Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Stage Stores, Inc. and its subsidiary (“we,” “us” or “our”) have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Those adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods have been made. Results of operations for such interim periods are not necessarily indicative of the results of operations for a full year due to seasonality and other factors. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto filed with our Annual Report on Form 10-K for the year ended February 2, 2019 (“Form 10-K”).
We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of August 3, 2019, we operated in 42 states through 645 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 141 GORDMANS off-price stores, as well as an e-commerce website (www.stage.com). Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized markets in the Midwest.
References to a particular year are to our fiscal year, which is the 52- or 53-week period ending on the Saturday closest to January 31st of the following calendar year. For example, a reference to “2019” is a reference to the fiscal year ending February 1, 2020, and “2018” is a reference to the fiscal year ended February 2, 2019. Fiscal years 2019 and 2018 are comprised of 52 weeks. References to the “three months ended August 3, 2019” and “three months ended August 4, 2018” are for the respective 13-week fiscal quarters. References to quarters relate to our fiscal quarters. References to the “six months ended August 3, 2019” and “six months ended August 4, 2018” are for the respective 26-week fiscal periods.
Recently Adopted Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (“ASU”) 2016-02, Leases (Topic 842), and subsequently issued related ASUs, which were incorporated into Topic 842. Under the new standard, lessees are required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the later of the lease commencement date and the date of adoption. The guidance also requires qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. We adopted the new standard on February 3, 2019, the first day of fiscal 2019.
Transition elections:
|
|
|
|
•
|
We elected to apply the effective date transition method as of the February 3, 2019 adoption date. Comparative periods prior to the adoption of the new standard have not been restated and are reported under the legacy guidance in Accounting Standards Codification (“ASC”) Topic 840, Leases.
|
|
|
|
|
•
|
We elected the package of practical expedients in the transition guidance, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
|
|
|
|
|
•
|
We elected not to use the practical expedient of using hindsight to determine the lease term and in assessing impairment of the right-of-use assets.
|
Accounting policy elections:
|
|
|
|
•
|
We elected the short-term lease exemption for leases that have a lease term of twelve months or less. For leases that qualify for the short-term exemption, we will not recognize a right-of-use asset or liability and will recognize those lease expenses on a straight-line basis over the lease term.
|
|
|
|
|
•
|
We elected to not separate lease and non-lease components for all of our current lease classes.
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
The adoption of the standard resulted in the recognition of operating lease assets and liabilities of $344.2 million and $375.8 million, respectively, as of February 3, 2019. Included in the measurement of the operating lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and deferred rent tenant allowances. We also recognized a cumulative effect charge of $5.2 million, net of tax, to the opening accumulated deficit balance. This adjustment reflects $5.8 million in depreciation of leasehold improvements associated with conforming the asset useful life to the remaining lease life as of the transition date. It also reflects $0.6 million associated with the derecognition of lease obligations that had been classified as finance obligations under the former failed sale-leaseback guidance applied to build-to-suit arrangements. Under the new standard, these leases are classified as operating leases. The adoption of the standard did not have a material impact on our results of operations or cash flows. In addition, our bank covenants under our Credit Facility were not affected by the adoption of the standard. See Note 5 for further disclosures regarding leases.
Recent Accounting Pronouncements Not Yet Adopted. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires disclosure of the nature of hosting arrangements that are service contracts. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and disclosures.
NOTE 2 - FAIR VALUE MEASUREMENTS
We recognize or disclose the fair value of our financial and non-financial assets and liabilities on a recurring and non-recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.
We applied the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
|
|
|
|
Level 1 –
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2 –
|
Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
Level 3 –
|
Inputs that are both unobservable and significant to the overall fair value measurement reflect our estimates of assumptions that market participants would use in pricing the asset or liability.
|
Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
|
Balance
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Securities held in grantor trust for deferred
compensation plans (a)(b)
|
$
|
16,763
|
|
|
$
|
16,763
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
Balance
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held in grantor trust for deferred
compensation plans (a)(b)
|
$
|
19,536
|
|
|
$
|
19,536
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2018
|
|
|
Balance
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held in grantor trust for deferred
compensation plans (a)(b)
|
$
|
20,188
|
|
|
$
|
20,188
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
(a) The liability for the amount due to participants corresponding in value to the securities held in the grantor trust is recorded in other long-term liabilities.
(b) Using the market approach, the fair values of these securities represent quoted market prices multiplied by the quantities held. Net gains and losses related to the changes in fair value in the assets and liabilities under the various deferred compensation plans are recorded in selling, general and administrative expenses and were nil for the six months ended August 3, 2019 and August 4, 2018, and for the fiscal year ended February 2, 2019.
Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
|
Balance
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Assets held for sale (a)
|
$
|
2,799
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,799
|
|
|
Operating lease assets (b)
|
4,585
|
|
|
—
|
|
|
—
|
|
|
4,585
|
|
|
Store property, equipment and leasehold improvements (b)
|
629
|
|
|
—
|
|
|
—
|
|
|
629
|
|
|
Total Assets
|
$
|
8,013
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
|
Balance
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Store property, equipment and leasehold improvements (a)
|
$
|
1,583
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2018
|
|
|
Balance
|
|
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Store property, equipment and leasehold improvements (a)
|
$
|
1,101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,101
|
|
(a) Assets held for sale are recorded at the asset’s fair value less estimated costs to sell and are reflected in prepaid expenses and other current assets. For the six months ended August 3, 2019, we recognized impairment charges of $1.0 million based on a third party valuation of the underlying assets. These impairment charges are recorded in selling, general and administrative expenses.
(b) Using an undiscounted cash flow model, we evaluate the cash flow trends of our stores at least annually and when events or changes in circumstances, such as a store closure, indicate that the asset group may not be fully recoverable. When a store’s projected undiscounted cash flows indicate its asset carrying value may not be recoverable, we use a discounted cash flow model to estimate the fair value of the underlying asset group. An impairment write-down is recorded if the carrying value of an asset exceeds its fair value. Key assumptions in estimating future cash flows include, among other things, expected future operating performance, including expected closure date and lease term, and changes in economic conditions. We believe estimated future cash flows are sufficient to support the carrying value of our right-of-use operating lease and long-lived assets. Significant changes in the key assumptions used in our cash flow projections may result in additional asset impairments. For the six months ended August 3, 2019 and August 4, 2018 and during fiscal year 2018, we recognized impairment charges of $0.6 million, $1.1 million, and $2.8 million, respectively. Impairment charges related to store property, equipment and leasehold improvements are recorded in cost of sales and related buying, occupancy and distribution expenses.
Due to the short-term nature of cash and cash equivalents, payables and short-term debt obligations, the carrying value approximates the fair value of these instruments. In addition, we believe that the credit facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.
NOTE 3 - DEBT OBLIGATIONS
Debt obligations for each period presented consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
February 2, 2019
|
|
August 4, 2018
|
|
Revolving loan
|
$
|
275,025
|
|
|
$
|
204,044
|
|
|
$
|
244,649
|
|
|
Term loan
|
48,750
|
|
|
50,000
|
|
|
25,000
|
|
|
Finance obligations
|
—
|
|
|
554
|
|
|
1,064
|
|
|
Other financing
|
—
|
|
|
508
|
|
|
1,511
|
|
|
Total debt obligations
|
323,775
|
|
|
255,106
|
|
|
272,224
|
|
|
Less: Current portion of debt obligations
|
5,000
|
|
|
4,812
|
|
|
3,542
|
|
|
Long-term debt obligations
|
$
|
318,775
|
|
|
$
|
250,294
|
|
|
$
|
268,682
|
|
We have total availability of $448.7 million with a seasonal increase to $473.7 million under our senior secured revolving credit facility agreement including a revolving loan (“Revolving Loan”) and term loans (“Term Loan”), jointly referred to as the “Credit Facility”. Additionally, we have a $25.0 million letter of credit sublimit. The Term Loan is payable in quarterly installments of $1.3 million that began on June 15, 2019, with the remaining balance due upon maturity. The Credit Facility matures on December 16, 2021.
We use the Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings under the Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Credit Facility agreement. The Credit Facility is secured by our inventory, cash, cash equivalents, and substantially all of our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the Credit Facility agreement. For the six months ended August 3, 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the Credit Facility, were 4.7% and $309.9 million, respectively.
Letters of credit issued under the Credit Facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At August 3, 2019, outstanding letters of credit totaled approximately $8.6 million. These letters of credit expire within 12 months of issuance and may be renewed.
The Credit Facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The Credit Facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At August 3, 2019, we were in compliance with the debt covenants of the Credit Facility agreement and we expect to remain in compliance. Excess availability under the Credit Facility at August 3, 2019 was $66.1 million.
We derecognized finance obligations of $0.6 million upon adoption of ASC Topic 842, Leases, on February 3, 2019. See Note 1 for further disclosures regarding the adoption impact.
NOTE 4 - REVENUE
Net Sales
We recognize revenue for merchandise sales, net of expected returns and sales tax, at the time of in-store purchase or delivery of the product to our guest. When merchandise is shipped to our guests, we estimate receipt based on historical experience. Revenue is deferred and a liability is established for sales returns based on historical return rates and sales for the return period. We recognize an asset and corresponding adjustment to cost of sales for our right to recover returned merchandise. At each financial reporting date, we assess our estimates of expected returns, refund liabilities and return assets. For merchandise sold in our stores and online, tender is accepted at the point of sale. When we receive payment before the guest has taken possession of the merchandise, the amount received is recorded as deferred revenue until the transaction is complete. Our performance obligations for unfulfilled merchandise orders are typically satisfied within one week. Shipping and handling fees charged to guests relate to fulfillment activities and are included in net sales with the corresponding costs recorded in cost of sales.
We record deferred revenue for the sale of gift cards and merchandise credits issued for returned merchandise, and we recognize revenue in net sales upon redemption. Gift card and merchandise credit redemptions typically occur within 12 months of the date of issuance with the majority redeemed within the first three months. Our gift cards and merchandise credits do not expire. Based on historical redemption rates, a small percentage of gift cards and merchandise credits will never be redeemed. We recognize estimated breakage income for gift cards and merchandise credits that will never be redeemed in proportion to actual historical redemption patterns.
Under our loyalty program, members can accumulate points, based on their spending, toward earning a reward certificate that can be redeemed for future merchandise purchases. Points earned by loyalty members reset to zero at the end of each calendar year. Reward certificates expire 30 days after the date of issuance. We allocate and defer a portion of our sales to reward certificates expected to be earned, based on the relative stand-alone sales transaction price and reward certificate value, and recognize the reward certificate as a net sale when it is redeemed.
The following table presents the composition of net sales by merchandise category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Merchandise Category
|
|
Department Stores
|
|
Off-price Stores
|
|
Total Company
|
|
Department Stores
|
|
Off-price Stores
|
|
Total Company
|
|
Women’s
|
|
$
|
100,639
|
|
|
$
|
24,954
|
|
|
$
|
125,593
|
|
|
$
|
117,209
|
|
|
$
|
19,264
|
|
|
$
|
136,473
|
|
|
Men’s
|
|
49,582
|
|
|
11,534
|
|
|
61,116
|
|
|
53,124
|
|
|
8,913
|
|
|
62,037
|
|
|
Children's
|
|
25,198
|
|
|
9,870
|
|
|
35,068
|
|
|
29,400
|
|
|
7,530
|
|
|
36,930
|
|
|
Apparel
|
|
175,419
|
|
|
46,358
|
|
|
221,777
|
|
|
199,733
|
|
|
35,707
|
|
|
235,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
39,227
|
|
|
6,097
|
|
|
45,324
|
|
|
45,141
|
|
|
4,505
|
|
|
49,646
|
|
|
Accessories
|
|
17,988
|
|
|
3,865
|
|
|
21,853
|
|
|
18,426
|
|
|
3,889
|
|
|
22,315
|
|
|
Cosmetics/Fragrances
|
|
27,188
|
|
|
2,856
|
|
|
30,044
|
|
|
31,287
|
|
|
2,428
|
|
|
33,715
|
|
|
Home/Gifts
|
|
25,539
|
|
|
20,708
|
|
|
46,247
|
|
|
10,950
|
|
|
15,939
|
|
|
26,889
|
|
|
Other
|
|
2,859
|
|
|
651
|
|
|
3,510
|
|
|
1,039
|
|
|
807
|
|
|
1,846
|
|
|
Non-apparel
|
|
112,801
|
|
|
34,177
|
|
|
146,978
|
|
|
106,843
|
|
|
27,568
|
|
|
134,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue adjustments not allocated (a)
|
|
(347
|
)
|
|
(543
|
)
|
|
(890
|
)
|
|
(281
|
)
|
|
(276
|
)
|
|
(557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
287,873
|
|
|
$
|
79,992
|
|
|
$
|
367,865
|
|
|
$
|
306,295
|
|
|
$
|
62,999
|
|
|
$
|
369,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Merchandise Category
|
|
Department Stores
|
|
Off-price Stores
|
|
Total Company
|
|
Department Stores
|
|
Off-price Stores
|
|
Total Company
|
|
Women’s
|
|
$
|
184,254
|
|
|
$
|
45,815
|
|
|
$
|
230,069
|
|
|
$
|
220,696
|
|
|
$
|
39,231
|
|
|
$
|
259,927
|
|
|
Men’s
|
|
88,690
|
|
|
20,048
|
|
|
108,738
|
|
|
94,460
|
|
|
16,458
|
|
|
110,918
|
|
|
Children's
|
|
50,336
|
|
|
19,750
|
|
|
70,086
|
|
|
58,478
|
|
|
15,626
|
|
|
74,104
|
|
|
Apparel
|
|
323,280
|
|
|
85,613
|
|
|
408,893
|
|
|
373,634
|
|
|
71,315
|
|
|
444,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
79,498
|
|
|
11,171
|
|
|
90,669
|
|
|
89,624
|
|
|
9,324
|
|
|
98,948
|
|
|
Accessories
|
|
34,702
|
|
|
8,209
|
|
|
42,911
|
|
|
37,298
|
|
|
8,255
|
|
|
45,553
|
|
|
Cosmetics/Fragrances
|
|
55,057
|
|
|
5,669
|
|
|
60,726
|
|
|
62,473
|
|
|
4,910
|
|
|
67,383
|
|
|
Home/Gifts
|
|
45,865
|
|
|
40,561
|
|
|
86,426
|
|
|
19,794
|
|
|
33,822
|
|
|
53,616
|
|
|
Other
|
|
7,687
|
|
|
1,503
|
|
|
9,190
|
|
|
5,004
|
|
|
1,431
|
|
|
6,435
|
|
|
Non-apparel
|
|
222,809
|
|
|
67,113
|
|
|
289,922
|
|
|
214,193
|
|
|
57,742
|
|
|
271,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue adjustments not allocated (a)
|
|
(2,259
|
)
|
|
(970
|
)
|
|
(3,229
|
)
|
|
(3,169
|
)
|
|
(192
|
)
|
|
(3,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
543,830
|
|
|
$
|
151,756
|
|
|
$
|
695,586
|
|
|
$
|
584,658
|
|
|
$
|
128,865
|
|
|
$
|
713,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories.
|
Contract Liabilities
Contract liabilities reflect our performance obligations related to gift cards, merchandise credits, loyalty program rewards and merchandise orders that have not been satisfied as of a given date, and therefore, revenue recognition has been deferred. Contract liabilities (recorded in accrued expenses and other current liabilities) for each period presented were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
February 2, 2019
|
|
August 4, 2018
|
|
Gift cards and merchandise credits, net
|
|
$
|
9,759
|
|
|
$
|
12,433
|
|
|
$
|
9,657
|
|
|
Loyalty program rewards, net
|
|
5,147
|
|
|
1,484
|
|
|
4,612
|
|
|
Merchandise fulfillment liability
|
|
859
|
|
|
488
|
|
|
850
|
|
|
Total contract liabilities
|
|
$
|
15,765
|
|
|
$
|
14,405
|
|
|
$
|
15,119
|
|
The following table summarizes contract liability activity for each period presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Beginning balance
|
|
$
|
14,440
|
|
|
$
|
14,028
|
|
|
$
|
14,405
|
|
|
$
|
13,474
|
|
|
Net sales recognized during the period from amounts included in contract liability balances at the beginning of the period
|
|
(5,522
|
)
|
|
(5,484
|
)
|
|
(6,571
|
)
|
|
(6,284
|
)
|
|
Current period additions to contract liability balances included in contract liability balances at the end of the period
|
|
6,847
|
|
|
6,575
|
|
|
7,931
|
|
|
7,929
|
|
|
Ending balance
|
|
$
|
15,765
|
|
|
$
|
15,119
|
|
|
$
|
15,765
|
|
|
$
|
15,119
|
|
Credit Income
We earn credit income from our private label credit card (“PLCC”) through a profit-sharing arrangement with Comenity Bank, an affiliate of Alliance Data Systems Corporation. Comenity Bank owns the PLCC portfolio and manages the account activation, receivables funding, card authorization, card issuance, statement generation, remittance processing and guest service functions for our PLCC program. We perform certain duties, including electronic processing and transmitting of transaction records, and executing marketing promotions designed to increase card usage. We also accept payments in our stores from cardholders on behalf of Comenity Bank. We receive a monthly net portfolio yield payment from Comenity Bank, and we can potentially earn an annual bonus based upon the performance of the PLCC portfolio. The receivable for credit income, which is recorded in prepaid expenses and other current assets, was $4.5 million, $4.9 million and $4.7 million as of August 3, 2019, February 2, 2019 and August 4, 2018, respectively.
On April 11, 2019, we entered into an amendment to our profit-sharing arrangement with Comenity Bank. The amendment extended the term of the arrangement from July 31, 2021 to July 31, 2024.
We recorded deferred revenue for certain upfront payments received from Comenity Bank associated with the execution of the PLCC agreement. The amounts recognized in credit income related to these upfront payments for each period presented were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Upfront payments recognized in credit income
|
|
$
|
250
|
|
|
$
|
438
|
|
|
$
|
875
|
|
|
$
|
875
|
|
As of August 3, 2019, deferred revenue of $7.0 million remained to be amortized.
NOTE 5 - LEASES
Our lease agreements include leases for our retail stores, distribution centers and corporate headquarters. As of August 3, 2019, all of our leases were classified as operating leases. Our store leases typically have an initial term of 10 years and often have two renewal options of five years each. The exercise of a lease renewal option is at our sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that we will exercise that option. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.
We recognize a lease liability for our obligation to make lease payments arising from the lease and a related asset for our right to use the underlying asset for the lease term. The lease liability is measured based on the present value of lease payments over the lease term, and the asset is measured based on the value of the lease liability, net of landlord allowances. As the implicit interest rate in our lease agreements is not readily identifiable, we use our estimated collateralized incremental borrowing rate in determining the present value of lease payments. For all current lease classes, we made an accounting policy election not to separate lease and non-lease components.
The majority of our leases include fixed rent payments. A number of store leases provide for escalating minimum rent payments at pre-determined dates. Certain store leases provide for contingent rent payments based on a percentage of retail sales over contractual levels. Some of our leases include variable payments for maintenance, taxes and insurance.
Operating lease payments are expensed on a straight-line basis over the lease term. Variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred.
We sublease our former corporate office building to a third party and recognize sublease income on a straight-line basis over the lease term.
ASC 842 Disclosures
Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August 3, 2019
|
|
August 3, 2019
|
|
Operating lease cost
|
$
|
26,163
|
|
|
$
|
52,457
|
|
|
Variable lease cost
|
9,784
|
|
|
19,441
|
|
|
Short-term lease cost
|
24
|
|
|
24
|
|
|
Sublease income
|
(369
|
)
|
|
(737
|
)
|
|
Total net lease cost
|
$
|
35,602
|
|
|
$
|
71,185
|
|
|
|
|
|
|
|
Net lease cost in cost of sales and related buying, occupancy and distribution expenses
|
$
|
34,818
|
|
|
$
|
68,876
|
|
|
Net lease cost in selling, general and administrative expenses
|
784
|
|
|
2,309
|
|
|
Total net lease cost
|
$
|
35,602
|
|
|
$
|
71,185
|
|
Cash and non-cash activities associated with our leases were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
August 3, 2019
|
|
Cash paid for operating leases
|
$
|
55,139
|
|
|
Cash received from sublease
|
724
|
|
|
Lease assets obtained in exchange for lease liabilities (a)
|
12,701
|
|
(a) Excludes operating lease assets of $344.2 million recognized on February 3, 2019 as a result of the adoption of ASU 2016-02, Leases (Topic 842). See Note 1 for further disclosures regarding the adoption impact.
The weighted average remaining lease term and weighted-average discount rate associated with our leases as of August 3, 2019 were as follows:
|
|
|
|
|
|
|
Weighted average remaining lease term
|
5.3 years
|
|
|
Weighted average discount rate
|
10.1
|
%
|
Maturities of operating leases as of August 3, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
|
Sublease
|
|
2019 (remainder of year)
|
|
$
|
54,535
|
|
|
$
|
(723
|
)
|
|
2020
|
|
102,731
|
|
|
(1,492
|
)
|
|
2021
|
|
87,965
|
|
|
(1,582
|
)
|
|
2022
|
|
71,781
|
|
|
(1,582
|
)
|
|
2023
|
|
50,986
|
|
|
(1,054
|
)
|
|
2024
|
|
33,063
|
|
|
—
|
|
|
Thereafter
|
|
59,818
|
|
|
—
|
|
|
Total lease payments
|
|
460,879
|
|
|
$
|
(6,433
|
)
|
|
Less: Effects of discounting
|
|
106,964
|
|
|
|
|
Present value of lease liabilities
|
|
353,915
|
|
|
|
|
Less: Current portion of lease liabilities
|
|
74,906
|
|
|
|
|
Long-term lease liabilities
|
|
$
|
279,009
|
|
|
|
|
|
|
|
|
|
As of August 3, 2019, there were no leases that had not yet commenced.
Comparative Period Disclosures Reported Under ASC 840
Future minimum rental commitments on long-term, non-cancelable operating leases at February 2, 2019, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Commitments
|
|
Sublease Income
|
|
Net Minimum Lease Commitments
|
|
2019
|
|
$
|
108,541
|
|
|
$
|
(1,447
|
)
|
|
$
|
107,094
|
|
|
2020
|
|
98,859
|
|
|
(1,492
|
)
|
|
97,367
|
|
|
2021
|
|
83,377
|
|
|
(1,582
|
)
|
|
81,795
|
|
|
2022
|
|
67,447
|
|
|
(1,582
|
)
|
|
65,865
|
|
|
2023
|
|
46,887
|
|
|
(1,054
|
)
|
|
45,833
|
|
|
Thereafter
|
|
77,910
|
|
|
—
|
|
|
77,910
|
|
|
Total
|
|
$
|
483,021
|
|
|
$
|
(7,157
|
)
|
|
$
|
475,864
|
|
While infrequent in occurrence, occasionally we are responsible for the construction of leased stores and for paying project costs. ASC 840-40-55, The Effect of Lessee Involvement in Asset Construction, requires us to be considered the owner (for accounting purposes) of such build-to-suit arrangements during the construction period. The leases are accounted for as finance obligations with the amounts received from the landlord being recorded in debt obligations. Interest expense is recognized at a rate that will amortize the finance obligation over the initial term of the lease. Where ASC 840-40-55 was applicable, we have recorded finance obligations with interest rates of 6.1% and 12.3% on our condensed consolidated financial statements related to two store leases as of February 2, 2019.
Future minimum annual payments required under existing finance obligations as of February 2, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Minimum Payments
|
|
Less: Interest
|
|
Principal Payments
|
|
2019
|
|
$
|
580
|
|
|
$
|
26
|
|
|
$
|
554
|
|
NOTE 6 - STOCK-BASED COMPENSATION
Stock-based compensation expense by type of grant for each period presented was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Non-vested stock
|
$
|
515
|
|
|
$
|
1,079
|
|
|
$
|
1,296
|
|
|
$
|
2,266
|
|
|
Restricted stock units
|
68
|
|
|
259
|
|
|
246
|
|
|
751
|
|
|
Stock-settled performance share units
|
121
|
|
|
412
|
|
|
289
|
|
|
783
|
|
|
Cash-settled performance share units
|
(51
|
)
|
|
96
|
|
|
28
|
|
|
150
|
|
|
Total stock-based compensation expense
|
653
|
|
|
1,846
|
|
|
1,859
|
|
|
3,950
|
|
|
Related tax benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation expense, net of tax
|
$
|
653
|
|
|
$
|
1,846
|
|
|
$
|
1,859
|
|
|
$
|
3,950
|
|
As of August 3, 2019, we have estimated unrecognized compensation cost of $5.5 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.3 years.
Non-vested Stock
We grant shares of non-vested stock to our employees and non-employee directors. Shares of non-vested stock awarded to employees vest 25% annually over a period of four years from the grant date. Shares of non-vested stock awarded to non-employee directors cliff vest after one year. At the end of the vesting period, shares of non-vested stock convert one-for-one to common stock. Certain non-vested stock awards have shareholder rights, including the right to vote and to receive dividends. The fair value of non-vested stock awards with dividend rights is based on the closing share price of our common stock on the grant date. The fair value of non-vested stock awards that do not have dividend rights is discounted for the present value of expected dividends during the vesting period. Compensation expense is recognized ratably over the vesting period.
The following table summarizes non-vested stock activity for the six months ended August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Stock
|
|
Number of Shares
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at February 2, 2019
|
|
1,379,616
|
|
|
$
|
4.43
|
|
|
Granted
|
|
954,670
|
|
|
0.96
|
|
|
Vested
|
|
(630,901
|
)
|
|
5.40
|
|
|
Forfeited
|
|
(39,664
|
)
|
|
6.89
|
|
|
Outstanding at August 3, 2019
|
|
1,663,721
|
|
|
2.01
|
|
The weighted-average grant date fair value for non-vested stock granted during the six months ended August 3, 2019 and August 4, 2018 was $0.96 and $2.41, respectively. The aggregate intrinsic value of non-vested stock that vested during the six months ended August 3, 2019 and August 4, 2018, was $0.4 million and $1.6 million, respectively. The payment of employees’ tax liabilities for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liabilities. As a result, the actual number of shares issued during the six months ended August 3, 2019 was 582,980.
Restricted Stock Units (“RSUs”)
We grant RSUs to our employees, which vest 25% annually over a period of four years from the grant date. Each vested RSU is settled in cash in an amount equal to the fair market value of one share of our common stock on the vesting date, not to exceed five times the per share fair market value of our common stock on the grant date. Unvested RSUs have the right to receive a dividend equivalent payment equal to cash dividends paid on our common stock. RSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for RSUs is remeasured based on the closing share price of our common stock at each reporting period until the award vests. Compensation expense is recognized ratably over the vesting period and adjusted with changes in the fair value of the liability.
The following table summarizes RSU activity for the six months ended August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number of Units
|
|
Weighted
Average Grant
Date Fair Value
|
|
Outstanding at February 2, 2019
|
|
1,740,314
|
|
|
$
|
2.16
|
|
|
Granted
|
|
1,615,000
|
|
|
0.98
|
|
|
Vested
|
|
(482,814
|
)
|
|
2.17
|
|
|
Forfeited
|
|
(562,500
|
)
|
|
1.61
|
|
|
Outstanding at August 3, 2019
|
|
2,310,000
|
|
|
1.47
|
|
Stock-settled Performance Share Units (“Stock-settled PSUs”)
We grant stock-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a performance cycle of three years. These awards cliff vest following a performance cycle of three years, and if earned, are settled in shares of our common stock, unless otherwise determined by our Board of Directors (“Board”), or its Compensation Committee. The actual number of shares of our common stock that may be earned ranges from zero to a maximum of twice the number of target units awarded to the recipient. Grant recipients do not have any shareholder rights on unvested or unearned stock-settled PSUs. The fair value of these PSUs is estimated using a Monte Carlo simulation, based on the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period for stock-settled PSUs.
The following table summarizes stock-settled PSU activity for the six months ended August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Granted
|
|
Target PSUs
Outstanding at February 2, 2019
|
|
Target PSUs Granted
|
|
Target PSUs Forfeited
|
|
Target PSUs
Outstanding at August 3, 2019
|
|
Weighted Average
Grant Date
Fair Value
per Target PSU
|
|
2017
|
|
470,000
|
|
|
—
|
|
|
(50,000
|
)
|
|
420,000
|
|
|
$
|
1.80
|
|
|
2018
|
|
280,000
|
|
|
—
|
|
|
—
|
|
|
280,000
|
|
|
3.05
|
|
|
2019
|
|
—
|
|
|
375,000
|
|
|
—
|
|
|
375,000
|
|
|
1.39
|
|
|
Total
|
|
750,000
|
|
|
375,000
|
|
|
(50,000
|
)
|
|
1,075,000
|
|
|
1.98
|
|
The weighted-average grant date fair value for stock-settled PSUs granted during the six months ended August 3, 2019 and August 4, 2018 was $1.39 and $3.05, respectively. No stock-settled PSUs vested during the six months ended August 3, 2019 and August 4, 2018.
Cash-settled Performance Share Units (“Cash-settled PSUs”)
We grant cash-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a performance cycle of three years. These awards cliff vest following a performance cycle of three years, and if earned, are settled in cash. The amount of settlement ranges from zero to a maximum of twice the number of target units awarded multiplied by the fair market value of one share of our common stock on the vesting date. Grant recipients do not have any shareholder rights on unvested or unearned cash-settled PSUs. Cash-settled PSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for cash-settled PSUs is remeasured based on their fair value at each reporting period until the award vests, which is estimated using a Monte Carlo simulation. Assumptions used in the valuation include the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period and adjusted with changes in the fair value of the liability.
The following table summarizes cash-settled PSU activity six months ended August 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Granted
|
|
Target PSUs
Outstanding at February 2, 2019
|
|
Target PSUs Granted
|
|
Target PSUs Forfeited
|
|
Target PSUs
Outstanding at August 3, 2019
|
|
Weighted Average
Grant Date
Fair Value
per Target PSU
|
|
2018
|
|
300,000
|
|
|
—
|
|
|
(50,000
|
)
|
|
250,000
|
|
|
$
|
3.05
|
|
|
2019
|
|
—
|
|
|
530,000
|
|
|
(50,000
|
)
|
|
480,000
|
|
|
$
|
1.39
|
|
|
Total
|
|
300,000
|
|
|
530,000
|
|
|
(100,000
|
)
|
|
730,000
|
|
|
$
|
1.96
|
|
NOTE 7 - PENSION PLAN
We sponsor a frozen defined benefit pension plan. The components of net periodic pension cost, which were recognized in selling, general and administrative expenses, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Employer service cost
|
$
|
135
|
|
|
$
|
133
|
|
|
$
|
270
|
|
|
$
|
256
|
|
|
Interest cost on pension benefit obligation
|
317
|
|
|
317
|
|
|
644
|
|
|
675
|
|
|
Expected return on plan assets
|
(359
|
)
|
|
(456
|
)
|
|
(727
|
)
|
|
(870
|
)
|
|
Amortization of net loss
|
202
|
|
|
155
|
|
|
372
|
|
|
354
|
|
|
Net periodic pension cost
|
$
|
295
|
|
|
$
|
149
|
|
|
$
|
559
|
|
|
$
|
415
|
|
Our funding policy is to make contributions to maintain the minimum funding requirements for our pension obligations in accordance with the Employee Retirement Income Security Act. We may elect to contribute additional amounts to maintain a level of funding to minimize the Pension Benefit Guaranty Corporation premium costs or to cover the short-term liquidity needs of the plan in order to maintain current invested positions. We contributed $0.5 million during the six months ended August 3, 2019, and we expect to contribute an additional $0.8 million in 2019.
NOTE 8 - EARNINGS PER SHARE
For the three and six months ended August 3, 2019 and August 4, 2018, respectively, participating securities had no impact on loss per common share and there were no anti-dilutive securities.