Item 2 - Management’s Discussion and
Analysis of Financial Condition and
Results of Operations
November 2, 2019 and November 3, 2018
Overview
Management’s Discussion and Analysis of Financial Condition
and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding
of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a
historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include,
but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships,
general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s
filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition
and results of operations should be read in conjunction with the unaudited interim condensed consolidated financial statements
and related notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K as of and for the fiscal year ended February 2, 2019.
The Company operates in two reportable segments: fye and etailz.
The fye segment operates a chain of retail entertainment stores and e-commerce sites, www.fye.com and www.secondspin.com.
As of November 2, 2019, the fye segment operated 206 stores totaling approximately 1.1 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 for both segments, with the
peak selling period being the holiday season which falls in the Company’s fourth fiscal quarter.
The Company’s results have been, and will continue to be,
contingent upon management’s ability to understand industry trends and to manage the business in response to those trends
and general economic trends. Management monitors a number of key performance indicators to evaluate its performance, including:
Net Sales and Comparable Store Net Sales: The fye segment
measures the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the
beginning of its thirteenth full month of operation. Stores relocated, expanded or downsized are excluded from comparable store
sales if the change in square footage is greater than 20% until the thirteenth full month following relocation, expansion or downsizing.
Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately
preceding the month of closing. The fye segment further analyzes net sales by store format and by product category. The etailz
segment measures total year over year sales growth by product category and evaluates product sales by supplier.
Cost of Sales and Gross Profit: Gross profit is calculated
based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales
levels, mix of products sold, vendor discounts and allowances, shrinkage, obsolescence and distribution costs. Distribution expenses
include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and
costs associated with product returns to vendors.
Selling, General and Administrative (“SG&A”)
Expenses: Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses
and depreciation charges. SG&A expenses also include fixed assets write-offs associated with store closures, if any, and miscellaneous
income and expense items, other than interest.
Balance Sheet and Ratios: The Company views cash and working
capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Cash Flows
section for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen and Thirty-nine Weeks Ended November
2, 2019
Compared to the Thirteen and Thirty-nine
Weeks Ended November 3, 2018
Segment Highlights (amounts in thousands):
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
|
|
November 2,
2019
|
|
|
November 3,
2018
|
|
|
November 2,
2019
|
|
|
November 3,
2018
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
40,840
|
|
|
$
|
47,865
|
|
|
$
|
127,602
|
|
|
$
|
152,473
|
|
etailz
|
|
|
28,616
|
|
|
|
44,119
|
|
|
|
98,008
|
|
|
|
138,288
|
|
Total Company
|
|
$
|
69,456
|
|
|
$
|
91,984
|
|
|
$
|
225,610
|
|
|
$
|
290,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
16,155
|
|
|
$
|
18,276
|
|
|
$
|
50,670
|
|
|
$
|
61,181
|
|
etailz
|
|
|
6,924
|
|
|
|
9,110
|
|
|
|
22,915
|
|
|
|
30,066
|
|
Total Company
|
|
$
|
23,079
|
|
|
$
|
27,386
|
|
|
$
|
73,585
|
|
|
$
|
91,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
fye
|
|
$
|
(21,524
|
)
|
|
$
|
(9,493
|
)
|
|
$
|
(34,280
|
)
|
|
$
|
(21,495
|
)
|
etailz
|
|
|
(1,353
|
)
|
|
|
(4,261
|
)
|
|
|
(3,640
|
)
|
|
|
(9,808
|
)
|
Total Company
|
|
$
|
(22,877
|
)
|
|
$
|
(13,754
|
)
|
|
$
|
(37,920
|
)
|
|
$
|
(31,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of etailz Loss from Operations to etailz Adjusted Loss from Operations
|
|
|
etailz loss from operations
|
|
$
|
(1,353
|
)
|
|
$
|
(4,261
|
)
|
|
$
|
(3,640
|
)
|
|
$
|
(9,808
|
)
|
Acquisition related amortization and compensation expenses (1)
|
|
|
286
|
|
|
|
1,722
|
|
|
|
924
|
|
|
|
5,906
|
|
etailz adjusted loss from operations (2)
|
|
$
|
(1,067
|
)
|
|
$
|
(2,539
|
)
|
|
$
|
(2,716
|
)
|
|
$
|
(3,902
|
)
|
|
|
Reconciliation of fye Loss From Operations to fye Adjusted Loss From Operations
|
|
fye Loss From Operations
|
|
$
|
(21,524
|
)
|
|
$
|
(9,493
|
)
|
|
$
|
(34,280
|
)
|
|
$
|
(21,495
|
)
|
Asset impairment charges
|
|
|
16,035
|
|
|
|
—
|
|
|
|
16,035
|
|
|
|
—
|
|
fye Adjusted Loss From Operations (2)
|
|
$
|
(5,489
|
)
|
|
$
|
(9,493
|
)
|
|
$
|
(18,245
|
)
|
|
$
|
(21,495
|
)
|
(1) For the 13 weeks ended November 2, 2019, acquisition
related expenses consisted of amortization expense of intangible assets of $286 thousand. For the 39 weeks ended November 2, 2019,
acquisition related expenses consisted of amortization expense of intangible assets of $858 thousand and compensation expense
of $66 thousand. For the 13 weeks ended November 3, 2018, acquisition related expenses consisted of amortization expense of intangible
assets of $972 thousand and compensation expense of $750 thousand. For the 39 weeks ended November 3, 2018, acquisition related
expenses consisted of amortization expense of intangible assets of $2,915 thousand and compensation expense of $2,991 thousand.
(2) In addition to
the results of operations determined in accordance with generally accepted accounting principles in the United States (“U.S.
GAAP”), we reported non-GAAP adjusted operating loss for the etailz and the fye segments as shown above.
Total
Revenue. The following table sets forth a year-over-year
comparison of the Company’s total revenue:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
|
|
|
|
Thirty-nine Weeks Ended
|
|
|
Change
|
|
|
|
|
(amounts in thousands)
|
|
November 2,
2019
|
|
November 3,
2018
|
|
|
$
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
November 2,
2019
|
|
November 3,
2018
|
|
|
$
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
fye revenue
|
|
$
|
40,840
|
|
|
$
|
47,865
|
|
|
$
|
(7,025
|
)
|
|
|
-14.7
|
%
|
|
|
-5.2
|
%
|
|
$
|
127,602
|
|
|
$
|
152,473
|
|
|
$
|
(24,871
|
)
|
|
|
-16.3
|
%
|
|
|
-2.1
|
%
|
etailz revenue
|
|
|
28,616
|
|
|
|
44,119
|
|
|
|
(15,503
|
)
|
|
|
-35.1
|
%
|
|
|
|
|
|
|
98,008
|
|
|
|
138,288
|
|
|
|
(40,280
|
)
|
|
|
-29.1
|
%
|
|
|
|
|
Total revenue
|
|
$
|
69,456
|
|
|
$
|
91,984
|
|
|
$
|
(22,528
|
)
|
|
|
-24.5
|
%
|
|
|
|
|
|
$
|
225,610
|
|
|
$
|
290,761
|
|
|
$
|
(65,151
|
)
|
|
|
-22.4
|
%
|
|
|
|
|
Total revenue decreased 24.5% and 22.4% for the thirteen and thirty-nine
weeks ended November 2, 2019 as compared to the same period last year.
fye Segment
The following table sets forth a period over period comparison
of net fye sales by merchandise category:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
|
|
|
Thirty-nine Weeks Ended
|
|
|
Change
|
|
|
|
|
(amounts in thousands, except store count)
|
|
November 2,
2019
|
|
|
November 3,
2018
|
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
November 2,
2019
|
|
|
November 3,
2018
|
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye net sales
|
|
$
|
39,988
|
|
|
$
|
46,758
|
|
|
$
|
(6,770
|
)
|
|
|
-14.5
|
%
|
|
|
-5.2
|
%
|
|
$
|
127,602
|
|
|
$
|
149,975
|
|
|
$
|
(22,373
|
)
|
|
|
-14.9
|
%
|
|
|
-2.1
|
%
|
Other revenue
|
|
|
852
|
|
|
|
1,107
|
|
|
|
(255
|
)
|
|
|
-23.0
|
%
|
|
|
|
|
|
|
—
|
|
|
|
2,498
|
|
|
|
(2,498
|
)
|
|
|
-100.0
|
%
|
|
|
|
|
Total revenue
|
|
$
|
40,840
|
|
|
$
|
47,865
|
|
|
$
|
(7,025
|
)
|
|
|
-14.7
|
%
|
|
|
|
|
|
$
|
127,602
|
|
|
$
|
152,473
|
|
|
$
|
(24,871
|
)
|
|
|
-16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of fye net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trend / Lifestyle
|
|
|
46.2
|
%
|
|
|
41.9
|
%
|
|
|
|
|
|
|
|
|
|
|
6.3
|
%
|
|
|
45.2
|
%
|
|
|
40.1
|
%
|
|
|
|
|
|
|
|
|
|
|
8.4
|
%
|
Video
|
|
|
25.8
|
%
|
|
|
29.6
|
%
|
|
|
|
|
|
|
|
|
|
|
-17.7
|
%
|
|
|
26.2
|
%
|
|
|
30.2
|
%
|
|
|
|
|
|
|
|
|
|
|
-13.7
|
%
|
Music
|
|
|
17.7
|
%
|
|
|
17.9
|
%
|
|
|
|
|
|
|
|
|
|
|
-9.4
|
%
|
|
|
17.7
|
%
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
-5.8
|
%
|
Electronics
|
|
|
10.3
|
%
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
-7.4
|
%
|
|
|
10.9
|
%
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
-3.9
|
%
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Count:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
227
|
|
|
|
(21
|
)
|
|
|
-9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Square footage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145
|
|
|
|
1,268
|
|
|
|
(123
|
)
|
|
|
-9.7
|
%
|
|
|
|
|
fye net sales. Net sales decreased 14.5% and 16.0% during
the thirteen weeks and thirty-nine weeks ended November 2, 2019, respectively, as compared to the same periods last year. The
decline in net sales resulted from a 9.3% decline in total stores in operation and a 5.2% and 2.1% decline in comparable store
net sales for the thirteen and thirty-nine weeks ended November 2, 2019, respectively.
Trend/Lifestyle:
Comparable store net sales in the trend/lifestyle category increased
6.3% and 8.4% during the thirteen and thirty-nine weeks ended November 2, 2019, respectively. Trend/lifestyle products represented
46.2% and 45.2% of total net sales for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to 41.9%
and 40.1% in the comparable periods last year. The Company continues to take advantage of opportunities to strengthen its selection
and shift product mix to growing categories of entertainment-related merchandise.
Video:
Comparable store sales in the video category decreased 17.7% and
13.7% during the thirteen and thirty-nine week periods ended November 2, 2019, respectively. The video category represented 25.8%
and 26.2% of total net sales for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to 29.6% and
30.2% in the comparable periods last year due to continued industry-wide decline in physical media sales.
Music:
During the thirteen and thirty-nine weeks ended November 2, 2019,
music sales in comparable stores decreased 9.4% and 5.8%, respectively, versus the thirteen and thirty-nine weeks ended November
3, 2018. The music category represented 17.7% of total net sales for both thirteen and thirty-nine weeks ended November 2, 2019,
respectively, compared to 17.9% and 18.4% for the thirteen and thirty-nine weeks ended November 3, 2018 due to continued industry-wide
decline in physical media sales.
Electronics:
Comparable store net sales in the electronics category decreased
7.4% and 3.9% during the thirteen and thirty-nine weeks ended November 2, 2019, respectively. Electronics net sales represented
10.3% and 10.9% of total net sales for the thirteen and thirty-nine weeks ended November 3, 2019, respectively, compared to 10.6%
and 11.3% of total net sales for the comparable periods last year.
Other Revenue. Other revenue, which was primarily related
to commissions and fees earned from third parties for the fye segment, was approximately $0.9 million and $2.5 million for the
thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to $1.1 million and $3.6 million in the comparable
periods last year. The decline in other revenue was primarily due to lower number of stores in operation.
etailz Segment
etailz reported sales of $28.6 million and
$98.0 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, compared to $44.1 million and $138.3
million for the thirteen and thirty-nine weeks ended November 3, 2018. etailz generates revenue across a broad array of product
lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health & personal
care, home/kitchen/grocery, pets, sporting goods, toys & art. During the thirty-nine weeks ended November 2, 2019, etailz
sold approximately 28,000 unique SKUs from approximately 1,600 suppliers, compared to approximately 38,000 unique SKUs from approximately
2,100 suppliers during the thirty-nine weeks ended November 3, 2018. The decline in sales was attributable to the vendor remediation
performance improvement plan which was implemented during the fourth quarter of 2018 for the etailz segment, as discussed in Note
1 to the interim condensed consolidated financial statements included elsewhere in this Form 10-Q.
Gross Profit. The following table sets
forth a year-over-year comparison of the Company’s Gross Profit:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
Thirty-nine Weeks Ended
|
|
|
Change
|
|
(amounts in thousands)
|
|
November 2, 2019
|
|
|
November 3, 2018
|
|
|
$
|
|
|
%
|
|
|
November 2, 2019
|
|
|
November 3, 2018
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit
|
|
$
|
16,155
|
|
|
$
|
18,276
|
|
|
$
|
(2,121
|
)
|
|
|
-11.6
|
%
|
|
$
|
50,670
|
|
|
$
|
61,181
|
|
|
$
|
(10,511
|
)
|
|
|
-17.2
|
%
|
etailz gross profit
|
|
|
6,924
|
|
|
|
9,110
|
|
|
|
(2,186
|
)
|
|
|
-24.0
|
%
|
|
|
22,915
|
|
|
|
30,066
|
|
|
|
(7,151
|
)
|
|
|
-23.8
|
%
|
Total gross profit
|
|
$
|
23,079
|
|
|
$
|
27,386
|
|
|
$
|
(4,307
|
)
|
|
|
-15.7
|
%
|
|
$
|
73,585
|
|
|
$
|
91,247
|
|
|
$
|
(17,662
|
)
|
|
|
-19.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit as a % of fye revenue
|
|
|
39.6
|
%
|
|
|
38.2
|
%
|
|
|
|
|
|
|
|
|
|
|
39.7
|
%
|
|
|
40.1
|
%
|
|
|
|
|
|
|
|
|
etailz gross profit as a % of etailz revenue
|
|
|
24.2
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
23.4
|
%
|
|
|
21.7
|
%
|
|
|
|
|
|
|
|
|
Total gross profit as a % of total revenue
|
|
|
33.2
|
%
|
|
|
29.8
|
%
|
|
|
|
|
|
|
|
|
|
|
32.6
|
%
|
|
|
31.4
|
%
|
|
|
|
|
|
|
|
|
Gross profit decreased 15.7% to $23.1 million for the thirteen
weeks ended November 2, 2019 compared to $27.4 million for the thirteen weeks ended November 3, 2018. For the thirty-nine weeks
ended November 2, 2019, gross profit decreased 19.4% to $73.6 million compared to $91.2 million for the comparable period last
year.
fye Segment
fye gross profit as a percentage of total revenue for the thirteen
and thirty-nine weeks ended November 2, 2019 was 39.6% and 39.7%, respectively, compared to 38.2% and 40.1% for the comparable
periods last year. The increase in the gross profit percentage for the thirteen weeks ended November 2, 2019, as compared to the
thirteen weeks ended November 3, 2018, was primarily attributable to increased merchandise margin in the Trend/Lifestyle category.
etailz Segment
etailz gross profit as a percentage of total
revenue for the thirteen and thirty-nine weeks ended November 2, 2019 was 24.2% and 23.4%, respectively, compared to 20.6% and
21.7% for the comparable periods last year. The increase in the gross profit rate was a result of the performance improvement
plan implemented during the fourth quarter of 2018. See Note 1 to the interim condensed consolidated financial statements, included
elsewhere in this Form 10-Q for the description of the etailz segment performance improvement plan.
SG&A Expenses. The following table sets forth a period
over period comparison of the Company’s SG&A expenses:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
Thirty-nine Weeks Ended
|
|
|
Change
|
|
(amounts in thousands)
|
|
November 2,
2019
|
|
November 3,
2018
|
|
|
$
|
|
%
|
|
|
November 2,
2019
|
|
November 3,
2018
|
|
|
$
|
|
%
|
|
fye SG&A, excluding depreciation and amortization
|
|
$
|
21,012
|
|
|
$
|
26,620
|
|
|
$
|
(5,608
|
)
|
|
|
-21.1
|
%
|
|
$
|
67,094
|
|
|
$
|
79,214
|
|
|
$
|
(12,120
|
)
|
|
|
-15.3
|
%
|
As a % of total fye revenue
|
|
|
51.4
|
%
|
|
|
55.6
|
%
|
|
|
|
|
|
|
|
|
|
|
52.6
|
%
|
|
|
52.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
etailz SG&A, excluding depreciation and amortization
|
|
|
7,812
|
|
|
|
12,217
|
|
|
|
(4,405
|
)
|
|
|
-36.1
|
%
|
|
|
25,246
|
|
|
|
36,528
|
|
|
|
(11,282
|
)
|
|
|
-30.9
|
%
|
As a % of total etailz revenue
|
|
|
27.3
|
%
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
25.8
|
%
|
|
|
26.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,097
|
|
|
|
2,303
|
|
|
|
(1,206
|
)
|
|
|
-52.4
|
%
|
|
|
3,130
|
|
|
|
6,808
|
|
|
|
(3,678
|
)
|
|
|
-54.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
29,921
|
|
|
$
|
41,140
|
|
|
$
|
(11,219
|
)
|
|
|
-27.3
|
%
|
|
$
|
95,470
|
|
|
$
|
122,550
|
|
|
$
|
(27,080
|
)
|
|
|
-22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total revenue
|
|
|
43.1
|
%
|
|
|
44.7
|
%
|
|
|
|
|
|
|
|
|
|
|
42.3
|
%
|
|
|
42.1
|
%
|
|
|
|
|
|
|
|
|
SG&A expenses decreased $11.2 million and $27.1 million for
the thirteen and thirty-nine weeks ended November 2, 2019, respectively.
fye Segment
fye SG&A, excluding depreciation and amortization expenses,
decreased $5.6 million, or 21.1%, and $12.1 million, or 15.3%, for the thirteen and thirty-nine weeks ended November 2, 2019,
respectively. As a percentage of fye revenue, SG&A expenses in the fye segment for the thirteen and thirty-nine weeks ended
November 2, 2019 were 51.4% and 52.6%, respectively, compared to 55.6% and 52.0% for the same periods last year. The decline in
SG&A expenses was due to lower sales primarily as a result of fewer stores in operation. The decrease in SG&A expenses
as a percentage of revenue for the thirteen weeks ended November 2, 2019 was primarily due to a decrease in outside consulting
and professional fees. The increase in SG&A expenses as a percentage of revenue for the thirty-nine weeks ended November 2,
2019 was primarily due to higher outside consulting and professional fees during the first and second quarters of fiscal 2019.
etailz Segment
etailz SG&A, excluding depreciation and amortization expenses,
decreased $4.4 million and $11.3 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively. As a percentage
of etailz revenue, SG&A expenses in the etailz segment for the thirteen and thirty-nine weeks ended November 2, 2019 were
27.3% and 25.8%, respectively, compared to 27.7% and 26.4% for the same periods last year. The decrease was primarily due to expense
reduction initiatives implemented in the fourth quarter of 2018.
Asset Impairment charges. During the thirty nine weeks ended
November 2, 2019, the Company concluded, based on continued operating losses within the fye segment driven by lower than expected
third quarter sales that triggering events had occurred, and an evaluation of the fye long-lived assets for impairment was required.
Fixed assets and operating lease right-of-use assets, primarily at the Company’s retail store locations, as well as certain
fixed assets at the fye 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 November 2, 2019, resulting in the recording
of fixed assets and operating lease right-of-use assets impairment charges of $2.4 million and $13.6 million, respectively. Estimated
fair values for long-lived assets at these locations, including operating lease right of use assets, 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.
Depreciation and amortization.
Consolidated depreciation and amortization expense decreased
$1.2 million and $3.7 million for the thirteen and thirty-nine weeks ended November 2, 2019, respectively, primarily due to the
$4.1 million decrease in carrying value of fixed assets and the $16.4 million decrease in intangible assets resulting from impairment
charges recorded during the fourth quarter of fiscal 2018. For a discussion of the Company’s
impairment charges, see “Nature of Operations and Summary
of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in the Company’s Annual Report
on Form 10-K as of and for the year ended February 2, 2019.
Interest Expense.
Interest expense was $228 thousand and $554 thousand during the thirteen
and thirty-nine weeks ended November 2, 2019, respectively. Interest expense consisted primarily of interest payments resulting
from borrowings under the Company’s credit facility and unused commitment fees. Interest expense during the thirteen and
thirty-nine weeks ended November 3, 2018 was $277 thousand and $444 thousand, respectively. The decrease in interest expense for
the thirteen weeks ended November 2, 2019 was due to a decrease in interest rates for the borrowings under our credit facility.
The increase in interest expense for the thirty-nine weeks ended November 2, 2019 was due to 9 months of borrowings during fiscal
2019 as compared to 4 months of borrowings during fiscal 2018.
Other Loss (Income).
As of November 2, 2019, other (income) loss consisted of the following:
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
(amounts in thousands)
|
|
November 2,
2019
|
|
November 3,
2018
|
|
|
November 2,
2019
|
|
November 3,
2018
|
|
Investment write down
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
Interest income
|
|
|
(30
|
)
|
|
|
(43
|
)
|
|
|
(112
|
)
|
|
|
(171
|
)
|
Other (income) loss
|
|
$
|
(30
|
)
|
|
$
|
(43
|
)
|
|
$
|
388
|
|
|
$
|
(171
|
)
|
Income Tax Expense.
Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the
Company’s deferred tax assets. There were insignificant tax expense amounts recorded during the thirteen and thirty-nine
weeks ended November 2, 2019 and comparative periods last year.
Net Loss. The following
table sets forth a period over period comparison of the Company’s net loss:
|
|
Thirteen Weeks Ended
|
|
|
Thirty-nine Weeks Ended
|
|
(amounts in thousands)
|
|
November 2,
2019
|
|
|
November 2,
2018
|
|
|
$
Change
|
|
|
November 2,
2019
|
|
|
November 2,
2018
|
|
|
$ Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(21,003
|
)
|
|
$
|
(13,988
|
)
|
|
$
|
(7,015
|
)
|
|
$
|
(15,666
|
)
|
|
$
|
(31,576
|
)
|
|
$
|
15,910
|
|
Income tax expense
|
|
|
80
|
|
|
|
64
|
|
|
|
16
|
|
|
|
223
|
|
|
|
136
|
|
|
|
87
|
|
Net loss
|
|
$
|
(21,083
|
)
|
|
$
|
(14,052
|
)
|
|
$
|
(7,031
|
)
|
|
$
|
(15,889
|
)
|
|
$
|
(31,712
|
)
|
|
$
|
15,823
|
|
LIQUIDITY
Liquidity
and Cash Flows Considerations:
The unaudited condensed consolidated financial statements
for the thirteen and thirty-nine weeks ended November 2, 2019 were prepared on the basis of a going concern which
contemplates that the Company will be able to realize assets and satisfy liabilities and commitments 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 continued implementation of the performance improvement plan for the etailz segment, the
availability of future funding and the completion of other strategic alternatives. The unaudited condensed consolidated
financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The Company incurred net losses of $39.1 million and $31.7
million for the thirty-nine weeks ended November 2, 2019 and November 3, 2018, respectively, and has an accumulated deficit
of $89.3 million at November 2, 2019. In addition, net cash used in operating activities for the thirty-nine weeks ended
November 2, 2019 was $30.8 million. Net cash used in operating activities for the thirty-nine weeks ended November 3, 2018
was $53.3 million. The Company also experienced negative cash flows from operations during fiscal 2018 and 2017, and expects
to incur net losses in the foreseeable future. Based on its recurring losses from operations, expectation of continuing
operating losses for the foreseeable future, and uncertainty with respect to any available future funding as well as the
completion of other strategic alternatives, the Company has concluded that there is substantial doubt about the
Company’s ability to continue as a going concern for a period of one year after the date of filing of this Quarterly
Report on Form 10-Q.
Management has plans to address the Company’s
current liquidity position. As disclosed in the Company’s Annual Report on Form 10-K filed May 14, 2019, the Company
implemented strategic initiatives on December 11, 2018, aimed at improving organizational efficiencies and conserving working
capital needed to support the growth of the etailz segment (the “performance improvement plan”). As a result of
the initiative, and inventory management in the fye segment, the Company was able to reduce cash used in operations by $22.5
million for the thirty-nine weeks ended November 2, 2019 as compared to the thirty-nine weeks ended November 2, 2018. We
anticipate continued improvement in cash flows used in operations for the remainder of fiscal 2019. In addition, the Company
continues to evaluate other strategic initiatives, including establishing a credit facility at the etailz segment, which could
provide additional liquidity. At November 2, 2019, we had cash and cash equivalents of $3.1 million, net working capital of
$35.4 million, short-term borrowings in the amount of $27.8 million on our revolving credit facility, and $11.0 million of
availability on our revolving credit facility. This compares to $4.5 million in cash and cash equivalents, net working
capital of $70.0 million, short-term borrowings in the amount of $27.4 million on the Company’s revolving credit
facility at November 3, 2018, and $22.1 million of availability on our revolving credit facility.
The Company’s primary sources of liquidity are
its 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 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 in the implementation of our strategy and planned
activities.
In addition to the aforementioned current sources
of existing working capital, the Company is continuing its efforts to generate additional sales and increase margins. There
can be no assurance that any of the initiatives or strategic alternatives described above will be implemented, successful or
consummated.
The following table sets forth a summary of key components of cash
flow and working capital:
|
|
|
|
As of or for the
Thirty-nine Weeks Ended
|
|
|
Change
|
|
|
|
(amounts in thousands)
|
|
November 2,
2019
|
|
|
November 3,
2018
|
|
|
$
|
|
|
|
Operating Cash Flows
|
|
$
|
(30,822
|
)
|
|
$
|
(53,337
|
)
|
|
$
|
22,515
|
|
|
|
Investing Cash Flows
|
|
|
(2,013
|
)
|
|
|
(1,546
|
)
|
|
|
(467
|
)
|
|
|
Financing Cash Flows
|
|
|
27,771
|
|
|
|
25,940
|
|
|
|
1,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
(1)
|
|
(2,128
|
)
|
|
|
(2,851
|
)
|
|
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
(2)
|
|
9,162
|
|
|
|
14,563
|
|
|
|
(5,401
|
)
|
|
|
Merchandise Inventory
|
|
|
101,130
|
|
|
|
131,285
|
|
|
|
(30,155
|
)
|
|
|
Working Capital
|
|
|
35,378
|
|
|
|
70,000
|
|
|
|
(34,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Included in Investing Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Cash and cash equivalents per condensed consolidated balance sheets
|
|
$
|
3,073
|
|
|
$
|
4,497
|
|
|
|
|
|
|
|
Add: restricted cash
|
|
|
6,089
|
|
|
|
10,066
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash
|
|
$
|
9,162
|
|
|
$
|
14,563
|
|
|
|
|
|
Cash used in operations was $30.8 million for
the thirty-nine weeks ended November 2, 2019, primarily due to a net loss of $39.1 million, adding back loss on impairment of
long lived assets of $16.0 million, depreciation and amortization of $3.1 million, a $6.3 million seasonal increase in inventory,
a $1.2 million decrease in prepaid expenses and other current assets, and a $0.1 million decrease in other long-term assets, combined
with a reduction in accounts payable, accrued expenses and other current liabilities, deferred revenue, and other long-term liabilities
of $4.3 million, $0.9 million, $1.0 million, and $7.3 million, respectively. The Company’s merchandise inventory and accounts
payable are influenced by the seasonality of its business.
Cash used in investing activities was $2.0 million
for the thirty-nine weeks ended November 2, 2019, which consisted primarily of capital expenditures.
Cash provided by financing activities for the thirty-nine weeks
ended November 2, 2019, was comprised of $27.8 million proceeds from short-term borrowings.
Capital Expenditures. During the thirteen
and thirty-nine weeks ended November 2, 2019, the Company made capital expenditures of $0.6 million and $2.1 million, respectively.
The Company currently plans to spend approximately $3.0 million for capital expenditures during fiscal 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated 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 consolidated financial statements. Management continually evaluates its estimates and judgments including those related
to merchandise inventory and return costs and income taxes. Management bases its estimates and judgments on historical experience
and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in the Form 10-K as of and for the year ended February 2, 2019 includes a summary
of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial
statements. As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a critical accounting
policy. With the exception of goodwill, there have been no material changes or modifications to the critical accounting policies
since February 2, 2019.
Recent Accounting Pronouncements:
The information set forth under Note 3, Recently Adopted Accounting
Pronouncements section contained in Item 1, included elsewhere in the Form 10-Q, is incorporated herein by reference.
Non-GAAP Measures:
This Form 10-Q contains
certain non-GAAP metrics, including: adjusted operating loss for the etailz segment and SG&A excluding depreciation and amortization
expenses, for each reporting segment. A non-GAAP measure is not a recognized measure of financial performance under GAAP in the
United States, and should not be considered as a substitute for SG&A expenses, operating earnings, net earnings from continuing
operations or cash flows from operating activities, as determined in accordance with GAAP. Non-GAAP items are provided because
management believes that, when reconciled from the GAAP items to which they relate, they provide additional useful information
to investors regarding the Company’s operational performance.
The Company calculates
etailz adjusted loss from operations to evaluate its own operating performance and as an integral part of its planning process.
The Company presents etailz adjusted loss from operations as a supplemental measure because it believes such a measure provides
management and investors with a more complete understanding of its business operating results, including underlying trends, by
excluding the effects of certain charges.
The Company calculates
SG&A expenses, excluding depreciation and amortization expenses, for each reporting segment to evaluate its own operating
performance and as an integral part of its planning process. The Company presents SG&A expenses, excluding depreciation and
amortization expenses, as a supplemental measure because it believes such a measure provides management and investors with a more
complete understanding of its business operating results, including underlying trends, by excluding the effects of certain charges.
TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
PART I – FINANCIAL INFORMATION