NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 — Basis of Presentation
The unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC"). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been omitted, pursuant to such rules and regulations. These unaudited Condensed Consolidated Financial Statements, except the Condensed Consolidated Balance Sheet as of February 2, 2019 derived from the Company's audited financial statements, should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, considered necessary to present fairly our financial position, results of operations, and cash flows as of August 3, 2019, August 4, 2018 and for all periods presented.
Recently issued accounting pronouncements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements for fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting the updated provisions.
Recently adopted accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The Company adopted the new standard, ASC 842, Leases, and all related amendments on February 3, 2019 using the "Comparatives Under 840 Option" for all leases in which we applied the previous standard, ASC 840, Leases, and recognized the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of February 3, 2019. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carryforward the historical lease classification. In addition, we elected certain practical expedients and accounting policies including the lessee practical expedient to not separate lease components. We made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We recognize those lease payments in the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term. Adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of $134.9 million and $153.9 million, respectively, as of February 3, 2019. The operating lease asset recorded at adoption of the standard represents the capitalization of operating lease assets and the reclassification of prepaid rent and leasehold acquisition costs, offset by the reclassification of straight-line rent accruals, tenant improvement allowances and vacant space reserves. At adoption, we recorded an adjustment to retained earnings of $3.3 million, which includes the recognition of the deferred gain on the sale-leaseback transaction of our corporate headquarters facility. Additional information and disclosures required by the new standard are contained in Note 9 - Leases.
In August 2018, the SEC adopted a final rule under SEC Release No. 33-10532, Disclosure Update and Simplification that amends certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The amendments also expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements, in which registrants must now analyze changes in shareholders’ equity, in the form of reconciliation, for the current and comparative year-to-date periods, with subtotals for each interim period. This final rule was effective on November 5, 2018. As of the first quarter of Fiscal 2019, the Company has adopted all relevant disclosure requirements, including the shareholders’ equity interim disclosures.
We reviewed all other significant newly-issued accounting pronouncements and concluded they are either not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.
NOTE 2 — Revenue
Merchandise sales
We sell merchandise through our brick and mortar and eCommerce sales channels. Revenues are recognized when control of the promised merchandise is transferred to our customers. Within our brick and mortar sales channel, control is transferred at the point of sale. Within our eCommerce sales channel, control is transferred upon delivery of the merchandise to our customers. Shipping revenues associated with the eCommerce channel are recognized upon the completion of the delivery. The revenue recorded reflects the consideration that we expect to receive in exchange for our merchandise. The Company has elected, as an accounting policy, to exclude from the transaction price all taxes assessed by governmental authorities imposed on merchandise sales.
Right of return
As part of our merchandise sales, we offer customers a right of return on merchandise that lapses, after a specified period of time, based on the original purchase date. The Company estimates the amount of sales that may be returned by our customers and records this estimate as a reduction of revenue in the period in which the related revenues are recognized. We utilize historical and industry data to estimate the total return liability. Conversely, the reduction in revenue results in a corresponding reduction in merchandise, buying and occupancy costs which results in a contract asset for the anticipated merchandise returned. The total reduction in revenue from estimated returns was $1.2 million and as of both August 3, 2019 and February 2, 2019, this amount is included within accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Friendship rewards program
The Company established the Friendship Rewards Program as a loyalty program where customers earn points towards future discount certificates based on their purchase activity. We have identified the additional benefits received from this program as a separate performance obligation within a sales contract in the form of the discount certificates earned by customers. Accordingly, we assess any incremental discounts issued to our customers through the program and allocate a portion of the transaction price associated with merchandise sales from loyalty program members to the future discounts earned. The transaction price allocated to future discounts is recorded as deferred revenue until the discounts are used or forfeited. In addition, the Company estimates breakage on the points earned within the program that will not be used by customers for future discounts. The Company estimates breakage based on the historical redemption rate and considers industry trends. Breakage is recorded as a reduction to the deferred revenue associated with the program. As of August 3, 2019, and February 2, 2019, the Company recorded $4.2 million and $3.8 million, respectively, in deferred revenue associated with the program, which is included in accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Gift card revenue
The Company sells gift cards to customers which can be redeemed for merchandise within our brick and mortar and eCommerce sales channels. Gift cards are recorded as deferred revenue when issued and are subsequently recorded as revenue upon redemption. The Company estimates breakage related to gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage on gift cards is recorded as revenue in proportion to the rate of gift card redemptions by vintage. As of August 3, 2019, and February 2, 2019, the Company had $2.6 million and $4.6 million, respectively, of deferred revenue associated with the issuance of gift cards. The deferred gift card revenue is included in accrued liabilities and other current liabilities in the Condensed Consolidated Balance Sheets.
Private label credit card
The Company offers a private label credit card ("PLCC") which bears the Christopher and Banks brand name offered under an agreement with Comenity Bank. Pursuant to this agreement, there are several obligations on behalf of Comenity Bank that impact the recording of revenue.
In connection with extending the term of the agreement, the Company received a signing bonus. We have determined that the benefits associated with signing the agreement are recognized over time throughout its term. This is the most accurate depiction of the transfer of services as the customer receives and consumes the benefits by obtaining and having the ability to use financing through Comenity Bank for purchases within our brick and mortar and eCommerce sales channels throughout the agreement's term. The deferred signing bonus is included in other liabilities and is being recognized in net sales ratably over the term of the contract.
The other revenue based on customer usage of the card is recognized in net sales in the periods in which the related customer transaction occurs. As of August 3, 2019 and February 2, 2019, the Company had $1.5 million recorded as deferred revenue associated with the signing bonus, of which $0.3 million is included in accrued liabilities and other current liabilities and the remaining $1.2 million is included in other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company recorded $0.1 million into revenue for the thirteen and twenty-six-week periods ended August 3, 2019 and August 4, 2018, respectively, associated with the signing bonus.
The Company records revenue associated with royalties received for purchases made using the PLCC. Royalty revenue is recognized based on the total amount to which we have a right to invoice in accordance with the practical expedient included in ASC 606. Accordingly, royalty revenue is recognized in the period in which the related purchases are recognized.
The Company receives a performance bonus based on the total amount of new PLCC accounts that are opened during the year. We have determined that this is a form of variable consideration. Variable consideration is recorded if, in the Company’s judgment, it is probable that a significant future reversal of revenue under the contract will not occur.
Disaggregation of revenue
The following table provides information about disaggregated revenue by sales channel. All revenue illustrated below is included within our one reportable segment.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-six Weeks Ended
|
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
|
August 3, 2019
|
|
August 4, 2018
|
|
Brick and mortar stores
|
|
$
|
65,595
|
|
|
$
|
66,715
|
|
|
|
$
|
130,647
|
|
|
$
|
134,770
|
|
|
eCommerce sales
|
|
16,698
|
|
|
19,216
|
|
1
|
|
35,598
|
|
|
38,010
|
|
1
|
Other
|
|
1,150
|
|
|
1,487
|
|
|
|
418
|
|
|
539
|
|
|
Net sales
|
|
$
|
83,443
|
|
|
$
|
87,418
|
|
|
|
$
|
166,663
|
|
|
$
|
173,319
|
|
|
|
|
(1)
|
Includes approximately $2.4 million and $4.7 million of 2018 revenues for the thirteen and twenty-six week periods ended, respectively, from orders placed in store and fulfilled from another location. For 2019, similar sales are included in brick and mortar stores.
|
Amounts included within other revenue relate to revenues earned from our private label credit card, net of any revenue adjustments and accruals.
Contract balances
The following table provides information about contract assets and liabilities from contracts with customers (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Liabilities
|
|
|
August 3, 2019
|
|
February 2, 2019
|
|
|
Current
|
|
Non-Current
|
|
Current
|
|
Non-Current
|
Right of return
|
|
$
|
1,215
|
|
|
$
|
—
|
|
|
$
|
1,176
|
|
|
$
|
—
|
|
Friendship Rewards Program
|
|
4,169
|
|
|
—
|
|
|
3,768
|
|
|
—
|
|
Gift card revenue
|
|
2,637
|
|
|
—
|
|
|
4,646
|
|
|
—
|
|
Private label credit card
|
|
274
|
|
|
1,210
|
|
|
274
|
|
|
1,348
|
|
Total
|
|
$
|
8,295
|
|
|
$
|
1,210
|
|
|
$
|
9,864
|
|
|
$
|
1,348
|
|
The Company recognized revenue of $1.4 million and $1.5 million in the thirteen-week periods ended August 3, 2019 and August 4, 2018, respectively, related to contract liabilities recorded at the beginning of the period. The Company recognized revenue of $3.1 million and $3.4 million in the twenty-six-week periods ended August 3, 2019 and August 4, 2018, respectively, related to contract liabilities recorded at the beginning of the period. Such revenues were comprised of the redemption and forfeiture of Friendship Rewards Program discount certificates, redemption of gift cards, and amortization of the PLCC signing bonus. As of August 3, 2019, and February 2, 2019, the Company did not have any material contract assets.
For the thirteen and twenty-six-week periods ended August 3, 2019 and August 4, 2018, the Company did not recognize any revenue resulting from changes in the estimated variable consideration to be received associated with performance obligations satisfied or partially satisfied in prior periods.
Transaction price allocated to remaining performance obligations
The following table includes the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied or partially unsatisfied as of August 3, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of
|
|
|
|
|
|
|
Fiscal 2019
|
|
Fiscal 2020
|
|
Thereafter
|
Private label credit card
|
|
$
|
137
|
|
|
$
|
274
|
|
|
$
|
1,073
|
|
Total
|
|
$
|
137
|
|
|
$
|
274
|
|
|
$
|
1,073
|
|
Contract Costs
The Company has not incurred any costs to obtain or fulfill a contract.
NOTE 3 — Property, Equipment and Improvements, Net
Property, equipment and improvements, net consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
Description
|
|
August 3, 2019
|
|
February 2, 2019
|
Store leasehold improvements
|
|
$
|
50,071
|
|
|
$
|
50,305
|
|
Store furniture and fixtures
|
|
70,442
|
|
|
70,815
|
|
Corporate office and distribution center furniture, fixtures and equipment
|
|
6,220
|
|
|
6,179
|
|
Computer and point of sale hardware and software
|
|
33,631
|
|
|
33,098
|
|
Construction in progress
|
|
91
|
|
|
419
|
|
Total property, equipment and improvements, gross
|
|
160,455
|
|
|
160,816
|
|
Less accumulated depreciation and amortization
|
|
(132,530
|
)
|
|
(129,173
|
)
|
Total property, equipment and improvements, net
|
|
$
|
27,925
|
|
|
$
|
31,643
|
|
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset's estimated future cash flows (undiscounted and without interest charges). If the sum of the estimated future cash flows is less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which is typically based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis is depreciated over the remaining useful life of that asset.
When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For long-lived assets deployed at store locations, we review for impairment at the individual store level.
Our impairment loss calculations involve uncertainty because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including estimating useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows. If actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material.
Due to declining sales and continued operating losses, the Company performed an impairment analysis during the period ended August 3, 2019. Leasehold improvements, store furniture and fixtures at certain under-performing stores, and stores identified for closure were analyzed for impairment. As a result of this analysis, the Company recorded a $0.3 million long-lived asset impairment during the thirteen and twenty-six week periods ended August 3, 2019. The Company recorded no long-lived asset impairment during the thirteen and twenty-six week periods ended August 4, 2018.
Sale-Leaseback
On April 27, 2018, the Company completed the sale of and entered into an agreement to leaseback its corporate headquarters facility, which includes its distribution center, in Plymouth, Minnesota. The agreement provided for the sale of the facility for a purchase price of $13.7 million and the subsequent leaseback of the facility for a 15-year period. The lease is classified as an operating lease. As a result of this transaction, the Company recorded a deferred gain of $7.7 million. During Fiscal 2018, the Company recognized the deferred gain on a straight-line basis over the term of the lease. At the beginning of Fiscal 2019, the remaining $7.3 million of the deferred gain was recorded as an adjustment to retained earnings with the adoption of ASC 842, Leases.
As part of the transaction, the Company deposited $1.7 million in escrow for certain repairs to the building. As of August 3, 2019, and February 2, 2019, $0.8 million remained in escrow for repairs to the building. This amount is considered to be restricted cash and is included within cash and cash equivalents on the Condensed Consolidated Balance Sheet.
NOTE 4 — Accrued Liabilities
Accrued liabilities and other current liabilities consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
February 2, 2019
|
Gift card and store credit liabilities
|
|
$
|
2,637
|
|
|
$
|
4,646
|
|
Accrued Friendship Rewards Program loyalty liability
|
|
4,169
|
|
|
3,768
|
|
Accrued income, sales and other taxes payable
|
|
1,200
|
|
|
911
|
|
Accrued occupancy-related expenses
|
|
645
|
|
|
3,700
|
|
Sales return reserve
|
|
1,215
|
|
|
1,176
|
|
eCommerce obligations
|
|
4,842
|
|
|
6,194
|
|
Other accrued liabilities
|
|
4,799
|
|
|
5,499
|
|
Total accrued liabilities and other current liabilities
|
|
$
|
19,507
|
|
|
$
|
25,894
|
|
NOTE 5 — Credit Facility
The Company is party to an amended and restated credit agreement ("the Credit Facility") with Wells Fargo Bank, National Association ("Wells Fargo"), as lender. On August 3, 2018, the Company entered into a second amendment ("Second Amendment") to the Credit Facility.
The Second Amendment, among other changes, (i) extended the term of the Credit Facility to August 3, 2023; and (ii) supplemented the existing $50.0 million revolving Credit Facility by adding a new $5.0 million revolving "first-in, last-out" tranche credit facility (the "FILO Facility"), subject to borrowing base restrictions applicable to the FILO Facility. The Company must draw under the FILO Facility before making any borrowings under the revolving Credit Facility.
Loans under the FILO Facility will bear interest based on quarterly excess available under the Borrowing Base as defined in the Credit Facility. The interest rate under the FILO Facility will be either (i) the London Interbank Offered Rate ("LIBOR") plus 3.00% for FILO loans that are LIBOR loans; or (ii) 2.00% above the Base Rate for FILO loans that are Base Rate loans as such terms are defined in the Credit Facility. Borrowings under the Credit Facility will generally accrue interest at a rate ranging from 1.50% to 1.75% over the LIBOR or 0.50% to 0.75% over the Wells Fargo Prime Rate based on the amount of Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date, as such terms are defined in the Credit Facility. The Company has the ability to select between the LIBOR or prime based rate at the time of the cash advance. The Credit Facility has an unused commitment fee of 0.25%.
In addition to these changes, the Second Amendment eliminates availability against the Company's real property, which was the subject of a sale-leaseback transaction on April 27, 2018. The Company expensed approximately $30 thousand of deferred financing costs during the twenty-six week period ended August 3, 2019 in connection with the Credit Agreement. The deferred financing costs have been combined with the balance of the deferred financing costs remaining from the prior amendment on September 8, 2014. Deferred financing costs are included in other assets on the Condensed Consolidated Balance Sheet and are being amortized as interest expense over the related term of the Second Amendment.
The Credit Facility contains customary events of default and various affirmative and negative covenants. The sole financial covenant contained in the Credit Facility requires the Company to maintain Availability at least equal to the greater of (a) ten percent (10%) of the borrowing base or (b) $3.0 million. In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met. The Company was in compliance with all financial covenants and other financial provisions of the Credit Facility as of August 3, 2019.
The Company's obligations under the Credit Facility are secured by the assets of the Company and its subsidiaries. The Company has pledged substantially all of its assets as collateral security for the loans, including accounts owed to the Company, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all of the Company's subsidiaries.
There were $3.5 million and zero in outstanding borrowings under the Credit Facility as of August 3, 2019 and February 2, 2019, respectively. The capped borrowing base at August 3, 2019 was approximately $39.8 million. As of August 3, 2019, the Company had open on-demand letters of credit of approximately $11.1 million. Accordingly, after reducing the capped borrowing base, current borrowings of $3.5 million, open letters of credit and the required minimum availability of the greater of $3.0 million, or $3.4 million (10.0% of the revolving loan cap), the net availability of revolving credit loans under the Credit Facility was approximately $21.8 million at August 3, 2019.
NOTE 6 — Income Taxes
For the thirteen weeks ended August 3, 2019, the Company recorded income tax expense of $40 thousand, or an effective tax rate of (0.7)%, versus income tax expense of $63 thousand, or an effective tax rate of (0.9)% for the same period of Fiscal 2018. For the twenty-six weeks ended August 3, 2019, the Company recorded income tax expense of $80 thousand, or an effective rate of (0.7)%, versus income tax expense of $106 thousand, or an effective rate of (0.8)%, for the same period of Fiscal 2018. The income tax provisions for the Fiscal 2019 and 2018 periods are primarily driven by state taxes.
As of August 3, 2019, the possibility of future cumulative losses still exists. Accordingly, the Company has continued to maintain a valuation allowance against its net deferred tax assets. A small deferred tax asset was allowed to remain related to certain state tax benefits. As of February 2, 2019, the Company has gross federal and state net operating loss ("NOL") carryforwards of approximately $145.5 million and $73.6 million, respectively. A portion of the federal net operating loss carryforwards will begin to expire in 2032 while the other portion can be carried forward indefinitely. The state net operating loss carryforwards have carryforward periods of 5 to 20 years and begin to expire in the current year. The Company also has federal tax credits of $859 thousand which will begin to expire in 2030 and gross charitable contribution carryforwards of $726 thousand that will begin to expire in 2020.
Sections 382 and 383 of the Internal Revenue Code limit the annual utilization of certain tax attributes, including net operating loss carryforwards, incurred prior to a change in ownership. If the Company were to experience an ownership change, as defined by Sections 382 and 383, its ability to utilize its tax attributes could be substantially limited. Depending on the severity of the annual NOL limitation, the Company could permanently lose its ability to use a significant number of its accumulated NOLs.
The Company's liability for unrecognized tax benefits associated with uncertain tax provisions is recorded within the Condensed Consolidated Balance Sheets in Other non-current liabilities. There has been no material change in the reserve for unrecognized tax benefits since the end of the previous year. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense. We do not expect any significant changes to the amount of unrecognized tax benefits in the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. With few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax years before Fiscal 2011. The Company does not have any ongoing income tax audits that are anticipated to have a material impact on the financial statements.
NOTE 7 — Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share (“EPS”) shown on the face of the accompanying Condensed Consolidated Statement of Operations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-six Weeks Ended
|
|
|
August 3,
|
|
August 4,
|
|
August 3,
|
|
August 4,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator (in thousands):
|
|
|
|
|
|
|
|
|
Net loss attributable to Christopher & Banks Corporation
|
|
$
|
(5,941
|
)
|
|
$
|
(7,426
|
)
|
|
$
|
(12,093
|
)
|
|
$
|
(12,745
|
)
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
37,440
|
|
|
37,458
|
|
|
37,686
|
|
|
37,381
|
|
Dilutive shares
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common and common equivalent shares outstanding - diluted
|
|
37,440
|
|
|
37,458
|
|
|
37,686
|
|
|
37,381
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.34
|
)
|
Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.34
|
)
|
Total stock options of approximately 4.8 million and 4.3 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen-week periods ended August 3, 2019 and August 4, 2018, as they were anti-dilutive. Total stock options of approximately 4.7 million and 4.0 million were excluded from the shares used in the computation of diluted earnings per share for the twenty-six-week periods ended August 3, 2019 and August 4, 2018, as they were anti-dilutive.
NOTE 8 — Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable
Level 3 – Unobservable inputs that are significant to the fair value of the asset or liability.
Assets that are Measured at Fair Value on a Non-recurring Basis:
The following table summarizes certain information for non-financial assets for the twenty-six weeks ended August 3, 2019 and the fiscal year ended February 2, 2019, that are measured at fair value on a non-recurring basis in periods subsequent to an initial recognition period. The Company places amounts into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-six Weeks Ended
|
|
Fiscal Year Ended
|
Long-Lived Assets Held and Used (in thousands):
|
|
August 3, 2019
|
|
February 2, 2019
|
Carrying value
|
|
$
|
510
|
|
|
$
|
4,829
|
|
Fair value measured using Level 3 inputs
|
|
199
|
|
|
445
|
|
Impairment charge
|
|
$
|
311
|
|
|
$
|
4,384
|
|
Approximately $0.2 million of the Fiscal 2019 impairment charge reduced the carrying value of operating lease assets. The remainder of the Fiscal 2019 and 2018 impairment charges reduced the carrying value of fixed assets.
All of the fair value measurements included in the table above were based on significant unobservable inputs (Level 3). The Company determines fair value for measuring assets on a non-recurring basis using a discounted cash flow approach as discussed in Note 3, Property, Plant and Equipment. In determining future cash flows, the Company uses its best estimate of future operating results, which requires the use of significant estimates and assumptions, including estimated sales, merchandise margin and expense levels, and the selection of an appropriate discount rate; therefore, differences in the estimates or assumptions could produce significantly different results. General economic uncertainty impacting the retail industry and continuation of recent trends in company performance makes it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.
Fixed asset fair values were derived using a discounted cash flow ("DCF") model to estimate the present value of net cash flows that the asset or asset group is expected to generate. The key inputs to the DCF model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as capital expenditures, as well as an appropriate discount rate. In the case of assets for which the impairment was the result of restructuring activities, no future cash flows have been assumed as the assets will cease to be used and expected sale values are nominal.
n
NOTE 9 — Leases
The Company leases its store locations and vehicles under operating leases. The store lease terms, including rental period, renewal options, escalation clauses and rent as a percentage of sales, vary among the leases. Most store leases require the Company to pay real estate taxes and common area maintenance charges. In addition, we have lease agreements that contain both lease and non-lease components. We have elected to combine lease and non-lease components for all classes of assets.
Maturities of our lease liabilities as of August 3, 2019 are as follows:
|
|
|
|
|
|
(in thousands)
|
|
Lease Liabilities(1)
|
Remainder of 2019
|
|
$
|
19,479
|
|
2020
|
|
31,824
|
|
2021
|
|
26,201
|
|
2022
|
|
22,946
|
|
2023
|
|
22,170
|
|
Thereafter
|
|
45,568
|
|
Total lease payments
|
|
168,188
|
|
Less: Imputed interest
|
|
(27,962
|
)
|
Present value of lease liabilities
|
|
140,226
|
|
Less: Current lease liabilities
|
|
(28,258
|
)
|
Long-term lease liabilities
|
|
$
|
111,968
|
|
|
|
(1)
|
Includes retail stores and the corporate headquarters facility, including the distribution center.
|
Maturities of our lease liabilities as of February 2, 2019 (under ASC 840, Leases) were as follows:
|
|
|
|
|
|
(in thousands)
|
|
Lease Liabilities(1)
|
2019
|
|
$
|
36,965
|
|
2020
|
|
25,887
|
|
2021
|
|
21,386
|
|
2022
|
|
18,439
|
|
2023
|
|
17,811
|
|
Thereafter
|
|
38,827
|
|
Total lease payments
|
|
$
|
159,315
|
|
|
|
(1)
|
Includes retail stores and the corporate headquarters facility, including the distribution center.
|
The weighted average remaining lease terms and discount rates for all leases as of August 3, 2019 were as follows:
|
|
|
|
|
Remaining lease term and discount rate:
|
|
August 3, 2019
|
Weighted average remaining lease term (years)
|
|
6.0
|
|
Weighted average discount rate
|
|
6.0
|
%
|
Operating expense for the thirteen weeks ended August 3, 2019 totaled approximately $10.2 million, with $0.5 million of that amount representing operating lease variable rent that was recorded in cost of sales. In addition, all but $20 thousand of the $9.7 million of non-variable operating lease rent is included in cost of sales. $20 thousand of operating lease expense is included in selling, general and administrative expenses. For the thirteen weeks ended August 3, 2019, cash lease payments were $11.2 million, and right of use assets obtained in exchange for lease liabilities were $0.5 million.
Operating expense for the twenty-six weeks ended August 3, 2019 totaled approximately $20.6 million, with $0.9 million of that amount representing operating lease variable rent that was recorded in cost of sales. In addition, all but $52 thousand of the $19.7 million of non-variable operating lease expense is included in cost of sales. $52 thousand of operating lease expense is included in selling, general and administrative expenses. For the twenty-six weeks ended August 3, 2019, cash lease payments were $21.3 million, and right of use assets obtained in exchange for lease liabilities were $2.6 million.
NOTE 10 — Legal Proceedings
We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated. If we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue a potential loss contingency.
On August 14, 2019, Mark Gottlieb, a Company stockholder, filed a purported class action lawsuit against Jonathan Duskin; Seth Johnson; Keri Jones; Kent Kleeberger; William Sharpe, III; Joel Waller and Laura Weil (the "Named Directors"), B. Riley FBR, Inc. and B. Riley Financial Inc., in the Court of Chancery in the State of Delaware, on behalf of himself and all stockholders who held shares as of December 20, 2018. The lawsuit alleges that the Named Directors breached their duty of loyalty in connection with the Company's rejection in December of 2018, of an unsolicited bid to acquire the Company. The lawsuit further alleges that the B. Riley firms aided and abetted the asserted breach of the duty of loyalty by the Named Directors. The Company believes the Complaint is without merit. The Named Directors, and the Company on their behalf, together with the B. Riley firms, intend to defend the lawsuit vigorously.
The ultimate resolution of legal matters can be inherently uncertain and, for some matters, we may be unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of these uncertainties. We do not, however, currently believe that the resolution of any pending matter will have a material adverse effect on our financial position, results of operations or liquidity.