Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 seasonal 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
January 30, 2016
(“Form 10-K”).
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 “2016” is a reference to the fiscal year ending January 28, 2017, and “2015” is a reference to the fiscal year ended January 30, 2016. Each of 2016 and 2015 are comprised of 52 weeks.
Customer Loyalty Program
. Prior to the third quarter of 2016, customers who spent a required amount within a specified time frame using our private label credit card received reward certificates which could be redeemed for merchandise. We estimated the net cost of the rewards and recorded a liability associated with unredeemed certificates and customer spend toward unissued certificates. The cost of the loyalty rewards program was recorded in cost of sales. In the third quarter of 2016, we expanded our loyalty program to enable all customers to earn benefits regardless of how they choose to pay. We record deferred revenue for the retail value of certificates earned, net of estimated breakage, as customers make purchases towards earning reward certificates.
Recent Accounting Standards
. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which supersedes most existing revenue recognition guidance in GAAP. The core principle of the guidance is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects what a company expects to be entitled to in exchange for those goods or services. ASU 2014-09 allows for either a retrospective or cumulative effect transition method of adoption. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year. The new revenue standard will be effective for us in the first quarter of fiscal year ending February 2, 2019. We do not expect the adoption of ASU 2014-09 to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires lessees to recognize the assets and liabilities that arise from finance and operating leases on the balance sheet. In addition, this guidance requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. The new standard will be effective for us in the first quarter of fiscal year ending February 1, 2020. We are currently evaluating the impact that the adoption of this ASU will have on our consolidated financial statements and we expect that our reported assets and liabilities will significantly increase under the new standard.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which modifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, excess income tax benefits and tax deficiencies related to equity awards that vest or settle will be recognized as income tax expense, rather than within additional paid-in capital on the balance sheet. The recognition of excess tax benefits and losses may create significant volatility in earnings. We do not expect the adoption of the other requirements of this ASU to have a material impact on our consolidated financial statements. The new standard will be effective for us in the first quarter of fiscal year ending February 3, 2018.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides guidance on certain specific cash flow issues including proceeds received from the settlement of insurance claims. This guidance requires cash proceeds received from the settlement of insurance claims to be classified on the statement of cash flows on the basis of the related insurance coverage (that is, the nature of the loss). The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our consolidated statements of cash flows.
2.
Stock-Based Compensation
Stock-based compensation expense by type of grant for each period presented was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
Stock appreciation rights (“SARs”)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Non-vested stock
|
1,362
|
|
|
1,719
|
|
|
5,311
|
|
|
5,133
|
|
Performance shares
|
(569
|
)
|
|
1,278
|
|
|
2,034
|
|
|
3,763
|
|
Total compensation expense
|
793
|
|
|
2,997
|
|
|
7,345
|
|
|
8,926
|
|
Related tax benefit
|
(298
|
)
|
|
(1,126
|
)
|
|
(2,762
|
)
|
|
(3,356
|
)
|
Stock-based compensation expense, net of tax
|
$
|
495
|
|
|
$
|
1,871
|
|
|
$
|
4,583
|
|
|
$
|
5,570
|
|
As of
October 29, 2016
, we have unrecognized compensation cost of
$18.6 million
related to stock-based compensation awards granted. That cost is expected to be recognized over a weighted average period of
2.4 years
.
SARs
Prior to 2012, we granted stock options and SARs to our employees, which generally vested over
four years
from the date of grant. There were no stock options outstanding as of January 30, 2016. Outstanding SARs will expire, if not exercised or forfeited, within
seven years
from the date of grant. Exercised SARs are settled by the issuance of common stock in an amount equal to the increase in our stock price between the grant date and the exercise date.
The following table summarizes SARs activity for the
nine months ended
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term (years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
Outstanding, vested and exercisable at January 30, 2016
|
|
224,400
|
|
|
$
|
17.16
|
|
|
|
|
|
Forfeited
|
|
(39,750
|
)
|
|
14.66
|
|
|
|
|
|
Outstanding, vested and exercisable at October 29, 2016
|
|
184,650
|
|
|
$
|
17.70
|
|
|
1.1
|
|
$
|
—
|
|
No SARs were exercised during the
nine months ended
October 29, 2016
. The aggregate intrinsic value of stock options and SARs exercised during the
nine months ended
October 31, 2015
was
$0.9 million
.
Non-vested Stock
We grant shares of non-vested stock to our employees and non-employee directors. The non-vested stock converts
one-for-one
to common stock at the end of the vesting period at no cost to the recipient to whom it is awarded. The vesting period of the non-vested stock ranges from
one
to
four years
from the date of grant.
The following table summarizes non-vested stock activity for the
nine months ended
October 29, 2016
:
|
|
|
|
|
|
|
|
|
Non-vested Stock
|
|
Number of Shares
|
|
Weighted
Average Grant
Date Fair Value
|
Outstanding at January 30, 2016
|
|
894,526
|
|
|
$
|
20.20
|
|
Granted
|
|
1,396,947
|
|
|
6.78
|
|
Vested
|
|
(371,656
|
)
|
|
19.45
|
|
Forfeited
|
|
(238,290
|
)
|
|
12.25
|
|
Outstanding at October 29, 2016
|
|
1,681,527
|
|
|
10.34
|
|
The weighted-average grant date fair value for non-vested stock granted during the
nine months ended
October 29, 2016
and
October 31, 2015
was
$6.78
and
$20.65
, respectively. The aggregate intrinsic value of non-vested stock that vested during the
nine months ended
October 29, 2016
and
October 31, 2015
, was
$2.7 million
and
$5.4 million
, respectively. The payment of the employees’ tax liability for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liability. As a result, the actual number of shares issued during
nine months ended
October 29, 2016
was
289,757
.
Performance Shares
We grant performance shares as a means of rewarding management for our long-term performance based on shareholder return performance measures. The actual number of shares that may be issued ranges from
zero
to a maximum of twice the number of granted shares outstanding, as reflected in the table below, and is based on our shareholder return performance relative to a specific group of companies over a
3
-year performance cycle. If earned, the performance shares vest following the
3
-year cycle. Compensation expense is recorded ratably over the vesting period and is based on the fair value at grant date as determined using a Monte Carlo probability model. Grant recipients do not have any shareholder rights until the granted shares have been issued.
The following table summarizes information about the performance shares that were outstanding at
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Granted
|
|
Target Shares
Outstanding at January 30, 2016
|
|
Target Shares Granted
|
|
Target Shares Vested
|
|
Target Shares Forfeited
|
|
Target Shares
Outstanding at
October 29, 2016
|
|
Weighted Average
Grant Date Fair Value Per Share
|
2014
|
|
160,423
|
|
|
—
|
|
|
(3,438
|
)
|
|
(36,667
|
)
|
|
120,318
|
|
|
$
|
33.84
|
|
2015
|
|
223,876
|
|
|
—
|
|
|
(6,983
|
)
|
|
(45,707
|
)
|
|
171,186
|
|
|
28.33
|
|
2016
|
|
—
|
|
|
451,680
|
|
|
(5,168
|
)
|
|
(90,439
|
)
|
|
356,073
|
|
|
8.69
|
|
Total
|
|
384,299
|
|
|
451,680
|
|
|
(15,589
|
)
|
|
(172,813
|
)
|
|
647,577
|
|
|
|
|
The weighted-average grant date fair value for performance shares granted during the
nine months ended
October 29, 2016
and
October 31, 2015
was
$8.69
and
$28.33
, respectively. For the 2013 performance grant, none of the
112,750
target shares that were outstanding at
January 30, 2016
were earned. The aggregate intrinsic value of performance shares that vested during the
nine months ended
October 29, 2016
and
October 31, 2015
was
$0.1 million
and
$4.9 million
, respectively. The payment of the employees’ tax liability for the vested shares was satisfied by withholding shares with a fair value equal to the tax liability. As a result, the actual number of shares issued during
nine months ended
October 29, 2016
was
11,323
.
3.
Debt Obligations
Debt obligations for each period presented consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
October 29, 2016
|
|
January 30, 2016
|
Revolving Credit Facility
|
$
|
231,758
|
|
|
$
|
156,840
|
|
Finance obligations
|
2,981
|
|
|
3,764
|
|
Other financing
|
8,225
|
|
|
5,119
|
|
Total debt obligations
|
242,964
|
|
|
165,723
|
|
Less: Current portion of debt obligations
|
6,372
|
|
|
2,847
|
|
Long-term debt obligations
|
$
|
236,592
|
|
|
$
|
162,876
|
|
On
October 6, 2014
, we entered into a Second Amended and Restated Credit Agreement for a
$300.0 million
senior secured revolving credit facility (“Revolving Credit Facility”) with a seasonal increase to
$350.0 million
and a
$50.0 million
letter of credit subfacility. The Revolving Credit Facility matures on
October 6, 2019
.
We use the Revolving 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 are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Revolving Credit Facility agreement. Inventory, cash and cash equivalents are pledged as collateral. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the Revolving Credit Facility agreement. For the
nine months ended
October 29, 2016
, the weighted average interest rate on outstanding borrowings and the average daily borrowings were
1.83%
and
$188.0 million
, respectively.
Letters of credit issued under the Revolving Credit Facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At
October 29, 2016
, outstanding letters of credit totaled approximately
$5.7 million
. These letters of credit expire within
twelve months
of issuance. Excess borrowing availability under the Revolving Credit Facility at
October 29, 2016
was
$112.2 million
.
The Revolving Credit Facility agreement contains covenants which, among other things, restrict, based on required levels of excess availability, (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to
$30 million
in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. The agreement also contains a fixed charge coverage ratio covenant in the event excess availability is below a defined threshold or an event of default has occurred. At
October 29, 2016
, we were in compliance with all of the debt covenants of the Revolving Credit Facility agreement and we expect to remain in compliance.
During the
nine months ended
October 29, 2016
, we borrowed approximately
$5.8 million
under an equipment financing note bearing an effective interest rate of
3.2%
. The equipment financing note is payable in monthly installments over a
three
-year term and is secured by certain equipment.
4.
Earnings per Share
The following tables show the computation of basic and diluted earnings per common share for each period presented (in thousands, except per share amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
Basic EPS:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(15,634
|
)
|
|
$
|
(10,183
|
)
|
|
$
|
(31,053
|
)
|
|
$
|
(17,205
|
)
|
Less: Allocation of earnings to participating securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss allocated to common shares
|
(15,634
|
)
|
|
(10,183
|
)
|
|
(31,053
|
)
|
|
(17,205
|
)
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
27,155
|
|
|
32,017
|
|
|
27,066
|
|
|
31,917
|
|
Basic EPS
|
$
|
(0.58
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(15,634
|
)
|
|
$
|
(10,183
|
)
|
|
$
|
(31,053
|
)
|
|
$
|
(17,205
|
)
|
Less: Allocation of earnings to participating securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss allocated to common shares
|
(15,634
|
)
|
|
(10,183
|
)
|
|
(31,053
|
)
|
|
(17,205
|
)
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
27,155
|
|
|
32,017
|
|
|
27,066
|
|
|
31,917
|
|
Add: Dilutive effect of stock awards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
27,155
|
|
|
32,017
|
|
|
27,066
|
|
|
31,917
|
|
Diluted EPS
|
$
|
(0.58
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(1.15
|
)
|
|
$
|
(0.54
|
)
|
|
|
|
|
|
|
|
|
The number of shares attributable to stock options, SARs and non-vested stock grants that would have been considered dilutive securities, but were excluded from the calculation of diluted earnings per common share because the effect was anti-dilutive, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
Number of anti-dilutive shares due to net loss for the period
|
20
|
|
|
9
|
|
|
42
|
|
|
52
|
|
Number of anti-dilutive SARs due to exercise price greater than average market price of our common stock
|
187
|
|
|
224
|
|
|
198
|
|
|
158
|
|
5.
Stockholders’ Equity
On
November 17, 2016
, our Board of Directors (“Board”) declared a quarterly cash dividend of
$0.15
per share of common stock, payable on
December 14, 2016
to shareholders of record at the close of business on
November 29, 2016
.
6.
Pension Plan
We sponsor a frozen defined benefit pension plan. The components of net periodic pension cost were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 29, 2016
|
|
October 31, 2015
|
|
October 29, 2016
|
|
October 31, 2015
|
Employer service cost
|
$
|
85
|
|
|
$
|
88
|
|
|
$
|
255
|
|
|
$
|
262
|
|
Interest cost
|
400
|
|
|
391
|
|
|
1,198
|
|
|
1,174
|
|
Expected return on plan assets
|
(437
|
)
|
|
(549
|
)
|
|
(1,312
|
)
|
|
(1,646
|
)
|
Net loss amortization
|
225
|
|
|
194
|
|
|
673
|
|
|
581
|
|
Net periodic pension cost
|
$
|
273
|
|
|
$
|
124
|
|
|
$
|
814
|
|
|
$
|
371
|
|
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 made no contributions during the
nine months ended
October 29, 2016
.
7.
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 apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and base 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2016
|
|
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)
|
$
|
18,623
|
|
|
$
|
18,623
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
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)
|
$
|
17,286
|
|
|
$
|
17,286
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(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 items 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
nine months ended
October 29, 2016
and for the fiscal year ended
January 30, 2016
.
Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, 2016
|
|
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)
|
$
|
473
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2016
|
|
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)
|
$
|
3,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,895
|
|
(a)
In accordance with ASC No. 360-10,
Accounting for the Impairment or Disposal of Long-Lived Assets
, we review the carrying value of long-lived assets periodically and when events or circumstances indicate a potential impairment has occurred. Using an undiscounted cash flow model, we evaluate the cash flow trends of our stores to identify property, equipment and leasehold improvements that may not be fully recoverable. When a store’s projected undiscounted cash flows indicate impairment, we use a discounted cash flow model to estimate the fair value of the underlying long-lived assets. An impairment write-down is recorded if the carrying value of a long-lived 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. For the
nine months ended
October 29, 2016
and fiscal year
2015
, we recognized impairment charges of
$0.5 million
and
$10.6 million
, respectively. Impairment charges are recorded in cost of sales and related buying, occupancy and distribution expenses. We believe estimated future cash flows are sufficient to support the carrying value of our long-lived assets. If estimated cash flows significantly differ in the future, there could be additional asset impairments.
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 Revolving Credit Facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.