NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts and where otherwise indicated)
|
|
|
|
1.
|
BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
|
Description of Business
The accompanying consolidated financial statements include the accounts of Chico’s FAS, Inc., a Florida corporation, and its wholly-owned subsidiaries (“the Company”, “we”, “us” and “our”). We operate as an omni-channel specialty retailer of women’s private branded, sophisticated, casual-to-dressy clothing, intimates and complementary accessories. We currently sell our products through retail stores, catalogs and via our websites at
www.chicos.com
,
www.chicosofftherack.com, www.whbm.com
and
www.soma.com
. As of
February 3, 2018
, we had
1,460
stores located throughout the United States, Puerto Rico, the U.S. Virgin Islands and Canada, and sold merchandise through
94
franchise locations in Mexico.
Fiscal Year
Our fiscal years end on the Saturday closest to January 31 and are designated by the calendar year in which the fiscal year commences. The periods presented in these consolidated financial statements are the fiscal years ended
February 3, 2018
(“fiscal
2017
” or “current period”),
January 28, 2017
(“fiscal
2016
” or “prior period”) and
January 30, 2016
(“fiscal
2015
”). Fiscal
2017
contained 53 weeks while fiscal
2016
and
2015
each contained 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Segment Information
Our brands, Chico’s, White House Black Market ("WHBM") and Soma have been identified as separate operating segments and aggregated into
one
reportable segment due to the similarities of the economic and operating characteristics of the brands.
Adoption of New Accounting Pronouncements
In the first quarter of 2017, we adopted the guidance of Accounting Standard Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provision of ASU 2016-09 related to the recognition of excess tax benefits and deficiencies in the income statement was adopted on a prospective basis whereas the provision related to the classification in the statement of cash flows was adopted retrospectively, and the prior periods were adjusted accordingly. The Company has elected to continue estimating forfeitures of share-based awards when determining compensation cost to be recognized each period. The adoption of ASU 2016-09 did not have a material impact on the accompanying consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in banks, short-term highly liquid investments with original maturities of three months or less and payments due from banks for third-party credit card and debit transactions for approximately
3
to
5
days of sales.
Marketable Securities
Marketable securities are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. For the purposes of computing realized and unrealized gains and losses, cost and fair value are determined on a specific identification basis. We consider all securities available-for-sale, including those with maturity dates beyond 12 months, and therefore classify these securities within current assets on the consolidated balance sheets as they are available to support current operational liquidity needs.
Fair Value of Financial Instruments
Our consolidated financial instruments consist of cash, money market accounts, marketable securities, assets held in our non-qualified deferred compensation plan, accounts receivable, accounts payable and debt. Cash, accounts receivable and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of the instruments.
Inventories
We use the weighted average cost method to determine the cost of merchandise inventories. We identify potentially excess and slow-moving inventories by evaluating inventory aging, turn rates and inventory levels in conjunction with our overall sales trend. Further, inventory realization exposure is identified through analysis of gross margins and markdowns in combination with changes in current business trends. We record excess and slow-moving inventories at net realizable value and may liquidate certain slow-moving inventory through third parties. We estimate our expected shrinkage of inventories between physical inventory counts by using average store shrinkage experience rates, which are updated on a regular basis. Substantially all of our inventories consist of finished goods.
Costs associated with sourcing are generally capitalized while merchandising, distribution and product development costs are generally expensed as incurred, and are included in the accompanying consolidated statements of income as a component of cost of goods sold. Approximately
23%
of total purchases in fiscal
2017
and
2016
were made from
one
supplier. In fiscal
2017
and
2016
, approximately
52%
and
55%
of our merchandise cost originated in China, respectively.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Depreciation of property and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their estimated useful lives (generally 10 years or less) or the related lease term, plus one anticipated renewal when there is an economic cost associated with non-renewal.
Our property and equipment is generally depreciated using the following estimated useful lives:
|
|
|
|
|
|
|
|
|
|
Estimated Useful Lives
|
|
Land improvements
|
15 - 35 years
|
|
Building and building improvements
|
20 - 35 years
|
|
Equipment, furniture and fixtures
|
2 - 20 years
|
|
Leasehold improvements
|
10 years or term
of lease, if shorter
|
Maintenance and repairs of property and equipment are expensed as incurred, and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation or amortization are eliminated from the accounts, and any gain or loss is charged to income.
Operating Leases
We lease retail stores and a limited amount of office space under operating leases. The majority of our lease agreements provide for tenant improvement allowances, rent escalation clauses and/or contingent rent provisions. Tenant improvement allowances are recorded as a deferred lease credit within deferred liabilities and amortized as a reduction of rent expense over the term of the lease. Rent escalation clauses, “rent-free” periods and other rental expenses are amortized on a straight-line basis over the term of the leases, including the construction period. This is generally
60
-
90
days prior to the store opening date, when we generally begin improvements in preparation for our intended use.
Certain leases provide for contingent rents, in addition to a basic fixed rent, which are determined as a percentage of gross sales in excess of specified levels. We record a contingent rent liability in accrued liabilities on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when it is determined that achieving the specified levels during the lease year is probable.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-lived intangible assets are assessed for impairment at least annually. We perform our annual impairment test during the fourth quarter, or more frequently should events or circumstances change that would indicate that impairment may have occurred.
Goodwill represents the excess of the purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Impairment testing for goodwill is done at a reporting unit level. Reporting units are defined as an operating segment or one level below an operating segment, called a component. Using these criteria, we identified our reporting units and concluded that the goodwill related to the territorial franchise rights for the state of Minnesota should be allocated to the Chico’s reporting unit and the goodwill associated with the WHBM acquisition should be assigned to the WHBM reporting unit.
We evaluate the appropriateness of performing a qualitative assessment, on a reporting unit level, based on current circumstances. A two-step impairment test is performed only if the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We may elect to skip the qualitative assessment and perform the two-step impairment test. The first step of the impairment test compares the fair value of our reporting units with their carrying amounts, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on both an income approach and market approach. The income approach is based on estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant, while the market approach is based on sales or EBITDA multiples of similar companies and transactions or other available indications of value. For
2017
and
2016
, we performed a qualitative assessment of the goodwill associated with the Chico's and WHBM reporting units and concluded it was more likely than not that the fair value exceeded the carrying amount as of the annual assessment dates. In fiscal
2015
, we performed a goodwill impairment assessment of the Boston Proper reporting unit and recorded pre-tax, non-cash goodwill impairment charges of
$48.9 million
. We completed the sale of the Boston Proper direct-to-consumer ("DTC") business in January 2016.
We test indefinite-lived intangible assets for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the intangible is less than its carrying amount. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of the intangible is less than its carrying amount, we calculate the value of the indefinite-lived intangible assets using a discounted cash flow method, based on the relief from royalty concept, and compare the fair value to the carrying value to determine if the asset is impaired. We may elect to skip the qualitative assessment when appropriate based on current circumstances. For
2017
and
2016
, we performed a qualitative assessment of the WHBM trade name and concluded it was more likely than not that the fair value exceeded the carrying amount as of the annual assessment dates. In fiscal
2015
we performed an impairment assessment of Boston Proper indefinite-lived intangible assets and recorded pre-tax, non-cash impairment charges of
$39.4 million
on the Boston Proper trade name.
Intangible assets subject to amortization consisted of the value of Boston Proper customer relationships. In fiscal
2015
, we performed an impairment assessment of the Boston Proper customer relationships and recorded pre-tax, non-cash impairment charges of
$24.2 million
. All remaining Boston Proper intangible assets, including the Boston Proper trade name and customer relationships were included in the sale of the Boston Proper DTC business in fiscal 2015. In fiscal
2017
and
2016
, we did not have any intangible assets subject to amortization.
Accounting for the Impairment of Long-lived Assets
Long-lived assets, including definite-lived intangibles, are reviewed periodically for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. If future undiscounted cash flows expected to be generated by the asset are less than its carrying amount, an asset is determined to be impaired. The fair value of an asset is estimated using estimated future cash flows of the asset discounted by a rate commensurate with the risk involved with such asset while incorporating marketplace assumptions. The impairment loss recorded is the amount by which the carrying value of the asset exceeds its fair value. In fiscal
2017
,
2016
and
2015
, we completed an evaluation of long-lived assets at certain underperforming stores for indicators of impairment and, as a result, recorded impairment charges of approximately
$6.0 million
,
$2.5 million
and
$1.4 million
, respectively, which are included in costs of goods sold in the accompanying consolidated statements of income. Impairment charges in fiscal
2017
included
$2.9 million
resulting from hurricanes Harvey, Irma and Maria (collectively, the "Hurricanes"). Additionally, in connection with the restructuring program initiated in fiscal 2014 as further discussed in Note 2, we identified approximately
150
stores, including the Boston Proper stores, to be closed from fiscal 2015 through fiscal 2017. As a result, in fiscal
2015
, we recorded additional impairment charges of approximately
$12.5 million
which are included in restructuring and strategic charges in the accompanying consolidated statements of income. As of the end of fiscal 2017, we have closed a majority of the stores identified for closure in connection with our restructuring and strategic activities and did not incur any material additional impairment charges.
Revenue Recognition
Retail sales by our stores are recorded at the point of sale and are net of estimated customer returns, sales discounts under rewards programs and company issued coupons, promotional discounts and employee discounts. For sales from our websites and catalogs, revenue is recognized at the time we estimate the customer receives the product, which is typically within a few days of shipment. Amounts related to shipping and handling costs billed to customers are recorded in net sales and the related shipping and handling costs are recorded in cost of goods sold in the accompanying consolidated statements of income. Amounts paid by customers to cover shipping and handling costs are immaterial.
We sell gift cards in stores, on our e-commerce website and through third parties.
Our gift cards do not have expiration dates. We account for gift cards by recognizing a liability at the time the gift card is sold. The liability is relieved and revenue is recognized for gift cards upon redemption. In addition, we recognize revenue for the amount of gift cards expected to go unredeemed (commonly referred to as gift card breakage) under the redemption recognition method. This method records gift card breakage as revenue on a proportional basis over the redemption period based on our historical gift card breakage rate. We determine the gift card breakage rate based on our historical redemption patterns. We recognize revenue on the remaining unredeemed gift cards based on determining that the likelihood of the gift card being redeemed is remote and that there is no legal obligation to remit the unredeemed gift cards to relevant jurisdictions.
Soma offers a points based loyalty program in which customers earn points based on purchases. Attaining specified loyalty point levels results in the issuance of reward coupons to discount future purchases. As program members accumulate points, we accrue the estimated future liability, adjusted for expected redemption rates and expirations. The liability is relieved and revenue is recognized for loyalty point reward coupons upon redemption. In addition, we recognize revenue on unredeemed points when it can be determined that the likelihood of the point being redeemed is remote and there is no legal obligation to remit the point value. We determined the loyalty point breakage rate based on historical and redemption patterns.
As part of the normal sales cycle, we receive customer merchandise returns related to store, website and catalog sales. To account for the financial impact of potential customer merchandise returns, we estimate future returns on previously sold merchandise. Reductions in sales and gross margin are recorded for estimated merchandise returns based on return history, current sales levels and projected future return levels.
Our policy towards taxes assessed by a government authority directly imposed on revenue producing transactions between a seller and a customer is, and has been, to exclude all such taxes from revenue.
Advertising Costs
Costs associated with the production of non-catalog advertising, such as writing, copying, printing and other costs are expensed as incurred. Costs associated with communicating advertising that has been produced, such as television and magazine, are expensed when the advertising event takes place. Catalog expenses consist of the cost to create, print and distribute catalogs. Such costs are amortized over their expected period of future benefit, which is typically less than six weeks. For fiscal
2017
,
2016
and
2015
, advertising expense was approximately
$94.5 million
,
$115.4 million
and
$159.9 million
, respectively, and is included within SG&A in the accompanying consolidated statements of income.
Stock-Based Compensation
Stock-based compensation for all awards is based on the grant date fair value of the award, net of estimated forfeitures, and is recognized over the requisite service period of the awards. The fair value of restricted stock awards and performance-based awards is determined by using the closing price of the Company’s common stock on the date of the grant. Compensation expense for performance-based awards is recorded based on the amount of the award ultimately expected to vest, depending on the level and likelihood of the performance condition being met.
Shipping and Handling Costs
Shipping and handling costs to transport goods to customers, amounted to
$40.5 million
,
$35.9 million
and
$37.3 million
in fiscal
2017
,
2016
and
2015
, respectively, and are included within cost of goods sold in the accompanying consolidated statements of income.
Store Occupancy and Pre-Opening Costs
Store occupancy and pre-opening costs (including store-related costs and training expenses) incurred prior to the opening of new stores are expensed as incurred and are included within cost of sales in the accompanying consolidated statements of income.
Income Taxes
Income taxes are accounted for in accordance with authoritative guidance, which requires the use of the asset and liability method. Deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, we follow a comprehensive model to recognize, measure, present and disclose in our consolidated financial statements the estimated aggregate tax liability of uncertain tax positions that we have taken or expect to take on a tax return. This model states that a tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that has greater than a
50%
likelihood of being realized upon the ultimate settlement with a taxing authority having full knowledge of all relevant information.
Foreign Currency
The functional currency of our foreign operations is generally the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect as of the balance sheet date, while revenues and expenses are translated at the average exchange rates for the period. The resulting translation adjustments are recorded as a component of comprehensive income in the consolidated statements of comprehensive income. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the consolidated statements of income.
Self-Insurance
We are self-insured for certain losses relating to workers’ compensation, medical and general liability claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the aggregate liability for uninsured claims incurred based on historical experience. While we do not expect the amount we will ultimately pay to differ significantly from our estimates, self-insurance accruals could be affected if future claims experience differs significantly from the historical trends and assumptions.
Supplier Allowances
From time to time, we receive allowances and/or credits from certain of our suppliers. The aggregate amount of such allowances and credits, which is included in cost of goods sold, is immaterial to our consolidated results of operations.
Earnings Per Share
In accordance with relevant accounting guidance, unvested share-based payment awards that include non-forfeitable rights to dividends, whether paid or unpaid, are considered participating securities. As a result, such awards are required to be included in the calculation of earnings per common share pursuant to the “two-class” method. For us, participating securities are composed entirely of unvested restricted stock awards and performance-based restricted stock units ("PSU's") that have met their relevant performance criteria.
Under the two-class method, net income is reduced by the amount of dividends declared in the period for common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period including the participating securities. Diluted EPS reflects the dilutive effect of potential common shares from non-participating securities such as stock options, PSU's and restricted stock units.
Newly Issued Accounting Pronouncements
In October 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-16, Accounting for
Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.
ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU 2016-16 requires companies to recognize the income tax effects of intercompany sales or transfers of other assets in the income statement as income tax expense (benefit) in the period the sale or transfer occurs. Additionally, companies would evaluate whether the tax effects of the intercompany sales of transfers of non-inventory assets should be included in their estimates of annual effective tax rates by using today's interim guidance on income tax accounting. ASU 2016-16 will require modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption, which we will implement in the first quarter of fiscal 2018. At
February 3, 2018
, the Company had
$5.7 million
in assets related to the transfer of intra–entity asset transfers.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaces the existing guidance in Accounting Standard Codification 840, Leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and should be applied on a modified retrospective basis. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases, the lessee would recognize straight-line total rent expense. Upon adoption of the standard in fiscal 2019, we expect to record material right–of– use assets and lease liabilities on the balance sheet approximating the present value of future lease payments.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities
, under which entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify as available-for-sale in other comprehensive income but instead recognize the change in fair value in net income. The standard is effective for interim and annual reporting periods beginning after December 15, 2017 and should be applied prospectively with cumulative adjustment to opening retained earnings. We do not anticipate adoption to have a material impact to our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB approved a one year deferral of the effective date, to make it effective for annual and interim reporting periods beginning after December 15, 2017. The standard allows for either a full retrospective or a modified retrospective transition method. The FASB has issued subsequent ASUs related to ASU No. 2014-09, which detail amendments to the ASU, implementation considerations, narrow-scope improvements and practical expedients. Through our evaluation of the impact of this ASU, we have identified certain changes that are expected to be made to our accounting policies, practices, systems and controls including: revenue related to our online sales will be recognized at the shipping point rather than upon receipt by the customer; the timing of our recognition of advertising expenses, whereby certain expenses that are currently amortized over their expected period of future benefit will be expensed the first time the advertisement appears; and presentation of estimated merchandise returns as both an asset, equal to the inventory value net of processing costs, and a corresponding return liability, compared to the current practice of recording an estimated net return liability. We plan to adopt this ASU under the modified retrospective approach beginning in the first quarter of fiscal 2018 with a cumulative adjustment to opening retained earnings as opposed to retrospectively adjusting prior periods. Based on our progress to date, we do not anticipate adoption to have a material impact to our consolidated financial statements.
|
|
|
|
2.
|
RESTRUCTURING AND STRATEGIC CHARGES:
|
During the fourth quarter of fiscal 2014, we initiated a restructuring program, including the acceleration of domestic store closures and an organizational realignment, to ensure that resources align with long-term growth initiatives, including omni-channel.
In fiscal
2015
, we completed an evaluation of the Boston Proper brand, completed the sale of the Boston Proper DTC business and closed its stores. We assessed the disposal group and determined that the sale of the Boston Proper DTC business did not have a major effect on our consolidated results of operations, financial position or cash flows. Accordingly, the disposal group is not presented in the consolidated financial statements as a discontinued operation. Pretax losses for the Boston Proper DTC business for fiscal
2015
was
$11.8 million
. The loss recorded in fiscal 2015 upon disposition of the Boston Proper assets held for sale was not material.
During the first quarter of fiscal
2016
, we expanded our restructuring program to include components of our strategic initiatives that further align the organizational structure with long-term growth initiatives and to reduce cost of goods sold ("COGS") and selling, general and administrative expenses ("SG&A") through strategic initiatives. These strategic initiatives include realigning marketing and digital commerce, improving supply chain efficiency, reducing non-merchandise expenses, optimizing marketing spend and transition of executive leadership. We also adjusted the estimated store closures to
150
through fiscal 2017 in connection with the restructuring and strategic activities. In fiscal
2016
, the Company recorded pre-tax restructuring and strategic charges of
$31.0 million
, primarily related to outside services, severance and proxy solicitation costs. In fiscal
2016
, we substantially completed our restructuring program. As of the end of fiscal 2017, we have closed a majority of the stores identified for closure in connection with our restructuring and strategic activities and did not incur any material additional expenses related to lease terminations or restructuring and strategic charges.
A summary of the restructuring and strategic charges is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
Fiscal 2015
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Impairment charges
|
|
$
|
1,453
|
|
|
$
|
22,001
|
|
|
Continuing employee-related costs
|
|
1,796
|
|
|
8,330
|
|
|
Severance charges
|
|
9,485
|
|
|
6,863
|
|
|
Proxy solicitation costs
|
|
5,697
|
|
|
—
|
|
|
Lease terminations
|
|
427
|
|
|
9,578
|
|
|
Outside services
|
|
12,013
|
|
|
—
|
|
|
Other charges
|
|
156
|
|
|
2,029
|
|
|
Restructuring and strategic charges, pre-tax
|
|
$
|
31,027
|
|
|
$
|
48,801
|
|
As of
February 3, 2018
, a reserve of
$0.5 million
related to restructuring and strategic activities was included in other current and deferred liabilities in the accompanying consolidated balance sheets. A roll-forward of the reserve is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Employee-Related Costs
|
|
Severance Charges
|
|
Lease Termination Charges
|
|
Outside Services
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Ending Balance, January 28, 2017
|
$
|
671
|
|
|
$
|
2,413
|
|
|
$
|
846
|
|
|
$
|
7,299
|
|
|
$
|
11,229
|
|
|
Charges
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Payments
|
(671
|
)
|
|
(2,413
|
)
|
|
(332
|
)
|
|
(7,299
|
)
|
|
(10,715
|
)
|
|
Ending Balance, February 3, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
514
|
|
|
$
|
—
|
|
|
$
|
514
|
|
|
|
|
|
3.
|
MARKETABLE SECURITIES:
|
Marketable securities are classified as available-for-sale and as of
February 3, 2018
generally consist of corporate bonds, U.S. government agencies, municipal securities and commercial paper with
$34.0 million
of securities with maturity dates within one year or less and
$26.1 million
with maturity dates over one year and less than two years. As of
January 28, 2017
, marketable securities generally consisted of U.S. government agencies and corporate bonds.
The following tables summarize our investments in marketable securities at
February 3, 2018
and
January 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
|
|
|
|
(in thousands)
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Total marketable securities
|
$
|
60,361
|
|
|
$
|
—
|
|
|
$
|
(301
|
)
|
|
$
|
60,060
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
|
|
|
|
(in thousands)
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
Total marketable securities
|
$
|
50,460
|
|
|
$
|
3
|
|
|
$
|
(93
|
)
|
|
$
|
50,370
|
|
|
|
|
|
4.
|
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 the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Entities are required to use a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date. The three levels are defined as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 – Unadjusted quoted prices in active markets for similar assets or liabilities, or; Unadjusted quoted
prices for identical or similar assets or liabilities in markets that are not active, or; Inputs other than quoted
prices that are observable for the asset or liability
Level 3 – Unobservable inputs for the asset or liability.
We measure certain financial assets at fair value on a recurring basis, including our marketable securities, which are classified as available-for-sale securities, certain cash equivalents, specifically our money market accounts and assets held in our non-qualified deferred compensation plan. The money market accounts are valued based on quoted market prices in active markets. Our marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third party pricing entities, except for U.S. government securities which are valued based on quoted market prices in active markets. The investments in our non-qualified deferred compensation plan are valued using quoted market prices and are included in other assets on our consolidated balance sheets.
From time to time, we measure certain assets at fair value on a non-recurring basis. This includes the evaluation of long-lived assets, goodwill and other intangible assets for impairment using company-specific assumptions which would fall within Level 3 of the fair value hierarchy.
To assess the fair value of goodwill, we utilize both an income approach and a market approach. Inputs used to calculate the fair value based on the income approach primarily include estimated future cash flows, discounted at a rate that approximates the cost of capital of a market participant. Inputs used to calculate the fair value based on the market approach include identifying sales and EBITDA multiples based on guidelines for similar publicly traded companies and recent transactions.
To assess the fair value of trade names, we utilize a relief from royalty approach. Inputs used to calculate the fair value of the trade names primarily include future sales projections, discounted at a rate that approximates the cost of capital of a market participant and an estimated royalty rate.
To assess the fair value of long-term debt, we utilize a discounted future cash flow model using current borrowing rates for similar types of debt of comparable maturities.
Fair value calculations contain significant judgments and estimates, which may differ from actual results due to, among other things, economic conditions, changes to the business model or changes in operating performance.
During fiscal
2017
, we did not make any transfers between Level 1 and Level 2 financial assets. Furthermore, during fiscal
2017
and fiscal
2016
we did not have any Level 3 financial assets measured on a recurring basis. We conduct reviews on a quarterly basis to verify pricing, assess liquidity and determine if significant inputs have changed that would impact the fair value hierarchy disclosure.
In accordance with the provisions of the guidance, we categorized our financial assets and liabilities which are valued on a recurring basis, based on the priority of the inputs to the valuation technique for the instruments, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Balance as of February 3, 2018
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
1,250
|
|
|
$
|
1,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Municipal securities
|
6,557
|
|
|
—
|
|
|
6,557
|
|
|
—
|
|
|
U.S. government agencies
|
12,744
|
|
|
—
|
|
|
12,744
|
|
|
—
|
|
|
Corporate bonds
|
37,030
|
|
|
—
|
|
|
37,030
|
|
|
—
|
|
|
Commercial paper
|
3,729
|
|
|
—
|
|
|
3,729
|
|
|
—
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,315
|
|
|
7,315
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
68,625
|
|
|
$
|
8,565
|
|
|
$
|
60,060
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
1
|
$
|
68,601
|
|
|
$
|
—
|
|
|
69,036
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Balance as of January 28, 2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market accounts
|
$
|
471
|
|
|
$
|
471
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
Municipal securities
|
5,634
|
|
|
—
|
|
|
5,634
|
|
|
—
|
|
|
U.S. government agencies
|
23,071
|
|
|
—
|
|
|
23,071
|
|
|
—
|
|
|
Corporate bonds
|
15,799
|
|
|
—
|
|
|
15,799
|
|
|
—
|
|
|
Commercial paper
|
5,866
|
|
|
—
|
|
|
5,866
|
|
|
—
|
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
Deferred compensation plan
|
7,523
|
|
|
7,523
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
58,364
|
|
|
$
|
7,994
|
|
|
$
|
50,370
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
1
|
$
|
84,785
|
|
|
$
|
—
|
|
|
85,139
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1
The carrying value of long-term debt includes the current and long-term portions and the remaining unamortized debt issuance costs.
|
|
|
|
|
5.
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
|
Prepaid expenses and accounts receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
|
|
|
|
|
|
(in thousands)
|
|
Prepaid expenses
|
$
|
52,189
|
|
|
$
|
39,847
|
|
|
Accounts receivable
|
8,479
|
|
|
12,911
|
|
|
Prepaid expenses and other current assets
|
$
|
60,668
|
|
|
$
|
52,758
|
|
|
|
|
|
6.
|
PROPERTY AND EQUIPMENT, NET:
|
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
|
|
|
|
|
|
(in thousands)
|
|
Land and land improvements
|
$
|
30,572
|
|
|
$
|
31,103
|
|
|
Building and building improvements
|
125,504
|
|
|
127,398
|
|
|
Equipment, furniture and fixtures
|
636,542
|
|
|
617,311
|
|
|
Leasehold improvements
|
529,835
|
|
|
538,735
|
|
|
Total property and equipment
|
1,322,453
|
|
|
1,314,547
|
|
|
Less accumulated depreciation and amortization
|
(901,415
|
)
|
|
(837,362
|
)
|
|
Property and equipment, net
|
$
|
421,038
|
|
|
$
|
477,185
|
|
Total depreciation expense for fiscal
2017
,
2016
and
2015
was
$96.2 million
,
$109.1 million
and
$116.6 million
, respectively.
|
|
|
|
7.
|
OTHER CURRENT AND DEFERRED LIABILITIES:
|
Other current and deferred liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
|
|
|
|
|
|
(in thousands)
|
|
Allowance for customer returns, gift cards and store credits outstanding
|
$
|
55,948
|
|
|
$
|
59,893
|
|
|
Accrued payroll, benefits, bonuses and severance costs and termination benefits
|
29,685
|
|
|
45,512
|
|
|
Current portion of deferred rent and lease credits
|
19,158
|
|
|
22,451
|
|
|
Other
|
28,924
|
|
|
42,376
|
|
|
Other current and deferred liabilities
|
$
|
133,715
|
|
|
$
|
170,232
|
|
In fiscal 2015, we entered into a credit agreement (the "Credit Agreement") among the Company, JPMorgan Chase Bank, N.A. as Administrative Agent, Bank of America, N.A., as Syndication Agent and the other lenders. Our obligations under the Credit Agreement are guaranteed by certain of our material U.S. subsidiaries. The Credit Agreement provides for a term loan commitment in the amount of
$100.0 million
, of which
$100.0 million
was drawn at closing, and matures on May 4, 2020, payable in quarterly installments, as defined in the Credit Agreement, with the remainder due at maturity.
The Credit Agreement also provides for a
$100.0 million
revolving credit facility, of which
$24.0 million
was drawn at closing and repaid in the second quarter of fiscal 2015. There were
no
amounts outstanding on the revolving credit facility as of
February 3, 2018
. The revolving credit facility matures on May 4, 2020.
The Credit Agreement contains various covenants and restrictions, including maximum leverage ratio, as defined, of no more than
3.50
to
1.00
until July 31, 2018, and
3.25
to
1.00
after July 31, 2018, and minimum fixed charge coverage ratio, as defined, of not less than
1.20
to
1.00
. If the Company failed to comply with these financial covenants, a default would trigger and all principal and outstanding interest would be due and payable. At
February 3, 2018
, the Company was in compliance with all financial covenant requirements of the Credit Agreement.
The Credit Agreement has borrowing options which accrue interest by reference, at our election, at either an adjusted eurodollar rate tied to LIBOR or an Alternate Base Rate ("ABR") plus an interest rate margin, as defined in the Credit Agreement. The interest rate on borrowings and our commitment fee rate vary based on the maximum leverage ratio as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Leverage Ratio:
|
|
Eurodollar Spread
|
|
ABR Spread
|
|
Commitment Fee Rate
|
|
Category 1:
|
< 2.25 to 1.00
|
|
1.25%
|
|
0.25%
|
|
0.20%
|
|
Category 2:
|
≥ 2.25 to 1.00 but
< 3.00 to 1.00
|
|
1.50%
|
|
0.50%
|
|
0.25%
|
|
Category 3:
|
≥ 3.00 to 1.00
|
|
1.75%
|
|
0.75%
|
|
0.30%
|
As of
February 3, 2018
,
$68.6 million
in borrowings were outstanding under the Credit Agreement, and are reflected as
$15.0 million
in current debt and
$53.6 million
in long-term debt in the accompanying consolidated balance sheets.
The following table provides details on our debt outstanding as of
February 3, 2018
and
January 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
|
|
|
|
|
|
(in thousands)
|
|
Credit Agreement, net
|
$
|
68,601
|
|
|
$
|
84,785
|
|
|
Less: current debt
|
(15,000
|
)
|
|
(16,250
|
)
|
|
Long-term debt
|
$
|
53,601
|
|
|
$
|
68,535
|
|
Aggregate future maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
FISCAL YEAR ENDING:
|
|
|
(in thousands)
|
|
|
February 2, 2019
|
$
|
15,000
|
|
|
February 1, 2020
|
15,000
|
|
|
January 30, 2021
|
38,750
|
|
|
|
|
|
9.
|
NONCURRENT DEFERRED LIABILITIES:
|
Deferred liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
January 28, 2017
|
|
|
|
|
|
|
|
(in thousands)
|
|
Deferred rent
|
$
|
50,529
|
|
|
$
|
51,909
|
|
|
Deferred lease credits, net
|
63,932
|
|
|
80,217
|
|
|
Other deferred liabilities
|
7,979
|
|
|
8,868
|
|
|
Deferred liabilities
|
122,440
|
|
|
140,994
|
|
|
Less current portion of deferred rent and lease credits
|
(19,158
|
)
|
|
(22,451
|
)
|
|
Noncurrent deferred liabilities
|
$
|
103,282
|
|
|
$
|
118,543
|
|
Deferred rent represents the difference between operating lease obligations currently due and operating lease expense, which is recorded on a straight-line basis over the appropriate respective terms of the leases.
Deferred lease credits represent construction allowances received from landlords and are amortized as a reduction of rent expense over the appropriate respective terms of the related leases.
|
|
|
|
10.
|
COMMITMENTS AND CONTINGENCIES:
|
Leases
We lease retail stores, a limited amount of office space and certain office equipment under operating leases expiring in various years through the fiscal year ending 2028. Certain operating leases provide for renewal options that generally approximate five years at a pre-determined rental value. In the normal course of business, operating leases are typically renewed or replaced by other leases.
Minimum future rental payments under non-cancelable operating leases (including leases with certain minimum sales cancellation clauses described below and exclusive of common area maintenance charges and/or contingent rental payments based on sales) as of
February 3, 2018
, are approximately as follows:
|
|
|
|
|
|
|
|
FISCAL YEAR ENDING:
|
|
|
(in thousands)
|
|
|
February 2, 2019
|
$
|
191,075
|
|
|
February 1, 2020
|
172,797
|
|
|
January 30, 2021
|
156,051
|
|
|
January 29, 2022
|
136,810
|
|
|
January 28, 2023
|
106,563
|
|
|
Thereafter
|
168,179
|
|
|
Total minimum lease payments
|
$
|
931,475
|
|
Certain leases provide that we may cancel the lease if our retail sales at that location fall below an established level. A majority of our store operating leases contain cancellation clauses that allow the leases to be terminated at our discretion, if certain minimum sales levels are not met within the first few years of the lease term. We have not historically met or exercised a significant number of these cancellation clauses and, therefore, have included commitments for the full lease terms of such leases in the above table. For fiscal
2017
,
2016
and
2015
, total rent expense under operating leases was approximately
$263.7 million
,
$268.5 million
and
$266.2 million
, respectively, including common area maintenance charges of approximately
$47.9 million
,
$47.6 million
and
$46.7 million
, respectively, other rental charges of approximately
$40.3 million
,
$41.2 million
and
$40.1 million
, respectively, and contingent rental expense, based on sales, of approximately
$4.3 million
,
$5.2 million
and
$5.8 million
, respectively.
Open Purchase Orders
At
February 3, 2018
and
January 28, 2017
, we had approximately
$316.5 million
and
$356.7 million
, respectively, of open purchase orders for inventory, in the normal course of business.
Legal Proceedings
In July 2015, White House Black Market, Inc. (WHBM) was named as a defendant in Altman v. White House Black Market, Inc., a putative class action filed in the United States District Court for the Northern District of Georgia. The complaint alleges that WHBM, in violation of federal law, willfully published more than the last five digits of a credit or debit card number on customers' point-of-sale receipts. Plaintiff seeks an award of statutory damages of
$100
to
$1,000
for each alleged willful violation of the law, as well as attorneys’ fees, costs and punitive damages. The Company denies the material allegations of the complaint and believes the case is without merit. On October 25, 2017, the magistrate in the matter recommended that the class be certified. On November 8, 2017, WHBM filed objections to such recommendation. On February 12, 2018, the District Court issued an order certifying the class. On February 26, 2018, the Company filed a petition with the District Court for permission to appeal its decision to the Eleventh Circuit Court of Appeals. The Company will continue to vigorously defend the matter, including a planned motion for summary judgment to dismiss all claims. At this time, the Company is unable to reasonably estimate the potential loss or range of loss, if any, related to the lawsuit because there are a number of unknown facts and unresolved legal issues that may impact the amount of any potential liability, including, without limitation, (a) whether the action will ultimately be permitted to proceed as a class, (b) if the action proceeds as a class, the resolution of certain disputed statutory interpretation issues that may impact the size of the putative class and (c) whether or not the plaintiff is entitled to statutory damages. No assurance can be given that these issues will be resolved in the Company’s favor or that the Company will be successful in its defense on the merits or otherwise. If the case were to proceed as a class action and the Company were to be unsuccessful in its defense on the merits, the ultimate resolution of the case could have a material adverse effect on the Company’s consolidated financial condition or results of operations.
Other than as noted above, we are not currently a party to any material legal proceedings other than claims and lawsuits arising in the normal course of business. All such matters are subject to uncertainties, and outcomes may not be predictable. Consequently, the ultimate aggregate amounts of monetary liability or financial impact with respect to these matters as of February 3, 2018 are not estimable. However, while such matters could affect our consolidated operating results when resolved in future periods, management believes that upon final disposition, any monetary liability or financial impact to us would not be material to our annual consolidated financial statements.