
($4,888
|
)
|
|
|
-5.8
|
%
|
As a % of total fye revenue
|
|
|
55.6%
|
|
|
|
51.4%
|
|
|
|
|
|
|
|
|
|
|
|
52.0%
|
|
|
|
47.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
etailz SG&A, excluding depreciation and amortization
|
|
|
12,217
|
|
|
|
9,477
|
|
|
|
2,740
|
|
|
|
28.9
|
%
|
|
|
36,528
|
|
|
|
27,634
|
|
|
|
8,894
|
|
|
|
32.2
|
%
|
As a % of total etailz revenue
|
|
|
27.7%
|
|
|
|
23.2%
|
|
|
|
|
|
|
|
|
|
|
|
26.4%
|
|
|
|
22.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,303
|
|
|
|
3,425
|
|
|
|
(1,122
|
)
|
|
|
-32.8
|
%
|
|
|
6,808
|
|
|
|
9,989
|
|
|
|
(3,181
|
)
|
|
|
-31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
41,140
|
|
|
$
|
39,692
|
|
|
|
$ 1,448
|
|
|
|
3.6
|
%
|
|
$
|
122,550
|
|
|
$
|
121,725
|
|
|
|
$825
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total revenue
|
|
|
44.7%
|
|
|
|
42.7%
|
|
|
|
|
|
|
|
|
|
|
|
42.1%
|
|
|
|
40.9%
|
|
|
|
|
|
|
|
|
|
SG&A expenses
increased $1.4 million and $0.8 million for the thirteen and thirty-nine weeks ended November 3, 2018, respectively.
fye Segment
fye SG&A,
excluding depreciation and amortization expenses, decreased $0.2 million, or 0.6%, and $4.9 million, or 5.8%, for the
thirteen and thirty-nine weeks ended November 3, 2018, respectively. As a percentage of fye revenue, SG&A expenses in the
fye segment for the thirteen and thirty-nine weeks ended November 3, 2018 were 55.6% and 52.0%, respectively, compared to
51.4% and 47.8% for the same period last year. The decline in SG&A expenses was due to fewer stores in operation. The
increase in the rate for the thirteen weeks ended November 3, 2018 was primarily due to increased home office expenses to
support strategic growth initiatives. The increase in the rate for the thirty-nine weeks ended November 3, 2018 was primarily
due to the comparable sales decline and increased home office expenses to support strategic growth initiatives.
etailz Segment
etailz SG&A, excluding depreciation
and amortization expenses, increased $2.7 million and $8.9 million for the thirteen and thirty-nine weeks ended November 3, 2018,
respectively. As a percentage of etailz revenue, SG&A expenses in the etailz segment for the thirteen and thirty-nine weeks
ended November 3, 2018 were 27.7% and 26.4%, respectively, compared to 23.2% and 22.8% for the same period last year. The increase
in SG&A expenses was due to investments in product identification and sourcing, technology, and platform diversification,
in addition to higher marketplace commissions on higher sales.
Depreciation and amortization.
Consolidated
depreciation and amortization expense decreased $1.1 million and $3.2 million for the thirteen and thirty-nine weeks ended November
3, 2018, respectively, primarily due to the $29.1 million net decrease in carrying value of fixed assets, resulting from impairment
charges recorded for the fye segment, during the fourth quarter of fiscal 2017. For a discussion of the Company’s impairment
charges, see “Nature of Operations and Summary of Significant
Accounting Policies” in the
Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018.
Interest Expense.
Interest expense
was $277 thousand and $444 thousand during the thirteen and thirty-nine weeks ended November 3, 2018, respectively. Interest expense
consisted primarily of interest paid on Company’s borrowings and unused commitment fees and the amortization of fees related
to the Company’s credit facility. Interest expense during the thirteen and thirty-nine weeks ended October 28, 2017 was
$83 thousand and $200 thousand, respectively. The increase in interest expense was due to borrowings under the credit facility
as discussed in Note 8 to the condensed consolidated financial statements.
Gain on Insurance Proceeds.
During
the thirty-nine weeks ended October 28, 2017, the fye segment recorded an $8.7 million gain on insurance proceeds related to the
death of the Company’s former Chairman.
Other
Income.
Other income was $43 thousand and $171 thousand during the thirteen and thirty-nine weeks ended November 3, 2018,
respectively, compared to $32 thousand and $91 thousand for the same periods last year.
Income
Tax Expense.
Based on available objective evidence, management concluded that a full valuation allowance should be recorded
against the Company’s deferred tax assets. There were insignificant tax expense (benefit) amounts recorded during the thirteen
and thirty-nine weeks ended November 3, 2018 and comparative periods last year due to the losses recognized each period.
Net
Loss.
The following table sets forth a period over period comparison of the Company’s net loss:
|
|
Thirteen Weeks ended
|
|
|
Thirty-nine Weeks ended
|
|
($ in thousands)
|
|
November 3,
2018
|
|
|
October 28,
2017
|
|
|
Change
|
|
|
November 3,
2018
|
|
|
October 28,
2017
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(13,988)
|
|
|
$
|
(8,135)
|
|
|
$
|
(5,853)
|
|
|
$
|
(31,576)
|
|
|
$
|
(10,045)
|
|
|
$
|
(21,531)
|
|
Income tax expense (benefit)
|
|
|
64
|
|
|
|
(64)
|
|
|
|
128
|
|
|
|
136
|
|
|
|
40
|
|
|
|
96
|
|
Net loss
|
|
$
|
(14,052)
|
|
|
$
|
(8,071)
|
|
|
$
|
(5,981)
|
|
|
$
|
(31,712)
|
|
|
$
|
(10,085)
|
|
|
$
|
(21,627)
|
|
LIQUIDITY
Liquidity and Cash Flows:
The Company’s
primary sources of
liquidity are borrowing capacity under its revolving credit facility, available
cash and cash equivalents, and cash generated from operations. The Company’s cash flows may be impacted by many factors
including the economic environment, consumer confidence, competitive conditions in the retail industry and the success of its
strategies. For the next 12 months, management believes that the Company’s existing liquidity will be adequate to fund its
working capital needs. Management believes that the Company’s current financial position will provide it the financial flexibility
to support its growth initiatives. However, in accordance with the Company’s financing strategy, the Company may access
the capital markets opportunistically.
Management anticipates
any cash requirements due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility,
as discussed in note 8 in the interim condensed consolidated financial statements.
Further, in response to the general decline in operating
results, management, in consultation with and approval of the Board of Directors, intends to implement certain strategic initiatives,
operational efficiencies and other considerations directed towards improving the Company’s performance, operations and cash
flow.
In connection with the preparation
of the unaudited interim condensed consolidated financial statements, the Company has evaluated and concluded there are no conditions
or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for
a period of one year following the date that the financial statements are issued.
The following table sets forth a summary
of key components of cash flow and working capital:
|
|
|
|
|
|
As
of or for the
Thirty-nine Weeks Ended
|
|
|
Change
|
|
|
|
($
in thousands)
|
|
|
|
November
3,
2018
|
|
|
October
28,
2017
|
|
|
$
|
|
|
|
Operating Cash Flows
|
|
|
|
|
(53,337)
|
|
|
|
(33,947)
|
|
|
|
(19,390)
|
|
|
|
Investing Cash Flows
|
|
|
|
|
(1,546)
|
|
|
|
6,028
|
|
|
|
(7,574)
|
|
|
|
Financing Cash Flows
|
|
|
|
|
25,940
|
|
|
|
-
|
|
|
|
25,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
(1)
|
|
|
(2,851)
|
|
|
|
(6,392)
|
|
|
|
3,541
|
|
|
|
Cash, Cash Equivalents, and Restricted
Cash
|
|
(2)
|
|
|
14,563
|
|
|
|
16,158
|
|
|
|
(1,595)
|
|
|
|
Merchandise Inventory
|
|
|
|
|
131,285
|
|
|
|
144,754
|
|
|
|
(13,469)
|
|
|
|
Working Capital
|
|
|
|
|
70,000
|
|
|
|
95,951
|
|
|
|
(25,951)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in Investing Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Cash and cash equivalents per interim
condensed consolidated balance sheets
|
|
|
|
$
|
4,497
|
|
|
$
|
3,924
|
|
|
$
|
573
|
|
|
|
Add: restricted
cash
|
|
|
|
|
10,066
|
|
|
|
12,234
|
|
|
|
(2,168)
|
|
|
|
Cash, cash equivalents,
and restricted cash
|
|
|
|
$
|
14,563
|
|
|
$
|
16,158
|
|
|
$
|
(1,595)
|
|
Cash used in operations
was $53.3 million for the thirty-nine weeks ended November 3, 2018, primarily due to a net loss of $31.7 million, adding back
depreciation and amortization of $6.8 million and non-cash compensation of $2.4 million, less $1.2 million increase in accounts
receivable, $21.9 million seasonal increase in inventory, $2.3 million increase in prepaid expenses, and reductions in deferred
revenue and other long-term liabilities of $2.0 million and $3.3 million, respectively. The Company’s merchandise inventory and
accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually
in the fiscal first quarter, reflecting payments for merchandise inventory purchased during the prior year’s holiday season.
Cash used in investing
activities was $1.5 million for the thirty-nine weeks ended November 3, 2018, which consisted of $2.9 million in capital expenditures,
offset by
$1.3 million of capital distributions from the joint venture.
Cash provided by financing activities
for the thirty-nine weeks ended November 3, 2018, was comprised of $27.4 million proceeds from short-term borrowings, offset by
a $1.5 million payment to the etailz shareholders as per the original etailz acquisition share purchase agreement.
Capital Expenditures.
During the thirteen
and thirty-nine weeks ended November 3, 2018, respectively, the Company made capital expenditures of $1.1 million and $2.9 million,
respectively. The Company currently plans to spend approximately $4.0 million for capital expenditures during fiscal 2018.
CRITICAL ACCOUNTING
POLICIES AND ESTIMATES
The preparation of financial statements
and related disclosures in conformity with accounting principles generally accepted in the United States requires that management
apply accounting policies and make estimates and assumptions that affect results of operations and the reported amounts of assets
and liabilities in the financial statements. Management continually evaluates its estimates and judgments including those related
to merchandise inventory and return costs and income taxes. Management bases its estimates and judgments on
historical experience
and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations included in the Form 10-K for the year ended February 3, 2018 includes
a summary of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated
financial statements. There have been no material changes or modifications to the policies since February 3, 2018.
Recent Accounting Pronouncements:
The information set forth
under Note 2, Recently Adopted Accounting Pronouncements section, and Note 3, Recently Issued Accounting Pronouncements, contained
in Item 1, “Notes to Interim Condensed Consolidated Financial Statements”, is incorporated herein by reference.
Non-GAAP Measures:
This
Form 10-Q contains certain non-GAAP metrics, including: etailz adjusted income (loss) from operations and SG&A, excluding
depreciation and amortization expenses, for each reporting segment. A non-GAAP
measure is not a recognized
measure of financial performance under GAAP in the United States, and should not be considered as a substitute for SG&A expenses,
operating earnings, net earnings from continuing operations or cash flows from operating activities, as determined in accordance
with GAAP.
Non-GAAP items are provided because management believes that, when reconciled from the GAAP items to which they
relate, they provide additional useful information to investors regarding the Company’s operational performance.
The
Company calculates etailz adjusted income (loss) from operations to evaluate its own operating performance and as an integral
part of its planning process. The Company presents etailz adjusted income (loss) from operations as a supplemental measure because
it believes such a measure provides management and investors with a more complete understanding of its business operating results,
including underlying trends, by excluding the effects of certain charges.
The
Company calculates SG&A, excluding depreciation and amortization expenses, for each reporting segment to evaluate its own
operating performance and as an integral part of its planning process. The Company presents SG&A, excluding depreciation and
amortization expenses, as a supplemental measure because it believes such a measure provides management and investors with a more
complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION