Item 1. Financial Statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
Notes to Consolidated Financial Statements
1. Basis of Presentation
In the opinion of management of Destination XL Group, Inc., a Delaware corporation (formerly known as Casual Male Retail Group, Inc. and, collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended February 2, 2019 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 22, 2019.
The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.
The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2019 and fiscal 2018 are 52-week periods ending on February 1, 2020 and February 2, 2019, respectively.
Segment Information
The Company has historically had two principal operating segments: its stores and direct businesses. The Company considers these two operating segments to be similar in terms of economic characteristics, production processes and operations, and has therefore aggregated them into one reportable segment, retail segment, consistent with its omni-channel business approach. In fiscal 2018, the Company launched a wholesale segment, which the Company considers a third operating segment. However, due to the immateriality of the wholesale segment’s revenues, profits and assets at May 4, 2019, its operating results are aggregated with the retail segment for the first three months of fiscal 2019.
Reclassification
The Company has reclassified $190,228 in costs, incurred in the first quarter of fiscal 2018 from “Selling, general and administrative” to “CEO transition costs” and “Corporate restructuring.” These costs were initially reported in “Selling, general and administrative” in the first quarter of fiscal 2018.
Intangibles
In the fourth quarter of fiscal 2018, the Company purchased the rights to the domain name “dxl.com.” The domain name has a carrying value of $1.2 million and is considered an indefinite-lived asset. During the first three months ended May 4, 2019, no event or circumstance occurred which would cause a reduction in the fair value of this intangible asset.
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, “
Fair Value Measurements and Disclosures
,” defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.
The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.
The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.
7
The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At
May 4, 2019
, the fair value approximated the carrying amount based upon terms availabl
e to the Company for borrowings with similar arrangements and remaining maturities.
The fair value of the “dxl.com” domain name, an indefinite-lived asset, is measured on a non-recurring basis in connection with the Company’s annual impairment test. The fair value of the domain name was determined to approximate carrying value, due to its recent acquisition in December, and is classified within Level 3 of the valuation hierarchy. See Intangibles above.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.
Accumulated Other Comprehensive Income (Loss) - (“AOCI”)
Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income and reclassifications from AOCI for the three months ended May 4, 2019 and May 5, 2018, respectively, were as follows:
|
|
May 4, 2019
|
|
|
May 5, 2018
|
|
For the three months ended:
|
|
(in thousands)
|
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
|
Pension
Plans
|
|
|
Foreign
Currency
|
|
|
Total
|
|
Balance at beginning of the quarter
|
|
$
|
(5,521
|
)
|
|
$
|
(662
|
)
|
|
$
|
(6,183
|
)
|
|
$
|
(5,840
|
)
|
|
$
|
(403
|
)
|
|
$
|
(6,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before
reclassifications, net of taxes
|
|
|
28
|
|
|
|
(24
|
)
|
|
|
4
|
|
|
|
57
|
|
|
|
(126
|
)
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other
comprehensive income, net of taxes
(1)
|
|
|
122
|
|
|
|
—
|
|
|
|
122
|
|
|
|
72
|
|
|
|
—
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) for the period
|
|
|
150
|
|
|
|
(24
|
)
|
|
|
126
|
|
|
|
129
|
|
|
|
(126
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of quarter
|
|
$
|
(5,371
|
)
|
|
$
|
(686
|
)
|
|
$
|
(6,057
|
)
|
|
$
|
(5,711
|
)
|
|
$
|
(529
|
)
|
|
$
|
(6,240
|
)
|
|
(1)
|
Includes the amortization of the unrecognized loss on pension plans, which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $165,000 and $97,000 for the three months ended May 4, 2019 and May 5, 2018, respectively.
|
Stock-based Compensation
All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statements of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results and future changes in estimates may differ from the Company’s current estimates. During the first quarter of fiscal 2019, the Company granted performance stock units with a market condition. See Note 6 for disclosure concerning the assumptions and valuation method used to determine the fair value of the award and the associated derived service period over which the associated stock compensation will be recognized.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.
There was no material impairment of long-lived assets in the first quarter of fiscal 2019 or fiscal 2018.
8
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “
Leases (Topic 842)
.” This ASU is a comprehensive new standard that amends various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. It requires lessees to recognize lease assets and lease liabilities for most leases, including those leases previously classified as operating leases under GAAP. The ASU retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. ASU 2016-02 requires a modified retrospective transition for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11 “
Leases (Topic 842): Targeted Improvements
” that allows entities to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption.
The Company adopted ASU 2016-02 on February 3, 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning accumulated deficit. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for the respective periods.
On February 3, 2019, the Company recognized leases, primarily related to its stores and corporate headquarters, on its Consolidated Balance Sheet, as right-of use assets of $214.1 million with corresponding lease liabilities of $254.5 million and eliminated certain existing lease-related asset and liabilities as a net adjustment to the right-of-use assets. In connection with this adoption, the Company recorded a transition adjustment, which was a net credit of $5.3 million to opening accumulated deficit. This adjustment reflected the net of (i) the recognition of the Company’s deferred gain from a sale-leaseback of $10.3 million, (ii) the write-off of initial direct costs of $1.2 million and (iii) the recognition of impairments, upon adoption, on certain right-of-use assets totaling $3.8 million. The new standard had a material impact on the Consolidated Balance Sheet as a result of the recognition of the right-of-use assets, the corresponding lease obligations and the net credit to accumulated deficit of $5.3 million. Because the Company recognized the outstanding deferred gain from a sale-leaseback of $10.3 million, with the adoption of the new standard, results of operations will not have the future benefit of approximately $1.5 million, which was the annual amortization being recognized over the initial 20-year term of the sale-leaseback of the Company’s corporate office. The adoption of the new standard had no material impact on Consolidated Statement of Cash Flows.
The following is a discussion of the Company’s lease policy under the new lease accounting standard:
The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments, initial direct costs and any lease incentives are included in the value of those right-of use assets. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, based on information available at the lease measurement date to determine the present value of future payments.
The Company’s store leases typically contain options that permit renewals for additional periods of up to five years each. In general, for store leases with an initial term of 10 years or more, the options to extend are not considered reasonably certain at lease commencement. For stores leases with an initial term of 5 years, the Company evaluates each lease independently and, only when the Company considers it reasonably certain that it will exercise an option to extend, will the associated payment of that option be included in the measurement of the right-of-use asset and lease liability. Renewal options are not included in the lease term for our automobile and equipment leases because they are not considered reasonably certain of being exercised at lease commencement. Renewal options were not considered for our corporate headquarter and distribution center lease, which was entered into in 2006 and was for an initial 20-year term. At the end of the initial term, the Company will have the opportunity to extend this lease for six additional successive periods of five years. The Company elected the lessee non-lease component separation practical expedient, which permits the Company to not separate non-lease components from the lease components to which they relate. The Company also made an accounting policy election that the recognition requirement of ASU 842 will not be applied to certain, if any, non-store leases, with a term of 12 months or less, recognizing those lease payments on a straight-line basis over the lease term.
For store leases, the Company accounts for lease components and non-lease components as a single lease component. Certain store leases may require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, and are expensed as incurred as variable lease costs. Other store leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities.
See Note 4 ‘‘
Leases
’’ for additional information.
9
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, “
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”
This guidance modifies the disclosure requirements on fair value measurements in Topic 820 by removing disclosures regarding transfers between Level 1 and Level 2 of the fair value hierarchy, by modifying the measurement uncertainty disclosure, and by requiring additional disclosures for Level 3 fair value measurements, among others. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact this pronouncement will have on its Consolidated Financial Statements.
No other new accounting pronouncements, issued or effective during the first three months of fiscal 2019, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.
2. Revenue Recognition
The Company operates as a retailer of big and tall men’s clothing, which includes stores, direct and wholesale.
Revenue is recognized by the operating segment that initiates a customer’s order. Store sales are defined as sales that originate and are fulfilled directly at the store level. Direct sales are defined as sales that originate online, including those initiated online at the store level, on our website or on third-party marketplaces. Wholesale sales are defined as sales made to wholesale customers pursuant to the terms of each customer’s contract with the Company.
Generally, all revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration in exchange for those goods.
Sales tax collected from customers and remitted to taxing authorities is excluded from revenue and is included as part of accrued expenses on the Consolidated Balance Sheets.
|
̶
|
Revenue from the Company’s store operations is recorded upon purchase of merchandise by customers, net of an allowance for sales returns, which is estimated based upon historical experience.
|
|
̶
|
Revenue from the Company’s direct operations is recognized at the time a customer order is delivered, net of an allowance for sales returns, which is estimated based upon historical experience.
|
|
̶
|
Revenue from the Company’s wholesale operations is recognized at the time the wholesale customer takes physical receipt of the merchandise, net of any identified discounts in accordance with each individual order. An allowance for chargebacks will be established once the Company has sufficient historical experience. For the first three months of fiscal 2019, chargebacks were immaterial. There were no revenues from wholesale for the first three months of fiscal 2018.
|
Unredeemed Gift Cards, Gift Certificates, and Credit Vouchers.
Upon issuance of a gift card, gift certificate, or credit voucher, a liability is established for its cash value. The liability is relieved and net sales are recorded upon redemption by the customer. Based on historical redemption patterns, the Company can reasonably estimate the amount of gift cards, gift certificates, and credit vouchers for which redemption is remote, which is referred to as “breakage”. Breakage is recognized over two years in proportion to historical redemption trends and is recorded as sales in the Consolidated Statements of Operations. The gift card liability, net of breakage, was $1.8 million and $2.4 million at May 4, 2019 and February 2, 2019, respectively.
Unredeemed Loyalty Coupons.
The Company offers a free loyalty program to its customers for which points accumulate based on the purchase of merchandise. Over 90% of the Company’s customers participate in the loyalty program. Under ASC 606,
Revenue from Contracts with Customers
, these loyalty points provide the customer with a material right and a distinct performance obligation with revenue deferred and recognized when the points are expected to redeem or expire. The cycle of earning and redeeming loyalty points is generally under one year in duration. The loyalty accrual, net of breakage, was $1.1 million and $1.0 million at May 4, 2019 and February 2, 2019, respectively.
Shipping.
Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales for all periods presented. Amounts related to shipping and handling that are billed to customers are recorded in sales, and the related costs are recorded in cost of goods sold, including occupancy costs, in the Consolidated Statements of Operations.
Disaggregation of Revenue
As noted above under
Segment Information
in Note 1, the Company’s business consists of one reportable segment, its retail segment. Substantially all of the Company’s revenue is generated from its stores and direct businesses. The operating results from the wholesale segment, which are immaterial, have been aggregated with this reportable segment for the first three months of fiscal 2019, but the revenues are separately reported below. Accordingly, the Company has
determined that the following sales channels depict the nature, amount, timing, and uncertainty of how revenue and cash flows are affected by economic factors:
10
|
|
For the three months ended
|
|
|
|
|
(in thousands)
|
|
May 4, 2019
|
|
|
|
|
May 5, 2018
|
|
|
|
|
Store sales
|
|
$
|
86,715
|
|
|
78.4
|
%
|
$
|
89,344
|
|
|
78.8
|
%
|
Direct sales
|
|
$
|
23,833
|
|
|
21.6
|
%
|
$
|
23,967
|
|
|
21.2
|
%
|
Retail segment
|
|
$
|
110,548
|
|
|
|
|
$
|
113,311
|
|
|
|
|
Wholesale segment
|
|
|
2,425
|
|
|
|
|
|
20
|
|
|
|
|
Total sales
|
|
$
|
112,973
|
|
|
|
|
$
|
113,331
|
|
|
|
|
3. Debt
Credit Agreement with Bank of America, N.A.
On May 24, 2018, the Company entered into the Seventh Amended and Restated Credit Agreement with Bank of America, N.A., as agent, providing for a secured $140.0 million credit facility (the “Credit Facility”). The Credit Facility replaced the Company’s previous credit facility with Bank of America.
The Credit Facility provides maximum committed borrowings of $125.0 million in revolver loans, with the ability, pursuant to an accordion feature, to increase the Credit Facility by an additional $50.0 million upon the request of the Company and the agreement of the lender(s) participating in the increase (the “Revolving Facility”). The Revolving Facility provides for a sublimit of $20.0 million for commercial and standby letter of credits and up to $15.0 million for swingline loans. The Company’s ability to borrow under the Revolving Facility (the “Loan Cap”) is determined using an availability formula based on eligible assets. The Credit Facility requires the Company to maintain a minimum consolidated fixed charge coverage ratio of 1.0:1.0 if its excess availability under the Credit Facility fails to be equal to or greater than the greater of 10% of the Loan Cap and $7.5 million.
The maturity date of the Credit Facility is May 24, 2023.
The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets.
The Credit Facility includes a new $15.0 million “first in, last out” (FILO) term facility (the “FILO loan”), which is discussed below under long-term debt.
At May 4, 2019, the Company had outstanding borrowings under the Revolving Facility of $64.6 million, before unamortized debt issuance costs of $0.3 million. Outstanding standby letters of credit were $2.9 million and outstanding documentary letters of credit were $0.5 million. Unused excess availability at May 4, 2019 was $32.3 million. Average monthly borrowings outstanding under the Revolving Facility during the first three months of fiscal 2019 were $56.4 million, resulting in an average unused excess availability of approximately $38.8 million. The Company’s ability to borrow under the Revolving Facility was determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.
Borrowings made pursuant to the Revolving Facility bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a varying percentage based on the Company’s excess availability, of either 0.25% or 0.50%, or (b) the LIBOR rate (the Company being able to select interest periods of 1 week,1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability, of either 1.25% or 1.50%. The Company was also subject to an unused line fee of 0.25%. At May 4, 2019, the Company’s prime-based interest rate was 5.75%. At May 4, 2019, the Company had approximately $56.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 3.69%. The LIBOR-based contracts expired on May 6, 2019. When a LIBOR-based borrowing expires, the borrowings reverted back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.
The fair value of the amount outstanding under the Revolving Facility at May 4, 2019 approximated the carrying value.
Long-Term Debt
Long-term debt is as follows:
(in thousands)
|
|
May 4, 2019
|
|
|
February 2, 2019
|
|
FILO Loan
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
Less: unamortized debt issuance costs
|
|
|
(229
|
)
|
|
|
(243
|
)
|
Total long-term debt
|
|
|
14,771
|
|
|
|
14,757
|
|
Less: current portion of long-term debt
|
|
|
—
|
|
|
|
—
|
|
Long-term debt, net of current portion
|
|
$
|
14,771
|
|
|
$
|
14,757
|
|
The total borrowing capacity under the FILO loan is based on a borrowing base, generally defined as a specified percentage of the value of eligible accounts, including certain trade names, that step down over time, plus a specified percentage of the value of eligible
11
inventory that steps down over time. There can be no voluntary prepayments on the FILO loan during the first year. After its one-year anniversary, the FILO loan can be repaid, in whole or in part, subject to certain payment conditions. The t
erm loan expires on May 24, 2023, if not repaid in full prior to that date.
Borrowings made under the FILO loan will bear interest, calculated under either the Federal Funds rate or the LIBOR rate, at a rate equal to the following: (a) the Federal Funds rate plus a carrying percentage based on the Company’s excess availability, of either 1.75% or 2.00% or (b)the LIBOR rate (the Company being able to select interest periods of 1 week, 1 month, 2 months, 3 months or 6 months) plus a varying percentage based on the Company’s excess availability of either 2.75% or 3.00%. At May 4, 2019, the outstanding balance of $15.0 million was in a 2-month LIBOR-based contract with an interest rate of 5.29%. The LIBOR-based contract expires on June 9, 2019. When a LIBOR-based contract expires, the Company can enter into a new LIBOR-based borrowing arrangement.
4. Leases
The Company leases all of its store locations and its corporate headquarters, which also includes its distribution center, under operating leases. The store leases typically have initial terms of 5 years to 10 years, with options that usually permit renewal for additional five-year periods. The initial term of the lease for the corporate headquarter was for 20 years, with the opportunity to extend for six additional successive periods of five years, beginning in fiscal 2026. The Company also leases certain equipment and other assets under operating leases, typically with initial terms
of 3 to 5 years. The Company is generally obligated for the cost of property taxes, insurance and common area maintenance fees relating to its leases, which are considered variable lease costs and are expensed as incurred.
The following table is a summary of the Company’s components of net lease cost for the three months ended May 4, 2019:
(in thousands)
|
|
|
|
|
Operating lease cost
(1)
|
|
$
|
13,253
|
|
Short-term lease costs
(2)
|
|
|
—
|
|
Variable lease costs
(1)
|
|
|
4,045
|
|
Total lease costs
|
|
$
|
17,298
|
|
|
(1)
|
Lease costs related to store locations are included in Cost of Goods Sold Including Occupancy on the Consolidated Statement of Operations and expenses and lease costs related to the corporate headquarters, automobile and equipment leases are included in Selling, General and Administrative expenses on the Consolidated Statement of Operations.
|
|
(2)
|
For the first quarter of fiscal 2019, the Company had no short-term lease costs.
|
Supplemental cash flow information related to leases for the three months ended May 4, 2019 is as follows:
(in thousands)
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
14,611
|
|
Non-cash operating activities:
|
|
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
$
|
1,851
|
|
Supplemental balance sheet information related to leases as of May 4, 2019 is as follows:
Operating leases:
|
|
|
|
|
Weighted average remaining lease term
|
|
5.8 yrs.
|
|
Weighted average discount rate
|
|
|
7.08
|
%
|
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the Consolidated Balance Sheet as of May 4, 2019:
12
(in thousands)
|
|
|
|
|
2019 (remaining)
|
|
$
|
43,328
|
|
2020
|
|
|
54,775
|
|
2021
|
|
|
53,429
|
|
2022
|
|
|
48,510
|
|
2023
|
|
|
40,275
|
|
Thereafter
|
|
|
64,582
|
|
Total minimum lease payments
|
|
$
|
304,899
|
|
Less: amount of lease payments representing interest
|
|
|
56,063
|
|
Present value of future minimum lease payments
|
|
$
|
248,836
|
|
Less: current obligations under leases
|
|
|
41,340
|
|
Long-term lease obligations
|
|
$
|
207,496
|
|
As previously disclosed in the Company's Consolidated Financial Statements for the year ending February 2, 2019, future minimum lease payments for noncancelable operating leases, under the previous lease accounting standard, were as follows at February 2, 2019:
(in thousands)
|
|
|
|
|
2019
|
|
$
|
57,364
|
|
2020
|
|
|
52,699
|
|
2021
|
|
|
50,380
|
|
2022
|
|
|
45,061
|
|
2023
|
|
|
36,605
|
|
Thereafter
|
|
|
56,638
|
|
Total minimum lease payments
|
|
$
|
298,747
|
|
5. Long-Term Incentive Plans
The following is a summary of the Company’s Long-Term Incentive Plan (“LTIP”). All equity awards granted under long-term incentive plans are issued from the Company’s stockholder-approved 2016 Incentive Compensation Plan. See Note 6,
Stock-Based Compensation
.
At May 4, 2019, the Company has two active LTIPs, its 2017-2018 LTIP and 2018-2020 LTIP. Each participant in the plan participates based on that participant’s “Target Cash Value” which is defined as the participant’s annual base salary (on the participant’s effective date) multiplied by his or her LTIP percentage. Under each LTIP, 50% of each participant’s Target Cash Value is subject to time-based vesting and 50% is subject to performance-based vesting. All time-based awards for both the 2017-2018 LTIP and the 2018-2020 LTIP were granted on the effective date on each LTIP and all awards were in restricted stock units (RSUs).
2017-2018 LTIP
The performance targets for the Company’s 2017-2018 LTIP were approved by the Compensation Committee of the Board of Directors (the” Compensation Committee”) on March 31, 2017 and covered a two-year period performance period, which ended on February 2, 2019. Awards for any achievement of performance targets are not granted until the performance targets are achieved and then are subject to additional vesting through August 31 following the end of the applicable performance period. The time-vested portion of the 2017-2018 LTIP vests in two installments with 50% of the time-vested portion vesting on April 1, 2019 and 50% vesting on April 1, 2020.
In the first quarter of fiscal 2019, the Compensation Committee approved a 25% payout of its performance targets for the 2017-2018 LTIP, resulting in awards totaling $0.5 million, with a grant date of March 19, 2019. On that date, the Company granted 150,299 RSUs, which will vest, net of any forfeitures, on August 31, 2019. In conjunction with the grant of the RSUs, the Company reclassified $0.3 million of the liability accrual from “Accrued expenses and other current liabilities” to “Additional paid-in capital” in the first quarter of fiscal 2019. See the Consolidated Statement of Changes in Stockholders’ Equity. In addition to the performance awards, the Company expects to incur stock-based compensation of approximately $2.0 million for its time-based awards, which is being expensed over thirty-six months, through April 1, 2020.
2018-2020 LTIP
In June 2018, the Company amended its LTIP to, among other things, extend the performance period for awards to three years, beginning with grants in fiscal 2018. On October 24, 2018, the Compensation Committee established performance targets for the 2018-2020 LTIP. Awards for any achievement of performance targets will not be granted until the performance targets are achieved and then will be subject to additional vesting through August 31, 2021. The time-vested portion of the award vests in four equal installments, vesting on October 24, 2019, April 1, 2020, April 1, 2021 and April 1, 2022.
13
Assuming that the Company achieves the performance target at target levels and all time-based awards vest, the compensation expense associated with the 2018-2020 LTIP is estimated to be approximately $4.1 million. Approximately half of the compensation expense relates to the time-vested RSUs, which is being expensed straight-line over forty-one months.
Through the end of the first quarter of fiscal 2019, the Company has accrued $0.1 million for performance awards under the 2018-2020 LTIP.
6. Stock-Based Compensation
The Company has one active stock-based compensation plan: the 2016 Incentive Compensation Plan (the “2016 Plan”). The initial share reserve under the 2016 Plan was 5,725,538 shares of common stock. A grant of a stock option award or stock appreciation right will reduce the outstanding reserve on a one-for-one basis, meaning one share for every share granted. A grant of a full-value award, including, but not limited to, restricted stock, restricted stock units and deferred stock, will reduce the outstanding reserve by a fixed ratio of 1.9 shares for every share granted. At May 4, 2019 the Company had 2,341,884 shares available under the 2016 Plan.
In accordance with the terms of the 2016 Plan, any shares outstanding under the previous 2006 Incentive Compensation Plan (the “2006 Plan”) at August 4, 2016 that subsequently terminate, expire or are cancelled for any reason without having been exercised or paid are added back and become available for issuance under the 2016 Plan, with stock options being added back on a one-for-one basis and full-value awards being added back on a 1 to 1.9 basis. At May 4, 2019, there are 784,251 stock options that remain outstanding under the 2006 Plan.
The 2016 Plan is administered by the Compensation Committee. The Compensation Committee is authorized to make all determinations with respect to amounts and conditions covering awards. Options are not granted at a price less than fair value on the date of the grant. Except with respect to 5% of the shares available for awards under the 2016 Plan, no award will become exercisable unless such award has been outstanding for a minimum period of one year from its date of grant.
The following tables summarize the share activity and stock option activity for the Company’s 2006 Plan and 2016 Plan, on a combined basis, for the first three months of fiscal 2019:
|
|
Restricted shares
|
|
|
Restricted stock units
(1)
|
|
|
Deferred shares
(2)
|
|
|
Fully-vested
shares
(3)
|
|
|
Performance stock units
(4)
|
|
|
Total number of shares
|
|
|
Weighted-average
grant-date
fair value
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding non-vested shares at beginning of year
|
|
|
30,000
|
|
|
|
1,372,628
|
|
|
|
204,040
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,606,668
|
|
|
$
|
2.93
|
|
Shares granted
|
|
|
—
|
|
|
|
390,299
|
|
|
|
19,371
|
|
|
|
29,410
|
|
|
|
720,000
|
|
|
|
1,159,080
|
|
|
$
|
1.83
|
|
Shares vested/issued
|
|
|
(10,000
|
)
|
|
|
(374,202
|
)
|
|
|
(2,575
|
)
|
|
|
(29,410
|
)
|
|
|
—
|
|
|
|
(416,187
|
)
|
|
$
|
3.39
|
|
Shares canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
-
|
|
Outstanding non-vested shares at end of quarter
|
|
|
20,000
|
|
|
|
1,388,725
|
|
|
|
220,836
|
|
|
|
—
|
|
|
|
720,000
|
|
|
|
2,349,561
|
|
|
$
|
2.31
|
|
|
(1)
|
During the first quarter of fiscal 2019, the Company granted 150,299 RSUs in connection with the partial achievement of performance targets under the 2017-2018 LTIP, see Note 5,
Long-Term Incentive Plans
. In addition, the Company granted, as a signing award, 240,000 time-based RSUs to Mr. Kanter, which will vest equally over four years. As a result of net share settlement, of the 374,202 time-based RSUs which vested during the first quarter of fiscal 2019, only 295,788 shares of common stock were issued.
|
|
(2)
|
The 19,371 shares of deferred stock, with a fair value of $49,391, represent compensation to certain directors in lieu of cash, in accordance with their irrevocable elections. The shares of deferred stock will vest three years from the date of grant or at separation of service, based on the irrevocable election of each director.
|
|
(3)
|
During the first quarter of fiscal 2019, the Company granted 29,410 shares of stock, with a fair value of approximately $74,996, to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. Directors are required to elect 50% of their quarterly retainer in equity. Any shares in excess of the minimum required election are issued from the Company’s Fourth Amended and Restated Non-Employee Director Compensation Plan (“Non-Employee Director Compensation Plan”).
|
|
(4)
|
On February 19, 2019, the Company granted 720,000 shares of performance stock units (“PSUs”), with a fair value of $1.0 million, to Mr. Kanter. The PSUs vest in installments when the following milestones are met: one-third of the PSUs vest when the trailing 90-day volume-weighted average closing stock price (“VWAP”) is $4.00, one-third of the PSUs vest when the VWAP is $6.00 and one-third when the VWAP is $8.00. All PSUs will expire on April 1, 2023 if no performance metric is achieved. The $1.0 million is being expensed over the respective derived service periods of each tranche of 16 months, 25 months and 30 months, respectively. The respective fair value and derived service periods assigned to the PSUs were determined using a Monte Carlo model based on: the Company’s historical volatility of 55.9%, a term of 4.1 years, stock price on the date of grant of $2.50 per share, a risk-free rate of 2.5% and a cost of equity of 9.5%.
|
14
|
|
Number of
shares
|
|
|
Weighted-average
exercise price
per option
|
|
|
Weighted-average
remaining
contractual term
|
|
Aggregate
intrinsic value
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at beginning of year
|
|
|
957,400
|
|
|
$
|
4.50
|
|
|
5.1 years
|
|
$
|
16,878
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Options expired and canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
—
|
|
Outstanding options at end of quarter
|
|
|
957,400
|
|
|
$
|
4.50
|
|
|
4.8 years
|
|
$
|
2,850
|
|
Options exercisable at end of quarter
|
|
|
849,808
|
|
|
$
|
4.76
|
|
|
4.2 years
|
|
$
|
1,900
|
|
Valuation Assumptions
For the first three months of fiscal 2019, the Company granted 720,000 PSUs, 390,299 RSUs and 19,371 shares of deferred stock. For the first three months of fiscal 2018, the Company granted 138,888 stock options, 56,080 shares of restricted stock, 305,161 RSUs and 21,494 shares of deferred stock.
Unless otherwise specified by the Compensation Committee, RSUs, restricted stock and deferred stock are valued using the closing price of the Company’s common stock on the day immediately preceding the date of grant.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. There were no stock options granted in the first quarter of fiscal 2019. The following assumptions were used for grants for the first quarter of fiscal 2018:
|
|
May 5, 2018
|
|
Expected volatility
|
|
|
48.9
|
%
|
Risk-free interest rate
|
|
|
2.55
|
%
|
Expected life
|
|
4.5 yrs
|
|
Dividend rate
|
|
|
—
|
|
Non-Employee Director Compensation Plan
The Company granted 6,862 shares of common stock, with a fair value of approximately $17,498, to certain of its non-employee directors as compensation in lieu of cash in the first three months of fiscal 2019.
Stock Compensation Expense
The Company recognized total stock-based compensation expense of $0.4 million and $0.4 million for the first three months of fiscal 2019 and fiscal 2018, respectively. The total compensation cost related to time-vested stock options, restricted stock, RSU and PSU awards not yet recognized as of May 4, 2019 was approximately $3.3 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 30 months.
7. Earnings per Share
The following table provides a reconciliation of the number of shares outstanding for basic and diluted earnings per share:
|
|
For the three months ended
|
|
|
|
May 4, 2019
|
|
|
May 5, 2018
|
|
(in thousands
)
|
|
|
|
|
|
|
|
|
Common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
49,602
|
|
|
|
48,791
|
|
Common stock equivalents – stock options and restricted stock
(1)
|
|
|
—
|
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
|
|
49,602
|
|
|
|
48,791
|
|
|
(1)
|
Common stock equivalents of 525 shares and 377 shares for the three months ended May 4, 2019 and May 5, 2018, respectively, were excluded due to the net loss.
|
The following potential common stock equivalents were excluded from the computation of diluted earnings per share in each period because the exercise price of such options was greater than the average market price per share of common stock for the respective
15
periods or because of the unearned compensation associated with either stock options, restricted stock units, restricted or deferred stock had an anti-dilutive effect.
|
|
For the three months ended
|
|
|
|
May 4, 2019
|
|
|
May 5, 2018
|
|
(in thousands, except exercise prices)
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
942
|
|
|
|
1,242
|
|
Restricted stock units
|
|
|
1,105
|
|
|
|
316
|
|
Restricted and deferred stock
|
|
|
39
|
|
|
|
65
|
|
Range of exercise prices of such options
|
|
$2.00
-
$7.02
|
|
|
$1.85
-
$7.02
|
|
The above options, which were outstanding at May 4, 2019, expire from March 19, 2020 to June 29, 2028.
Shares of unvested time-based restricted stock of 20,000 at May 4, 2019 and 66,666 shares at May 5, 2018 were excluded from the computation of basic earnings per share and will continue to be excluded until such shares vest.
All 20,000 shares of restricted stock outstanding at May 4, 2019 are considered issued and outstanding. Each share of restricted stock has all of the rights of a holder of the Company’s common stock, including, but not limited to, the right to vote and the right to receive dividends, which rights are forfeited if the restricted stock is forfeited. The 720,000 PSUs are excluded from basic and diluted earnings per share until the market condition is achieved.
8. Income Taxes
Since the end of fiscal 2014, the Company has maintained a full valuation allowance against its deferred tax assets. While the Company has projected it will return to profitability, generate taxable income and ultimately emerge from a three-year cumulative loss, based on the Company’s forecast for fiscal 2019, the Company believes that a full valuation allowance remains appropriate at this time. Realization of the Company’s deferred tax assets is dependent on generating sufficient taxable income in the near term. At May 4, 2019, the Company had total deferred tax assets of $58.7 million, total deferred tax liabilities of $11.0 million and a valuation allowance of $47.7 million.
As of May 4, 2019, for federal income tax purposes, the Company has net operating loss carryforwards of $141.5 million, which will expire from fiscal 2022 through fiscal 2036 and net operating loss carryforwards of $21.7 million that are not subject to expiration. For state income tax purposes, the Company has $91.9 million of net operating losses that are available to offset future taxable income, which will expire from fiscal 2019 through fiscal 2039. Additionally, the Company has $3.4 million of net operating loss carryforwards related to the Company’s operations in Canada, which will expire from fiscal 2025 through fiscal 2039.
The Company’s financial statements reflect the expected future tax consequences of uncertain tax positions that the Company has taken or expects to take on a tax return, based solely on the technical merits of the tax position. The liability for unrecognized tax benefits at May 4, 2019 was approximately $2.0 million and was associated with a prior tax position related to exiting the Company’s direct business in Europe during fiscal 2013. The amount of unrecognized tax benefits has been presented as a reduction in the reported amounts of the Company’s federal and state net operating losses carryforwards. No penalties or interest have been accrued on this liability because the carryforwards have not yet been utilized. The reversal of this liability would result in a tax benefit being recognized in the period in which the Company determines the liability is no longer necessary.
The discrete tax rate method was used for calculating tax expense for the first quarter of fiscal 2019 and fiscal 2018. The Company’s tax provision for the first quarter of fiscal 2019 and fiscal 2018 included tax expense of $51,000 and $26,000, respectively, in other comprehensive income (loss), which resulted in a tax benefit on the Consolidated Statement of Operations related to the corresponding decrease in valuation allowance, partially offset by a tax expense, primarily for certain states’ margin tax.
9. CEO Transition Costs
In connection with Mr. Levin’s retirement and the appointment of Mr. Kanter as the Company’s President and Chief Executive Officer, the Company has incurred certain transition costs. For the first quarter of fiscal 2019 and 2018, the Company has incurred $0.7 million and $0.1 million, respectively, related to CEO search costs, Acting CEO consulting costs, housing allowance and legal fees. In addition, in accordance with the terms of the transition agreement between the Company and Mr. Levin, the Company is accruing for estimated future cash payments that Mr. Levin will be entitled to under his transition agreement and existing performance plans, if and when such targets are achieved.
16