Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in the Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by a check mark whether the Registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for 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.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted
and posted 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 and post such files).
Indicate by checkmark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule
12b-2 of the Act).
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
As of August 3, 2018, 36,225,824 shares of the Registrant’s
Common Stock were issued and outstanding. The aggregate market value of the voting stock held by non-affiliates of the Registrant,
based upon the closing sale price of the Registrant’s Common Stock on August 3, 2018 as reported on the Global tier of The
NASDAQ Stock Market, Inc. was $21,287,726.
Shares of Common Stock held by the Company’s controlling shareholder, who
controlled approximately 39% of the outstanding Common Stock, have been excluded for purposes of this computation. Because of such
shareholder’s control, shares owned by other officers, directors and 5% shareholders have not been excluded from the computation.
As of March 29, 2019, there were 36,258,839 shares of Common Stock issued and outstanding.
Indicate by check mark whether
the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
PART I
Cautionary Statement for Purposes of
the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
This document includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information that
are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to the Trans
World Entertainment Corporation’s (“the Company’s”) future prospects, developments and business strategies.
The statements contained in this document that are not statements of historical fact may include forward-looking statements that
involve a number of risks and uncertainties.
We have used the words “anticipate”,
“believe”, “could”, “estimate”, “expect”, “intend”, “may”,
“plan”, “predict”, “project”, and similar terms and phrases, including references to assumptions,
in this document to identify forward-looking statements. These forward-looking statements are made based on management’s
expectations and beliefs concerning future events and are subject to uncertainties and factors relating to our operations and business
environment, all of which are difficult to predict and many of which are beyond the Company’s control, that could cause actual
results to differ materially from those matters expressed in or implied by these forward-looking statements. The following factors
are among those that may cause actual results to differ materially from the Company’s forward-looking statements.
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new product introductions;
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continued and accelerated declines in compact disc (“CD”) and home video industry sales;
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highly competitive nature of the retail entertainment business;
·
advancements in technology, including digital distribution and media streaming;
·
competitive pricing;
·
current economic conditions and changes in mall traffic;
·
dependence on key employees, the ability to hire new employees and pay competitive wages;
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the Company’s level of debt and related restrictions and limitations;
·
future cash flows;
·
availability of real estate;
·
vendor terms;
·
interest rate fluctuations;
·
access to third party digital marketplaces
·
adverse publicity;
·
product liability claims;
·
changes in laws and regulations;
·
breach of data security;
·
increase in Amazon Marketplace fulfillment and storage fees and
·
the other matters set forth under Item 1A “Risk Factors,” Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations”, and other sections of this Annual Report on Form 10-K
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The reader should keep in mind that any forward-looking statement
made by us in this document, or elsewhere, pertains only as of the date on which we make it. New risks and uncertainties come up
from time-to-time and it’s impossible for us to predict these events or how they may affect us. In light of these risks and
uncertainties, you should keep in mind that any forward-looking statements made in this report or elsewhere might not occur.
In addition, the preparation of financial statements in accordance
with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions.
These estimates and assumptions affect:
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the reported amounts and timing of revenue and expenses,
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the reported amounts and classification of assets and liabilities, and
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·
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the disclosure of contingent assets and liabilities.
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Actual results may vary from our estimates and assumptions.
These estimates and assumptions are based on historical results, assumptions that we make, as well as assumptions by third parties.
Item 1. BUSINESS
Company Background
Trans World Entertainment Corporation, which,
together with its consolidated subsidiaries, is referred to herein as “the Company”, “we”, “us”
and “our”, was incorporated in New York in 1972. We own 100% of the outstanding Common Stock of Record Town, Inc. and
etailz, Inc. See below for additional information.
Our Reportable Segments
We operate our business in two segments:
For Your Entertainment Segment (“fye”)
The Company’s fye segment operates
retail stores and two e-commerce sites and continues to be one of the largest specialty retailers of entertainment products, including
trend, video, music, electronics and related products in the United States.
Stores and Store
Concepts
As of February
2,
2019
, the fye segment operated 210 stores totaling approximately 1.2 million square feet in the United States, the District
of Columbia and the U.S. Virgin Islands predominantly under the For Your Entertainment brand.
Mall stores
. The Company operated 193 traditional
mall-based stores as of February 2, 2019. Mall stores average about 5,200 square feet and carry a full complement of entertainment
products, including trend, video, music, electronics, and related products.
Video
only stores.
The Company operated 5 video only stores as of February 2, 2019, under the Suncoast Motion Pictures brand. These
stores specialize in the sale of video and related product. They average about 2,500 square feet.
Freestanding Stores.
The
Company operated 12 freestanding stores predominantly under the fye brand. They carry a full complement of entertainment products,
including trend, video, music, electronics, and related products and are located in freestanding, strip center and downtown locations.
The freestanding stores average approximately 12,700 square feet.
Retail Web Sites
The fye segment operates two retail web sites,
www.fye.com
and
www.secondspin.com
. fye.com is our flagship site and carries entertainment
products, including trend, video, music, electronics and related products. SecondSpin.com is a leading seller of used CDs,
DVDs, and Blu-Ray online and carries one of the largest catalogs of used media available online.
etailz Segment (“etailz”)
etailz is a leading online marketplace retail expert. etailz
uses a data driven approach to digital marketplace retailing utilizing proprietary software and e-commerce insight to identify
new distributors and wholesalers, isolate emerging product trends, and optimize price positioning and inventory purchase decisions.
etailz Retail
Partnerships
Fulfilled by Amazon Global.
etailz is
a leading Amazon marketplace retailer that partners with brands and employs advanced technology and strategies to grow sales both
domestically and internationally.
Additional Marketplace Opportunities.
etailz
partners with companies to expand their brand on eBay, Jet and Walmart.
Drop Ship
.
Drop ship arrangements allow
etailz to offer partners’ entire catalog across marketplaces, expanding their brand presence and capturing additional sales.
Merchandise Categories
fye Segment
Net sales by merchandise category as a
percentage of total net sales for fiscal 2018 and 2017 were as follows:
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2018
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2017
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Lifestyle/Trend
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41.5
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%
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37.3
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%
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Video
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27.6
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30.9
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Music
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17.6
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19.3
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Electronics
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13.3
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12.5
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Total
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100.0
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%
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100.0
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%
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etailz Segment
etailz generates revenue across a broad
array of product lines primarily through the Amazon Marketplace. Approximately 60% of total etailz revenue was generated by four
major categories: health & personal care; home/kitchen/grocery; tools/office/outdoor; and baby.
Business Environment
fye Segment
Video and music accounted for approximately
45% of the segment’s net sales in fiscal 2018 versus approximately 50% of net sales in fiscal 2017. Physical media sales
have suffered from the shift of content to digital distribution, media streaming and online retailers that offer entertainment
products to consumers and collectively have gained a larger share of the market.
etailz Segment
The Company’s etailz segment operates as a third party
e-commerce market place (“Digital Marketplace”) reseller. Digital Marketplaces are e-commerce platforms where online
retailers enable third party sellers access to their website and customer base to sell various merchandise. Digital marketplaces
allow consumers to shop from a variety of merchants in one place and have become an integral part of many e-commerce sellers’
businesses, including Amazon.com, Walmart.com, Jet.com, and ebay.
E-commerce sales are growing faster than physical store sales.
According to the U.S. retail e-commerce sales statistics, total estimated e-commerce sales for 2019 are projected at $560.7 billion,
an increase of 11% from 2018, while e-commerce sales in 2018 accounted for 10% of total retail sales as compared to 9% of total
retail sales for 2017.
During fiscal 2018, in response to the
general decline in operating results, management implemented the following strategic initiatives, operational efficiencies and
other considerations directed towards improving the etailz segment’s performance, operations, and cash flow:
Vendor Rationalization
and Remediation
Using a profit driven approach, the
Company determined there was an opportunity to rationalize and remediate its vendor portfolio to improve profitability, streamline
core operations and improve efficiencies. Rationalization and remediation activities included terminating unprofitable vendors
and improving vendor relationships through negotiations focused on improvements to gross margins and supply chain efficiencies.
SG&A Rationalization
During the fourth quarter of fiscal
2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the
etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner
organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in
force was implemented during the fourth quarter of fiscal 2018, in addition to changes in senior management. Additional reductions
implemented included expenses related to technology, hardware, and employee benefits.
Working Capital Optimization
The segment is in the process of
implementing strategies that will enhance sales, improve inventory turns and decrease Amazon storage fees.
Competition
fye Segment
The specialty entertainment retail industry
is intensely competitive and subject to rapid changes in consumer preferences. We compete with mass merchants, consumer electronics
stores, lifestyle retailers and online retailers. Our media products are also distributed through other methods such as digital
delivery. We also compete with sellers of pre-owned and value media products. Additionally, we compete with other forms of entertainment
activities, including casual and mobile games, movies, television, theater, sporting events and family entertainment centers.
We compete with Walmart, Inc.; Target Corporation;
Amazon.com, Inc. (“Amazon”); and Best Buy Co., Inc., among others.
The Company has diversified its products and
taken other measures to position itself competitively within its industry. The Company believes it effectively competes in the
following ways:
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Diversified product mix: the Company is expanding the range of product offerings in our non-media businesses. As a result,
the non-media categories contribution to total sales increased to 55% in fiscal 2018 as compared to 50% in fiscal 2017.
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Customer service: the Company offers personalized customer service in its stores guided by a commitment to approach every customer
with gratitude, humility and respect.
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Location and convenience: a strength of the Company is its convenient store locations that are often the exclusive retailer
in regional shopping centers offering a full complement of entertainment products.
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Marketing: the Company utilizes in-store visual displays, live events and digital marketing strategy that leverages email
marketing, keyword buys, search engine optimization, social media, and display advertising.
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etailz Segment
etailz competes with other third-party marketplace
sellers using a data driven approach to digital marketplace retailing utilizing proprietary software and e-commerce insight coupled
with a direct customer relationship engagement to identify new distributors and wholesalers, isolate emerging product trends, and
optimize price positioning and inventory purchase decisions.
Seasonality
The Company’s business is seasonal, with its fourth fiscal
quarter constituting the Company’s peak selling period. In fiscal 2018, fourth quarter revenue accounted for approximately
30% of annual total revenue. In anticipation of increased sales activity in the fourth fiscal quarter, the Company purchases additional
inventory and hires seasonal associates to supplement its core store sales and distribution center staff. If, for any reason, the
Company’s net sales were below seasonal norms during the fourth fiscal quarter, the Company’s operating results could
be adversely affected. During the fourth quarter of fiscal 2018, fye comparable store sales (as defined within Key Performance
Indicators of Item 7) increased 2.8% compared to the same quarter last year. etailz sales declined 8.3% for the fourth fiscal quarter
of 2018 compared to the same quarter last year and adversely affected annual results. Quarterly sales can also be affected by the
timing of new product releases, new store openings or closings and the performance of existing stores.
Advertising
fye Segment
The Company makes use of visual displays including in-store
signage and external banners. The Company employs a marketing strategy including email blasts and social networking. Certain vendors
from whom the Company purchases merchandise offer advertising allowances, of varying duration and amount, to promote their merchandise.
etailz Segment
etailz utilizes social media and content marketing to strengthen
its visibility within the industry and locally. The segment’s Facebook, Instagram, LinkedIn, Pinterest, and Twitter accounts
have a strong and engaged following. etailz public relations efforts consist of press releases, articles in industry publications,
and articles on our website. In addition, etailz hosts conferences for its partners which strengthens its presence within the industry
and establishes etailz as a leader in online marketplace retail.
Within in its marketing division, etailz offers advertising
services to its partners including social media ads, influencer campaigns, and marketplace advertising.
Suppliers and Purchasing
fye Segment
The fye segment purchases inventory from approximately 460 suppliers.
In fiscal 2018, 37% of fye purchases were made from ten suppliers including Universal Studio Home Entertainment, Paramount Video
, Buena Vista Home Video, SONY Music, Twentieth Century Fox Home Entertainment, Warner/Elektra/Atlantic, Universal Music Group
Distribution, Funko LLC, Warner Home Video, and Alliance Entertainment.
etailz Segment
During fiscal 2018, etailz purchased inventory
from various suppliers in numerous product categories, primarily through the Amazon Marketplace. In fiscal 2018, no individual
supplier exceeded 10% of etailz revenue.
The Company does not have material long-term
purchase contracts; rather, it purchases products from its suppliers on an order-by-order basis. Historically, the Company has
not experienced difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access
to adequate sources of supply.
Trade Customs and Practices
Under current trade practices with large suppliers, retailers
of music and video products are generally entitled to return unsold merchandise they have purchased in exchange for other merchandise
carried by the suppliers. The largest music suppliers charge a related merchandise return penalty or return handling fee. Most
manufacturers and distributors of video products do not charge a return penalty or handling fee. Under current trade practices
with large suppliers, retailers of trend, electronics, video games and related products may receive markdown support from suppliers
to help clear discontinued or slow turning merchandise. Merchandise return policies and other trade practices have not changed
significantly in recent years. The Company generally adapts its purchasing policies to changes in the policies of its largest suppliers.
Employees
As of February 2, 2019, the Company employed
approximately 2,200 people, of whom approximately 1,000 were employed on a full-time basis. Others were employed on a part-time
basis.
fye Segment
The fye segment had approximately 800 full-time employees
and approximately 1,200 part-time employees. The fye segment hires seasonal sales and distribution center employees during
its fourth quarter peak selling season to ensure continued levels of personalized customer service and in-stock position.
Assistant store managers, store managers, district managers and regional managers are eligible to receive incentive
compensation based on the sales and/or profitability of stores for which they are responsible. Sales support managers are
generally eligible to receive incentive compensation based on achieving Company performance targets. None of the
Company’s employees are covered by collective bargaining agreements and management believes that the Company enjoys
favorable relations with its employees.
etailz segment
During the fourth quarter of 2018, etailz implemented certain
strategic initiatives in order to create operation efficiencies directed towards improving the etailz segment’s performance,
operations, and cash flow to support the ongoing operating model changes and to create a leaner organization that is better aligned
with current and future business focus. As part of the initiatives, a 30% reduction in force was implemented during the fourth
quarter of fiscal 2018, in addition to changes in senior management.
After the reduction in force, as of February 2, 2019, the etailz segment employed 189 full-time and 15 part-time employees.
Trademarks
The trademarks, for your entertainment (fye), etailz, and Suncoast
Motion Pictures are registered with the U.S. Patent and Trademark Office and are owned by the Company. We believe that our rights
to these trademarks are adequately protected. We hold no material patents, licenses, franchises or concessions; however, our established
trademarks and trade names are essential to maintaining our competitive position in the entertainment retail industry.
Information Systems
fye Segment
The Company’s inventory management
systems and point-of-sale technology show daily sales and in-store stock by title by store. The systems use this data to automatically
generate replenishment shipments to each store from our distribution centers, enabling each store to carry a merchandise assortment
uniquely tailored to its own sales mix and rate of sale. Call lists and reservation system also provide our buying staff with information
to determine order size and inventory management for store-by-store inventory allocation.
To support most operations, the Company
uses a large-scale computing environment with a state-of-the-art storage area network, a wired and wireless corporate network installed
at regional headquarters, and a secure virtual private network to access and provide services to computing assets located in stores,
distribution centers and satellite offices, and to the mobile workforce.
An Oracle based point-of-sale system has been enhanced to facilitate
trade-in transactions, including automatic lookup of trade-in prices and printing of machine-readable bar codes to facilitate in-store
restocking of pre-owned products. In addition, our central database of all pre-owned products allows us to actively manage the
pricing and product availability of our pre-owned products across our store base and reallocate our pre-owned products as necessary.
etailz segment
etailz has a data driven approach to digital marketplace retail
utilizing proprietary software. Using data collected from the marketplaces, optimal inventory thresholds and purchasing trends
are calculated within their advanced inventory management software developed in-house. etailz also has proprietary software related
to pricing, marketing, and marketplace seller information. To support most operations, etailz uses cloud computing services
and a secure network to provide computing services.
Available Information
The Company’s headquarters are located
at 38 Corporate Circle, Albany, New York 12203, and its telephone number is (518) 452-1242. The Company’s corporate website
address is www.twec.com. The Company makes available, free of charge, its Exchange Act Reports (Forms 10-K, 10-Q, 8-K and any amendments
thereto) on its web site as soon as practical after the reports are filed with the Securities and Exchange Commission (“SEC”).
The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC. This information can be obtained from the site http://www.sec.gov. The Company’s Common
Stock, $0.01 par value, is listed on the NASDAQ Global Market under the trading
symbol “TWMC”. The Company’s
fiscal year end is the Saturday closest to January 31. The fiscal 2018 (“fiscal 2018”) year ended on February 2, 2019
and fiscal 2017 (“fiscal 2017”) year ended February 3, 2018. Fiscal 2018 consisted of 52 weeks and fiscal 2017 consisted
of 53 weeks.
Item 1A. RISK FACTORS
The following is a discussion of certain
factors, which could affect the financial results of the Company.
Risks Related to Our Business and Industry
The Company’s results of operations
are affected by the continued declines in the physical video and music industries.
Physical media sales have suffered
from the shift of content to digital distribution, streaming and online retailers that offer entertainment products at discounted
prices and collectively have gained a larger share of the market. Physical video and music represent approximately 45% of sales
and have been impacted by new distribution channels, including digital distribution, streaming and internet fulfillment.
If we cannot successfully implement our business strategy
our growth and profitability could be adversely impacted.
Our future results will depend, among other things, on our success
in implementing our business strategy. There can be no assurance that we will be successful in implementing our business strategy
or that the strategy will be successful in sustaining acceptable levels of sales growth and profitability.
During fiscal 2018, in response to the
general decline in operating results, management implemented the following strategic initiatives, operational efficiencies and
other considerations directed towards improving the etailz segment’s performance, operations, and cash flow:
Vendor Rationalization
and Remediation
Using a profit driven approach, the
Company determined there was an opportunity to rationalize and remediate its vendor portfolio to improve profitability, streamline
core operations and improve efficiencies. Rationalization and remediation activities included terminating unprofitable vendors
and improving vendor relationships through negotiations focused on improvements to gross margins and supply chain efficiencies.
SG&A Rationalization
During the fourth quarter of fiscal
2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed towards improving the
etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes and to create a leaner
organization that is better aligned with current and future business focus. As part of the initiatives, a 30% reduction in
force was implemented during the fourth quarter of fiscal 2018. Additional reductions implemented included expenses related to
technology, hardware, and employee benefits.
Working Capital Optimization
The segment is in the process of
implementing strategies that will enhance sales, improve inventory turns and decrease Amazon storage fees.
The Company’s results of operations may suffer if the
Company does not accurately predict consumer acceptance of new products or distribution technologies or adapt to a shift to multichannel
experience.
The entertainment industry is characterized by changing technology,
evolving format standards, and new and enhanced product introductions. These characteristics require the Company to respond quickly
to technological
changes and understand the impact of these changes on customers’
preferences. If the Company is unable to participate in new product or distribution technologies, its results of operations may
suffer. Specifically, CD and DVD formats have experienced a continuous decline as digital forms of music and video content have
become more prevalent. If the Company does not timely adapt to these changing technologies and sufficiently shift to other merchandise
categories, operating results could significantly suffer.
In addition, multichannel retailing is rapidly evolving with
the increasing use of computers, tablets, mobile phones and other devices to shop in stores and online and the increased use of
social media as a means of interacting with our customers and enhancing their shopping experiences. If we are unable to adapt to
the growth of multichannel retailing, and keep pace with the changing expectations of our customers and new developments by our
competitors, customer experience could be negatively affected, resulting in a loss of customer confidence and satisfaction, and
lost sales, which could adversely affect our reputation and results of operations.
Increased competition from existing
retailers, including internet retailers, could adversely affect the Company’s results of operations.
The Company competes with a wide variety of entertainment retailers,
including mass merchandisers, consumer electronics outlets, internet retailers and independent operators, some of whom have greater
financial and other resources than the Company and frequently sell their product at discounted prices or with added value.
In addition, the Company’s success depends on our ability
to positively differentiate ourselves from other retailers. The retail business is highly competitive. In the past, the Company
has been able to compete by differentiating our customer shopping experience, by creating an attractive value proposition through
a careful combination of price, merchandise assortment, convenience, customer service and marketing efforts. Customer perceptions
regarding our stores, our in-stock position and deep assortment of product are also factors in our ability to compete. No single
competitive factor is dominant, and actions by our competitors on any of these factors could have an adverse effect on our sales,
gross profit and expenses. If we fail to continue to positively differentiate ourselves from our competitors, our results of operations
could be adversely affected.
The ability to attract customers to
our stores depends heavily on the success of the shopping malls in which many of our stores are located; any decrease in consumer
traffic in those malls could adversely affect the Company’s results of operations.
In order to generate customer traffic,
we depend heavily on locating many of our stores in prominent locations within shopping malls. Sales at these stores are derived
from the volume of traffic in those malls. Our stores benefit from the ability of a mall’s other tenants to generate consumer
traffic in the vicinity of our stores. Our sales volume and mall traffic generally may be adversely affected by, among other things,
economic downturns in a particular area, competition from e-commerce retailers, non-mall retailers and other malls, increases in
gasoline prices, fluctuations in exchange rates in border or tourism-oriented locations and the closing or decline in popularity
of other stores in the malls in which we are located. An uncertain economic outlook could curtail new shopping mall development,
decrease shopping mall traffic, reduce the number of hours that shopping mall operators keep their shopping malls open or force
them to cease operations entirely. A reduction in mall traffic as a result of these or any other factors could have a material
adverse effect on our business, results of operations and financial condition.
Continued increases in Amazon Marketplace fulfillment and
storage fees
could have an adverse impact on our profit margin and results of operations.
etailz utilizes Amazon’s Freight
by Amazon (“FBA”) platform to store their products at the Amazon fulfillment center and to pack and distribute these
products to customers. If Amazon continues to increase its FBA fees, our profit margin for the etailz segment could be adversely
affected.
The Company’s business is influenced
by general economic conditions.
The Company’s performance is subject to general economic
conditions and their impact on levels of discretionary consumer spending. General economic conditions impacting discretionary consumer
spending include, among others, wages and employment, consumer debt, reductions in net worth, residential real estate and mortgage
markets, taxation, fuel and energy prices, interest rates, consumer confidence and other macroeconomic factors.
Consumer purchases of discretionary items,
such as our merchandise, generally decline during recessionary periods and other periods where disposable income is adversely affected.
A downturn in the economy affects specialty retailers disproportionately, as consumers may prioritize reductions in discretionary
spending, which could have a direct impact on purchases of our merchandise and adversely impact our results of operations. In addition,
reduced consumer spending may drive us and our competitors to offer additional products at promotional prices, which would have
a negative impact on gross profit.
Disruption of global capital and credit markets may have
a material adverse effect on the Company’s liquidity and capital resources.
Distress in the financial markets has in the past and can in
the future result in extreme volatility in security prices, diminished liquidity and credit availability. There can be no assurance
that our liquidity will not be affected by changes in the financial markets and the global economy or that our capital resources
will at all times be sufficient to satisfy our liquidity needs.
Because of our floating rate credit facility, we may be adversely
affected by interest rate changes.
Our financial position may be affected by fluctuations in interest
rates, as our credit facility is subject to floating interest rates. Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.
If we were to borrow against our senior credit facility, a significant increase in interest rates could have an adverse effect
on our financial position and results of operations.
The Company is dependent upon access to capital, including
bank credit facilities and short-term vendor financing, for its liquidity needs.
The Company must have sufficient sources of liquidity to fund
its working capital requirements and indebtedness. The Company believes that the combination of its cash and cash equivalents on
hand, cash flow received from operations, funds available under the Company’s credit facility and short-term vendor financing
will be sufficient to meet the Company’s normal working capital and debt service requirements for at least the next twelve
months. If these sources of liquidity do not satisfy the Company’s requirements, the Company may need to seek additional
financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the
availability of credit and the Company’s credit rating, as well as the Company’s reputation with potential lenders.
These factors could materially adversely affect the Company’s ability to fund its working capital requirements, costs of
borrowing, and the Company’s financial position and results of operations would be adversely impacted.
Historically, we have experienced declines
and we may continue to experience fluctuation in our level of sales and results from operations.
A variety of factors has historically affected, and will continue
to affect, our sales results and profit margins. These factors include general, regional and national economic conditions; competition;
actions taken by our competitors; consumer trends and preferences; new product introductions and changes in our product mix; timing
and effectiveness of promotional events and weather. fye’s annual comparable store sales may decline further than they did
in fiscal 2018. Also, they may vary from quarter to quarter as our business is highly seasonal in nature. Our highest sales and
operating income historically occur during the fourth fiscal quarter, which is due in part to the holiday selling season. The fourth
fiscal quarter generated approximately 30% of our
total revenue for fiscal 2018. Any decrease in our fourth fiscal
quarter sales, whether due to a slow holiday selling season, unseasonable weather conditions, economic conditions or otherwise,
could have a material adverse effect on our business, financial condition and operating results for the entire fiscal year. There
is no assurance that we will achieve positive levels of sales and earnings growth, and any decline in our future growth or performance
could have a material adverse effect on our business and results of operations.
Failure to open new stores or renew
existing leases in profitable stores may limit our earnings.
Historically, the Company’s growth has come from adding
stores. The Company opens new stores if it finds desirable locations and is able to negotiate suitable lease terms for profitability.
A lack of new store growth may impact the Company’s ability to increase sales and earnings. During fiscal 2018, the Company
did not open any new stores and closed 50 stores with expiring leases. The Company regularly renews leases at existing locations
if those stores are profitable. Failure to renew these leases may impact the Company’s earnings. See Item 2: Properties,
for timing of lease expirations.
A change in one or more of the Company’s
vendors’ policies or the Company’s relationship with those vendors could adversely affect the Company’s results
of operations.
The Company is dependent on its vendors
to supply merchandise in a timely and efficient manner. If a vendor fails to deliver on its commitments, whether due to financial
difficulties or other reasons, the Company could experience merchandise shortages that could lead to lost sales.
Approximately 37% of fye segment’s purchases come from
ten major suppliers. As is standard in its industry, the Company does not maintain long-term contracts with its suppliers but instead
makes purchases on an order-by-order basis. If the Company fails to maintain customary trade terms or enjoy positive vendor relations,
it could have an adverse effect on the Company’s results of operations.
Historically, the etailz segment has not experienced
difficulty in obtaining satisfactory sources of supply and management believes that it will continue to have access to adequate
sources of supply. No individual supplier exceeded 10% of etailz purchases.
etailz revenue is dependent upon maintaining etailz’s
relationship with Amazon and failure to do so, or any restrictions on our ability to offer products on the Amazon Marketplace,
could have an adverse impact on our business, financial condition and results of operations.
etailz generates substantially all of its revenue through the
Amazon Marketplace. Therefore, we depend in large part on our relationship with Amazon for the continued growth of the etailz segment.
In particular, we depend on our ability to offer products on the Amazon Marketplace. We also depend on Amazon for the timely delivery
of products to customers. Any adverse change in our relationship with Amazon, including restrictions on the ability to offer products
or termination of the relationship, could adversely affect the continued growth of our etailz segment and our financial condition
and results of operations.
The Company’s results of operations
are affected by the availability of new products.
The Company’s business is affected
by the release of “hit” music and video titles, which can create fluctuations in sales. It is not possible to determine
the timing of these fluctuations or the future availability of hit titles. The Company is dependent upon the major music and movie
producers to continue to produce hit products. To the extent that new hit releases are not available, or not available at prices
attractive to consumers, or, if manufacturers fail to introduce or delay the introduction of new products, the Company’s
results of operations may be adversely affected.
If the Company’s vendors fail
to provide marketing and merchandising support at historical levels, the Company’s results of operations could be adversely
affected.
The manufacturers of entertainment products have typically provided
retailers with significant marketing and merchandising support for their products. As part of this support, the Company receives
cooperative advertising and other allowances from these vendors. These allowances enable the Company to actively promote and merchandise
the products it sells at its stores and on its websites. If the Company’s vendors fail to provide this support at historical
levels, the Company’s results of operations could be negatively impacted.
Parties with whom the Company does business
may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to the Company.
The Company is a party to contracts, transactions and business
relationships with various third parties, including vendors, suppliers, service providers and lenders, pursuant to which such third
parties have performance, payment and other obligations to the Company. In some cases, the Company depends upon such third parties
to provide essential products, services or other benefits, including with respect to store and distribution center locations, merchandise,
advertising, software development and support, logistics, other agreements for goods and services in order to operate the Company’s
business in the ordinary course, extensions of credit, credit card accounts and related receivables, and other vital matters. Economic,
industry and market conditions could result in increased risks to the Company associated with the potential financial distress
or insolvency of such third parties. If any of these third parties were to become subject to bankruptcy, receivership or similar
proceedings, the rights and benefits of the Company in relation to its contracts, transactions and business relationships with
such third parties could be terminated, modified in a manner adverse to the Company, or otherwise impaired. The Company cannot
make any assurances that it would be able to arrange for alternate or replacement contracts, transactions or business relationships
on terms as favorable as the Company’s existing contracts, transactions or business relationships, if at all. Any inability
on the part of the Company to do so could negatively affect the Company’s cash flows, financial condition and results of
operations.
Breach of data security could harm our business and standing
with our customers.
The protection of our customer, employee and business data is
critical to us. Our business, like that of most retailers, involves the receipt and transmission of customers’ personal information,
consumer preferences and transmission of the payment card information, as well as confidential information about our employees,
our suppliers and our Company. We rely on commercially available systems, software, tools and monitoring to provide security
for processing, transmission and storage of all such data, including confidential information. Despite the security measures we
have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches,
acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. Unauthorized
parties may attempt to gain access to our systems or information through fraud or other means, including deceiving our employees
or third-party service providers. The methods used to obtain unauthorized access, disable or degrade service, or sabotage
systems are also constantly changing and evolving, and may be difficult to anticipate or detect. We have implemented and regularly
review and update our control systems, processes and procedures to protect against unauthorized access to or use of secured data
and to prevent data loss. However, the ever-evolving threats mean we must continually evaluate and adapt our systems and processes,
and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. Any
security breach involving the misappropriation, loss or other unauthorized disclosure of customer payment card or personal information
or employee personal or confidential information, whether by us or our vendors, could damage our reputation, expose us to risk
of litigation and liability, disrupt our operations, harm our business and have an adverse impact upon our net sales and profitability.
As the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous,
with new and changing requirements applicable to our business, compliance with those requirements could also result in additional
costs. Further, if we are unable to comply with the security standards established by banks and the credit card industry, we may
be
subject to fines, restrictions and expulsion from card acceptance
programs, which could adversely affect our retail operations.
Our hardware and software systems are
vulnerable to damage, theft or intrusion that could harm our business.
Our success, in particular our ability to successfully manage
inventory levels and process customer transactions, largely depends upon the efficient operation of our computer hardware and software
systems. We use management information systems to track inventory at the store level and aggregate daily sales information, communicate
customer information and process purchasing card transactions, process shipments of goods and report financial information.
Any failure of our computer hardware or software systems that
causes an interruption in our operations or a decrease in inventory tracking could result in reduced net sales and profitability.
Additionally, if any data intrusion, security breach, misappropriation or theft were to occur, we could incur significant costs
in responding to such event, including responding to any resulting claims, litigation or investigations, which could harm our operating
results.
Our inability or failure to protect our intellectual property
rights, or any claimed infringement by us of third party intellectual rights, could have a negative impact on our operating results.
Our trademarks, service marks, copyrights, patents, trade secrets
and other intellectual property, including proprietary software, are valuable assets that are critical to our success. The unauthorized
reproduction or other misappropriation of our intellectual property could cause a decline in our revenue. In addition, any infringement
or other intellectual property claim made against us could be time-consuming to address, result in costly litigation, cause product
delays, require us to enter into royalty or licensing agreements or result in our loss of ownership or use of the intellectual
property.
Loss of key personnel or the inability
to attract, train and retain qualified employees could adversely affect the Company’s results of operations.
The Company believes that its future prospects depend, to a
significant extent, on the services of its executive officers. Our future success will also depend on our ability to attract
and retain qualified key personnel. The loss of the services of certain of the Company’s executive officers and other key
management personnel could adversely affect the Company’s results of operations.
In addition to our executive officers, the Company’s business
is dependent on our ability to attract, train and retain a large number of qualified team members. Many of those team members
are employed in entry-level or part-time positions with historically high turnover rates. Our ability to meet our labor needs while
controlling our costs is subject to external factors such as unemployment levels, health care costs and changing demographics.
If we are unable to attract and retain adequate numbers of qualified team members, our operations, customer service levels and
support functions could suffer. Those factors, together with increased wage and benefit costs, could adversely affect our
results of operations.
Failure to comply with legal and regulatory requirements
could adversely affect the Company’s results of operations.
The Company’s business is subject to a wide array of laws
and regulations. Significant legislative changes that impact our relationship with our workforce (none of which is represented
by unions) could increase our expenses and adversely affect our operations. Examples of possible legislative changes impacting
our relationship with our workforce include changes to an employer’s obligation to recognize collective bargaining units,
the process by which collective bargaining units are negotiated or imposed, minimum wage requirements, health care mandates, and
changes in overtime regulations.
Our policies, procedures and internal controls are designed
to comply with all applicable laws and regulations, including those imposed by the Securities and Exchange Commission and the NASDAQ
Global Market, as well as applicable employment laws. Additional legal and regulatory requirements increase the complexity of the
regulatory environment in which we operate and the related cost of compliance. Failure to comply with such laws and regulations
may result in damage to our reputation, financial condition and market price of our stock.
We could be materially and adversely affected if our distribution
center is disrupted.
We operate a distribution center in Albany, New York. We ship
approximately 82% of our fye segment merchandise inventory through our distribution center. If our distribution center is destroyed
or disrupted for any reason, including weather, fire, labor, or other issues we could incur significantly higher costs and longer
lead times associated with distributing our products to our stores during the time it takes to reopen or replace the distribution
center.
We maintain business interruption insurance to protect us from
the costs relating to matters such as a shutdown, but our insurance may not be sufficient, or the insurance proceeds may not be
timely paid to us, in the event of a shutdown.
We may face difficulties in meeting our labor needs to effectively
operate our business.
We are heavily dependent upon our labor workforce in the geographic
areas where we conduct our business. Our compensation packages are designed to provide benefits commensurate with our level
of expected service. However, within our retail and logistics operations, we face the challenge of filling many positions
at wage scales that are appropriate to the industry and competitive factors. We also face other risks in meeting our labor
needs, including competition for qualified personnel and overall unemployment levels. Changes in any of these factors, including
a shortage of available workforce in areas in which we operate, could interfere with our ability to adequately service our customers
or to open suitable locations and could result in increasing labor costs.
Our business could be adversely affected by increased labor
costs, including costs related to an increase in minimum wage and health care.
Labor is one of the primary components in the cost of operating
our business. Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment
rates, health care, or other employee benefits costs may adversely impact our operating expenses. A considerable amount
of our store team members are paid at rates related to the federal or state minimum wage and any changes to the minimum wage rate
may increase our operating expenses. Furthermore, inconsistent increases in state and or city minimum wage requirements
limit our ability to increase prices across all markets and channels. Additionally, we are self-insured with respect
to our health care coverage in the U.S. and do not purchase third party insurance for the health insurance benefits provided to
employees with the exception of pre-defined stop loss coverage, which helps limit the cost of large claims. There is no assurance
that future health care legislation will not adversely impact our results or operations.
Litigation may adversely affect our business, financial condition
and results of operations.
Our business is subject to the risk of litigation by employees,
consumers, suppliers, competitors, stockholders, government agencies or others through private actions, class actions, administrative
proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory
actions, is difficult to assess or quantify. We may incur losses relating to these claims, and in addition, these proceedings
could cause us to incur costs and may require us to devote resources to defend against these claims that could adversely affect
our results of operations. For a description of current legal proceedings, see “Part I, Item 3, Legal Proceedings.”
Certain of our strategies, including product innovations
and expanding our exclusive offerings, may present greater risks.
We are continuously assessing opportunities to improve store
productivity and complementary products and services related to our core business, including product innovations and exclusive
offerings. We may expend both capital and personnel resources on such business opportunities which may or may not be successful.
There can be no assurance that we will be able to develop product innovations and exclusive offerings to a point where they will
become profitable or generate positive cash flow.
An impairment of the carrying value of fixed assets, intangible
assets and goodwill has negatively affected and may in the future negatively affect our financial results.
Because we have grown in part through acquisitions,
goodwill and other acquired intangible assets have represented a substantial portion of our total assets.
Under generally accepted accounting principles,
we assess our long-lived assets for impairment whenever economic events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. Goodwill is not amortized but is evaluated annually for impairment.
During fiscal 2018, as a result of triggering
events, the Company performed impairment tests on its fixed assets and intangible assets, and concluded that both
its fixed assets and intangible assets were partially impaired. Additionally, as a result of the annual impairment review, the
Company determined that goodwill was fully impaired during 2018. The Company recorded impairment losses of approximately
$4.1 million and $16.4 million for the fixed assets and intangible assets, respectively. The Company recorded an impairment
loss of $39.2 million for goodwill.
In the future, significant negative industry
or general economic trends, disruptions to our business and unexpected significant changes or planned changes in our use of our
long-lived assets may result in additional impairments to our fixed assets and intangible assets. Any reduction in or impairment
of the value of fixed assets or intangible assets will result in a charge against earnings, which could have an adverse impact
on our reported results of operations and financial condition.
The effects of natural disasters, terrorism, acts of war,
and public health issues may adversely affect our business.
Natural disasters, including earthquakes, hurricanes, floods,
and tornadoes may affect store and distribution center operations. In addition, acts of terrorism, acts of war, and military action
both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability
to purchase merchandise from suppliers for sale to our customers. Public health issues, such as flu or other pandemics, whether
occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce
being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally,
public health issues may disrupt, or have an adverse effect on, our suppliers’ operations, our operations, our customers,
or customer demand. Our ability to mitigate the adverse effect of these events depends, in part, upon the effectiveness
of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that
our plans will be adequate or implemented properly in the event of an actual disaster. We may be required to suspend operations
in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results
of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer
spending habits could have a material adverse effect on customer purchases of our products.
The terms of our asset-based revolving credit agreement
impose certain restrictions on us that may impair our ability to respond to changing business and economic conditions, which
could have a significant adverse impact on our business. Additionally, our business could suffer if our ability to acquire
financing is reduced or eliminated.
We maintain an asset-based revolving credit agreement with Wells
Fargo Bank, N.A., which provides for a senior secured revolving credit facility (“ABL Facility”) of up to $75 million.
The ABL Facility contains various representations, warranties and restrictive covenants that, among other things and subject to
specified circumstances and exceptions, restrict our ability to incur indebtedness (including guarantees), grant liens, make investments,
pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose
of certain assets or change the nature of their business. In addition, excess availability equal to at least 10% of the loan cap
must be maintained under the ABL Facility. The ABL Facility does not otherwise contain financial maintenance covenants. These restrictions
could (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities
or business plans; and (2) adversely affect our ability to finance our operations, strategic acquisitions, investments or
other capital needs or to engage in other business activities that would be in our interest.
The ABL Facility includes customary events of default including
non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default
to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests,
material judgments and change of control. Additionally, we cannot be assured that our borrowing relationship with our lenders will
continue or that our lenders will remain able to support their commitments to us in the future. If our lenders fail
to do so, then we may not be able to secure alternative financing on commercially reasonable terms, or at all.
Risks Related to Ownership of Our Common
Stock.
The Robert J. Higgins TWMC Trust (the
“Trust”) owns approximately 39% of the outstanding Common Stock. Therefore, the trustees have significant influence
and control over the outcome of any vote of the Company’s Shareholders.
The Robert J. Higgins TWMC Trust owns approximately 39% of the
outstanding Common Stock and there are no limitations on the Trust acquiring shares in the future. Accordingly, the trustees
have significant influence over the election of our directors, the appointment of new management and the approval of actions requiring
shareholder approval, such as adopting amendments to our articles of incorporation and approving mergers or sales of all or substantially
all of our assets. Such concentration of ownership and substantial voting influence may have the effect of delaying or preventing
a change of control, even if a change of control is in the best interest of all shareholders. There may be instances in which the
interest of the Trust may conflict or be perceived as being in conflict with the interest of a holder of our securities or the
interest of the Company. W. Michael Reickert, a member of the Board of Directors of the Company, is a trustee of the Trust.
The Company’s stock price has
experienced and could continue to experience volatility and could decline, resulting in a substantial loss on your investment.
Our stock price has experienced, and could continue to experience
in the future, substantial volatility as a result of many factors, including global economic conditions, broad market fluctuations
and public perception of the prospects for music and the home video industry. Changes in our comparable store net sales could also
affect the price of our Common Stock. Failure to meet market expectations, particularly with respect to comparable store sales,
net revenues, operating margins and earnings per share, would likely result in a further decline in the market price of our stock.
If we do not meet the continued listing
standards of the NASDAQ Global Market, our common stock could be delisted from trading, which could limit investors’
ability to make transactions in our common stock and subject us to additional trading restrictions.
Our common stock is listed on the NASDAQ Global
Market (“the NASDAQ”), which imposes continued listing requirements with respect to listed shares. On January 15, 2019,
we received a letter from the NASDAQ stating that we are not in compliance with NASDAQ Listing Rule 5450(a)(1) because
the closing bid price of our common stock was below the required minimum of $1.00 per share for the previous 30 consecutive business
days. In accordance with NASDAQ Listing Rules, we have a period of 180 calendar days, or until July 15, 2019,
to regain compliance with the minimum bid price requirement. If at any time before July 15, 2019 the closing bid price of our common
stock is at least $1.00 per share for a minimum of 10 consecutive business days, NASDAQ will provide us with written
confirmation that we have regained compliance with the minimum bid price requirement and this
matter
will be closed.
If we are unable to demonstrate compliance with Rule 5450(a)(1) by July 15, 2019, we can submit
a request for an additional 180-day period to regain compliance with the minimum bid price requirement.
There can be no assurance, however, that
we will be able to regain compliance with the minimum bid price requirement or that we will otherwise be in compliance with other NASDAQ listing
criteria. If we fail to regain and maintain compliance with the minimum bid requirement or to meet the other applicable continued
listing requirements in the future and NASDAQ determines to delist our common stock, the delisting could adversely affect
the market price and liquidity of our common stock, reduce our ability to raise additional capital.
The limited public float and trading volume for our Common
Stock may have an adverse impact and cause significant fluctuation of market price.
Historically, ownership of a significant portion of our outstanding
shares of Common Stock has been concentrated in a small number of stockholders. Consequently, our Common Stock has a relatively
small float and low average daily trading volume, which could affect a stockholder’s ability to sell our stock or the price
at which it can be sold. In addition, future sales of substantial amounts of our Common Stock in the public market by those larger
stockholders, or the perception that these sales could occur, may adversely impact the market price of the stock and our stock
could be difficult for a stockholder to liquidate.
Item 1B. UNRESOLVED SEC COMMENTS
None.
Item 2.
PROPERTIES
Retail
Stores
As
of February 2, 2019, the fye segment leased and operated 210 stores some of which have renewal options. The majority of the leases
provide for the payment of fixed monthly rent and expenses for maintenance, property taxes and insurance, while others provide
for the payment of monthly rent based on a percentage of sales. Certain leases provide for additional rent based on store sales
in excess of specified levels. The following table lists the leases due to expire in each of the fiscal years shown as of the fiscal
year-end, assuming any renewal options are not exercised:
|
Year
|
|
No. of
Leases
|
|
Year
|
|
No. of
Leases
|
|
|
|
|
|
|
|
|
|
2019
|
|
158
|
|
2023
|
|
4
|
|
|
|
|
|
|
|
|
|
2020
|
|
16
|
|
2024
|
|
1
|
|
|
|
|
|
|
|
|
|
2021
|
|
27
|
|
2025 and beyond
|
|
0
|
|
|
|
|
|
|
|
|
|
2022
|
|
4
|
|
|
|
|
As
leases expire, the Company will evaluate the decision to exercise renewal rights or obtain new leases for the same or similar locations
based on store profitability.
Corporate
Offices and Distribution Center Facilities
As of
February 2, 2019, we leased the following office and distribution facilities:
|
|
|
Square
|
|
|
Owned or
|
|
|
|
Location
|
|
Footage
|
|
|
Leased
|
|
Use
|
|
fye
|
|
|
|
|
|
|
|
|
|
Albany, NY
|
|
|
39,800
|
|
|
Leased
|
|
Office administration
|
|
Albany, NY
|
|
|
141,500
|
|
|
Leased
|
|
Distribution center
|
|
|
|
|
|
|
|
|
|
|
|
etailz
|
|
|
|
|
|
|
|
|
|
Spokane, WA
|
|
|
27,800
|
|
|
Leased
|
|
Office administration
|
|
Spokane, WA
|
|
|
32,000
|
|
|
Leased
|
|
Distribution center
|
The Company
believes that it has adequate distribution facilities to meet the Company’s current business needs. Shipments from the Albany
distribution facility to the fye segment’s retail stores provide approximately 82% of merchandise shipment requirements to
stores. Stores are serviced by common carriers chosen on the basis of geography and rate considerations. The balance of the stores’
merchandise requirements is satisfied through direct shipments from vendors. The Spokane, WA distribution center supports the distribution
to outside distribution facilities for sale on third-party marketplaces.
Item
3.
LEGAL PROCEEDINGS
The Company is subject to various legal proceedings
and claims that have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be
no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon the information available
at this time, that
the expected outcome of these matters, individually
or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company.
Loyalty Memberships
and Magazine Subscriptions Class Action
On November
14, 2018, three consumers filed a putative class action complaint against Trans World Entertainment Corporation and Synapse Group,
Inc. in the United States District Court for the District of Massachusetts Boston Division (Case No.1:18-cv-12377-DPW) concerning
enrollment in the Company’s Backstage Pass VIP loyalty program and associated magazine subscriptions. The complaint alleges,
among other things, that the Company’s “negative option marketing” misled consumers into enrolling for membership
and subscriptions without obtaining the consumers’ consent. The complaint seeks statutory and actual damages.
The Company
has filed a motion to dismiss the case which remains pending; however the court has already dismissed the plaintiffs’ only
claim under federal law. The court has not yet decided the rest of the motion, but has indicated its preliminary agreement with
significant portions of that motion, including that the case should not be able to proceed as a class action. The Company believes
it has meritorious defenses to the plaintiffs’ claims and, if the court does not grant the Company’s motion to dismiss
in full, the Company intends to vigorously defend the action.
Store
Manager Class Actions
There
are two pending class actions. The first,
Spack v. Trans World Entertainment Corp.
was originally filed in the
District of New Jersey, April 2017(the “Spack Action”). The Spack Action alleges that Trans World misclassified Store
Managers as exempt nationwide. It also alleges violations of New Jersey and Pennsylvania State Law with respect to the Trans World’s
use of the fluctuating workweek method to pay Senior Assistant Managers at stores located in those two states, and that managers
and assistant managers worked “off-the-clock.” The second,
Roper v. Trans World Entertainment Corp.
, was
filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide
misclassification claim on behalf of Store Managers. Both actions were consolidated into the Northern District of New York, with
the Spack Action being the lead case.
Plaintiffs moved for
conditional certification, June 2018 and partially granted in January 2019. The opt-in period for the collective that was certified
closed on April 6, 2019. Once the scope of the conditionally certified collective is known, opt-in discovery relating to that collective
will commence. Company plans to move to decertify that collective.
The Company believes the case is
without merit.
Item 4.
Mine Safety Disclosures
None.
PART
II
Item 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
: The Company’s Common Stock trades on the NASDAQ Global Market under the symbol “TWMC.” As of
March 29, 2019, there were 278 shareholders of record. The following table sets forth high and low last reported sale prices for
each fiscal quarter during the period from January 30, 2017 through March 29, 2019.
|
|
|
Closing Sales Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
$2.90
|
|
|
|
$1.65
|
|
|
2
nd
Quarter
|
|
|
$1.90
|
|
|
|
$1.50
|
|
|
3
rd
Quarter
|
|
|
$2.80
|
|
|
|
$1.55
|
|
|
4
th
Quarter
|
|
|
$1.90
|
|
|
|
$1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
1
st
Quarter
|
|
|
$1.80
|
|
|
|
$1.00
|
|
|
2
nd
Quarter
|
|
|
$1.35
|
|
|
|
$0.85
|
|
|
3
rd
Quarter
|
|
|
$1.14
|
|
|
|
$0.65
|
|
|
4
th
Quarter
|
|
|
$1.29
|
|
|
|
$0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
1
st
Quarter (through
March 29, 2019)
|
|
|
$0.62
|
|
|
|
$0.39
|
|
On March
29, 2019, the last trading date in March, the reported sale price on the Common Stock on the NASDAQ Global Market was $0.42.
Dividend
Policy:
The Company did not pay cash dividends in fiscal 2018 and fiscal 2017. The declaration and payment of any dividends
is at the sole discretion of the board of directors and is not guaranteed. The Company’s amended credit facility contains
certain restrictions related to the payment of cash dividends, including limiting the amount of dividends to $5.0 million annually
and not allowing borrowings under the amended facility for the six months before or six months after the dividend payment.
Issuer
Purchases of Equity Securities during the Quarter Ended February 2, 2019
During
the three month period ended February 2, 2019, the Company did not repurchase any shares under the share repurchase program.
The Company’s
amended credit facility contains certain restrictions related to share repurchases, including limiting the amount of repurchases
to $5.0 million annually and not allowing borrowings under the amended facility for the six months before or six months after the
share repurchase transaction.
Item 6.
SELECTED CONSOLIDATED FINANCIAL DATA
Not
required under the requirements of a Smaller Reporting Company.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Management’s
Discussion and Analysis of Financial Condition and Results of Operations provide information that the Company’s management
believes necessary to achieve an understanding of its financial condition 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 for the Company’s merchandise,
including the entry or exit of non-traditional retailers of the Company’s merchandise to or from its markets; releases by
the music and video, industries of an increased or decreased number of “hit releases”; general economic factors in
markets where the Company’s merchandise is sold; and other factors including, but not limited to: cost of goods, consumer
disposable income, consumer debt levels and buying patterns, consumer credit availability, interest rates, customer preferences,
unemployment, labor costs, inflation, fuel and energy prices, weather patterns, climate change, catastrophic events, competitive
pressures and insurance costs discussed in the Company’s filings with the Securities and Exchange Commission.
fye
Segment
The
U.S. entertainment retailing industry is a mature industry and continues to experience declines. Physical video and music
represent 45% of sales and both categories have been impacted by new distribution channels, including digital distribution and
internet fulfillment. As a result, the Company has had negative comparable store sales on an annual basis for the past five fiscal
years. To mitigate or lessen the impact these changes have had, the Company has focused on the following areas in an effort to
improve its business:
Evolve
the fye Brand Customer Experience.
The
Company is evolving the fye brand experience by diversifying its merchandise assortment and enhancing its merchandise presentation
as it continues its strategy towards becoming the most compelling entertainment and pop culture centric engagement in the marketplace.
In addition, the Company offers personalized customer service in its stores guided by a commitment to approach every customer with
gratitude, humility and respect.
Store
Portfolio Evaluation
The
Company’s real estate strategy is to maintain a core group of profitable locations, while evaluating opportunities for new
locations in new and existing malls.
During
fiscal year 2018 and fiscal year 2017, the Company closed 50 and 25 stores, respectively. The Company closes stores when minimum
operating thresholds are not achieved or upon lease expiration when either renewal is not available or management determines that
renewal is not in the Company’s best interest. The Company has signed short-term lease agreements for desirable locations,
which enables us to negotiate rents that are responsive to the then-current sales environment. The Company has 158 stores with
leases expiring during fiscal 2019. We will continue to close stores that do not meet our profitability goals, a process which
could result in further asset impairments and store closure costs. A continued reduction in the number of stores would lower total
sales.
The Company
believes that there is near-term opportunity for improving the productivity of existing stores. The environment in which our stores
operate is intensely competitive and includes internet-based retailers and mass merchants. We believe a specialty retailer that
can differentiate itself by offering a distinctive assortment and customer experience, and that can operate efficiently, will be
better positioned to maintain its market share.
Therefore,
we remain dedicated to enhancing our merchandise assortment through introducing additional product lines, improving the operational
efficiency of our stores and offering our customers a rewarding shopping experience guided by an approach to engage every customer
with gratitude, humility and respect.
Expanding
Customer Base
To strengthen
customer loyalty, the fye stores offer its customers the option of signing up for a Backstage Pass card which provides an additional
10% discount off of everyday selling prices on nearly all products in addition to other value added benefits members receive through
the program in exchange for a membership fee. The Company also hosts events to provide various segments of customers an opportunity
to experience entertainment and shop for unique and exclusive products based on their particular interests.
etailz
Segment
On October
17, 2016, the Company acquired all of the issued and outstanding capital stock of etailz, Inc., an innovative and leading digital
marketplace retail expert. etailz uses a data driven approach to digital marketplace retailing utilizing proprietary software and
e-commerce insight coupled with a direct customer relationship engagement to identify new distributors and wholesalers, isolate
emerging product trends, and optimize price positioning and inventory purchase decisions.
During
fiscal 2018, in response to the general decline in operating results, management implemented certain strategic initiatives, operational
efficiencies and other considerations directed towards improving the segment’s performance, operations, and cash flow:
Vendor
Rationalization and Remediation
Using
a profit driven approach, management determined there was an opportunity to rationalize and remediate its vendor portfolio to improve
profitability, streamline core operations and improve efficiencies. Rationalization and remediation activities included terminating
unprofitable vendors and improving vendor relationships through negotiations focused on improvements to gross margins and supply
chain efficiencies.
SG&A
Rationalization
During
the fourth quarter of fiscal 2018, etailz implemented certain strategic initiatives in order to create operation efficiencies directed
towards improving the etailz segment’s performance, operations, and cash flow to support the ongoing operating model changes
and to create a leaner organization that is better aligned with current and future business focus. As part of the initiatives,
a 30% reduction in force was implemented during the fourth quarter of fiscal 2018. Additional reductions implemented included expenses
related to technology, hardware, and employee benefits.
Working
Capital Optimization
etailz
is in the process of implementing strategies that will enhance sales, improve inventory turns and decrease Amazon storage fees.
Key
Performance Indicators
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.
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. 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, merchandise inventory, merchandise inventory per square foot, inventory leverage,
accounts payable leverage, and working capital as key indicators of its financial position. See Liquidity and Capital Resources
for further discussion of these items
.
Fiscal
Year Ended February 2, 2019 (“fiscal 2018”)
Compared
to Fiscal Year Ended February 2, 2018 (“fiscal 2017”)
The
Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal 2018, and 2017 ended February
2, 2019 and February 3, 2018, respectively. Fiscal 2018 had 52 weeks and fiscal 2017 had 53 weeks. The 53rd week in fiscal 2017
contributed approximately 1% to net sales.
Segment
Highlights:
|
(amounts in thousands)
|
|
|
|
Fiscal Year
Ended
February 2, 2019
|
|
|
Fiscal Year
Ended
February 3, 2018
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
|
|
$
|
231,290
|
|
|
$
|
268,397
|
|
|
etailz
|
|
|
|
|
186,900
|
|
|
|
174,459
|
|
|
Total Company
|
|
|
|
$
|
418,190
|
|
|
$
|
442,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
|
|
$
|
89,259
|
|
|
$
|
104,254
|
|
|
etailz
|
|
|
|
|
38,815
|
|
|
|
39,589
|
|
|
Total Company
|
|
|
|
$
|
128,074
|
|
|
$
|
143,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
|
|
$
|
(24,455
|
)
|
|
$
|
(49,261
|
)
|
|
etailz
|
|
|
|
|
(72,351
|
)
|
|
|
(2,140
|
)
|
|
Total Company
|
|
|
|
$
|
(96,806
|
)
|
|
$
|
(51,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fye Loss From Operations to fye Adjusted Loss From Operations
|
|
fye Loss From Operations
|
|
|
|
$
|
(24,455
|
)
|
|
$
|
(49,261
|
)
|
|
Asset impairment charges
|
|
|
|
|
1,946
|
|
|
|
29,107
|
|
|
fye Adjusted Loss From Operations
|
|
(1)
|
|
$
|
(22,509
|
)
|
|
$
|
(20,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of etailz Loss From Operations to etailz Adjusted (Loss) Income From Operations
|
|
etailz Loss From Operations
|
|
|
|
$
|
(72,351
|
)
|
|
$
|
(2,140
|
)
|
|
Acquisition related intangible amortization expenses
|
|
|
|
|
3,890
|
|
|
|
3,871
|
|
|
Acquisition related compensation expenses, net of contingency benefit of $3 million in fiscal 2017
|
|
|
|
|
3,821
|
|
|
|
982
|
|
|
Asset impairment charges
|
|
|
|
|
57,712
|
|
|
|
—
|
|
|
etailz Adjusted (Loss) Income From Operations
|
|
(1)
|
|
$
|
(6,928
|
)
|
|
$
|
2,713
|
|
|
(1)
|
In addition to the results of operations determined in accordance with generally accepted accounting principles in the United States (“GAAP”), we reported non-GAAP adjusted operating income (loss) as shown above. The Company believes that adjusted (loss) income from operations as per the segment disclosure, when considered together with its GAAP financial results, provides management and investors with a more complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges. This measure is not a recognized measure of financial performance under GAAP, and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP.
|
Total
Revenue.
The following table sets forth a year-over-year comparison of the Company’s total revenue:
|
|
|
|
|
|
|
|
|
|
|
2018 vs 2017
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye net sales
|
|
|
|
$
|
226,097
|
|
|
$
|
262,714
|
|
|
$
|
(36,617
|
)
|
|
|
(13.9
|
%)
|
|
etailz net sales
|
|
|
|
|
186,900
|
|
|
|
174,459
|
|
|
|
12,441
|
|
|
|
7.1
|
%
|
|
Other revenue
|
|
(1)
|
|
|
5,193
|
|
|
|
5,683
|
|
|
|
(490
|
)
|
|
|
(8.6
|
%)
|
|
Total revenue
|
|
|
|
$
|
418,190
|
|
|
$
|
442,856
|
|
|
$
|
(24,666
|
)
|
|
|
(5.6
|
%)
|
1.
Other revenue is comprised of third-party commission income and management fees related to the fye segment.
Total
revenue decreased 5.6% to $418.2 million compared to $442.9 million in fiscal 2017.
fye
Segment
The 13.9%
net sales decline from the prior year is primarily due to an 11.1% decline in average stores in operation and a 2.0% decline in
comparable store net sales. Stores closed in fiscal 2018 and fiscal 2017 recorded sales of $26.5 million and $14.9 million, respectively.
Total product units sold for fiscal 2018 decreased 18.5% while the average retail price for units sold increased 3.3%.
Net
fye sales by merchandise category for fiscal 2018 and fiscal 2017 were as follows:
|
(amounts in thousands)
|
|
2018
Net Sales
|
|
|
%
Total
|
|
|
2017
Net Sales
|
|
|
%
Total
|
|
|
Total $
Net Sales
Change
|
|
|
Total %
Net Sales
Change
|
|
|
Comparable
Store % Net
Sales Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trend/Lifestyle
|
|
$
|
93,830
|
|
|
|
41.5
|
%
|
|
$
|
98,019
|
|
|
|
37.3
|
%
|
|
$
|
(4,189
|
)
|
|
|
(4.3
|
%)
|
|
|
5.1
|
%
|
|
Video
|
|
|
62,403
|
|
|
|
27.6
|
%
|
|
|
81,261
|
|
|
|
30.9
|
%
|
|
|
(18,858
|
)
|
|
|
(23.2
|
%)
|
|
|
(8.8
|
%)
|
|
Music
|
|
|
39,793
|
|
|
|
17.6
|
%
|
|
|
50,691
|
|
|
|
19.3
|
%
|
|
|
(10,898
|
)
|
|
|
(21.5
|
%)
|
|
|
(8.6
|
%)
|
|
Electronics
|
|
|
30,071
|
|
|
|
13.3
|
%
|
|
|
32,743
|
|
|
|
12.5
|
%
|
|
|
(2,672
|
)
|
|
|
(8.2
|
%)
|
|
|
5.0
|
%
|
|
Total
|
|
$
|
226,097
|
|
|
|
100.0
|
%
|
|
$
|
262,714
|
|
|
|
100.0
|
%
|
|
$
|
(36,617
|
)
|
|
|
(13.9
|
%)
|
|
|
(2.0
|
%)
|
Trend/lifestyle
fye
stores offer a selection of trend/lifestyle products that primarily relate to theatrical releases, music, and gaming. The trend/lifestyle
category increased 5.1% on a comparable store sales basis in fiscal 2018 and represented 41.5% of the Company’s total net
sales in fiscal 2018 versus 37.3% in fiscal 2017. The Company continues to take advantage of opportunities to strengthen its selection
and shift product mix to growing categories of entertainment-related merchandise. The Company grew sales in this category by strengthening
its assortment of consumables and collectables, as well as by improving the product presentation and value proposition.
Video
fye stores
offer a wide range of new and used DVDs, Blu-rays, and 4Ks in all of its stores. Total net sales for the video category declined
8.8% on a comparable store sales basis in fiscal 2018. Video sales were negatively impacted by industry wide declines in physical
video due to digital options. According to the Industry Dashboard, during the period equivalent to the Company’s fiscal 2018,
total industry video sales declined 12.8%.
Music
fye stores
offer a wide range of new and used CDs, music DVDs and vinyl across most music genres, including new releases from current artists
as well as an extensive catalog of music from past periods and artists. Total net sales in the music category declined 8.6% on
a comparable store sale basis in fiscal 2018.
Electronics
fye
stores offer a selection of complementary portable electronics and accessories to support our entertainment products. The electronics
category increased 5.0% on a comparable store sales basis. Electronics represented 13.3% of the Company’s total net sales
in fiscal 2018 versus 12.5% in fiscal 2017.
etailz
Segment
etailz
recorded sales of $186.9 million for fiscal 2018 compared to $174.5 million for fiscal 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.
Gross
Profit.
The following table sets forth a year-over-year comparison of the Company’s gross profit:
|
|
|
|
|
|
|
|
|
2018 vs 2017
|
|
|
(amounts in thousands)
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit
|
|
$
|
89,259
|
|
|
$
|
104,254
|
|
|
$
|
(14,995
|
)
|
|
|
(14.4
|
%)
|
|
etailz gross profit
|
|
|
38,815
|
|
|
|
39,589
|
|
|
|
(774
|
)
|
|
|
(2.0
|
%)
|
|
Total gross profit
|
|
$
|
128,074
|
|
|
$
|
143,843
|
|
|
$
|
(15,769
|
)
|
|
|
(11.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit as a % of fye revenue
|
|
|
38.6
|
%
|
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
|
etailz gross profit as a % of etailz revenue
|
|
|
20.8
|
%
|
|
|
22.7
|
%
|
|
|
|
|
|
|
|
|
|
Total gross profit as a % of total revenue
|
|
|
30.6
|
%
|
|
|
32.5
|
%
|
|
|
|
|
|
|
|
|
Gross
profit decreased 11.0% to $128.1 million compared to $143.9 million in fiscal 2017 primarily due to the closure of 50 stores.
fye
Segment
Gross
profit as a percentage of sales was 38.6% in fiscal 2018 as compared to 38.8% in fiscal 2017. The slight decline in rate was due
to higher inventory markdowns to sell off seasonal and slow moving merchandise and liquidation sales for closed stores.
etailz
Segment
etailz
gross profit as a percentage of revenue was 20.8% in fiscal 2018 as compared to 22.7% in fiscal 2017. The decline in the gross
profit rate was primarily due to higher marketplace fulfillment and warehousing fees.
Selling,
General and Administrative Expenses.
The
following table sets forth a year-over-year comparison of the Company’s SG&A expenses:
|
(amounts in thousands)
|
|
|
|
|
|
|
|
2018 vs. 2017
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye SG&A before depreciation and amortization
|
|
$
|
107,141
|
|
|
$
|
114,982
|
|
|
$
|
(7,841
|
)
|
|
|
-6.8
|
%
|
|
As a % of total fye revenue
|
|
|
46.3
|
%
|
|
|
42.8
|
%
|
|
|
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
etailz SG&A before depreciation and amortization
|
|
|
48,965
|
|
|
|
39,446
|
|
|
|
9,519
|
|
|
|
24.1
|
%
|
|
As a % of total etailz revenue
|
|
|
26.2
|
%
|
|
|
22.6
|
%
|
|
|
|
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,116
|
|
|
|
13,496
|
|
|
|
(4,380
|
)
|
|
|
-32.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
165,222
|
|
|
$
|
167,924
|
|
|
$
|
(2,702
|
)
|
|
|
-1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total revenue
|
|
|
39.5
|
%
|
|
|
37.9
|
%
|
|
|
|
|
|
|
|
|
Total
SG&A expenses decreased $2.7 million.
fye
Segment
SG&A,
excluding depreciation and amortization, decreased $7.8 million, or 6.8%, primarily as a result of lower expenses due to fewer
stores in operation. The increase in the rate as a percentage of fye revenue was primarily due to the comparable sales decline
and increased corporate home office expenses to support strategic growth initiatives.
etailz
Segment
etailz
SG&A, excluding depreciation and amortization, expenses increased $9.5 million, or 24.1%, primarily as a result of investments
in product identification and sourcing, technology, and platform diversification, in addition to an increase in marketplace commissions
as a result of higher sales.
Depreciation
and amortization expense.
Consolidated depreciation and amortization expense decreased $4.4 million 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.
Asset
Impairment Charges
fye
Segment
During
fiscal 2018, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected fourth
quarter sales that a triggering event had occurred, and pursuant to Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 360,
Property, Plant, and Equipment
, an evaluation of the fye fixed assets for impairment was required.
Fixed assets, primarily at the Company’s retail store locations, as well as certain fixed assets at the corporate location,
consisting of the home office and the Albany distribution center, where impairment was determined to exist were written down to
their estimated fair values as of the end of fiscal 2018, resulting in the recording of asset impairment charges of $1.9 million.
Estimated fair values for fixed assets at these locations, including store fixtures, equipment, and leasehold improvements were
determined based on a measure of discounted future cash flows over the remaining lease terms at the respective locations. Future
cash flows were estimated based on individual store and corporate level plans and were discounted at a rate approximating the Company’s
cost of capital. Management believes its assumptions were reasonable and consistently applied.
During
fiscal 2017, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected fourth
quarter sales that a triggering event had occurred, and pursuant to FASB ASC 360,
Property, Plant, and Equipment
, an evaluation
of the fye fixed assets for impairment was required. Fixed assets, primarily at the Company’s retail store locations, as
well as certain fixed assets at the corporate location, consisting of the home office and the Albany distribution center, where
impairment was determined to exist were written down to their estimated fair values as of the end of fiscal 2017, resulting in
the recording of asset impairment charges of $29.1 million. Estimated fair values for fixed assets at these locations, including
store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted future cash flows over the
remaining lease terms at the respective locations. Future cash flows were estimated based on individual store and corporate level
plans and were discounted at a rate approximating the Company’s cost of capital. Management believes its assumptions were
reasonable and consistently applied.
etailz
Segment
During
fiscal 2018, the Company concluded, based on continued operating losses for the etailz segment driven by lower than expected operating
results culminating in the fourth quarter of fiscal 2018 that a triggering event had occurred, and pursuant to FASB ASC 360,
Property,
Plant, and Equipment
, an evaluation of the etailz fixed assets and intangible assets for impairment was required. Fixed assets
related to internally developed technology at etailz were written down to their estimated fair values at the end of fiscal 2018,
resulting in the recognition of asset impairment charges of $2.1 million. Intangible assets related to technology and vendor relationships
were written down to their estimated fair values at the end of fiscal 2018 resulting in the recognition of asset impairment charges
of $16.4 million.
As a result of the annual impairment review pursuant to
FASB ASC 350,
Intangibles
—
Goodwill and Other,
the Company performed its impairment test over
goodwill. Based on the Company’s annual impairment test, it was determined that the goodwill balance was fully impaired,
and the Company recognized an impairment loss of $39.2 million.
Interest
Expense.
Interest expense in fiscal 2018 was $0.7 million, compared to $0.3 million in fiscal 2017.
Other
Income.
Other income was $0.2 million in fiscal 2018 compared to $8.9 million in fiscal 2017. Other income for fiscal 2018
was comprised of interest income earned on escrow accounts. Other income for fiscal 2017 consisted primarily of a gain on insurance
proceeds related to the death of the Company’s former Chairman.
Income
Tax Expense.
The following table sets forth a year-over-year comparison of the Company’s income tax expense:
|
(amounts in thousands)
|
|
|
|
|
|
|
|
2018 vs 2017
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
80
|
|
|
$
|
(299
|
)
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(0.1
|
%)
|
|
|
0.7
|
%
|
|
|
|
|
The
fiscal 2018 income tax expense includes state taxes, adjustments to the reserve for uncertain tax positions
,
and the accrual of interest. The fiscal 2017 income tax benefit of the alternative minimum tax credit receivable is partially
offset by state taxes, adjustments to the reserve for uncertain tax positions
,
and the
accrual of interest.
Net
Loss.
The following table sets forth a year-over-year comparison of the Company’s net loss:
|
(amounts in thousands)
|
|
|
|
|
|
|
|
2018 vs 2017
|
|
|
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(97,382
|
)
|
|
$
|
(42,553
|
)
|
|
$
|
(54,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss as a percentage of total revenue
|
|
|
(23.3
|
%)
|
|
|
(9.6
|
%)
|
|
|
|
|
Net
loss was $97.4 million for fiscal 2018, compared to $42.6 million for fiscal 2017. Included in the results for fiscal 2018 and
fiscal 2017 are non-cash charges of $59.7 million and $29.1 million, respectively, as a result of recording impairment against
certain fixed assets in the fye segment and impairment against fixed assets, intangible assets, and goodwill in the etailz segment.
The increase in net loss was primarily due to an increase in asset impairment charges, combined with the decline in fye sales and
an overall lower gross profit rate.
LIQUIDITY
AND CAPITAL RESOURCES
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
to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to operate
and grow our business, including funding operating expenses, the purchase of inventory and capital expenditures. Our ability to
achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors, including the
timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of working capital needs;
and changes in our strategy or our planned activities.
The Company
incurred net losses of $97.4 million and $42.6 million for the years ended February 2, 2019 and February 3, 2018, respectively,
and has an accumulated deficit of $50.2 million at February 2, 2019. In addition, net cash used in operating activities for the
year ended February 2, 2019 was $25.5 million.
A noted
above, the Company experienced negative cash flows from operations during fiscal 2018 and 2017 and we expect to continue to incur
net losses in the foreseeable future. We implemented strategic initiatives on December 11, 2018, aimed at improving organizational
efficiency and conserving working capital needed to support the growth of our etailz segment. As a result of the initiative, we
expect that annual expenses will be reduced by $4.0 to $5.0 million.
At February
2, 2019, we had cash and cash equivalents of $4.4 million, net working capital of $65.9 million, and no outstanding borrowings
on our revolving credit facility, as further discussed below. This compares to $31.3 million in cash and cash equivalents and net
working capital of $92.8 million at February 3, 2018. We anticipate an improvement in cash flows from operations for
fiscal 2019.
In January
2017, the Company amended and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides
for commitments of $50 million subject to increase up to $75 million during the months of October to December of each year, as
needed. The availability under the Credit Facility is subject to limitations based on receivables and inventory levels. The principal
amount of all outstanding loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in
January 2022, unless otherwise paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit
Facility are secured by the assets of the Company. During fiscal 2018, the Company exercised the right to increase its
availability
to $60 million subject to the same limitations noted above. The Company had $30 million available for borrowing under the Credit
Facility as of February 2, 2019.
Interest
under the Credit Facility will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable
Margin, which is determined by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from
1.75% to 2.00% and the Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25%
is also payable on unused commitments.
As of
February 2, 2019 and as of February 3, 2018, the Company did not have any borrowings under the Credit Facility. Peak borrowings
under the Credit Facility during fiscal 2018 and fiscal 2017 were $35.7 million and $11.7 million, respectively. As of February
2, 2019 and February 3, 2018, the Company had no outstanding letters of credit. The Company had $30 million and $41 million available
for borrowing under the Credit Facility as of February 2, 2019 and February 3, 2018, respectively.
The
Credit Facility contains customary affirmative and negative covenants, including restrictions on dividends and
share repurchases, incurrence of additional indebtedness and acquisitions and covenants around the net number of store
closings and restrictions related to the payment of cash dividends and share repurchases, including limiting the amount of
dividends to $5 million annually, and not allowing borrowings under the amended facility for the six months before or six
months after the dividend payment. On October 29, 2018, the Company entered into a letter agreement with Wells Fargo in
accordance with the Credit Facility in which Wells Fargo provided consent to the Company exceeding the permitted number of
store closures and related inventory dispositions.
The Credit
Facility also includes customary events of default, including, among other things, material adverse effect, bankruptcy, and certain
changes of control. As of February 2, 2019, the Company was compliant with all covenants. On May 3, 2019, the Company entered into a letter agreement with Wells
Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company with respect to late
delivery of the Annual Financial Statements.
In addition to the aforementioned current
sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to
the Company, as well continuing our efforts to generate additional sales and increase margins. However, at this time the Company
has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms
or at all, should we require such additional funds. If the Company is unable to improve its operations, it may be required to obtain
additional funding, and the Company’s financial condition and results of operations may be materially adversely affected.
Furthermore,
broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance,
and may adversely impact our ability to raise additional funds, should we require such additional funds. Similarly, if our common
stock is delisted from the NASDAQ Global Market, it may also limit our ability to raise additional funds.
The consolidated
financial statements for the fiscal year ended February 2, 2019 were prepared on the basis of a going concern which contemplates
that the Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the
Company to meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement
plan implemented for the etailz segment and the availability of future funding. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
The following table sets forth a two-year summary of key components
of cash flow and working capital:
|
|
|
(amounts in thousands)
|
|
|
|
2018
|
|
|
2017
|
|
|
2018 vs.
2017
|
|
|
|
|
Operating Cash Flows
|
|
|
|
$
|
(25,518
|
)
|
|
$
|
(13
|
)
|
|
$
|
(25,505
|
)
|
|
|
|
Investing Cash Flows
|
|
|
|
|
(2,342
|
)
|
|
|
4,482
|
|
|
|
(6,824
|
)
|
|
|
|
Financing Cash Flows
|
|
|
|
|
(1,420
|
)
|
|
|
(5,040
|
)
|
|
|
3,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
(3,689
|
)
|
|
|
(8,407
|
)
|
|
|
4,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Period Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
|
(1)
|
|
|
14,226
|
|
|
|
43,506
|
|
|
|
(29,280
|
)
|
|
|
|
Merchandise Inventory
|
|
|
|
|
94,842
|
|
|
|
109,112
|
|
|
|
(14,270
|
)
|
|
|
|
Merchandise Inventory Per Square Foot - fye
|
|
|
|
|
59.8
|
|
|
|
59.9
|
|
|
|
(0.1
|
)
|
|
|
|
Accounts Payable leverage-fye
|
|
|
|
|
41.0
|
|
|
|
44.0
|
|
|
|
(3.0
|
)
|
|
|
|
Working Capital
|
|
|
|
|
65,947
|
|
|
|
92,827
|
|
|
|
(26,880
|
)
|
|
|
|
Inventory turns - fye
|
|
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
0.1
|
|
|
(1)
|
|
Cash and cash equivalents per Consolidated Balance Sheets
|
|
|
|
$
|
4,355
|
|
|
$
|
31,326
|
|
|
|
|
|
|
|
|
Add: Restricted cash
|
|
|
|
|
9,871
|
|
|
|
12,180
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash
|
|
|
|
$
|
14,226
|
|
|
$
|
43,506
|
|
|
|
|
|
During fiscal 2018, cash used in operations was $25.5 million, primarily
due to a net loss of $97.4 million, adding back depreciation and amortization of $9.1 million, a loss on impairment of goodwill
and long lived assets of $59.7 million, non-cash compensation of $3.0 million, and a decrease in merchandise inventory of $14.5
million, less an increase in accounts receivable of $0.9 million, the reduction in accounts payable of $7.5 million, the reduction
of accrued expenses and other current liabilities of $1.1 million, and the reduction in deferred revenue and other long-term liabilities
of $1.5 million and $4.0 million, respectively. During fiscal 2017, cash used in operations was $13 thousand primarily due to a
net loss of $42.6 million, adding back depreciation and amortization of $14.1 million, a loss due to fixed assets impairment of
$29.1 million, non-cash compensation of $3.1 million, decrease in merchandise inventory of $16.9 million, and a decrease in accounts
receivable and other current assets of $3.9 million, less the adjustment to the contingent consideration liability of $3.3 million,
the gain on insurance proceeds of $8.7 million, and reductions in accounts payable and deferred revenue of $10.5 million and $1.3
million, respectively.
The Company monitors various statistics to measure its management
of inventory, including inventory turnover (annual cost of sales divided by average merchandise inventory balances), inventory
investment per square foot (merchandise inventory divided by total store square footage) and inventory leverage (accounts payable
divided by merchandise inventory). Inventory turnover measures the Company’s ability to sell merchandise and how many times
it is replaced in a year. This ratio is important in determining the need for markdowns and planning future inventory levels and
assessing customer response to our merchandise. For the fye segment, inventory turnover in fiscal 2018 and in fiscal 2017 was 1.6
and 1.5, respectively. For the etailz segment, inventory turnover in fiscal 2018 and in fiscal 2017 was 5.2 and 5.3, respectively.
Inventory investment per square foot measures the productivity of the inventory. It is important in determining if the Company
has the appropriate level of inventory to meet customer demands while controlling its investment in inventory. Inventory investment
per square foot in the fye segment was $60 per square foot at the end of fiscal 2018, same level as at the end of fiscal 2017.
Accounts payable leverage measures the percentage of inventory being funded by the Company’s product vendors. The percentage
is important in determining the Company’s ability to fund its business. Accounts payable leverage on inventory for the fye
segment was 41.0% as of
February 2, 2019 compared with 44.0% as of February 3, 2018. Accounts
payable leverage on inventory for the etailz segment was 22.7% as of February 2, 2019 compared with 16.6% as of February 3, 2018.
Cash used in investing activities was $2.3 million in fiscal 2018,
compared to cash flows provided by investing activities of $4.5 million in fiscal 2017. During fiscal 2018, cash used in investing
activities consisted of $1.4 million in capital distributions received from the joint venture, less $3.7 million in capital expenditures.
During fiscal 2017, cash provided by investing activities consisted of Company owned life insurance proceeds of $14.4 million,
and $1.1 million in capital distributions received from the joint venture, less $8.4 million in capital expenditures, and a $2.6
million investment in a joint venture.
The Company has historically financed its capital expenditures through
borrowings under its revolving credit facility and cash flow from operations. The Company anticipates capital spending of approximately
$3 million in fiscal 2019, as the Company has made the majority of its planned capital investments.
Cash used in financing activities was $1.4 million in fiscal 2018,
compared to $5.0 million in fiscal 2017. In fiscal 2018 and fiscal 2017, cash used in financing activities was primarily comprised
of $1.5 million and $5.0 million payments, respectively, paid to the etailz shareholders in connection with the share purchase
agreement signed during the acquisition of etailz during fiscal 2016.
Off-Balance Sheet Arrangements.
The Company
has no off-balance sheet arrangements as defined by Item 303 (a) (4) of Regulation S-K.
Related Party Transactions.
The Company leases its 181,300 square foot distribution center/office
facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its former Chairman and largest shareholder.
The distribution center/office lease commenced on January 1, 2016, and expires on December 31, 2020. Under the lease accounted for as an operating lease, the Company
paid $1.2 million in both fiscal 2018 and fiscal 2017. Under the terms of the lease agreement, the Company is responsible for property
taxes and other operating costs with respect to the premises.
Sara Neblett, the wife of Josh Neblett, former CEO of etailz, was
employed with the Company as the Vice President of Partner Care of etailz until January 2019. During fiscal 2018 and fiscal
2017, Ms. Neblett received $169,125 and $165,250, respectively, in regular cash compensation. In addition, during fiscal 2018,
Ms. Neblett received approximately $1.0 million under the terms of the etailz acquisition agreement.
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 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.
Note 1 of the Notes to the Consolidated Financial Statements in this report includes a summary of the significant accounting policies
and methods used by the Company in the preparation of its consolidated financial statements. Management believes that of the Company’s
significant accounting policies and estimates, the following involve a higher degree of judgment or complexity:
Merchandise Inventory and Return Costs:
Merchandise inventory
is stated at the lower of cost or net realizable value under the average cost method. The average cost method attaches a cost to
each item and is a blended average of the original purchase price and those of subsequent purchases or other cost adjustments throughout
the life cycle of that item.
Inventory valuation requires significant judgment and
estimates, including obsolescence, shrink and any adjustments to net realizable value; if net realizable value is lower than cost.
Inherent in the entertainment products industry is the risk of obsolete inventory. Typically, newer media releases generate a
higher product demand. Some media vendors offer credits to reduce the cost of products that are selling more slowly, thus
allowing for a reduction in the selling price and reducing the possibility for items to become obsolete. For all merchandise
categories, the Company records obsolescence and any adjustments to net realizable value (if lower than cost) based on current and
anticipated demand, customer preferences, and market conditions. The provision for inventory shrink is estimated as a
percentage of sales for the period from the last date a physical inventory was performed to the end of the fiscal year. Such
estimates are based on historical results and trends and the shrink results from the last physical inventory. Physical
inventories are taken at least annually for all stores and the distribution center throughout the year and inventory records
are adjusted accordingly.
Shrink expense, including obsolescence was $3.4 million and $5.4
million in fiscal 2018 and fiscal 2017, respectively. As a rate to net sales, this equaled 0.8% and 1.2% for fiscal 2018
and fiscal 2017, respectively.
The Company is generally entitled to return merchandise purchased
from major music and video vendors for credit against other purchases from these vendors. Certain vendors reduce the credit with
a per unit merchandise return charge which varies depending on the type of merchandise being returned. Certain other vendors charge
a handling fee based on units returned. The Company records merchandise return charges in cost of sales. The Company incurred merchandise
return charges of $0.4 million in both fiscal 2018 and fiscal 2017.
Goodwill:
Our goodwill resulted from our acquisition of etailz
and represented the excess purchase price over the net identifiable assets acquired. All of our goodwill is associated with etailz,
a separate reporting unit, and there is no goodwill associated with our other reporting unit, fye. Goodwill is not amortized and
we are required to evaluate goodwill for impairment at least annually or whenever indicators of impairment are present. Our annual
test is completed at the end of the fourth fiscal quarter, and interim tests are conducted when circumstances indicate the carrying
value of the goodwill may not be recoverable.
Estimating the fair value of reporting units requires the use of
estimates and significant judgments that are based on a number of factors including actual operating results. It is possible that
these judgments and estimates could change in future periods.
As a result of the annual impairment review pursuant to
FASB ASC 350,
Intangibles
—
Goodwill and Other,
the Company performed its impairment test over
goodwill. Based on the Company’s annual impairment test, it was determined that the goodwill balance was fully impaired,
and the Company recognized an impairment loss of $39.2 million.
Long Lived Assets other than Goodwill:
Long-lived assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted
future net cash flows expected to be generated by the asset over its remaining useful life. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair value is generally measured based on discounted estimated future cash flows. Assets
to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the lower of the carrying amount
or fair value less disposition costs. For the purpose of the asset impairment test, the fye segment has two asset groupings –
corporate and
store level assets. For the purposes of the asset impairment test,
the etailz segment has one asset grouping, which is the same as the etailz reporting unit level.
During fiscal 2018 and fiscal 2017, the Company concluded, based
on continued operating losses within the fye segment driven by lower than expected fourth quarter sales that triggering events
had occurred in each respective fiscal year, and pursuant to FASB ASC 360,
Property, Plant, and Equipment,
an evaluation
of the fye fixed assets for impairment was required. Fixed assets primarily at the Company’s retail store locations, as well
as certain fixed assets at the corporate location, consisting of the home office and the Albany distribution center, where impairment
was determined to exist were written down to their estimated fair values as of the end of fiscal 2018 and fiscal 2017, resulting
in the recording of asset impairment charges of $1.9 million and $29.1 million, respectively. Estimated fair values for fixed assets
at these locations, including store fixtures, equipment, and leasehold improvements were determined based on a measure of discounted
future cash flows over the remaining lease terms at the respective locations. Future cash flows were estimated based on individual
store and corporate level plans and were discounted at a rate approximating the Company’s cost of capital. Management believes
its assumptions were reasonable and consistently applied.
During fiscal 2018, the Company concluded, based on continued operating
losses for the etailz segment driven by lower than expected operating results culminating in the fourth quarter of fiscal 2018
that a triggering event had occurred, and pursuant to FASB ASC 360,
Property, Plant, and Equipment
, an evaluation of the
etailz fixed assets and intangible assets for impairment was required. Fixed assets related to internally developed technology
at etailz were written down to their estimated fair values at the end of fiscal 2018, resulting in the recognition of asset impairment
charges of $2.1 million. Intangible assets related to technology and vendor relationships were written down to their estimated
fair values at the end of fiscal 2018 resulting in the recognition of asset impairment charges of $16.4 million.
Recently Issued Accounting Pronouncements.
The information set forth above may be found under Notes to Consolidated
Statements, Note 2, which is incorporated herein by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not required under the requirements of a Smaller Reporting Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to the Company’s Consolidated
Financial Statements is included in Item 15, and the Consolidated Financial Statements follow the signature page to this report
and are incorporated herein by reference.
The quarterly results of operations are included herein in Note
13 of Notes to the Consolidated Financial Statements in this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure
Controls and Procedures:
Under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures,
as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that the Company’s
disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and as of the end
of the period covered by this annual report, our disclosure controls and procedures were effective, in that they provide reasonable
assurance that information required to be disclosed by us in the reports we file or submit, under the Exchange Act, is recorded,
processed, summarized, as appropriate, to allow timely decisions regarding required disclosure and reported within the time period
specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated
to management including the principal executive officer and principal financial officer.
Management’s
Report on Internal Control Over Financial Reporting:
Management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) and 15d – 15(f) under the Exchange Act, as amended).
Under the supervision and with the participation of the Company’s management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based
on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal
Control-Integrated Framework (2013)
. Based on our evaluation under the framework in
Internal Control-Integrated Framework
(2013)
, our management concluded that our internal control over financial reporting was effective as of February 2, 2019.
Changes in Controls and Procedures:
As of February 2, 2019, there have been no changes in the Company’s internal controls over financial reporting that occurred
during fiscal 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls
over financial reporting.
Item 9B.
Other Information
No events have occurred which would require disclosure under this
Item.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and
share amounts)
|
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,355
|
|
|
$
|
31,326
|
|
|
Restricted cash
|
|
|
4,126
|
|
|
|
1,505
|
|
|
Accounts receivable
|
|
|
5,383
|
|
|
|
4,469
|
|
|
Merchandise inventory
|
|
|
94,842
|
|
|
|
109,112
|
|
|
Prepaid expenses and other current assets
|
|
|
6,657
|
|
|
|
6,976
|
|
|
Total current assets
|
|
|
115,363
|
|
|
|
153,388
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
5,745
|
|
|
|
10,675
|
|
|
Fixed assets, net
|
|
|
7,529
|
|
|
|
13,546
|
|
|
Goodwill
|
|
|
—
|
|
|
|
39,191
|
|
|
Intangible assets, net
|
|
|
3,668
|
|
|
|
23,967
|
|
|
Other assets
|
|
|
5,708
|
|
|
|
7,139
|
|
|
TOTAL ASSETS
|
|
$
|
138,013
|
|
|
$
|
247,906
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
34,329
|
|
|
$
|
41,780
|
|
|
Accrued expenses and other current liabilities
|
|
|
8,132
|
|
|
|
10,846
|
|
|
Deferred revenue
|
|
|
6,955
|
|
|
|
7,935
|
|
|
Total current liabilities
|
|
|
49,416
|
|
|
|
60,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
24,867
|
|
|
|
29,131
|
|
|
TOTAL LIABILITIES
|
|
|
74,283
|
|
|
|
89,692
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)
|
|
|
—
|
|
|
|
—
|
|
|
Common stock ($0.01 par value; 200,000,000 shares authorized; 64,436,671 shares and 64,305,171 shares issued, respectively)
|
|
|
644
|
|
|
|
643
|
|
|
Additional paid-in capital
|
|
|
344,214
|
|
|
|
341,103
|
|
|
Treasury stock at cost (28,177,832 and 28,156,601 shares, respectively)
|
|
|
(230,166
|
)
|
|
|
(230,145
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(735
|
)
|
|
|
(998
|
)
|
|
(Accumulated deficit) Retained earnings
|
|
|
(50,227
|
)
|
|
|
47,611
|
|
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
63,730
|
|
|
|
158,214
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
138,013
|
|
|
$
|
247,906
|
|
See Accompanying Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and
share amounts)
|
|
|
Fiscal Year Ended
|
|
|
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
412,997
|
|
|
$
|
437,173
|
|
|
Other revenue
|
|
|
5,193
|
|
|
|
5,683
|
|
|
Total revenue
|
|
|
418,190
|
|
|
|
442,856
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
290,116
|
|
|
|
299,013
|
|
|
Gross profit
|
|
|
128,074
|
|
|
|
143,843
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
165,222
|
|
|
|
167,924
|
|
|
Income from joint venture
|
|
|
—
|
|
|
|
(1,787
|
)
|
|
Asset impairment charges
|
|
|
59,658
|
|
|
|
29,107
|
|
|
Loss from operations
|
|
|
(96,806
|
)
|
|
|
(51,401
|
)
|
|
Interest expense
|
|
|
723
|
|
|
|
332
|
|
|
Other income
|
|
|
(227
|
)
|
|
|
(8,881
|
)
|
|
Loss before income taxes
|
|
|
(97,302
|
)
|
|
|
(42,852
|
)
|
|
Income tax expense (benefit)
|
|
|
80
|
|
|
|
(299
|
)
|
|
Net loss
|
|
$
|
(97,382
|
)
|
|
$
|
(42,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(2.68
|
)
|
|
$
|
(1.18
|
)
|
See Accompanying Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
|
|
|
Fiscal Year Ended
|
|
|
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(97,382
|
)
|
|
$
|
(42,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pension actuarial income (loss) adjustment
|
|
|
263
|
|
|
|
(196
|
)
|
|
Comprehensive loss
|
|
$
|
(97,119
|
)
|
|
$
|
(42,749
|
)
|
See Accompanying Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(dollars and shares in thousands)
|
|
|
Common
Shares
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Treasury
Shares
|
|
|
Treasury
Stock
At Cost
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Retained
Earnings
(Accumulaed
Deficit)
|
|
|
Shareholders’
Equity
|
|
|
Balance as of January 28, 2017
|
|
|
64,253
|
|
|
$
|
643
|
|
|
$
|
338,075
|
|
|
|
(28,137
|
)
|
|
$
|
(230,144
|
)
|
|
$
|
(802
|
)
|
|
$
|
90,164
|
|
|
$
|
197,936
|
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(42,553
|
)
|
|
|
(42,553
|
)
|
|
Pension actuarial loss adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(196
|
)
|
|
|
—
|
|
|
|
(196
|
)
|
|
Vested restricted shares
|
|
|
50
|
|
|
|
—
|
|
|
|
(39
|
)
|
|
|
(20
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(40
|
)
|
|
Common stock issued in the acquisition of etailz
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of unearned compensation/restricted stock amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
3,067
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,067
|
|
|
Balance as of February 3, 2018
|
|
|
64,305
|
|
|
$
|
643
|
|
|
$
|
341,103
|
|
|
|
(28,157
|
)
|
|
$
|
(230,145
|
)
|
|
$
|
(998
|
)
|
|
$
|
47,611
|
|
|
$
|
158,214
|
|
|
Decrease to opening balance of Retained Earnings as a result of applying ASU 2014-09
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(456
|
)
|
|
|
(456
|
)
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(97,382
|
)
|
|
|
(97,382
|
)
|
|
Pension actuarial income adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
263
|
|
|
|
—
|
|
|
|
263
|
|
|
Vested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
|
Common stock issued-new grants
|
|
|
132
|
|
|
|
1
|
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80
|
|
|
Amortization of unearned compensation/restricted stock amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
3,032
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,032
|
|
|
Balance as of February 2, 2019
|
|
|
64,437
|
|
|
$
|
644
|
|
|
$
|
344,214
|
|
|
$
|
(28,178
|
)
|
|
$
|
(230,166
|
)
|
|
$
|
(735
|
)
|
|
$
|
(50,227
|
)
|
|
$
|
63,730
|
|
See Accompanying Notes to Consolidated Financial Statements.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
Fiscal Year Ended
|
|
|
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
($
|
97,382
|
)
|
|
($
|
42,553
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation of fixed assets
|
|
|
5,226
|
|
|
|
10,272
|
|
|
Amortization of intangible assets
|
|
|
3,890
|
|
|
|
3,890
|
|
|
Amortization of lease valuations
|
|
|
—
|
|
|
|
(20
|
)
|
|
Stock based compensation
|
|
|
3,032
|
|
|
|
3,067
|
|
|
Treasury stock received for payment of withholding tax on exercises of RSUs
|
|
|
(21
|
)
|
|
|
—
|
|
|
Adjustment to contingent consideration
|
|
|
(272
|
)
|
|
|
(3,280
|
)
|
|
Loss on disposal of fixed assets
|
|
|
422
|
|
|
|
579
|
|
|
Loss on impairment of goodwill and long lived assets
|
|
|
59,658
|
|
|
|
29,107
|
|
|
Change in cash surrender value
|
|
|
78
|
|
|
|
(399
|
)
|
|
Gain on life insurance asset
|
|
|
—
|
|
|
|
(8,733
|
)
|
|
Changes in operating assets and liabilities that provide (use) cash:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(914
|
)
|
|
|
2,616
|
|
|
Merchandise inventory
|
|
|
14,535
|
|
|
|
16,892
|
|
|
Prepaid expenses and other current assets
|
|
|
319
|
|
|
|
1,295
|
|
|
Other long-term assets
|
|
|
6
|
|
|
|
(668
|
)
|
|
Accounts payable
|
|
|
(7,451
|
)
|
|
|
(10,527
|
)
|
|
Accrued expenses and other current liabilities
|
|
|
(1,134
|
)
|
|
|
1,648
|
|
|
Deferred revenue
|
|
|
(1,509
|
)
|
|
|
(1,293
|
)
|
|
Other long-term liabilities
|
|
|
(4,001
|
)
|
|
|
(1,906
|
)
|
|
Net cash used in operating activities
|
|
|
(25,518
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases of fixed assets
|
|
|
(3,689
|
)
|
|
|
(8,407
|
)
|
|
Proceeds from company owned life insurance
|
|
|
—
|
|
|
|
14,363
|
|
|
Investment in joint venture
|
|
|
—
|
|
|
|
(2,575
|
)
|
|
Capital distributions from joint venture
|
|
|
1,347
|
|
|
|
1,101
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(2,342
|
)
|
|
|
4,482
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Exercise of equity awards, net of treasury shares received
|
|
|
80
|
|
|
|
—
|
|
|
Vesting of long term equity awards
|
|
|
—
|
|
|
|
(39
|
)
|
|
Payments of long term borrowings
|
|
|
(35,734
|
)
|
|
|
(11,657
|
)
|
|
Proceeds from long term borrowings
|
|
|
35,734
|
|
|
|
11,657
|
|
|
Payments to etailz shareholders
|
|
|
(1,500
|
)
|
|
|
(5,000
|
)
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(1
|
)
|
|
Net cash used in financing activities
|
|
|
(1,420
|
)
|
|
|
(5,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash, cash equivalents, and restricted cash
|
|
|
(29,280
|
)
|
|
|
(571
|
)
|
|
Cash, cash equivalents, and restricted cash, beginning of year
|
|
|
43,506
|
|
|
|
44,077
|
|
|
Cash, cash equivalents, and restricted cash, end of year
|
|
$
|
14,226
|
|
|
$
|
43,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures and non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
723
|
|
|
$
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted performance based awards / deferred / restricted shares under deferred / restricted stock agreements
|
|
|
109
|
|
|
|
120
|
|
See Accompanying Notes to Consolidated Financial Statements.
Index to Notes
to Consolidated Financial Statements
Note
Number and Description
Note No.
|
1.
|
Nature of Operations and Summary of Significant Accounting Policies
|
|
|
|
|
2.
|
Recently Issued Accounting Pronouncements
|
|
|
|
|
3.
|
Goodwill and Other Intangible Assets
|
|
|
|
|
4.
|
Fixed Assets
|
|
|
|
|
5.
|
Restricted Cash
|
|
|
|
|
6.
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Credit Facility
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7.
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Leases
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8.
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Shareholders’ Equity
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9.
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Benefit Plans
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10.
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Income Taxes
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11.
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Related Party Transactions
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12.
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Commitments and Contingencies
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13.
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Quarterly Financial Information (Unaudited)
|
TRANS WORLD ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature
of Operations and Summary of Significant Accounting Policies
Nature of Operations:
Trans World Entertainment Corporation and subsidiaries (“the Company”) operates in two reportable segments: fye and
etailz. The fye segment is a specialty retailer of entertainment products, including trend, video, music, electronics and related
products in the United States. The fye segment operates a chain of retail entertainment stores and e-commerce sites,
www.fye.com
and
www.secondspin.com
. As of February 2, 2019, the fye segment operated 210 stores totaling approximately 1.2 million square feet in the United States,
the District of Columbia and the U.S. Virgin Islands. The etailz segment is a digital marketplace retailer and generates substantially
all of its revenue through Amazon Marketplace. The Company’s business is seasonal in nature, with the peak selling period
being the holiday season which falls in the Company’s fourth fiscal quarter.
Liquidity:
The Company’s
primary sources of liquidity are borrowing capacity under its revolving credit facility, available cash and cash equivalents,
and to a lesser extent, cash generated from operations. Our cash requirements relate primarily to working capital needed to
operate and grow our business, including funding operating expenses, the purchase of inventory and capital expenditures. Our
ability to achieve profitability and meet future liquidity needs and capital requirements will depend upon numerous factors,
including the timing and amount of our revenue; the timing and amount of our operating expenses; the timing and costs of
working capital needs; and changes in our strategy or our planned activities.
The Company incurred net losses of $97.4
million and $42.6 million for the years ended February 2, 2019 and February 3, 2018, respectively, and has an accumulated deficit
of $50.2 million at February 2, 2019. In addition, net cash used in operating activities for the year ended February 2, 2019 was
$25.5 million.
A noted above, the Company experienced negative cash flows
from operations during fiscal 2018 and 2017 and we expect to continue to incur net losses in the foreseeable future. We
implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiency and conserving working
capital needed to support the growth of our etailz segment (the “performance improvement plan”). As a result of the
initiative, we expect that annual expenses will be reduced by $4.0 to $5.0 million.
At February 2, 2019, we had cash and
cash equivalents of $4.4 million, net working capital of $65.9 million, and no outstanding borrowings on our revolving credit facility,
as further discussed below. This compares to $31.3 million in cash and cash equivalents and net working capital of $92.8 million
at February 3, 2018. We anticipate an improvement in cash flows from operations for fiscal year 2019.
In January 2017, the Company amended
and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides for commitments of $50
million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability
under the Credit Facility is subject to limitations based on receivables and inventory levels. The principal amount of all outstanding
loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise
paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the
assets of the Company. During fiscal 2018, the Company exercised the right to increase its availability to $60 million subject
to the same limitations noted above. The Company had $30 million available for borrowing under the Credit Facility as of February
2, 2019.
The Credit Facility contains customary affirmative and
negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness and
acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends
and share repurchases, including limiting the amount of dividends to $5 million annually, and not allowing borrowings under
the amended facility for the six months before or six months after the dividend payment. On October 29, 2018, the Company
entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent
to the Company exceeding the permitted number of store closures and related inventory dispositions.
The Credit Facility also includes customary
events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. As of February
2, 2019, the Company was compliant with all covenants. On May 3, 2019, the
Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided
consent to the Company with respect to late delivery of the Annual Financial Statements.
In addition to the aforementioned current
sources of existing working capital, the Company may explore certain other strategic alternatives that may become available to
the Company, as well continuing our efforts to generate additional sales and increase margins. However, at this time the Company
has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms
or at all, should we require such additional funds. If the Company is unable to improve its operations, it may be required
to obtain additional funding, and the Company’s financial condition and results of operations may be materially adversely
affected.
Furthermore, broad market and industry
factors may seriously harm the market price of our common stock, regardless of our operating performance, and may adversely impact
our ability to raise additional funds, should we require such additional funds. Similarly, if our common stock is delisted from
the NASDAQ Global Market, it may also limit our ability to raise additional funds.
The consolidated financial statements
for the fiscal year ended February 2, 2019 were prepared on the basis of a going concern which contemplates that the Company will
be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to meet its liabilities
and to continue as a going concern is dependent on improved profitability, the performance improvement plan implemented for the
etailz segment and the availability of future funding. The consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Basis of Presentation:
The consolidated financial statements consist of Trans World Entertainment Corporation, its wholly-owned subsidiaries, Record Town,
Inc. (“Record Town”), Record Town’s subsidiaries and etailz, Inc. All significant intercompany accounts and transactions
have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions, including those related to merchandise inventory
and return costs; valuation of goodwill and long-lived assets, income taxes, accounting for gift card liabilities, retirement plan
obligation, and other long-term liabilities that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Items Affecting
Comparability:
The Company’s fiscal year is a 52 or 53-week period ending the Saturday nearest to January 31. Fiscal
2018 and fiscal 2017 ended February 2, 2019 and February 3, 2018, respectively. Fiscal 2018 had 52 weeks and fiscal 2017 had 53
weeks.
Concentration of Business Risks:
The fye segment purchases inventory from approximately 460 suppliers. In fiscal 2018, 37% of fye purchases were made from ten
suppliers including Universal Studio Home
Entertainment, Paramount Video, Buena
Vista Home Video, SONY Music, Twentieth Century Fox Home Entertainment, Warner/Elektra/Atlantic, Universal Music Group Distribution,
Funko LLC, Warner Home Video, and Alliance Entertainment.
The etailz segment purchases various
inventory from numerous suppliers. The segment does not have material long-term purchase contracts; rather, it purchases products
from its suppliers on an order-by-order basis. Historically, the etailz segment has not experienced difficulty in obtaining satisfactory
sources of supply and management believes that it will continue to have access to adequate sources of supply.
etailz generates substantially all of
its revenue through the Amazon Marketplace. Therefore, the segment depends in large part on its relationship with Amazon for its
continued growth. In particular, the etailz segment depends on its ability to offer products on the Amazon Marketplace and on its
timely delivery of products to customers.
During fiscal 2018,
in response to the general decline in operating results, management
implemented certain
vendor remediation
initiatives directed
towards improving the segment’s performance, operations, and cash flow, including
terminating unprofitable vendors
and preparing for vendor negotiations, significant reduction in pay-in-advance terms, and improving vendor relationships through
negotiations focused on improvements to gross margins and supply chain efficiencies.
Cash and Cash
Equivalents:
The Company considers all highly liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Restricted Cash:
Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded
in Restricted Cash on the Company’s consolidated balance sheet.
Concentration
of Credit Risks:
The Company maintains centralized cash management and investment programs whereby excess cash balances are
invested in short-term money market funds.
The Company’s investments consist of short-term investment grade securities
consistent with its investment guidelines. These guidelines include the provision that sufficient liquidity will be maintained
to meet anticipated cash flow needs. The Company maintains these investments, all of which are classified as cash equivalents due
to their short term nature, with Wells Fargo Securities, LLC. The Company limits the amount of credit exposure with any one financial
institution and believes that no significant concentration of credit risk exists with respect to cash investments.
Accounts Receivable:
Accounts receivable for the fye segment are primarily comprised of receivables due from commissions due from third parties.
For the etailz segment, accounts receivable are comprised of receivables due from Amazon. There are no provisions for uncollectible
amounts from retail sales of merchandise inventory since payment is received at the time of sale.
Merchandise
Inventory and Return Costs:
Merchandise inventory is stated at the lower of cost or net realizable value under the average
cost method. Inventory valuation requires significant judgment and estimates, including obsolescence, shrink and any adjustments
to net realizable value, if market value is lower than cost. The Company records obsolescence and any adjustments to net realizable
value (if lower than cost) based on current and anticipated demand, customer preferences and market conditions. The provision for
inventory shrink is estimated as a percentage of store sales for the period from the last date a physical inventory was performed
to the end of the fiscal year. Such estimates are based on historical results and trends, and the shrink results from the
last physical inventory. Physical inventories are taken at least annually for all stores and the distribution center throughout
the year, and inventory records are adjusted accordingly.
The
Company is generally entitled to return merchandise purchased from major music vendors for credit against other purchases from
these vendors. Certain vendors reduce the credit with a merchandise return charge which varies depending on the type of merchandise
being returned. Certain other vendors charge a handling fee based on units returned. The Company records all merchandise return
charges in cost of sales.
Fixed Assets and Depreciation:
Fixed assets are recorded at cost and depreciated or amortized over the estimated useful life of the asset using the straight-line
method. The estimated useful lives are as follows:
|
Leasehold improvements
|
Lesser of estimated useful life of the asset or the lease term
|
|
Fixtures and equipment
|
3-7 years
|
Major improvements
and betterments to existing facilities and equipment are capitalized. Expenditures for maintenance and repairs are expensed as
incurred.
Goodwill:
The Company’s
goodwill resulted from the acquisition of etailz and represented the excess purchase price over the net identifiable assets acquired.
All of the goodwill is associated with etailz, a separate reporting unit, and there is no goodwill associated with the other reporting
unit, fye. Goodwill is not amortized and the Company is required to evaluate goodwill for impairment at least annually or whenever
indicators of impairment are present. The Company’s annual test is completed at the end of the fourth fiscal quarter, and
interim tests are conducted when circumstances indicate the carrying value of the goodwill may not be
recoverable.
Estimating the fair value of reporting
units requires the use of estimates and significant judgments that are based on a number of factors including actual operating
results. It is possible that these judgments and estimates could change in future periods.
As a result of the annual impairment review
pursuant to FASB ASC 350,
Intangibles
—
Goodwill and Other,
the Company performed its impairment test
over goodwill. Based on the Company’s annual impairment test, it was determined that the goodwill balance was fully impaired,
and the Company recognized an impairment loss of $39.2 million.
Long Lived Assets other than Goodwill:
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to undiscounted future net cash flows expected to be generated by the asset over its remaining useful life. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Fair value is generally measured based on discounted estimated
future cash flows. Assets to be disposed of would be separately presented in the Consolidated Balance Sheets and reported at the
lower of the carrying amount or fair value less disposition costs. For the purpose of the asset impairment test, the fye segment
has two asset groupings – corporate and store level assets. For the purposes of the asset impairment test, the etailz segment
has one asset grouping, which is the same as the etailz reporting unit level.
During fiscal 2018 and fiscal 2017,
the Company concluded, based on continued operating losses within the fye segment driven by lower than expected fourth quarter
sales that triggering events had occurred in each respective fiscal year, and pursuant to FASB ASC 360,
Property, Plant, and
Equipment,
an evaluation of the fye fixed assets for impairment was required. Fixed assets primarily at the Company’s
retail store locations, as well as certain fixed assets at the corporate location, consisting of the home office and the Albany
distribution center, where impairment was determined to exist were written down to their estimated fair values as of the end of
fiscal 2018 and fiscal 2017, resulting in the recording of asset impairment charges of $1.9 million and $29.1 million, respectively.
Estimated fair values for fixed assets at these locations, including store fixtures, equipment, and leasehold improvements were
determined based on a measure of discounted future cash flows
over the remaining lease terms at the
respective locations. Future cash flows were estimated based on individual store and corporate level plans and were discounted
at a rate approximating the Company’s cost of capital. Management believes its assumptions were reasonable and consistently
applied.
During fiscal 2018,
the Company concluded, based on continued operating losses for the etailz segment driven by lower than expected operating results
culminating in the fourth quarter of fiscal 2018 that a triggering event had occurred, and pursuant to FASB ASC 360,
Property,
Plant, and Equipment
, an evaluation of the etailz fixed assets and intangible assets for impairment was required. Fixed assets
related to internally developed technology at etailz were written down to their estimated fair values at the end of fiscal 2018
resulting in the recognition of asset impairment charges of $2.1 million. Intangible assets related to technology and vendor relationships
were written down to their estimated fair values at the end of fiscal 2018 resulting in the recognition of asset impairment charges
of $16.4 million.
Conditional
Asset Retirement Obligations:
The Company records the fair value of an asset retirement obligation (“ARO”) as a liability
in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or normal use of the asset. The Company also records a corresponding asset that
is depreciated over the life of the asset. Subsequent to its initial measurement, the ARO is adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.
Commitments and Contingencies:
The
Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion,
based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate,
will not have a material adverse effect on the results of operations and financial condition of the Company.
Revenue Recognition:
Retail
Sales
The Company recognizes sales revenue,
net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer (point of sale). Internet sales
include shipping revenue and are recorded upon shipment to the customer. The Company records shipping and handling costs in cost
of sales. Additionally, estimated sales returns are calculated based on expected returns.
Membership
Fee Revenue
The Company recognizes membership fee
revenue over the term of the membership, which is typically 12 months for the Company’s Platinum Backstage Pass membership,
and 24 months for the Company’s Backstage Pass VIP membership. For the Company’s Platinum Backstage Pass program, the
contractual term of the program is 12 months, in which revenue is recognized over that service period. For the Company’s
Backstage Pass VIP program, the term of the program is indefinite until a customer cancels the membership. The Company estimates
24 months as the service period based on historical cancellation patterns and recognizes revenue over that service period. Membership
in each program provides customers with merchandise discounts and exclusive member-only offers. Total membership fees related to
the loyalty programs collected in advance, net of estimated refunds, were as follows: cash received from customers during fiscal
2018 and 2017 was $13.7 million and $16.9 million, respectively. Membership fee revenue recognized was $15.0 million and $17.9
million during fiscal 2018 and 2017, respectively, and recognized on a straight-line basis over the service period. The remaining
performance obligation associated with the membership programs was $4.8 million and $6.1 million as of the end of fiscal 2018 and
fiscal 2017, respectively. Membership fee revenue is included in Net Sales in the Company’s Consolidated Statements of Operations.
Deferred membership revenue is included
in Deferred Revenue in the Company’s Consolidated Balance Sheets.
Other Revenue
The Company recognizes revenue related
to commissions earned from third parties. The Company assesses the principal versus agent considerations depending on control of
the good or service before it is transferred to the customer. As the Company is the agent and does not have control of the specified
good or service, the Company recognizes the fee or commission to which the Company expects to be entitled for the agency service.
Commissions earned from third parties were $5.0 million and $5.3 million during fiscal 2018 and fiscal 2017, respectively, and
are included in Other Revenue in the Company’s Consolidated Statements of Operations.
Gift Cards
The Company offers
gift cards for sale, which is included in deferred revenue in the Consolidated Balance Sheets. When gift cards are redeemed at
the store level, revenue is recorded and the related liability is reduced. Breakage is estimated based on proportion to the pattern
of rights exercised by the customer. The Company has the ability to reasonably and reliably estimate the gift card liability based
on historical experience with redemption rates associated with a large volume of homogeneous transactions. The Company issued $1.9
million and $2.8 million in gift cards for fiscal 2018 and fiscal 2017, respectively. The Company recognized in revenue for redeemed
gift cards of $1.9 million and $2.8 million for fiscal 2018 and fiscal 2017, respectively. The Company recorded breakage on its
gift cards for fiscal 2018 and fiscal 2017 in the amount of $0.2 million and $0.4 million, respectively. Gift card breakage is
recorded as Other Revenue in the Company’s Consolidated Statements of Operations. The remaining performance obligation associated
with our gift cards was $2.0 million and $2.2 million as of the end of fiscal 2018 and fiscal 2017, respectively.
Cost of Sales:
In addition to the cost of product, the Company includes in cost of sales those costs associated with purchasing, receiving, shipping,
online marketplace fulfillment fees, inspecting and warehousing product, and depreciation related to distribution operations. Also
included are costs associated with the return of product to vendors. Cost of sales further includes the cost of inventory shrink
losses and obsolescence and the benefit of vendor allowances and discounts.
Selling, General and Administrative
Expenses
: Included in SG&A expenses are payroll and related costs, store operating costs, occupancy charges, Amazon fees,
professional and service fees, general operating and overhead expenses and depreciation charges (excluding those related to distribution
operations). Selling, general and administrative expenses also include fixed asset write offs associated with store closures,
if any, and miscellaneous income and expense items, other than interest.
Advertising
Costs and Vendor Allowances:
The fye segment often receives allowances from its vendors to fund in-store displays, print and
radio advertising, and other promotional events. Vendor advertising allowances which exceed specific, incremental and identifiable
costs incurred in relation to the advertising and promotions offered by the Company to its vendors are classified as a reduction
in the purchase price of merchandise inventory. Accordingly, advertising and sales promotion costs are charged to operations, offset
by direct vendor reimbursements, as incurred. Total advertising expense, excluding vendor allowances, was $2.2 million and $3.1
million in fiscal 2018 and fiscal 2017, respectively. In the aggregate, vendor allowances supporting the fye segment’s advertising
and promotion are included as a reduction of SG&A expenses, and reimbursements of such costs were $2.1 million and $2.8 million
in fiscal 2018 and 2017, respectively. Advertising costs for the etailz segment primarily consist of Amazon marketing expenses
which were $1.7 million and $1.2 million in fiscal 2018 and fiscal 2017, respectively.
Lease Accounting:
The Company’s calculation of straight-line rent expense includes the impact of escalating rents for the lease period and
includes any period during which the Company is not obligated to pay rent while the store is being constructed (“rent holiday”).
The Company accounts for step rent provisions, escalation clauses and other lease concessions by recognizing these amounts on a
straight line basis over the initial lease term. The Company capitalizes leasehold improvements funded by tenant improvement allowances,
depreciating them over the term of the related leases. The tenant improvement allowances are recorded as deferred rent within other
long-term liabilities in the Consolidated Balance Sheets and are amortized as a reduction in rent expense over the life of the
related leases.
Store Closing
Costs
: Management periodically considers the closing of underperforming stores. In the event of a store closing, reserves are
established at the time a liability is incurred for the present value of any remaining lease obligations, net of estimated sublease
income, and other exit costs. Store closings are not considered discontinued operations and as such, closings do not represent
a significant change on the Company’s operations and financial results.
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. Deferred tax assets are subject to valuation allowances based upon management’s
estimates of realizability.
The Company recognizes
the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions
are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are
reflected in the period in which the change in judgment occurs. It is the Company’s practice to recognize interest and penalties
related to income tax matters in income tax expense (benefit) in the Consolidated Statements of Operations.
Stock-Based
Compensation:
Stock-based compensation represents the cost related to stock-based awards granted to employees and directors.
The Company measures stock-based compensation cost at grant date, based on the estimated fair value of the award, and recognizes
the cost as expense on a straight-line basis (net of estimated forfeitures) over the option’s requisite service period. The
Company recognizes compensation expense based on estimated grant date fair value using the Black-Scholes option-pricing
model. Tax benefits, if any, resulting from tax deductions in excess of the compensation cost recognized for those options are
to be classified and reported as both an operating cash outflow and financing cash inflow.
Comprehensive Income (Loss):
Comprehensive income (loss) consists of net income (loss) and a pension actuarial income (loss) adjustment that is recognized
in other comprehensive income (loss) (see Note 9).
Income (Loss)
Per Share:
Basic and diluted income (loss) per share is calculated by dividing net income (loss) by the weighted average common
shares outstanding for the period. During fiscal 2018 and fiscal 2017, the impact of all outstanding stock awards was not considered
because the Company reported a net loss and such impact would be anti-dilutive. Accordingly, basic and diluted loss per share for
fiscal 2018 and fiscal 2017 was the same. Total anti-dilutive stock awards for fiscal 2018 was approximately 2.9 million shares
as compared to 2.6 million shares for fiscal 2017.
Fair Value of Financial Instruments:
Fair value is
defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
In determining fair value, the accounting standards
establish a three level hierarchy for inputs used in measuring fair value, as follows:
|
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
•
|
Level 2 — Significant observable inputs other than quoted prices in active markets for similar assets and liabilities, such as quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
|
•
|
Level 3 — Significant unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants.
|
The carrying amounts reported in the
Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, accounts payable and other current liabilities
approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying value of life
insurance policies included in other assets approximates fair value based on estimates received from insurance companies and are
classified as Level 2 measurements within the hierarchy as defined by applicable accounting standards. The Company had no Level 3
financial assets or liabilities at February 2, 2019 or at February 3, 2018.
Recently Adopted Accounting Pronouncements
In June 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be
entitled for the transfer of promised goods or services to customers. On February 4, 2018, the Company adopted Topic
606 using the modified retrospective approach. The new standard states that revenue is recognized when performance
obligations are satisfied by transferring goods or services to the customer in an amount that the entity expects to collect
in exchange for those goods or services. The satisfaction of a performance obligation with a single customer may occur at a
point in time or may occur over time. The significant majority of the Company’s revenue is recognized at a point in
time, generally when a customer purchases and takes possession of merchandise through the stores or when merchandise
purchased through our e-commerce websites is shipped to a customer. Revenues do not include sales taxes or other taxes
collected from customers. The Company has arrangements with customers where the performance obligations are satisfied over
time, which primarily relate to the loyalty programs and gift card liabilities. The adoption of Topic 606 impacted the timing
of revenue recognition for gift card breakage. Prior to adoption of Topic 606, gift card breakage was recognized at the point
gift card redemption became remote. In accordance with the Topic 606, the Company recognizes gift card breakage in proportion
to the pattern of rights exercised by the customer. The adoption of Topic 606 also impacted the presentation of the
Consolidated Balance Sheets related to sales return reserves to be recorded on a gross basis, consisting of a separate right
of return asset and liability. The Company’s evaluation of Topic 606 included a review of certain third-party
arrangements to determine whether the Company acts as principal or agent in such arrangements, and such evaluation did not
result in any material changes in gross versus net presentation as a result of the adoption of the new standard. The
cumulative effect of initially applying Topic 606 was a $0.3 million increase to the opening balance of inventory, a $0.3
million increase to the opening balance of accrued expenses and other liabilities, a $0.5 million increase to the opening
balance of deferred revenue, and a $0.5 million decrease to the opening balance of retained earnings as of February 4, 2018.
The comparative prior period information continues to be reported under the accounting standards in effect during those
periods.
Segment
Information:
The Company operates in two reportable segments: fye and etailz. Operating earnings (loss) by operating segment,
is defined as income (loss) from operations, net interest expense, other income, and income taxes. Total Revenue, Gross Profit,
and Loss From Operations by reportable segment in U.S. dollars were as follows:
|
(amounts in thousands)
|
|
Fiscal Year
Ended
February 2,
2019
|
|
|
Fiscal Year
Ended
February 3,
2018
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
231,290
|
|
|
$
|
268,397
|
|
|
etailz
|
|
|
186,900
|
|
|
|
174,459
|
|
|
Total Company
|
|
$
|
418,190
|
|
|
$
|
442,856
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
89,259
|
|
|
$
|
104,254
|
|
|
etailz
|
|
|
38,815
|
|
|
|
39,589
|
|
|
Total Company
|
|
$
|
128,074
|
|
|
$
|
143,843
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
(24,455
|
)
|
|
$
|
(49,261
|
)
|
|
etailz
|
|
|
(72,351
|
)
|
|
|
(2,140
|
)
|
|
Total Company
|
|
$
|
(96,806
|
)
|
|
$
|
(51,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise Inventory
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
69,785
|
|
|
$
|
86,217
|
|
|
etailz
|
|
|
25,057
|
|
|
|
22,895
|
|
|
Total Company
|
|
$
|
94,842
|
|
|
$
|
109,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
101,785
|
|
|
$
|
153,050
|
|
|
etailz
|
|
|
36,228
|
|
|
|
94,856
|
|
|
Total Company
|
|
$
|
138,013
|
|
|
$
|
247,906
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long Term Liabilities
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
24,789
|
|
|
$
|
27,777
|
|
|
etailz
|
|
|
78
|
|
|
|
1,354
|
|
|
Total Company
|
|
$
|
24,867
|
|
|
$
|
29,131
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
1,242
|
|
|
$
|
7,342
|
|
|
etailz
|
|
|
2,447
|
|
|
|
1,065
|
|
|
Total Company
|
|
$
|
3,689
|
|
|
$
|
8,407
|
|
Note 2. Recently Issued Accounting
Pronouncements
In February 2016, the FASB
established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize
leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU
No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to
Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that
requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term
longer than 12
months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense
recognition in the income statement.
The new standard
is effective for on February 3, 2019 with early adoption permitted. A modified retrospective transition approach is required,
applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its
effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial
application. The Company will adopt the new standard on February 3, 2019 and use the effective date as the date of initial application.
Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided
for dates and periods before February 3, 2019.
The new standard
provides a number of optional practical expedients in transition. The Company expects to elect the ‘package of practical expedients’,
which permits management not to reassess under the new standard the prior conclusions about lease identification, lease classification
and initial direct costs. Management does not expect to elect the use-of-hindsight or the practical expedient pertaining to land
easements; the latter not being applicable to the Company.
The Company expects
that this standard will have a material effect on its consolidated financial statements. While the Company continues to assess
all of the effects of adoption, management currently believes the most significant effects relate to (1) the recognition of new
ROU assets and lease liabilities on the consolidated balance sheet for the retail stores, distribution centers, home office operating
leases; and; (2) providing significant new disclosures about our leasing activities.
The new standard
also provides practical expedients for an entity’s ongoing accounting. Management currently expects to elect the short-term lease
recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company will not recognize ROU
assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases
of those assets in transition, which represents approximately 158 retail stores, or 75%, of the total number of retail stores
in operation at February 3, 2019. Management also currently expects to elect the practical expedient to not separate lease and
non-lease components for all of its leases.
In March 2017, the FASB issued
ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost,” which is intended to improve the presentation of net periodic pension cost and
net periodic post-retirement benefit cost in an entity’s financial statements by requiring the service cost component be disaggregated
from other components of net benefit costs and presented in the same line item or items as other compensation costs for the employees.
Additionally, only the service cost component of net benefit cost is eligible for capitalization when applicable. ASU 2017-07
is effective for the Company’s fiscal year beginning February 3, 2019, and must be applied retrospectively. ASU 2017-07
is permitted for early adoption, but only at the beginning of an annual period for which financial statements have not been issued
or made available for issuance. The Company does not expect that this standard will have a material effect on its consolidated
financial statements.
In May 2017, the FASB issued ASU
2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which provided clarity
as to what changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting
in Topic 718. ASU 2017-09 is effective for the Company for interim and annual periods in fiscal year beginning February 3, 2019,
with early adoption permitted and is applied prospectively to changes in terms or conditions of awards occurring on or after the
adoption date. The Company does not expect that this standard will have a material effect on its consolidated financial statements.
Note 3.
Goodwill and Other Intangible Assets
Goodwill is not
amortized, but is evaluated for impairment at least annually. Goodwill represents the excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets acquired in the etailz acquisition.
Determining the
fair value of a reporting unit requires the use of significant estimates and assumptions, including revenue growth rates, operating
margins, discount rates, and future market conditions, among others. Goodwill and other long-lived assets are reviewed for impairment
if circumstances indicate that the carrying amount may not be recoverable.
During fiscal
2018, the Company concluded, based on continued operating losses for the etailz segment driven by lower than expected operating
results culminating in the fourth quarter of fiscal 2018 that a triggering event had occurred, and an evaluation of intangible
assets for impairment was required. Intangible assets related to technology and vendor relationships were written down to their
estimated fair value at the end of fiscal 2018 resulting in the recognition of asset impairment charges of $16.4 million. As a
result of the annual goodwill impairment review, it was determined that the goodwill balance was fully impaired, and
the Company recognized an impairment loss of $39.2 million.
The Company continues to amortize certain
vendor relationships, technology, and trade names and trademarks that have finite lives.
Identifiable intangible assets
as of February 2, 2019 consisted of the following:
|
(amounts in thousands)
|
|
February 2, 2019
|
|
|
|
|
Weighted
Average
Amortization
Period
(in months)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Impairment
|
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor Relationships
|
|
|
120
|
|
|
$
|
19,100
|
|
|
$
|
4,398
|
|
|
$
|
13,822
|
|
|
$
|
880
|
|
|
Technology
|
|
|
60
|
|
|
|
6,700
|
|
|
|
3,078
|
|
|
|
2,587
|
|
|
|
1,035
|
|
|
Trade names and trademarks
|
|
|
60
|
|
|
|
3,200
|
|
|
|
1,447
|
|
|
|
—
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
$
|
29,000
|
|
|
$
|
8,923
|
|
|
$
|
16,409
|
|
|
$
|
3,668
|
|
The changes in net intangibles and
goodwill from February 3, 2018 to February 2, 2019 were as follows:
|
(amounts in thousands)
|
|
|
|
February 3,
2018
|
|
|
Amortization
|
|
|
Impairment
|
|
|
February 2,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vendor relationships
|
|
|
|
$
|
16,612
|
|
|
$
|
1,910
|
|
|
$
|
13,822
|
|
|
$
|
880
|
|
|
Technology
|
|
|
|
|
4,962
|
|
|
|
1,340
|
|
|
|
2,587
|
|
|
|
1,035
|
|
|
Trade names and trademarks
|
|
|
|
|
2,393
|
|
|
|
640
|
|
|
|
—
|
|
|
|
1,753
|
|
|
Net amortized intangible assets
|
|
|
|
$
|
23,967
|
|
|
$
|
3,890
|
|
|
$
|
16,409
|
|
|
$
|
3,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
$
|
39,191
|
|
|
|
—
|
|
|
$
|
39,191
|
|
|
$
|
—
|
|
|
Total unamortized intangible assets
|
|
|
|
$
|
39,191
|
|
|
|
—
|
|
|
$
|
39,191
|
|
|
$
|
—
|
|
Estimated amortization expense
for each of the five succeeding fiscal years and thereafter is as follows (amounts in thousands):
|
Fiscal Year
|
Amortization
|
|
|
|
|
2019
|
$1,143
|
|
2020
|
1,143
|
|
2021
|
847
|
|
2022
|
115
|
|
2023
|
115
|
|
Thereafter
|
305
|
Note 4. Fixed
Assets
Fixed assets consist
of the following:
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Fixtures and equipment
|
|
$
|
10,885
|
|
|
$
|
14,403
|
|
|
Leasehold improvements
|
|
|
6,836
|
|
|
|
9,836
|
|
|
Total fixed assets
|
|
|
17,721
|
|
|
|
24,239
|
|
|
Allowances for depreciation and amortization
|
|
|
(10,192
|
)
|
|
|
(10,693
|
)
|
|
Fixed assets, net
|
|
$
|
7,529
|
|
|
$
|
13,546
|
|
Depreciation of fixed assets is included
in the Consolidated Statements of Operations as follows:
|
|
|
Fiscal Year
|
|
|
|
|
2018
|
|
|
2017
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
—
|
|
|
$
|
645
|
|
|
Selling, general and administrative expenses
|
|
|
5,226
|
|
|
|
9,627
|
|
|
Total
|
|
$
|
5,226
|
|
|
$
|
10,272
|
|
Depreciation expense
related to the Company’s distribution center facility and related equipment is included in cost of sales. All other depreciation
of fixed assets is included in SG&A expenses. As noted within Footnote 1, the Company recorded $4.1 million and $29.1 million
in fixed asset impairment during fiscal 2018 and fiscal 2017, respectively.
Note 5. Restricted
Cash
As of February
2, 2019 and February 3, 2018, the Company had restricted cash of $9.9 million and $12.2 million, respectively.
Restricted cash balance at the
end of fiscal 2018 consisted of $3.2 million related to the earn-out amount that could be paid to the selling shareholders of
etailz in accordance with the share purchase agreement created during the acquisition of etailz in fiscal 2016; and a $6.7 million
rabbi trust, that resulted from the death of the Company’s former Chairman, of which $1.0 million was classified as restricted
cash in current assets and $5.7 million was classified as restricted cash as a long-term asset.
Restricted cash
balance at the end of fiscal 2017 consisted of $1.5 million held to satisfy any indemnification claims within 18 months from the
date of etailz acquisition; $3.2 million earn-out amount that could be paid to the selling shareholders of etailz in accordance
with the share purchase agreement resulted from the etailz acquisition; and a $7.5 million rabbi trust, that resulted from the
death of the Company’s former Chairman.
A summary of cash,
cash equivalents and restricted cash is as follows (amounts in thousands):
|
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
Cash and cash equivalents
|
|
$
|
4,355
|
|
|
$
|
31,326
|
|
|
Restricted cash
|
|
|
9,871
|
|
|
|
12,180
|
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
14,226
|
|
|
$
|
43,506
|
|
Subsequent to
the close of fiscal 2018, during the first quarter of fiscal 2019, the $3.2 million earn-out escrow balance was returned to the
Company as a result of the etailz segment not achieving the earnings target, as described in the etailz share purchase agreement.
Note 6. Credit
Facility
In January 2017, the Company amended
and restated its revolving credit facility (“Credit Facility”). The Credit Facility provides for commitments of $50
million subject to increase up to $75 million during the months of October to December of each year, as needed. The availability
under the Credit Facility is subject to limitations based on receivables and inventory levels. The principal amount of all outstanding
loans under the Credit Facility together with any accrued but unpaid interest, are due and payable in January 2022, unless otherwise
paid earlier pursuant to the terms of the Credit Facility. Payments of amounts due under the Credit Facility are secured by the
assets of the Company. During fiscal 2018, the Company exercised the right to increase its availability to $60 million subject
to the same limitations noted above.
The Credit Facility contains customary
affirmative and negative covenants, including restrictions on dividends and share repurchases, incurrence of additional indebtedness
and acquisitions and covenants around the net number of store closings and restrictions related to the payment of cash dividends
and share repurchases, including limiting the amount of dividends to $5.0 million annually and not allowing borrowings under the
amended facility for the six months before or six months after the dividend payment. On October 29, 2018, the Company entered
into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company
to exceed the permitted number of store closures and related inventory dispositions.
The Credit Facility also includes customary
events of default, including, among other things, material adverse effect, bankruptcy, and certain changes of control. As of February
2, 2019, the Company was compliant with all covenants. On May 3, 2019, the Company entered into a letter agreement with Wells Fargo in accordance with the Credit Facility in which Wells Fargo provided consent to the Company with respect to late delivery of the Annual Financial Statements.
Interest under the Credit Facility
will accrue, at the election of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin, which is determined
by reference to the level of availability, with the Applicable Margin for LIBO Rate loans ranging from 1.75% to 2.00% and the
Applicable Margin for Prime Rate loans ranging from 0.75% to 1.00%. In addition, a commitment fee of 0.25% is also payable on
unused commitments.
As of February 2, 2019 and as of February
3, 2018, the Company did not have any borrowings under the Credit Facility. Peak borrowings under the Credit Facility during fiscal
2018 and fiscal 2017 were $35.7 million and $11.7 million, respectively. As of February 2, 2019 and February 3, 2018, the Company
had no outstanding letters of credit. The Company had $30 million and $41 million available for borrowing under the Credit Facility
as of February 2, 2019 and February 3, 2018, respectively.
Note 7. Leases
The Company conducts
all of its operations from leased premises that include retail stores, distribution centers, and administrative offices. At February
2, 2019, the Company leased 210 stores under operating leases, many of which contain renewal options and escalation clauses, for
periods ranging from one to ten years. Most store leases also provide for payment of operating expenses and real estate taxes.
Some also provide for contingent rent based on percentage of sales over a certain sales volume. During fiscal 2018 and fiscal
2017, the Company recorded minimum rentals of $21.7 million and $25.0 million, respectively, and did not record any contingent
rentals. In addition, the Company currently leases 2 distribution centers and 2 administrative offices.
Future minimum
rental payments required under all leases that have initial or remaining non-cancelable lease terms at February 2, 2019, are as
follows (amounts in thousands):
|
|
|
Operating
Leases
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
24,426
|
|
|
2020
|
|
|
8,393
|
|
|
2021
|
|
|
5,239
|
|
|
2022
|
|
|
1,881
|
|
|
2023
|
|
|
1,137
|
|
|
Thereafter
|
|
|
1,060
|
|
|
Total minimum payments required
|
|
$
|
42,136
|
|
In addition to
the obligations in the table above, a number of the Company’s stores have leases which have rent payments based on the store’s
sales volume in lieu of fixed minimum rent payments. During fiscal 2018 and fiscal 2017, minimum rent payments based on a store’s
sales volume were $0.5 million and $0.6 million, respectively.
Note 8. Shareholders’ Equity
The Company classifies repurchased shares as treasury stock
on the Company’s Consolidated Balance Sheet. During 2013, the Company’s Board of Directors authorized a share repurchase
program. There were no treasury stock repurchases under the share repurchase program during fiscal 2018 and fiscal 2017. As of
February 2, 2019, the Company has approximately $12.2 million available for future purchases under its share repurchase program.
No cash dividends were paid in fiscal
2018 and fiscal 2017. The Company’s Credit Facility contains certain restrictions related to the payment of cash dividends,
including limiting the amount of dividends to $5.0 million annually and not allowing borrowings under the amended facility for
the six months before or six months after the dividend payment.
Note 9. Benefit
Plans
401(k) Savings
Plan
Each segment of
the Company offers a 401(k) Savings Plan to eligible employees meeting certain age and service requirements.
The fye segment
offers a 401(k) plan which permits participants to contribute up to 80% of their salary, including bonuses, up to the maximum
allowable by IRS regulations. The Company matches 50% of the first 6% of employee contributions after completing one year of service.
Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participant vesting of the
Company’s matching contribution is based on the years of service completed by the participant. Participants are fully vested
upon the completion of four years of service. As of February 3, 2019, the fye segment suspended its matching contribution in response
to one of the Company’s cost-cutting initiatives.
The etailz segment
offers a 401(k) plan which permits participants to contribute up to the maximum allowable by IRS regulations. The Company matches
100% of the first 6% of employee contributions after completing one year of service. Participants are immediately vested in their
voluntary contributions plus actual earnings thereon. Participant vesting of the Company’s matching contribution is based
on the years of service completed by the participant. Participants are fully vested upon the completion of three years of service.
All participant forfeitures of non-vested benefits are used to reduce the Company’s contributions or fees in future years.
Total expense
related to the fye segment’s matching contributions was approximately $340,000 and $301,000 in fiscal 2018 and fiscal 2017,
respectively. Total expense related to the etailz segment’s matching contributions was approximately $297,000 and $224,000
in fiscal 2018 and fiscal 2017, respectively.
Stock Award Plans
As of February 2, 2019, there was approximately
$0.6 million of unrecognized compensation cost related to stock option awards comprised of the following: $0.5
million was related to stock option awards listed in the table below and expected to be recognized as expense over a weighted
average period of 1.4 years and $0.1 million was related to restricted stock option awards expected to be recognized as expense
over a weighted average period of 3.7
years.
The Company has outstanding awards under
three employee stock award plans, the 2005 Long Term Incentive and Share Award Plan, the Amended and Restated 2005 Long Term Incentive
and Share Award Plan (the “Old Plans”); and the 2005 Long Term Incentive and Share Award Plan (as amended and restated
April 5, 2017 (the “New “Plan”). Collectively, these plans are referred to herein as the Stock Award Plans.
Additionally, the Company had a stock award plan for non-employee directors (the “1990 Plan”). The Company no longer
issues stock options under the Old Plans or the 1990 Plan.
Equity awards authorized for issuance
under the New Plan total 5.0 million. As of February 2, 2019, of the awards authorized for issuance under the Stock Award Plans,
2.8 million were granted and are outstanding, 1.9 million of which were vested and exercisable. Shares available for future grants
of options and other share based awards under the New Plan at February 2, 2019 were 4.4 million.
The fair values of the options granted
have been estimated at the date of grant using the Black - Scholes option pricing model with the following assumptions:
|
|
|
2018
|
|
2017
|
|
Dividend yield
|
|
0%
|
|
0%
|
|
Expected stock price volatility
|
|
50.5-54.0%
|
|
40.6-46.4%
|
|
Risk-free interest rate
|
|
2.71%-3.01%
|
|
1.74%-2.39%
|
|
Expected award life (in years)
|
|
5.64-6.98
|
|
5.64-5.71
|
|
Weighted average fair value per share of awards granted during the year
|
|
$0.50
|
|
$0.73
|
The following table summarizes information
about stock options outstanding under the Company’s Stock Award Plans as of February 2, 2019:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Exercise
Price Range
|
|
Shares
|
|
|
Average
Remaining
Life
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
$0.98-$2.66
|
|
|
1,263,000
|
|
|
|
5.9
|
|
|
|
1.61
|
|
|
$
|
—
|
|
|
|
673,000
|
|
|
$
|
1.82
|
|
|
$
|
—
|
|
|
2.67-3.50
|
|
|
615,500
|
|
|
|
5.9
|
|
|
|
3.34
|
|
|
|
—
|
|
|
|
550,500
|
|
|
|
3.38
|
|
|
|
—
|
|
|
3.51-4.87
|
|
|
899,914
|
|
|
|
5.6
|
|
|
|
3.94
|
|
|
|
—
|
|
|
|
716,789
|
|
|
|
3.97
|
|
|
|
—
|
|
|
Total
|
|
|
2,778,414
|
|
|
|
5.8
|
|
|
$
|
2.75
|
|
|
$
|
—
|
|
|
|
1,940,289
|
|
|
$
|
3.06
|
|
|
$
|
—
|
|
The aggregate
intrinsic value in the preceding table represents the total pretax intrinsic value based on the Company’s closing common
stock price of $0.59 as of February 2, 2019, which would have been received by the award holders had all award holders under the
Stock Award Plans exercised their awards as of that date.
The following table summarizes stock
option activity under the Stock Award Plans:
|
|
|
Employee and Director Stock Award Plans
|
|
|
|
|
Number of
Shares
Subject To
Option
|
|
|
Stock Award
Exercise Price
Range Per
Share
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Other
Share
Awards
(1)
|
|
|
Weighted
Average
Grant Date
Value
|
|
|
Balance January 28, 2017
|
|
|
2,459,564
|
|
|
|
$1.73-$5.50
|
|
|
$
|
3.58
|
|
|
|
170,927
|
|
|
$
|
3.63
|
|
|
Granted
|
|
|
680,000
|
|
|
|
1.60-1.85
|
|
|
|
1.84
|
|
|
|
65,000
|
|
|
|
1.85
|
|
|
Exercised/vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(52,500
|
)
|
|
|
3.50
|
|
|
Forfeited
|
|
|
(389,500
|
)
|
|
|
1.85-4.87
|
|
|
|
3.23
|
|
|
|
(5,000
|
)
|
|
|
3.53
|
|
|
Canceled
|
|
|
(164,150
|
)
|
|
|
3.79-5.50
|
|
|
|
5.43
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance February 3, 2018
|
|
|
2,585,914
|
|
|
|
$1.60-$4.87
|
|
|
$
|
3.06
|
|
|
|
178,427
|
|
|
$
|
3.26
|
|
|
Granted
|
|
|
555,000
|
|
|
|
0.98-1.04
|
|
|
|
0.99
|
|
|
|
224,484
|
|
|
|
1.12
|
|
|
Exercised/vested
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(131,500
|
)
|
|
|
1.94
|
|
|
Forfeited
|
|
|
(290,500
|
)
|
|
|
0.98-3.88
|
|
|
|
2.07
|
|
|
|
—
|
|
|
|
—
|
|
|
Canceled
|
|
|
(72,000
|
)
|
|
|
1.73-3.88
|
|
|
|
1.64
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance February 2, 2019
|
|
|
2,778,414
|
|
|
|
$0.98-$4.87
|
|
|
$
|
2.75
|
|
|
|
271,411
|
|
|
$
|
1.68
|
|
|
(1)
|
Other Share Awards include deferred shares granted to executives and directors.
|
During fiscal 2018, the Company
recognized approximately $79 thousand in expenses for deferred shares issued to non-employee directors. During fiscal 2017,
the Company did not issue any deferred shares to non-employee directors. There were no exercises of non-restricted stock
options during fiscal 2018 and fiscal 2017. In connection with the acquisition of etailz, the Company issued 1,572,552
restricted shares of Company common stock to a key etailz employee, with a grant date fair value of $3.56 per share. These
shares vested ratably through January 2019. Total expense related to these shares was $2.4 million and $2.5 million in fiscal
2018 and 2017, respectively. As of February 2, 2019, the Company recognized a total of $5.6 million of compensation cost
related to these restricted shares.
Defined
Benefit Plans
The Company maintains
a non-qualified Supplemental Executive Retirement Plan (“SERP”) for certain Executive Officers of the Company. The
SERP, which is unfunded, provides eligible executives defined pension benefits that supplement benefits under other retirement
arrangements. The annual benefit amount is based on salary and bonus at the time of retirement and number of years of service.
Prior to June
1, 2003, the Company had provided the Board of Directors with a noncontributory, unfunded retirement plan (“Director Retirement
Plan”) that paid retired directors an annual retirement benefit.
For fiscal 2018 and 2017, net periodic
benefit cost recognized under both plans totaled approximately $0.6 million in each fiscal year. The accrued pension liability
for both plans was approximately $17.5 million and $18.3 million at February 2, 2019 and February 3, 2018, respectively, and is
recorded within other long term liabilities on the Consolidated Balance Sheets. The accumulated benefit obligation for both plans
was $17.7 million and $18.4 million as of the fiscal years ended February 2, 2019 and February 3, 2018, respectively.
The
following is a summary of the Company’s defined benefit pension plans as of each fiscal year-end:
Obligation
and Funded Status:
|
(amounts in thousands)
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
18,334
|
|
|
$
|
18,700
|
|
|
Service cost
|
|
|
56
|
|
|
|
63
|
|
|
Interest cost
|
|
|
560
|
|
|
|
555
|
|
|
Actuarial (gain) loss
|
|
|
(275
|
)
|
|
|
177
|
|
|
Benefits paid
|
|
|
(1,199
|
)
|
|
|
(1,161
|
)
|
|
Benefit obligation at end of year
|
|
$
|
17,476
|
|
|
$
|
18,334
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(17,476
|
)
|
|
$
|
(18,334
|
)
|
|
Unrecognized net actuarial gain
|
|
|
(263
|
)
|
|
|
(102
|
)
|
|
Accrued benefit cost
|
|
$
|
(17,739
|
)
|
|
$
|
(18,436
|
)
|
Amounts
recognized in the Consolidated Balance Sheets consist of:
|
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Current liability
|
|
$
|
(1,199
|
)
|
|
$
|
(1,199
|
)
|
|
Long term liability
|
|
|
(16,002
|
)
|
|
|
(17,135
|
)
|
|
Add: Accumulated other comprehensive income
|
|
|
(275
|
)
|
|
|
(102
|
)
|
|
Net amount recognized
|
|
$
|
(17,476
|
)
|
|
$
|
(18,436
|
)
|
Components of Net Periodic Benefit
Cost and Other Amounts Recognized in Other Comprehensive Loss:
Net Periodic Benefit Cost:
|
|
|
|
Fiscal Year
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Service cost
|
|
$
|
56
|
|
|
$
|
63
|
|
|
Interest cost
|
|
|
560
|
|
|
|
555
|
|
|
Amortization of prior service cost
|
|
|
—
|
|
|
|
17
|
|
|
Amortization of actuarial net gain
|
|
|
(19
|
)
|
|
|
(36
|
)
|
|
Net periodic benefit cost
|
|
$
|
597
|
|
|
$
|
599
|
|
Other Changes in Benefit Obligations Recognized in Other
Comprehensive Loss:
|
|
|
2018
|
|
|
2017
|
|
|
Net prior service cost recognized as a component of net periodic benefit cost
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gains arising during the period
|
|
|
263
|
|
|
|
213
|
|
|
|
|
|
263
|
|
|
|
196
|
|
|
Income tax effect
|
|
|
—
|
|
|
|
—
|
|
|
Total recognized in other comprehensive loss
|
|
$
|
263
|
|
|
$
|
196
|
|
|
Total recognized in net periodic benefit cost and other comprehensive loss
|
|
$
|
334
|
|
|
$
|
795
|
|
The pre-tax components
of accumulated other comprehensive loss, which have not yet been recognized as components of net periodic benefit cost as of February
2, 2019 and February 3, 2018 and the tax effect are summarized below.
|
(amounts in thousands)
|
|
February 2,
|
|
|
February 3,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net unrecognized actuarial gain
|
|
$
|
(263
|
)
|
|
$
|
(102
|
)
|
|
Other actuarial adjustments
|
|
|
(102
|
)
|
|
|
—
|
|
|
Accumulated other comprehensive income
|
|
$
|
(365
|
)
|
|
$
|
(102
|
)
|
|
Tax expense
|
|
|
1,100
|
|
|
|
1,100
|
|
|
Accumulated other comprehensive loss
|
|
$
|
735
|
|
|
$
|
998
|
|
|
|
|
Fiscal Year
|
|
|
|
2018
|
|
2017
|
|
Weighted-average assumptions used to determine benefit obligation:
|
|
|
|
|
|
Discount rate
|
|
3.37%
|
|
3.42%
|
|
Salary increase rate
|
|
3.00%
|
|
3.00%
|
|
Measurement date
|
|
Jan 31, 2019
|
|
Jan 31, 2018
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2018
|
|
2017
|
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
Discount rate
|
|
3.61%
|
|
3.16%
|
|
Salary increase rate
|
|
3.00%
|
|
3.00%
|
The discount rate
is based on the rates implicit in high-quality fixed-income investments currently available as of the measurement date. The Citigroup
Pension Discount Curve (CPDC) rates are intended to represent the spot rates implied by the high quality corporate bond market
in the U.S. The projected benefit payments attributed to the projected benefit obligation have been discounted using the CPDC mid-year rates and the discount rate is the single constant
rate that produces the same total present value.
The following benefit payments over
the next ten years, which reflect expected future service, as appropriate, are expected to be paid:
|
Year
|
|
Pension Benefits
|
|
(
amounts in thousands
)
|
|
|
2019
|
|
1,199
|
|
2020
|
|
1,192
|
|
2021
|
|
1,184
|
|
2022
|
|
1,149
|
|
2023
|
|
1,149
|
|
2024 – 2028
|
|
6,769
|
Accumulated Other Comprehensive
Loss
|
(amounts in thousands)
|
|
Pension
Benefit
|
|
|
February 3, 2018
|
|
$
|
(998
|
)
|
|
Other comprehensive income
|
|
|
263
|
|
|
February 2, 2019
|
|
$
|
(735
|
)
|
Note 10. Income Taxes
Income tax expense (benefit) consists
of the following:
|
|
|
Fiscal Year
|
|
|
(amounts in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Federal - current
|
|
$
|
(184
|
)
|
|
$
|
(500
|
)
|
|
State - current
|
|
|
264
|
|
|
|
201
|
|
|
Income tax expense (benefit)
|
|
$
|
80
|
|
|
$
|
(299
|
)
|
A reconciliation of the Company’s
effective income tax rate with the federal statutory rate is as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Federal statutory rate
|
|
|
21.0
|
%
|
|
|
33.7
|
%
|
|
State income taxes, net of federal tax effect
|
|
|
(0.3
|
%)
|
|
|
(0.5
|
%)
|
|
Change in Valuation Allowance
|
|
|
(12.5
|
%)
|
|
|
36.1
|
%
|
|
Cash surrender value - insurance / benefit program
|
|
|
—
|
%
|
|
|
7.0
|
%
|
|
Goodwill Impairment
|
|
|
(8.5
|
%)
|
|
|
—
|
%
|
|
Contingent consideration
|
|
|
0.1
|
%
|
|
|
2.6
|
%
|
|
Change in US Federal Statutory Tax Rate
|
|
|
—
|
%
|
|
|
(79.4
|
%)
|
|
Other
|
|
|
0.1
|
%
|
|
|
1.2
|
%
|
|
Effective tax rate
|
|
|
(0.1
|
%)
|
|
|
0.7
|
%
|
The other category
is comprised of various items, including the impacts of non-deductible meals, dues, penalties, amortization, parking benefits
and the refundable portion of the federal alternative minimum tax carryover credit.
Significant components
of the Company’s deferred tax assets are as follows:
|
(amounts in thousands)
|
|
February 2,
2019
|
|
|
February 3,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED TAX ASSETS
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
$
|
559
|
|
|
$
|
260
|
|
|
Retirement and compensation related accruals
|
|
|
6,001
|
|
|
|
6,724
|
|
|
Fixed assets
|
|
|
6,463
|
|
|
|
7,561
|
|
|
Federal and state net operating loss and credit carry forwards
|
|
|
75,117
|
|
|
|
64,807
|
|
|
Real estate leases, included deferred rent
|
|
|
1,973
|
|
|
|
2,446
|
|
|
Losses on investment
|
|
|
584
|
|
|
|
827
|
|
|
Others
|
|
|
556
|
|
|
|
577
|
|
|
Gross deferred tax assets before valuation allowance
|
|
$
|
91,253
|
|
|
$
|
83,202
|
|
|
Less: valuation allowance
|
|
|
(90,161
|
)
|
|
|
(76,810
|
)
|
|
Total deferred tax assets
|
|
$
|
1,092
|
|
|
$
|
6,392
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED TAX LIABILITIES
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
$
|
(922
|
)
|
|
$
|
(6,193
|
)
|
|
Inventory
|
|
|
(170
|
)
|
|
|
(199
|
)
|
|
Total deferred tax liabilities
|
|
$
|
(1,092
|
)
|
|
$
|
(6,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET DEFERRED TAX ASSET
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company, at
the end of fiscal 2018, has a net operating loss carryforward of $253.5 million for federal income tax purposes which will expire
at various times throughout 2038 with a portion being available indefinitely. The Company has approximately $289.0 million of
net operating loss carryforward for state income tax purposes as of the end of fiscal 2018 that expire at various times through
2038 and are subject to certain limitations and statutory expiration periods. The state net operating loss carryforwards are subject
to various business apportionment factors and multiple jurisdictional requirements when utilized. The Company has federal tax
credit carryforwards of $0.5 million which will expire in 2026. The
Company has state tax credit carryforwards of $1.1 million, of which $0.2 million will expire in 2027.
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. The ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income. Management considers the scheduled reversal of taxable temporary differences, projected future taxable
income and tax planning strategies in making this assessment. Based on the available objective evidence, management concluded
that a full valuation allowance should be recorded against its deferred tax assets. As of February 2, 2019, the valuation allowance
increased to $90.2 million from $76.8 million at February 3, 2018. Management will continue to assess the valuation allowance
against the gross deferred assets.
A reconciliation of the beginning and
ending amounts of unrecognized tax benefits for the respective years is provided below. Amounts presented excluded interest and
penalties, where applicable, on unrecognized tax benefits:
|
|
|
Fiscal Year
|
|
|
(amounts in thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
1,930
|
|
|
$
|
1,930
|
|
|
Increases in tax positions from prior years
|
|
|
—
|
|
|
|
—
|
|
|
Decreases in tax positions from prior years
|
|
|
—
|
|
|
|
—
|
|
|
Increases in tax positions for current years
|
|
|
—
|
|
|
|
—
|
|
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
|
Lapse of applicable statute of limitations
|
|
|
—
|
|
|
|
—
|
|
|
Unrecognized tax benefits at end of year
|
|
$
|
1,930
|
|
|
$
|
1,930
|
|
As of February 2, 2019, the Company
had $1.9 million of gross unrecognized tax benefits, $1.5 million of which would affect the Company’s tax rate if recognized.
While it is reasonably possible that the amount of unrecognized tax benefits will increase or decrease within the next twelve
months, the Company does not expect the change to have a significant impact on its results of operations or financial position.
The Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has substantially
concluded all federal income tax matters and all material state and local income tax matters through fiscal 2013.
The Company’s
practice is to recognize interest and penalties associated with its unrecognized tax benefits as a component of income tax expense
in the Company’s Consolidated Statements of Operations. During fiscal 2018, the Company accrued a provision for interest
expense of $0.2 million. As of February 2, 2019, the liability for uncertain tax positions reflected in the Company’s Consolidated
Balance Sheets was $3.3 million, including accrued interest and penalties of $2.5 million.
On December 22,
2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. The Act makes broad and complex changes to the U.S. tax code
including a significant reduction to the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018.
These changes were presented on prior year, rate reconciliation, accordingly, the federal deferred tax assets were written down
to account for the change in fiscal 2017. The write down is reflected in both the valuation allowance and the deferred tax assets
which total $35.0 million in fiscal 2017. As of February 3, 2018 this change is also presented in the effective tax rate schedule
as a reduction to the prior year losses by 79.4%. The valuation allowance rate impact includes an offsetting reduction for the
tax rate which results in no change to the provision for income taxes.
The Act also repeals
the Corporation Alternative Minimum Tax (“AMT”) for tax years beginning after December 31, 2017. Any AMT carryover credits
will be refundable starting in the 2018 tax year, remaining credit will be fully refundable in 2021, as such, the Company recorded
a current benefit in its’ financial statements.
Note 11. Related
Party Transactions
The Company leases its 181,300 square
foot distribution center/office facility in Albany, New York from an entity controlled by the estate of Robert J. Higgins, its
former Chairman and largest shareholder. The distribution center/office lease commenced on January 1, 2016, and expires on December
31, 2020. Under the lease, accounted for as an
operating lease, the Company paid $1.2 million in fiscal 2018 and fiscal 2017. Under the terms of the lease agreement, the Company
is responsible for property taxes and other operating costs with respect to the premises.
Sara Neblett, the wife of Josh Neblett,
former CEO of etailz, was employed with the Company as the Vice President of Partner Care of etailz until January 2019. During
fiscal 2018 and fiscal 2017, Ms. Neblett received $169,125 and $165,250, respectively,
in regular cash compensation. In addition, during fiscal 2018, Ms. Neblett received approximately $1.0 million under the terms
of the etailz acquisition agreement.
Note 12. Commitments and Contingencies
Legal Proceedings
The Company is
subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these matters, it is management’s opinion, based upon
the information available at this time, that the expected outcome of these matters, individually and in the aggregate, will not
have a material adverse effect on the results of operations and financial condition of the Company.
Loyalty Memberships
and Magazine Subscriptions Class Action
On November 14, 2018, three consumers
filed a putative class action complaint against Trans World Entertainment Corporation and Synapse Group, Inc. in the United States
District Court for the District of Massachusetts Boston Division (Case No.1:18-cv-12377-DPW) concerning enrollment in the Company’s
Backstage Pass VIP loyalty program and associated magazine subscriptions. The complaint alleges, among other things, that the
Company’s “negative option marketing” misled consumers into enrolling for membership and subscriptions without
obtaining the consumers’ consent. The complaint seeks statutory and actual damages.
The Company has filed a motion to dismiss
the case which remains pending; however the court has already dismissed the plaintiffs’ only claim under federal law. The
court has not yet decided the rest of the motion, but has indicated its preliminary agreement with significant portions of that
motion, including that the case should not be able to proceed as a class action. The Company believes it has meritorious defenses
to the plaintiffs’ claims and, if the court does not grant the Company’s motion to dismiss in full, the Company intends
to vigorously defend the action.
Store
Manager Class Actions
There are
two pending class actions. The first,
Spack v. Trans World Entertainment Corp.
was originally filed in the District
of New Jersey, April 2017 (the “Spack Action”). The Spack Action alleges that Trans World misclassified Store Managers
as exempt nationwide. It also alleges violations of New Jersey and Pennsylvania State Law with respect to the Trans World’s
use of the fluctuating workweek method to pay Senior Assistant Managers at stores located in those two states, and that managers
and assistant managers worked “off-the-clock.” The second,
Roper v. Trans World Entertainment Corp.
, was
filed in the Northern District of New York, May 2017 (the “Roper Action”). The Roper Action also asserts a nationwide
misclassification claim on behalf of Store Managers. Both actions were consolidated into the Northern District of New York, with
the Spack Action being the lead case.
Plaintiffs
moved for conditional certification, June 2018 and partially granted in January 2019. The opt-in period for the collective that
was certified closed on April 6, 2019. Once the scope of the conditionally certified collective is known, opt-in discovery relating
to that collective will commence. Company plans to move to decertify that collective.
Note 13. Quarterly
Financial Information (Unaudited)
(in thousands, except for per share amounts)
|
|
|
Fiscal 2018 Quarter
Ended
|
|
|
|
Fiscal
|
February 2,
|
November 3,
|
August 4,
|
May 5,
|
|
|
2018
|
2019
(3)
|
2018
|
2018
|
2018
|
|
|
|
|
|
|
|
|
Total Revenue
|
$418,190
|
$127,429
|
$91,984
|
$102,174
|
$96,603
|
|
Gross profit
|
128,074
|
36,827
|
27,386
|
32,173
|
31,688
|
|
Net income (loss)
|
($97,382)
|
($65,673)
|
($14,052)
|
($9,510)
|
($8,147)
|
|
Basic and diluted income (loss) per share
|
($2.68)
|
($1.81)
|
($0.39)
|
($0.26)
|
($0.22)
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017 Quarter
Ended
|
|
|
|
Fiscal
|
February 3,
|
October 28,
|
July 29,
|
April 29,
|
|
|
2017
|
2018
(2)
|
2017
|
2017
|
2017
(1)
|
|
|
|
|
|
|
|
|
Total Revenue
|
$442,856
|
$145,409
|
$93,001
|
$102,479
|
$101,967
|
|
Gross profit
|
143,843
|
40,787
|
31,581
|
35,170
|
36,305
|
|
Net income (loss)
|
($42,553)
|
($32,450)
|
($8,071)
|
($5,565)
|
$3,533
|
|
Basic and diluted income (loss) per share
|
($1.18)
|
($0.90)
|
($0.22)
|
($0.15)
|
$0.10
|
|
|
|
|
|
|
|
|
|
1.
|
Includes $8.7 million gain from insurance proceeds.
|
|
|
|
|
|
|
2.
|
Includes $29.1 million impairment of fixed assets.
|
|
|
|
|
|
|
3.
|
Includes $59.7 million impairment of fixed assets, intangible assets,
and goodwill.
|
Index to Exhibits
Document Number and Description
Exhibit No.
|
2.1
|
Share Purchase Agreement by and among Trans World Entertainment Corporation, etailz, Inc., each equity holder of etailz, Inc. and Thomas C. Simpson, as sellers’ representative, dated as of October 17, 2016 – incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed on October 18, 2016. Commission File No. 0-14818.
|
|
|
|
|
2.2
|
Registration Rights Agreement by and among Trans World Entertainment Corporation and each holder of Consideration Shares, dated as of October 17, 2016 – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 18, 2016. Commission File No. 0-14818.
|
|
|
|
|
2.3
|
Amendment No. 1 to Share Purchase Agreement by and among Trans World Entertainment Corporation, etailz Inc. and Thomas C. Simpson, as sellers’ representative, dated as of May 3, 2017 – incorporated herein by reference to Exhibit 1.1 to the Company’s Form 8-K filed on May 4, 2017. Commission File No. 0-14818.
|
|
|
|
|
3.1
|
Restated Certificate of Incorporation – incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended January 29, 1994. Commission File No. 0-14818.
|
|
|
|
|
3.2
|
Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818.
|
|
|
|
|
3.3
|
Certificate of Amendment to the Certificate of Incorporation – incorporated herein by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year ended January 31, 1998. Commission File No. 0-14818.
|
|
|
|
|
3.4
|
Amended By-Laws – incorporated herein by reference to Exhibit 3.4 to the Company’s Annual Report on Form 10-K for the year ended January 29, 2000. Commission File No. 0-14818.
|
|
|
|
|
3.5
|
Form of Certificate of Amendment to the Certificate of Incorporation—incorporated herein by reference to Exhibit 3.5 to the Company’s Registration Statement on Form S-4, No. 333-75231.
|
|
|
|
|
3.6
|
Form of Certificate of Amendment to the Certificate of Incorporation—incorporated herein by reference to Exhibit 3.6 to the Company’s Registration Statement on Form S-4, No. 333-75231.
|
|
|
|
|
3.7
|
Certificate of Amendment to the Certificate of Incorporation—incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed August 15, 2000. Commission File No. 0-14818.
|
|
|
|
|
3.8
|
Certificate of Amendment to the Certificate of Incorporation - incorporated herein by reference to Exhibit 2 to the Company’s Current Report on Form 8-A filed August 15, 2000. Commission File No. 0-14818.
|
|
|
|
|
*4.1
|
Specimen of Trans World Entertainment Corporation stock certificate.
|
|
|
|
|
*4.2
|
Description of Trans World Entertainment Corporation capital stock.
|
|
|
|
|
4.8
|
Second Amended and restated Credit Agreement between Trans World Entertainment Corporation and Wells Fargo; National Association dated January 17, 2017– incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed January 19, 2017. Commission File No. 0-14818.
|
|
4.9
|
Letter Agreement between Trans World Entertainment Corporation and Wells Fargo Bank, National Association dated as of October 29, 2018 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated November 1, 2018).
|
|
|
|
|
4.10
|
Letter Agreement between Trans World Entertainment Corporation and Wells Fargo Bank, National Association dated as of May
3, 2019 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated May 6, 2019).
|
|
|
|
|
10.1
|
Amended and Restated Lease, dated December 4, 2015, between Robert J. Higgins, as Landlord, and Record Town, Inc. and Trans World Entertainment Corporation, as Tenant – incorporated herein by reference to Exhibit 10.3 Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998. Commission File No. 0-14818.
|
|
|
|
|
10.5
|
Trans World Music Corporation 1990 Stock Option Plan for Non-Employee Directors, as amended and restated – incorporated herein by reference to Annex A to Trans World’s Definitive Proxy Statement on Form 14A filed as of May 19, 2000. Commission File No. 0-14818.
|
|
|
|
|
10.6
|
Form of Indemnification Agreement dated May 1, 1995 between the Company and its officers and directors—incorporated herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995. Commission File No. 0-14818.
|
|
|
|
|
10.7
|
Trans World Entertainment Corporation Supplemental Executive Retirement Plan, as amended – incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 16, 2012. Commission File No. 0-14818.
|
|
|
|
|
10.8
|
Trans World Entertainment Corporation 2005 Long Term Incentive and Share Award Plan–incorporated herein by reference to Appendix A to Trans World Entertainment Corporation’s Definitive Proxy Statement on Form 14A filed as of May 11, 2005. Commission File No. 0-14818.
|
|
|
|
|
10.9
|
Trans World Entertainment Corporation Bonus Plan – incorporated herein by reference to Appendix A to Trans World Entertainment Corporation’s Definitive Proxy Statement on Form 14A filed as of May 30, 2014. Commission File No. 0-14818.
|
|
|
|
|
10.10
|
Trans World Entertainment Corporation Amended and Restated 2005 Long Term Incentive and Share Award Plan—incorporated herein by reference to Appendix A to Trans World Entertainment Corporation’s Definitive Proxy Statement on Form 14A filed as of May 30, 2014. Commission File No. 0-14818.
|
|
|
|
|
10.11
|
Employment Agreement, dated as of August 27, 2014 between the Company and Michael Feurer,– incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 3, 2014. Commission File No. 0-14818.
|
|
|
|
|
10.12
|
Amended and Restated Employment Agreement, dated February 26, 2019 between the Company and Michael Feurer,– incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 4, 2019. Commission File No. 0-14818.
|
|
|
|
|
10.13
|
Severance, Retention and Restrictive Covenant Agreement between the Company and Bruce J. Eisenberg, dated February 26, 2019,– incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K filed on March 4, 2019. Commission File No. 0-14818.
|
|
|
|
|
10.14
|
Severance, Retention and Restrictive Covenant Agreement between the Company and Edwin J. Sapienza, dated February 26, 2019,– incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 4, 2019. Commission File No. 0-14818.
|
|
|
|
|
*10.15
|
Separation Agreement between the Company and Josh Neblett, dated March 11, 2019.
|
|
*21
|
Significant Subsidiaries of the Registrant.
|
|
|
|
|
*23
|
Consent of KPMG LLP.
|
|
|
|
|
*31.1
|
Certification of Chief Executive Officer dated May 14, 2019, relating to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2019, pursuant to Rule 13a-14(a) or Rule 15a-14(a).
|
|
|
|
|
*31.2
|
Certification of Chief Financial Officer dated May 14, 2019, relating to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2019, pursuant to Rule 13a-14(a) or Rule 15a-14(a).
|
|
|
|
|
*32
|
Certification of Chief Executive Officer and Chief Financial Officer of Registrant, dated May 14, 2019, pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 relating to the Registrant’s Annual Report on Form 10-K for the year ended February 2, 2019.
|
|
*101.INS
|
XBRL Instance Document
|
|
|
|
|
*101.SCH
|
XBRL Taxonomy Extension Schema
|
|
|
|
|
*101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
*101.DEF
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
*101.LAB
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
*101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
|
* Filed herewith
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