NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — Basis of Presentation
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States ("U.S.") Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been omitted, pursuant to such rules and regulations. These unaudited condensed consolidated financial statements, except the condensed consolidated balance sheet as of January 28, 2017 derived from the Company's audited financial statements, should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended
January 28, 2017
.
The results of operations for the interim period shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, considered necessary to present fairly our financial position, results of operations, and cash flows as of
July 29, 2017
, and
July 30, 2016
and for all periods presented.
Recently issued accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance under ASU No. 2014-09,
Revenue from Contracts with Customers.
ASU 2014-09 supersedes existing revenue recognition requirements and provides a new comprehensive revenue recognition model that requires entities to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers, Deferral of the Effective Date
, which defers the effective date of the new revenue recognition standard by one year. As a result, ASU 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. Adoption is allowed by either the full retrospective or modified retrospective approach. We do not believe the adoption of this standard will have a material impact on our consolidated financial statements. The new revenue standard will require the Company to recognize gift card breakage proportional to actual gift card redemptions. The Company continues to evaluate the merits of adopting the standard under the full retrospective or modified retrospective approach, which will require certain reclassifications.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires that lease arrangements longer than twelve months result in an entity recognizing an asset and liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the guidance and its impact on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 addresses simplification of 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. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements mostly due to the impact of the tax valuation allowance.
We reviewed all other significant newly-issued accounting pronouncements and concluded they are either not applicable to our operations, or that no material effect is expected on our consolidated financial statements as a result of future adoption.
NOTE 2 — Merchandise Inventories and Sources of Supply
Merchandise inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
January 28, 2017
|
Merchandise - in store/eCommerce
|
|
$
|
32,648
|
|
|
$
|
28,584
|
|
Merchandise - in transit
|
|
9,269
|
|
|
8,250
|
|
Total merchandise inventories
|
|
$
|
41,917
|
|
|
$
|
36,834
|
|
There have been no material changes to our ratio of imports to total merchandise purchases or concentration of supplier purchases in the twenty-six weeks ended
July 29, 2017
compared to the fiscal 2016 year ended
January 28, 2017
.
NOTE 3 — Property, Equipment and Improvements, Net
Property, equipment and improvements, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Description
|
|
July 29, 2017
|
|
January 28, 2017
|
Land
|
|
$
|
1,597
|
|
|
$
|
1,597
|
|
Corporate office, distribution center and related building improvements
|
|
12,700
|
|
|
12,700
|
|
Store leasehold improvements
|
|
49,362
|
|
|
49,450
|
|
Store furniture and fixtures
|
|
69,244
|
|
|
69,598
|
|
Corporate office and distribution center furniture, fixtures and equipment
|
|
4,938
|
|
|
4,880
|
|
Computer and point of sale hardware and software
|
|
33,541
|
|
|
32,313
|
|
Construction in progress
|
|
1,515
|
|
|
1,321
|
|
Total property, equipment and improvements, gross
|
|
172,897
|
|
|
171,859
|
|
Less accumulated depreciation and amortization
|
|
(120,914
|
)
|
|
(116,527
|
)
|
Total property, equipment and improvements, net
|
|
$
|
51,983
|
|
|
$
|
55,332
|
|
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In conjunction with an impairment analysis, the Company determined that improvements and equipment at certain under-performing stores and at stores identified for closure were impaired. As a result, the Company recorded approximately
$0.1 million
and
$0.3 million
for long-lived asset impairments during the thirteen week periods ended
July 29, 2017
and
July 30, 2016
, respectively. The Company recorded approximately
$0.2 million
and
$0.5 million
for long-lived asset impairments during the twenty-six week periods ended
July 29, 2017
and
July 30, 2016
, respectively.
NOTE 4 — Accrued Liabilities
Accrued liabilities and other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
January 28, 2017
|
Gift card and store credit liabilities
|
|
$
|
5,128
|
|
|
$
|
7,414
|
|
Accrued Friendship Rewards Program loyalty liability
|
|
3,587
|
|
|
3,770
|
|
Accrued income, sales and other taxes payable
|
|
1,866
|
|
|
1,239
|
|
Accrued occupancy-related expenses
|
|
3,354
|
|
|
3,614
|
|
Sales return reserve
|
|
1,282
|
|
|
943
|
|
eCommerce obligations
|
|
2,868
|
|
|
3,190
|
|
Other accrued liabilities
|
|
2,716
|
|
|
6,256
|
|
Total accrued liabilities and other current liabilities
|
|
$
|
20,801
|
|
|
$
|
26,426
|
|
NOTE 5 — Credit Facility
The Company is party to an amended and restated credit agreement (the "Credit Facility") with Wells Fargo Bank, N.A. (“Wells Fargo”), as lender. The Credit Facility was most recently amended and extended on September 8, 2014. The current expiration date is September 8, 2019.
The Credit Facility provides the Company with revolving credit loans of up to
$50.0 million
in the aggregate, subject to a borrowing base formula based primarily on eligible credit card receivables, inventory and real estate, as such terms are defined in the Credit Facility, and up to
$10.0 million
of which may be drawn in the form of standby and documentary letters of credit.
Borrowings under the Credit Facility will generally accrue interest at a rate ranging from
1.50%
to
1.75%
over the London Interbank Offered Rate ("LIBOR") or
0.50%
to
0.75%
over the Wells Fargo Prime Rate based on the amount of Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date, as such terms are defined in the Credit Facility. The Company has the ability to select between the LIBOR or prime based rate at the time of the cash advance. The Credit Facility has an unused commitment fee of
0.25%
.
The Credit Facility contains customary events of default and various affirmative and negative covenants. The sole financial covenant contained in the Credit Facility requires the Company to maintain Availability at least equal to the greater of (a) ten percent (
10%
) of the borrowing base or (b)
$3.0 million
. In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met. The Company was in compliance with all covenants and other financial provisions as of
July 29, 2017
.
The Company's obligations under the Credit Facility are secured by the assets of the Company and its subsidiaries. The Company has pledged substantially all of its assets as collateral security for the loans, including accounts owed to the Company, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of
100%
of all of the Company's subsidiaries.
The Company had
no
revolving credit loan borrowings under the Credit Facility during each of the twenty-six week periods ended
July 29, 2017
, and
July 30, 2016
. The total Borrowing Base at
July 29, 2017
was approximately
$36.5 million
. As of
July 29, 2017
, the Company had open on-demand letters of credit of approximately
$0.9 million
. Accordingly, after reducing the Borrowing Base for the open letters of credit and the required minimum availability of the greater of
$3.0 million
, or
10.0%
of the Borrowing Base, the net availability of revolving credit loans under the Credit Facility was approximately
$32.0 million
at
July 29, 2017
.
NOTE 6 — Income Taxes
The Company's liability for unrecognized tax benefits associated with uncertain tax positions is recorded within other non-current liabilities. There has been no material change in the reserve for unrecognized tax benefits since the end of the previous year. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense.
The Company and its subsidiaries are subject to U.S. federal income taxes and the income tax obligations of various state and local jurisdictions. Periods after fiscal 2013 remain subject to examination by the IRS. With few exceptions, the Company is not subject to state income tax examination by tax authorities for taxable years prior to fiscal 2012.
As of
July 29, 2017
, the end of the second quarter of fiscal 2017, the Company had no other ongoing audits in various jurisdictions and does not expect the liability for unrecognized tax benefits to significantly increase or decrease in the next twelve months.
As of
July 29, 2017
, the possibility of future cumulative losses still exists. Accordingly, the Company has continued to maintain a valuation allowance against its net deferred tax assets. A small deferred tax asset was allowed related to certain tax benefits.
As of
July 29, 2017
, the Company has federal and state net operating loss carryforwards ("NOLs") which will reduce future taxable income. Approximately
$36.2 million
in net federal tax benefits are available from federal NOLs. An additional
$1.2 million
is available in net tax credit carryforwards. The state NOLs will result in net state tax benefits of approximately
$2.5 million
.
Sections 382 and 383 of the Internal Revenue Code limit the annual utilization of certain tax attributes, including NOL carryforwards, incurred prior to a change in ownership. If the Company were to experience an ownership change, as defined by Sections 382 and 383, its ability to utilize its tax attributes could be substantially limited. Depending on the severity of the annual NOL limitation, the Company could permanently lose its ability to use a significant number of its accumulated NOLs.
NOTE 7 — Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share (“EPS”) shown on the face of the accompanying consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
July 29,
|
|
July 30,
|
|
July 29,
|
|
July 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator
(in thousands)
:
|
|
|
|
|
|
|
|
|
Net loss attributable to Christopher & Banks Corporation
|
|
$
|
(7,889
|
)
|
|
$
|
(3,884
|
)
|
|
$
|
(11,577
|
)
|
|
$
|
(4,052
|
)
|
Denominator
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
37,156
|
|
|
36,981
|
|
|
37,123
|
|
|
36,953
|
|
Dilutive shares
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common and common equivalent shares outstanding - diluted
|
|
37,156
|
|
|
36,981
|
|
|
37,123
|
|
|
36,953
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.21
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.11
|
)
|
Diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.11
|
)
|
Total stock options of approximately
4.1 million
and
2.2 million
were excluded from the shares used in the computation of diluted earnings per share for the thirteen week periods ended
July 29, 2017
and
July 30, 2016
, as they were anti-dilutive. Total stock options of approximately
4.1 million
and
2.4 million
were excluded from the shares used in the computation of diluted earnings per share for the twenty-six week periods ended
July 29, 2017
and
July 30, 2016
, respectively, as they were anti-dilutive.
NOTE 8 — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable
Level 3 – Unobservable inputs that are significant to the fair value of the asset or liability.
Assets that are Measured at Fair Value on a Non-recurring Basis:
The following table summarizes certain information for non-financial assets for the twenty-six weeks ended
July 29, 2017
and the fiscal year ended
January 28, 2017
, that are measured at fair value on a non-recurring basis in periods subsequent to an initial recognition period. The Company places amounts into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
Fiscal Year Ended
|
Long-Lived Assets Held and Used
(in thousands)
:
|
|
July 29, 2017
|
|
January 28, 2017
|
Carrying value
|
|
$
|
163
|
|
|
$
|
877
|
|
Fair value measured using Level 3 inputs
|
|
$
|
—
|
|
|
$
|
91
|
|
Impairment charge
|
|
$
|
163
|
|
|
$
|
786
|
|
All of the fair value measurements included in the table above were based on significant unobservable inputs (Level 3). The Company determines fair value for measuring assets on a non-recurring basis using a discounted cash flow approach as discussed in
Note 1, Nature of Business and Significant Accounting Policies
in our Form 10-K for the year ended
January 28, 2017
. In determining future cash flows, the Company uses its best estimate of future operating results, which requires the use of significant estimates and assumptions, including estimated sales, merchandise margin and expense levels, and the selection of an appropriate discount rate; therefore, differences in the estimates or assumptions could produce significantly different results.
General economic uncertainty impacting the retail industry and the continuation of recent trends in company performance makes it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.
The fair value measurement of the long-lived assets encompasses the following significant unobservable inputs:
|
|
|
|
|
|
Range
|
Unobservable Inputs
|
|
Fiscal 2016
|
Weighted Average Cost of Capital (WACC)
|
|
16%
|
Annual sales growth
|
|
0% to 7%
|
n
NOTE 9 — Legal Proceedings
The Company is subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated. In connection with a preliminary settlement of pre-litigation employment claims reached in February 2017, we established a loss contingency of
$1.475 million
as of January 28, 2017. In connection therewith, on April 13, 2017, a complaint was filed in state Circuit Court in the Fifteenth Judicial Circuit in Palm Beach County, Florida (the “Florida Circuit Court”) by
three
named plaintiffs in a purported class action asserting claims on behalf of current and former store managers. The plaintiffs principally alleged that they and other similarly situated store managers were improperly classified as exempt employees and thus not compensated for overtime work as required under applicable federal and state law. On May 4, 2017, the Company entered into a settlement agreement with the named plaintiffs and the proposed class. On May 8, 2017, the Florida Circuit Court issued an order approving the class settlement. As approved by the Florida Circuit Court, certain current and former store managers will be eligible to receive payments in connection with time worked in prior years. The settlement of the lawsuit is not an admission by us of any wrongdoing.
As part of the settlement, the Company contributed
$1.475 million
into a settlement fund in the second fiscal quarter of 2017. Any funds remaining after payment of all submitted claims and related settlement fund costs and expenses will revert to the Company. A final resolution of the matter and the dissolution of the settlement fund is expected by the end of this fiscal year. While the ultimate amount of the claims paid under the settlement is likely to be less than the Company has recorded, the difference is not expected to have a material impact on our consolidated financial position or liquidity.
The ultimate resolution of legal matters can be inherently uncertain and for some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of these uncertainties. The Company does not, however, currently believe that the resolution of any pending matter will have a material adverse effect on its financial position, results of operations or liquidity.
NOTE 10 — Segment Reporting
In the table below, Retail Operations includes activity generated by the Company’s retail store locations (Missy Petite Women ("MPW"), Outlets, Christopher & Banks, and C.J. Banks stores) as well as the eCommerce business. Retail Operations only includes net sales, merchandise gross margin and direct store expenses with
no
allocation of corporate overhead as that is the information used by the chief operating decision maker to evaluate performance and to allocate resources. The Corporate/Administrative balances include supporting administrative activity at the corporate office and distribution center facility and are included to reconcile the amounts to the condensed consolidated financial statements.
Business Segment Information
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
Corporate/
|
|
|
|
|
Operations
|
|
Administrative
|
|
Consolidated
|
Thirteen Weeks Ended July 29, 2017
|
|
|
|
|
|
|
Net sales
|
|
$
|
86,618
|
|
|
$
|
—
|
|
|
$
|
86,618
|
|
Depreciation and amortization
|
|
2,491
|
|
|
676
|
|
|
3,167
|
|
Impairment of long-lived assets
|
|
93
|
|
|
—
|
|
|
93
|
|
Operating income (loss)
|
|
4,146
|
|
|
(11,957
|
)
|
|
(7,811
|
)
|
|
|
|
|
|
|
|
Thirteen Weeks Ended July 30, 2016
|
|
|
|
|
|
|
Net sales
|
|
$
|
89,923
|
|
|
$
|
—
|
|
|
$
|
89,923
|
|
Depreciation and amortization
|
|
2,360
|
|
|
614
|
|
|
2,974
|
|
Impairment of long-lived assets
|
|
309
|
|
|
—
|
|
|
309
|
|
Operating income (loss)
|
|
7,878
|
|
|
(11,638
|
)
|
|
(3,760
|
)
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended July 29, 2017
|
|
|
|
|
|
|
Net sales
|
|
$
|
175,173
|
|
|
$
|
—
|
|
|
$
|
175,173
|
|
Depreciation and amortization
|
|
4,950
|
|
|
1,316
|
|
|
6,266
|
|
Impairment of long-lived assets
|
|
163
|
|
|
—
|
|
|
163
|
|
Operating income (loss)
|
|
13,953
|
|
|
(25,369
|
)
|
|
(11,416
|
)
|
Total assets
|
|
91,705
|
|
|
34,387
|
|
|
126,092
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended July 30, 2016
|
|
|
|
|
|
|
Net sales
|
|
$
|
189,957
|
|
|
$
|
—
|
|
|
$
|
189,957
|
|
Depreciation and amortization
|
|
4,746
|
|
|
1,250
|
|
|
5,996
|
|
Impairment of long-lived assets
|
|
476
|
|
|
—
|
|
|
476
|
|
Operating income (loss)
|
|
23,520
|
|
|
(28,234
|
)
|
|
(4,714
|
)
|
Total assets
|
|
105,274
|
|
|
46,601
|
|
|
151,875
|
|