ITEM 1. FINANCIAL STATEMENTS
Francesca’s Holdings Corporation
Unaudited Consolidated Balance Sheets
(In thousands, except share amounts)
|
|
August
3, 2019
|
|
|
February
2, 2019
|
|
|
August
4, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,962
|
|
|
$
|
20,103
|
|
|
$
|
23,354
|
|
Accounts
receivable
|
|
|
7,987
|
|
|
|
16,309
|
|
|
|
19,764
|
|
Inventories
|
|
|
30,942
|
|
|
|
30,478
|
|
|
|
31,902
|
|
Prepaid
expenses and other current assets
|
|
|
10,759
|
|
|
|
10,357
|
|
|
|
10,549
|
|
Total
current assets
|
|
|
71,650
|
|
|
|
77,247
|
|
|
|
85,569
|
|
Operating
lease right-of-use assets, net
|
|
|
230,295
|
|
|
|
-
|
|
|
|
-
|
|
Property
and equipment, net
|
|
|
61,874
|
|
|
|
71,207
|
|
|
|
89,858
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
7,233
|
|
Other
assets, net
|
|
|
4,197
|
|
|
|
4,588
|
|
|
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
368,016
|
|
|
$
|
153,042
|
|
|
$
|
187,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
18,773
|
|
|
$
|
24,330
|
|
|
$
|
29,406
|
|
Accrued
liabilities
|
|
|
12,398
|
|
|
|
11,333
|
|
|
|
11,926
|
|
Operating
lease liabilities
|
|
|
49,937
|
|
|
|
-
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
81,108
|
|
|
|
35,663
|
|
|
|
41,332
|
|
Operating
lease liabilities
|
|
|
213,870
|
|
|
|
-
|
|
|
|
-
|
|
Landlord
incentives and deferred rent
|
|
|
-
|
|
|
|
33,989
|
|
|
|
35,904
|
|
Long-term
debt
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
-
|
|
Other
liabilities
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities
|
|
|
305,039
|
|
|
|
79,652
|
|
|
|
77,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock – $0.01 par value, 80.0 million shares authorized; 4.0 million, 3.9 million and 3.9 million issued at
August 3, 2019, February 2, 2019 and August 4, 2018, respectively*
|
|
|
40
|
|
|
|
39
|
|
|
|
40
|
|
Additional
paid-in capital
|
|
|
112,869
|
|
|
|
113,121
|
|
|
|
112,569
|
|
Retained
earnings
|
|
|
110,089
|
|
|
|
120,251
|
|
|
|
157,748
|
|
Treasury
stock, at cost – 0.9 million shares at each of August 3, 2019, February 2, 2019 and August 4, 2018*
|
|
|
(160,021
|
)
|
|
|
(160,021
|
)
|
|
|
(160,021
|
)
|
Total
stockholders’ equity
|
|
|
62,977
|
|
|
|
73,390
|
|
|
|
110,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
368,016
|
|
|
$
|
153,042
|
|
|
$
|
187,572
|
|
* Reflects the 12-to-1 reverse
stock split that became effective on July 1, 2019. Refer to Note 1 – Summary of Significant Accounting Policies for further
information.
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Operations
(In thousands, except per share data)
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
Net sales
|
|
$
|
105,972
|
|
|
$
|
113,025
|
|
|
$
|
193,097
|
|
|
$
|
213,430
|
|
Cost
of goods sold and occupancy costs
|
|
|
65,469
|
|
|
|
68,918
|
|
|
|
122,267
|
|
|
|
130,960
|
|
Gross profit
|
|
|
40,503
|
|
|
|
44,107
|
|
|
|
70,830
|
|
|
|
82,470
|
|
Selling,
general and administrative expenses
|
|
|
39,124
|
|
|
|
43,277
|
|
|
|
79,118
|
|
|
|
86,160
|
|
Income (loss) from operations
|
|
|
1,379
|
|
|
|
830
|
|
|
|
(8,288
|
)
|
|
|
(3,690
|
)
|
Interest expense
|
|
|
152
|
|
|
|
112
|
|
|
|
325
|
|
|
|
229
|
|
Other
income
|
|
|
259
|
|
|
|
102
|
|
|
|
372
|
|
|
|
252
|
|
Income (loss) before
income tax (benefit) expense
|
|
|
1,486
|
|
|
|
820
|
|
|
|
(8,241
|
)
|
|
|
(3,667
|
)
|
Income
tax (benefit) expense
|
|
|
(326
|
)
|
|
|
366
|
|
|
|
96
|
|
|
|
(236
|
)
|
Net
income (loss)
|
|
$
|
1,812
|
|
|
$
|
454
|
|
|
$
|
(8,337
|
)
|
|
$
|
(3,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per
common share*
|
|
$
|
0.62
|
|
|
$
|
0.16
|
|
|
$
|
(2.87
|
)
|
|
$
|
(1.18
|
)
|
Diluted income (loss)
per common share*
|
|
$
|
0.61
|
|
|
$
|
0.16
|
|
|
$
|
(2.87
|
)
|
|
$
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares*
|
|
|
2,907
|
|
|
|
2,897
|
|
|
|
2,904
|
|
|
|
2,901
|
|
Diluted shares*
|
|
|
2,960
|
|
|
|
2,918
|
|
|
|
2,904
|
|
|
|
2,901
|
|
|
*
|
Reflects the 12-to-1 reverse stock split that became
effective on July 1, 2019. Refer to Note 1 – Summary of Significant Accounting Policies for further information.
|
The accompanying
notes are an integral part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statement of Changes
in Stockholders’ Equity
(In thousands)
|
|
Common
Stock*
|
|
|
Additional
|
|
|
|
|
|
Treasury
|
|
|
Total
|
|
Fiscal
Year 2019
|
|
Shares
Outstanding
|
|
|
Par
Value
|
|
|
Paid-in
Capital*
|
|
|
Retained
Earnings
|
|
|
Stock,
at
Cost
|
|
|
Stockholders'
Equity
|
|
Balance, February 2, 2019
|
|
|
2,972
|
|
|
$
|
39
|
|
|
$
|
113,121
|
|
|
$
|
120,251
|
|
|
$
|
(160,021
|
)
|
|
$
|
73,390
|
|
Cumulative
effect adjustment on adoption of new accounting standard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,825
|
)
|
|
|
-
|
|
|
|
(1,825
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,149
|
)
|
|
|
-
|
|
|
|
(10,149
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(271
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(271
|
)
|
Restricted
stocks forfeited
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, May 4, 2019
|
|
|
2,958
|
|
|
|
39
|
|
|
|
112,850
|
|
|
|
108,277
|
|
|
|
(160,021
|
)
|
|
|
61,145
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,812
|
|
|
|
-
|
|
|
|
1,812
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
Fractional shares
cancelled
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
Restricted
stocks issued, net of forfeitures
|
|
|
99
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, August
3, 2019
|
|
|
3,056
|
|
|
|
40
|
|
|
|
112,869
|
|
|
|
110,089
|
|
|
|
(160,021
|
)
|
|
|
62,977
|
|
|
|
Common
Stock*
|
|
|
Additional
|
|
|
|
|
|
Treasury
|
|
|
Total
|
|
Fiscal
Year 2018
|
|
Shares
Outstanding
|
|
|
Par
Value
|
|
|
Paid-in
Capital*
|
|
|
Retained
Earnings
|
|
|
Stock,
at
cost
|
|
|
Stockholders'
Equity
|
|
Balance, February 3, 2018
|
|
|
2,990
|
|
|
$
|
39
|
|
|
$
|
111,863
|
|
|
$
|
159,045
|
|
|
$
|
(156,499
|
)
|
|
$
|
114,448
|
|
Cumulative
effect adjustment on adoption of new accounting standards, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,134
|
|
|
|
-
|
|
|
|
2,134
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,885
|
)
|
|
|
-
|
|
|
|
(3,885
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
418
|
|
|
|
-
|
|
|
|
-
|
|
|
|
418
|
|
Restricted
stocks issued, net of forfeitures
|
|
|
71
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares
withheld related to net settlement of equity awards
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
Repurchases
of common stock
|
|
|
(55
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,522
|
)
|
|
|
(3,522
|
)
|
Balance, May 5, 2018
|
|
|
3,006
|
|
|
|
40
|
|
|
|
112,254
|
|
|
|
157,294
|
|
|
|
(160,021
|
)
|
|
|
109,567
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
454
|
|
|
|
-
|
|
|
|
454
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
315
|
|
|
|
-
|
|
|
|
-
|
|
|
|
315
|
|
Restricted
stocks issued, net of forfeitures
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, August
4, 2018
|
|
|
3,019
|
|
|
|
40
|
|
|
|
112,569
|
|
|
|
157,748
|
|
|
|
(160,021
|
)
|
|
|
110,336
|
|
* Reflects the 12-to-1 reverse
stock split that became effective on July 1, 2019. Refer to Note 1 – Summary of Significant Accounting Policies for further
information.
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Unaudited Consolidated Statements of
Cash Flows
(In thousands)
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
Cash
Flows Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(8,337
|
)
|
|
$
|
(3,431
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,320
|
|
|
|
12,105
|
|
Stock-based
compensation expense
|
|
|
(190
|
)
|
|
|
733
|
|
Loss
on sale of assets
|
|
|
99
|
|
|
|
350
|
|
Impairment
charges
|
|
|
189
|
|
|
|
148
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
1,473
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
8,322
|
|
|
|
(3,122
|
)
|
Inventories
|
|
|
(464
|
)
|
|
|
(5,086
|
)
|
Prepaid
expenses and other assets
|
|
|
(373
|
)
|
|
|
(2,411
|
)
|
Accounts
payable
|
|
|
(3,765
|
)
|
|
|
12,590
|
|
Accrued
liabilities
|
|
|
1,064
|
|
|
|
20
|
|
Operating
lease right-of-use assets and lease liabilities, net
|
|
|
(2,490
|
)
|
|
|
-
|
|
Landlord
incentives and deferred rent
|
|
|
-
|
|
|
|
(2,433
|
)
|
Net
cash provided by operating activities
|
|
|
5,375
|
|
|
|
10,936
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows Used in Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(3,372
|
)
|
|
|
(14,436
|
)
|
Net
cash used in investing activities
|
|
|
(3,372
|
)
|
|
|
(14,436
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows Used in Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings under the revolving credit facility
|
|
|
5,000
|
|
|
|
-
|
|
Repayments
of borrowings under the revolving credit facility
|
|
|
(5,000
|
)
|
|
|
-
|
|
Payment
of debt issuance costs
|
|
|
(144
|
)
|
|
|
(471
|
)
|
Taxes
paid related to net settlement of equity awards
|
|
|
-
|
|
|
|
(26
|
)
|
Repurchases
of common stock
|
|
|
-
|
|
|
|
(3,980
|
)
|
Net
cash used in financing activities
|
|
|
(144
|
)
|
|
|
(4,477
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,859
|
|
|
|
(7,977
|
)
|
Cash
and cash equivalents, beginning of year
|
|
|
20,103
|
|
|
|
31,331
|
|
Cash
and cash equivalents, end of period
|
|
$
|
21,962
|
|
|
$
|
23,354
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
(received) paid for income taxes
|
|
$
|
(8,601
|
)
|
|
$
|
226
|
|
Interest
paid
|
|
$
|
330
|
|
|
$
|
77
|
|
The accompanying notes are an integral
part of these Unaudited Consolidated Financial Statements.
Francesca’s Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
1.
|
Summary of Significant Accounting Policies
|
Nature of Business
Francesca’s Holdings Corporation is a holding company
incorporated in 2007 under the laws of the State of Delaware whose business operations are conducted through its subsidiaries. Unless
the context otherwise requires, the “Company,” refers to Francesca’s Holdings Corporation and its consolidated
subsidiaries. The Company operates a nationwide-chain of boutiques providing its customers with a unique, fun and personalized
shopping experience. The merchandise assortment the Company offers is a diverse and balanced mix of apparel, jewelry, accessories
and gifts at attractive values. The Company aims to offer a differentiated shopping experience and quality, on-trend merchandise
at a compelling value, across a wide variety of geographic markets and shopping venues. At August 3, 2019, the Company operated 718 boutiques,
which are located in 47 states throughout the United States and the District of Columbia, and also served its customers though
www.francescas.com, its ecommerce website.
On July 1, 2019, the Company effected a 12-to-1 stock split
(the “Reverse Stock Split”), reducing the number of shares of common stock outstanding on that date from 35.4 million
to 3.1 million shares. Additionally, the number of shares of common stock subject to outstanding stock options, restricted stock
awards and restricted stock units, the exercise price of outstanding stock options, and the number of shares reserved for future
issuance pursuant to the Company’s equity compensation plans were adjusted proportionately in connection with the Reverse
Stock Split. The number of authorized shares of common stock under the Company’s Amended and Restated Certificate of Incorporation
and the par value per share of the Company’s common stock were unchanged. All historical share and per share amounts presented
herein have been adjusted retrospectively to reflect these changes.
Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)
for interim financial statements and are in the form prescribed by the Securities and Exchange Commission (“SEC”).
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the
opinion of management, these unaudited financial statements include all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the Company’s financial position, results of operations, changes in equity,
and cash flows at the dates and for the periods presented. The financial information as of February 2, 2019 was derived from the
Company’s audited consolidated financial statements and notes thereto as of and for the fiscal year ended February 2, 2019
included in the Company’s Annual Report on Form 10-K filed with the SEC on May 3, 2019.
These unaudited interim consolidated financial statements should
be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal
year ended February 2, 2019 included in the Company’s Annual Report on Form 10-K.
Due to seasonal variations in the Company’s business,
interim results are not necessarily indicative of results that may be expected for any other interim period or for a full year.
Principles of Consolidation
The accompanying unaudited consolidated financial statements
include the accounts of the Company and all its subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company maintains its accounts on a 52- or 53-week year
ending on the Saturday closest to January 31st. Fiscal years 2019 and 2018 each include 52 weeks of operations. The fiscal
quarters ended August 3, 2019 and August 4, 2018 refer to the thirteen week periods ended as of those dates. The year-to-date periods
ended August 3, 2019 and August 4, 2018 refer to the twenty-six week periods ended as of those dates.
Management Estimates and Assumptions
The preparation of financial statements in conformity with GAAP
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, net of estimated
sales returns, and expenses during the reporting periods. Actual results could differ materially from those estimates.
Francesca’s
Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
Leases
Adoption of Accounting Standards Codification 842
On February 3, 2019, the Company adopted the provisions of Accounting
Standards Codification (“ASC”) 842, “Leases”, using the additional, optional transition method which allows
entities to initially apply the new standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings
at the date of adoption. Prior period amounts and disclosures were not adjusted and continue to be reported under ASC 840, “Leases.”
In applying the new standard, the Company elected the package
of practical expedients which allows the Company to carry forward its prior conclusions under ASC 840 about lease identification,
lease classification, and initial direct costs. The Company also elected the practical expedient of combining lease and non-lease
components as a single lease component as well as the short-term lease recognition exemption for all leases at transition.
As a result of the adoption, the Company recorded an operating
lease liability of $278.9 million and operating lease right-of-use (“ROU”) asset of $242.9 million at February 3, 2019.
Additionally, the Company recognized a $1.8 million cumulative-effect adjustment to the beginning balance of retained earnings
related to the impairment of certain operating lease ROU assets subjected to impairment testing under existing accounting guidance
for which indicators of impairment existed at the time of the adoption of ASC 842. The adoption of ASC 842 did not have a material
impact to the unaudited consolidated statements of operations or cash flows.
Accounting Policy Under ASC 842
The Company leases boutiques, its distribution center and office
space and certain boutique and corporate office equipment under operating leases. The Company determines if an arrangement contains
a lease at inception and recognizes operating lease ROU assets and operating lease liabilities at the commencement date based on
the present value of the fixed lease payments over the lease term and, for operating lease ROU assets, include initial direct costs
and exclude lease incentives. Variable lease payments are expensed as incurred. Lease terms may include options to extend or terminate
the lease when it is reasonably certain that the Company will elect that option. Subsequent to the recognition of its operating
lease ROU assets and operating lease liabilities, the Company recognizes lease expense related to its operating lease payments
on a straight-line basis over the lease term.
Operating lease liabilities are calculated using the effective
interest method and recognized at the commencement date based on the present value of lease payments over the reasonably certain
lease term. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilized a collateralized
incremental borrowing rate determined through the development of a synthetic credit rating to calculate the present value of its
lease payments.
The Company accounts for lease and non-lease components as a
single component. Accordingly, the Company’s fixed lease payments mainly consists of base rent, common area maintenance and
landlord advertising. Additionally, the Company also elected the short-term lease recognition exemption for all leases.
Impairment of Long-Lived Assets, Including Operating Lease
ROU Assets
The Company evaluates long-lived assets held for use, including
operating lease ROU assets, and held for sale whenever events or changes in circumstances indicate that the carrying amount of
those assets may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable
cash flows, which is generally at a boutique level. In determining whether an impairment has occurred, the Company considers both
qualitative and quantitative factors.
The quantitative analysis involves estimating the undiscounted
future cash flows directly related to that asset and comparing it against its carrying value. If the carrying value of the asset
is greater than the sum of the undiscounted future cash flows, an impairment loss is recognized for the difference between the
carrying value of the asset and its fair value. The fair value of the asset group is generally determined using discounted future
cash flows or a market participant’s ability to generate economic benefits using the asset in its highest and best use, whichever
is appropriate. The determination of fair value takes into account the asset’s historical performance, current sales trends,
market conditions and other relevant factors deemed material, and discounted using a rate commensurate with the risk. The inputs
used in the determination of the fair value are considered as Level 3 inputs in the fair value hierarchy, which require a significant
degree of judgment and are based on the Company’s own assumptions.
Francesca’s
Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842).” The new guidance, among other
things, requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted
basis and (ii) a ROU asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified
asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Since the original issuance of ASU 2016-02,
the FASB has issued several amendments and updates to this guidance (collectively, “ASC 842, Leases”). This new guidance
was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company
adopted ASC 842, Leases, on February 3, 2019 using the optional transition method. Please refer to “Leases” above in
this Note 1 and below in Note 9 to the Unaudited Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill
and Other-Internal-Use-Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software. This new guidance will be effective for fiscal years beginning after December 15, 2019 and interim
periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance
will have on its consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU
2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments.” ASU 2016-13 changes the methodology for measuring credit losses on financial instruments and
timing of when such losses are recorded. Since the original issuance of ASU 2016-13, the FASB has issued several amendments
and updates to this guidance. This new guidance is effective for fiscal years beginning after December 15, 2019, and interim
periods within those fiscal years. Early adoption is permitted. The guidance is to be adopted using the modified
retrospective approach. The Company is currently evaluating the effect that the new guidance will have on its consolidated
financial statements and related disclosures.
The Company disaggregates net sales into the following major
merchandise departments.
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
|
(in
thousands)
|
|
Apparel
|
|
$
|
52,389
|
|
|
$
|
56,807
|
|
|
$
|
94,213
|
|
|
$
|
106,341
|
|
Jewelry
|
|
|
27,957
|
|
|
|
26,984
|
|
|
|
51,835
|
|
|
|
50,842
|
|
Accessories
|
|
|
16,211
|
|
|
|
17,181
|
|
|
|
29,851
|
|
|
|
32,665
|
|
Gifts
|
|
|
8,532
|
|
|
|
11,337
|
|
|
|
16,375
|
|
|
|
22,442
|
|
Others
(1)
|
|
|
883
|
|
|
|
716
|
|
|
|
823
|
|
|
|
1,140
|
|
|
|
$
|
105,972
|
|
|
$
|
113,025
|
|
|
$
|
193,097
|
|
|
$
|
213,430
|
|
|
(1)
|
Includes gift card breakage income, shipping revenue
and change in return reserve.
|
Contract liability
The Company recognizes a contract liability related to its gift
cards. The Company accounts for the sale of gift cards as a liability at the time a gift card is sold. The liability is relieved
and revenue is recognized upon redemption of the gift card. The Company’s gift cards do not have an expiration date. Income
from gift card breakage is estimated based on historical redemption patterns and recognized over the historical redemption period.
Unredeemed gift cards at the end of the prior fiscal year recognized in revenues during the thirteen and twenty-six weeks ended
August 3, 2019 totaled $1.3 million and $3.1 million, respectively, and for the thirteen and twenty-six weeks ended August 4, 2018
totaled $1.1 million and $3.0 million, respectively.
|
3.
|
Earnings (Loss) Per Share
|
Earnings (loss) per common share amounts are calculated using
the weighted-average number of common shares outstanding for the period. Diluted loss per common share amounts are calculated using
the weighted-average number of common shares outstanding for the period and include the dilutive impact of restricted stock awards,
restricted stock units and stock option grants using the treasury stock method. The following table summarizes the potential dilution
that could occur if stock options to acquire common stock were exercised or if the restricted stock grants were fully vested and
reconciles the weighted-average common shares outstanding used in the computation of basic and diluted loss per share.
Francesca’s
Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
|
(in
thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,812
|
|
|
$
|
454
|
|
|
$
|
(8,337
|
)
|
|
$
|
(3,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding - basic(1)
|
|
|
2,907
|
|
|
|
2,897
|
|
|
|
2,904
|
|
|
|
2,901
|
|
Restricted
stocks awards, restricted stock units and stock options(1)
|
|
|
53
|
|
|
|
21
|
|
|
|
-
|
(2)
|
|
|
-
|
(2)
|
Weighted-average
common shares outstanding - diluted(1)
|
|
|
2,960
|
|
|
|
2,918
|
|
|
|
2,904
|
|
|
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share(1)
|
|
$
|
0.62
|
|
|
$
|
0.16
|
|
|
$
|
(2.87
|
)
|
|
$
|
(1.18
|
)
|
Diluted
earnings (loss) per common share(1)
|
|
$
|
0.61
|
|
|
$
|
0.16
|
|
|
$
|
(2.87
|
)
|
|
$
|
(1.18
|
)
|
|
(1)
|
Reflects the 12-to-1 reverse stock split that became effective on July 1, 2019. Refer to Note 1 – Summary of Significant
Accounting Policies for further information.
|
|
(2)
|
Due to the Company being in a net loss position in the twenty-six weeks ended August 3, 2019 and August 4, 2018, no
restricted stock awards, restricted stock units and stock options were included in the computation of diluted loss per share as
their effect
would have been anti-dilutive.
|
Potentially issuable shares under the Company’s stock-based
compensation plans which amounted to 0.1 million shares in each of the thirteen and twenty-six weeks ended August 3, 2019 and less
than 0.1 million and 0.1 million shares in the thirteen and twenty-six weeks ended August 4, 2018, respectively, were excluded
in the computation of diluted loss per shares due to their anti-dilutive effect. The Company also excluded contingently issuable
performance-based awards totaling 0.1 million in each of the thirteen and twenty-six weeks ended August 3, 2019 and August 4, 2018
from the computation of diluted earnings per share because the pre-established goals had not been satisfied as of the end of each
period.
|
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 an orderly transaction between market participants at the measurement date. The
carrying amount reflected in the consolidated balance sheets of financial assets and liabilities, which includes cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their fair values due to the short-term
nature of these financial assets and liabilities. The carrying amount of the Company’s debt approximates its fair value due
to the proximity of the debt issue date and the balance sheet date and the variable component of interest on debt.
The provision for income tax expense (benefit)
is based on the Company’s current estimate of the annual effective tax rate. The effective income tax expense (benefit) rates
for the thirteen weeks ended August 3, 2019 and August 4, 2018 were (22.0)% and 44.6%, respectively, and for the twenty-six weeks
ended August 3, 2019 and August 4, 2018 were 1.2% and (6.4)%, respectively. The decrease in the Company’s effective income
tax (benefit) expense rate during the thirteen weeks ended August 3, 2019 was due to a revision in the Company’s estimate
of its annualized taxable income for fiscal year 2019.
As of August 3, 2019 and August 4, 2018, the Company had $1.9
million and $11.7 million of income tax receivable, respectively. As previously disclosed, the Company received an income tax refund
of $8.5 million from the IRS on April 22, 2019.
|
6.
|
Revolving Credit Facility
|
On May 25, 2018, Francesca’s Holdings Corporation (the
“Holdings”), as a guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of
its subsidiaries as guarantors (together with Holdings and the Borrowers, the “Loan Parties”), entered into an asset
based revolving credit agreement (“ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent and
the lenders party thereto. The ABL Credit Agreement provides for revolving commitments of $50.0 million (including up to $10.0
million for letters of credit) and matures on May 25, 2023. Availability under the ABL Credit Agreement is subject to a customary
borrowing base comprised of: (a) a specified percentage of the Borrower’s credit card accounts (as defined in the ABL Credit
Agreement); and (b) a specified percentage of the Borrower’s eligible inventory (as defined in the ABL Credit Agreement),
and reduced by (c) certain customary reserves and adjustments (as defined in the ABL Credit Agreement). The ABL Credit
Agreement also contains an option to increase, permitting the Borrowers, subject to certain requirements, to arrange with lenders
for additional revolving commitments for up to an aggregate of $25.0 million. At August 3, 2019, the Company had $10.0 million
of borrowings outstanding and $10.0 million of borrowing base availability under the ABL Credit Agreement. Of the total borrowing
base availability as of August 3, 2019, $4.0 million is available to be drawn without consideration of the Fixed Charge Coverage
Ratio requirement (as defined below). Additionally, there were no letters of credit outstanding as of August 3, 2019.
Francesca’s
Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
All obligations of each Loan Party under the ABL Credit Agreement
are unconditionally guaranteed by the Company and each of the Company’s existing and future direct and indirect wholly owned
domestic subsidiaries, including the Borrowers. All obligations under the ABL Credit Agreement, and the guarantees of those obligations
(as well as banking services obligations and any interest rate hedging or other swap agreements), are secured by substantially
all of the assets of the Company and each of the Company’s existing and future direct and indirect wholly owned domestic
subsidiaries. Additionally, the ABL Credit Agreement contains customary events of default and requires the Loan Parties to comply
with certain financial covenants, including a restriction prohibiting the Loan Parties from declaring or making dividend payments,
subject to certain exceptions. In addition, Holdings may declare or make dividend payments, subject to the satisfaction of the
Payment Conditions (as defined in the ABL Credit Agreement). The ABL Credit Agreement also requires that the auditor’s report
on the Company’s audited financial statements for the previous fiscal year does not contain a “going concern”
or like qualification or exception and also requires the Loan Parties to maintain a minimum ratio of (i) EBITDAR (as defined in
the ABL Credit Agreement) minus unfinanced capital expenditures (as defined in the ABL Credit Agreement), to (ii) fixed charges
of 1.00 to 1.00 during periods when availability (as defined in the ABL Credit Agreement) is less than $6.0 million (or has recently
been less than $6.0 million as further specified in the ABL Credit Agreement) (such ratio, the “Fixed Charge Coverage Ratio”).
As of August 3, 2019, our borrowing availability was more than $6.0 million, resulting in the elimination of the Fixed Charge Coverage
Ratio requirement.
See Note 11, Subsequent Events for additional information on
the Term Loan Credit Agreement and First Amendment to ABL Credit Agreement (each as defined below) entered into on August 13, 2019.
|
7.
|
Stockholder Rights Plan
|
On July 31, 2019, the Board of Directors of the Company adopted
a limited duration stockholder rights plan (the “Rights Plan”) with an expiration date of August 1, 2022 and an ownership
trigger threshold of 15%, subject to certain exceptions. In connection with the Rights Plan, the Board of Directors
authorized and declared a dividend to the Company’s stockholders of record at the close of business on August 15, 2019 of
one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock.
Upon certain triggering events, each Right will entitle the
holder thereof to purchase from the Company one five-thousandth (subject to adjustment) of one share of Series A Junior Participating
Preferred Stock, $0.01 par value per share of the Company (the “Preferred Stock”) at an exercise price of $18.00 (the
“Exercise Price”) per one five-thousandth of a share of Preferred Stock. In addition, if a person or group acquires
beneficial ownership of 15% or more of the Company’s common stock without prior approval of the Company’s Board of
Directors, or in the case of a person or group that beneficially owned more than 15% of the Company’s common stock prior
to the issuance of the press release announcing the adoption of the Rights Agreement on August 2, 2019, such person or group acquires
beneficial ownership of any additional shares of the Company’s common stock without prior approval of the Company’s
Board of Directors, each holder of a Right (other than the acquiring person or group whose Rights will become void) will have the
right to purchase, upon payment of the Exercise Price and in accordance with and subject to the adjustment under the terms of the
Rights Plan, a number of shares of the Company’s common stock having a market value of twice the Exercise Price (as adjusted). The
complete terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of August 1, 2019,
between the Company and Computershare Trust Company, N.A., as rights agent.
|
8.
|
Stock-based Compensation
|
Stock-based compensation cost is measured at the grant date
fair value and is recognized as an expense on a straight-line basis over the employee’s requisite service period. The Company
recognized stock-based compensation expense of less than $0.1 million in the thirteen weeks ended August 3, 2019 and a net reversal
of previously accrued stock-based compensation of $0.2 million in the twenty-six weeks ended August 3, 2019. Stock-based compensation
expense during the thirteen and twenty-six weeks ended August 4, 2018 was $0.3 million and $0.7 million, respectively.
Francesca’s
Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
Management Awards
For the twenty-six weeks ended August 3, 2019, the Company granted
0.3 million of restricted stock units (“RSU”), and, for the twenty-six weeks ended August 4, 2018, granted 0.1 million
of restricted stock awards (“RSA”) to certain executives and key employees. Of the total award in each period,
50% of the total units or shares awarded were in the form of performance-based (“PSU” or “PSA”) while the
remaining 50% were in the form of time-based restricted shares. The number of PSUs or PSAs that may ultimately vest will be
equal to 0% to 150% of the target units or shares awarded subject to the achievement of pre-established performance goals and the
employee’s continued employment through the third anniversary of the grant date. The RSUs and RSAs vest in one installment
on the third anniversary of the award date.
At the end of each reporting period, the Company assessed the
probability of achieving the pre-established performance conditions related to the PSUs and PSAs and adjusted stock-based compensation
expense based on the results of such assessment.
The Company leases boutiques, its distribution center, office
space, and certain boutique and corporate office equipment under operating leases expiring in various years through the fiscal
year ending 2029. Certain of the leases provide that the Company may cancel the lease, with penalties as defined in the lease,
if the Company’s boutique sales at that location fall below an established level. Certain leases provide for additional rent
payments to be made when sales exceed a base amount. Certain operating leases provide for renewal options for periods from three
to five years at the market rate at the time of renewal. The Company’s lease agreements do not contain any material residual
value guarantees or material restrictive covenants. See above under “Leases” in Note 1 for additional information regarding
the Company’s adoption of ASC 842, Leases on February 3, 2019 and the impact of such adoption.
The following table presents the components of the Company’s
operating lease costs for the period presented.
|
|
Thirteen
Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
3, 2019
|
|
Operating
lease costs
|
|
$
|
15,322
|
|
|
$
|
30,471
|
|
Variable
lease costs
|
|
|
244
|
|
|
|
468
|
|
|
|
$
|
15,566
|
|
|
$
|
30,939
|
|
As of August 3, 2019, the weighted average remaining operating
lease term was 6.0 years and the weighted average discount rate for operating leases was 5.6%. Cash paid for operating leases included
in the measurement of lease liabilities totaled $32.5 million for the twenty-six weeks ended August 3, 2019.
As of August 3, 2019, the maturities of lease liabilities were
as follows:
Maturities of lease liabilities
|
|
|
|
Remainder
of 2019
|
|
$
|
32,215
|
|
2020
|
|
|
60,273
|
|
2021
|
|
|
51,956
|
|
2022
|
|
|
44,411
|
|
2023
|
|
|
38,113
|
|
Thereafter
|
|
|
85,179
|
|
Total
lease payments
|
|
|
312,147
|
|
Less:
Interest
|
|
|
48,340
|
|
Present
value of lease liabilities
|
|
$
|
263,807
|
|
As of August 3, 2019, the minimum rental commitments for operating
lease contracts that have not yet commenced was $4.8 million while its lease terms were within the range of 5 to 10 years.
On January 27, 2017, a purported collective action lawsuit entitled
Meghan Magee, et al. v. Francesca’s Holdings Corp., et al. was filed in the United States District Court for the District
of New Jersey, Camden Vicinage against the Company for alleged violations of federal and state wage and hour laws. After substitution
of a named plaintiff, the lawsuit is now captioned, Danielle Prulello, et al. v. Francesca’s Holding Corp., et al. On November
6, 2018, the court conditionally certified the collective action. The Company believes that the allegations contained in the lawsuit
are without merit and intends to vigorously defend itself against all claims asserted therein. A reasonable estimate of the amount
of any possible loss or range of loss cannot be made at this time and, as such, the Company has not recorded an accrual for any
possible loss.
Francesca’s
Holdings Corporation
Notes to Unaudited Consolidated Financial
Statements
The Company, from time to time, is subject to various claims
and legal proceedings, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial
disputes and other matters that arise in the ordinary course of business. While the outcome of any such claim cannot
be predicted with certainty, the Company does not believe that the outcome of these matters will have a material adverse effect
on the Company’s business, results of operations or financial condition.
Term Loan Credit Agreement
On August 13, 2019, the Loan Parties entered into a Term Loan
Credit Agreement (“Term Loan Credit Agreement”) with Tiger Finance, LLC, as administrative agent and the lenders party
thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022.
The loan under the Term Loan Credit Agreement (the “Term
Loan”) bears interest at a rate equal to LIBOR for the interest period relevant to the Term Loan, subject to a 0.00% floor,
plus 8.00%, provided that the interest rate on the Term Loan will not be less than 10.00%. The Term Loan Credit Agreement also
requires the Borrowers to pay a closing fee equal to 2.5% of the amount of the Term Loan and an annual agency fee of $50,000. The
Term Loan Credit Agreement is subject to a combined borrowing base together with the Company’s existing asset based revolving
credit facility. As of August 31, 2019, the combined borrowing base availability was $16.3 million.
The proceeds from the Term Loan were used to pay the $10.0 million
outstanding under the ABL Credit Agreement.
First Amendment to ABL Credit Agreement
On August 13, 2019, concurrent with entering into the Term Loan
Credit Agreement, the Company and the other Loan Parties, entered into a First Amendment to ABL Credit Agreement (the “First
Amendment to ABL Credit Agreement”) with JPMorgan Chase, N.A., as administrative agent, and the lenders party thereto, which
amends the existing ABL Credit Agreement.
The First Amendment to ABL Credit Agreement, among other things,
(i) reduces the Aggregate Revolving Commitment (as defined in the ABL Credit Agreement) from $50.0 million to $40.0 million; (ii)
allows the Loan Parties to enter into the Term Loan Credit Agreement; (iii) changes the maturity date under the ABL Credit Agreement
from May 23, 2023 to the earlier of (a) May 23, 2023 and (b) the date that is 90 days prior to any scheduled maturity of the Term
Loan; (iv) removes the requirement to maintain a minimum Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) previously
contained in the ABL Credit Agreement; and (v) limits the amount of capital expenditures that the Loan Parties may make through
the fiscal year ending in 2021, provided that the Loan Parties may make unlimited amounts of capital expenditures if certain payment
conditions are met. The reduced aggregate revolving commitment of $40.0 million exceeds the current borrowing base under the ABL
Credit Agreement by a significant amount and such reduction therefore does not result in any reduction in available borrowings
under the ABL Credit Agreement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains statements that constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These statements concern our
business, operations and financial performance and condition as well as our plans, objectives and expectations for our business
operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements
of historical fact included in this report are forward-looking statements. These statements may include words such as “aim”,
“anticipate”, “assume”, “believe”, “can have”, “could”, “due”,
“estimate”, “expect”, “goal”, “intend”, “likely”, “may”,
“objective”, “plan”, “potential”, “positioned”, “predict”, “should”,
“target”, “will”, “would” and other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements
we make relating to our estimated and projected earnings, sales, costs, expenditures, cash flows, growth rates, market share and
financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or
impact of pending or threatened litigation are forward-looking statements.
These forward-looking statements are based on
current expectations, estimates, forecasts and projections about our business and the industry in which we operate and
our management’s beliefs and assumptions. These statements are not guarantees of future performance or development
and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. All of
our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially
from our expectations. These risks and uncertainties include, but are not limited to, the following: the risk that the
Company may not be able to successfully execute its turnaround plan, the risk that we may not be able to successfully
integrate our Interim Chief Executive Officer and attract and integrate a new Chief Executive Officer; the risk that we
cannot anticipate, identify and respond quickly to changing fashion trends and customer preferences or changes in consumer
environment, including changing expectations of service and experience in boutiques and online, and evolve our business
model; our ability to attract a sufficient number of customers to our boutiques or sell sufficient quantities of our
merchandise through our ecommerce website; our ability to successfully open, close, refresh, and operate new boutiques each
year; our ability to efficiently source and distribute additional merchandise quantities necessary to support our growth;
risks related to our ability to comply with the continued listing standards of the Nasdaq Global Select Market; and the
impact of potential tariff increases or new tariffs. For additional information regarding these and other risks and
uncertainties that could cause actual results to differ materially from those contained in our forward looking statements,
please refer to “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended February 2,
2019 and filed with the Securities and Exchange Commission (“SEC”) on May 3, 2019 (“Fiscal Year 2018
10-K”) and any risk factors contained in subsequent Quarterly Reports on Form 10-Q or other filings we file with the
SEC, including under “Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q, as well as our
disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and elsewhere in this report and in our Fiscal Year 2018 10-K.
We derive many of our forward-looking statements from our own
operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable,
we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors
that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on
our behalf, are expressly qualified in their entirety by the cautionary statements contained in this report as well as other cautionary
statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking
statements made in this report in the context of these risks and uncertainties.
Potential investors and other readers are urged to consider
these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking
statements. These forward-looking statements speak only as of the date of this report. Except as required by law, we undertake
no obligation to update or revise any forward-looking statements publicly after the date of this report whether as a result of
new information, future developments or otherwise.
Overview
Unless the context otherwise requires, the “Company,”
“we,” “our,” “ours,” “us” and “francesca’s®” refer
to Francesca’s Holdings Corporation and its consolidated subsidiaries.
francesca’s® is a specialty retailer
which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping experience. The merchandise
assortment we offer is a diverse and balanced mix of apparel, jewelry, accessories and gifts. We aim to offer a differentiated
shopping experience and quality, on-trend merchandise at a compelling value, across a wide variety of geographic markets and shopping
venues. As of August 3, 2019, francesca’s® operated 718 boutiques in 47 states throughout the United States
and the District of Columbia and also served its customers through www.francescas.com, our ecommerce website. The information contained
on our ecommerce website is not incorporated by reference into this Quarterly Report on Form 10-Q and you should not consider information
contained on our ecommerce website to be part of this Quarterly Report on Form 10-Q.
During the thirteen weeks ended August 3, 2019, our net sales
decreased 6% to $106.0 million from $113.0 million, income from operations increased by $0.5 million from $0.8 million to $1.4
million, and net income increased $1.4 million from $0.5 million, or $0.16 earnings per diluted share, to $1.8 million, or $0.61
earnings per diluted share, over the comparable prior year period.
During the twenty-six weeks ended August 3, 2019, our net sales
decreased 10% to $193.1 million from $213.4 million, loss from operations increased by $4.6 million from $3.7 million to $8.3 million,
and net loss increased $4.9 million from $3.4 million, or $1.18 loss per diluted share, to $8.3 million, or $2.87 loss per diluted
share, over the comparable prior year period.
In February 2019, we executed a workforce reduction at both
our corporate office and field management as part of our cost reduction initiative associated with our turnaround plan that commenced
in January 2019. As a result, we expensed $0.9 million of severance benefits during the twenty-six weeks ended August 3, 2019.
These severance benefits are included in selling, general and administrative expenses in the unaudited consolidated statements
of operations.
On July 1, 2019, we effected a 12-to-1 stock split (the “Reverse
Stock Split”), reducing the number of shares of common stock outstanding on that date from 35.4 million to 3.1 million shares.
Additionally, the number of shares of our common stock subject to outstanding stock options, restricted stock awards and restricted
stock units, the exercise price of all our outstanding stock options, and the number of shares reserved for future issuance pursuant
to our equity compensation plans were adjusted proportionately in connection with the Reverse Stock Split. The number of authorized
shares of common stock under the Company’s Amended and Restated Certificate of Incorporation and the par value per share
of its common stock were unchanged. All historical share and per share amounts presented herein have been adjusted retrospectively
to reflect these changes. The Reverse Stock Split was effected in order to increase the market price per share of our common stock
to ensure the Company regained full compliance with The Nasdaq Stock Market LLC’s (“Nasdaq”) minimum bid price
requirement and maintained its listing on Nasdaq. Nasdaq informed the Company on July 17, 2019 that it had regained full compliance
with Nasdaq’s listing requirements.
On July 31, 2019, our Board of Directors adopted a limited duration
stockholder rights plan (the “Rights Plan”) with an expiration date of August
1, 2022 and an ownership trigger threshold of 15%, subject to certain exceptions. In connection with the Rights
Plan, the Board of Directors authorized and declared a dividend to the Company’s stockholders of record at the close of business
on August 15, 2019 of one preferred share purchase right (a “Right”) for each outstanding share of our common stock. Upon
certain triggering events, each Right will entitle the holder to purchase from us one
five-thousandth (subject to adjustment) of one share of Series A Junior Participating Preferred Stock, $0.01 par value per
share (the “Preferred Stock”) at an exercise price of $18.00 (the “Exercise Price”) per one five-thousandth
of a share of Preferred Stock. In addition, if a person or group acquires beneficial ownership of 15% or more of our common stock
without prior approval of our Board of Directors, or in the case of a person or group that beneficially owned more than 15% of
our common stock prior to the issuance of the press release announcing the adoption of the Rights Agreement on August 2, 2019,
such person or group acquires beneficial ownership of any additional shares of our common stock without prior approval of our Board
of Directors, each holder of a Right (other than the acquiring person or group whose Rights will become void) will have the right
to purchase, upon payment of the Exercise Price and in accordance with and subject to adjustment under the terms of the Rights
Plan, a number of shares of our common stock having a market value of twice the Exercise Price (as adjusted). The complete
terms of the Rights are set forth in a Rights Agreement (the “Rights Agreement”), dated as of August 1, 2019, between
Francesca’s Holdings Corporation and Computershare Trust Company, N.A., as rights
agent, which is included as Exhibit 4.1 to this Quarterly Report on Form 10-Q.
On August 13, 2019, Francesca’s Holdings Corporation (the
“Company”), as a guarantor, certain of its subsidiaries, as borrowers (the “Borrowers”), and certain of
its subsidiaries as guarantors (together with the Company and the Borrowers, the “Loan Parties”), entered into a Term
Loan Credit Agreement (“Term Loan Credit Agreement”) with Tiger Finance, LLC, as administrative agent and the lenders
party thereto. The Term Loan Credit Agreement provides for an aggregate term loan of $10.0 million and matures on August 13, 2022.
Concurrent with entering into the Term Loan Credit Agreement, the Company and the other Loan Parties, entered into a First Amendment
to ABL Credit Agreement (the “First Amendment to ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative
agent, and the lenders party thereto, which amends the Company’s existing asset based revolving credit agreement, dated as
of May 25, 2018, by and among the Company, the other Loan Parties, the lenders party thereto and JPMorgan Chase Bank, N.A., as
administrative agent (the “ABL Credit Agreement” and, as amended by the First Amendment to ABL Credit Agreement, the
“Amended ABL Credit Agreement”). See “Asset Based Revolving Credit Facility” and “Term Loan Credit
Agreement” under “Liquidity and Capital Resources” below for additional information.
On August 13, 2019, we announced the completion of our previously
announced strategic alternatives review process as we intend to focus on the execution of our turnaround plan.
Our boutique count decreased to 718 boutiques as of
August 3, 2019 from 742 boutiques as of August 4, 2018. As previously disclosed, our current priority is executing our
turnaround plan which is aimed at improving comparable sales and profitability. As such, we plan to close at least 10
existing boutiques during the remainder of the fiscal year as we continue to optimize our existing boutique fleet. We plan to
resume new boutique openings and remodels in the future, as appropriate, when the desired results are achieved under our
turnaround plan.
Results of Operations
The following represents operating data for the thirteen
and twenty-six weeks ended August 3, 2019 and August 4, 2018.
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
Net
sales change for period
|
|
|
(6
|
)%
|
|
|
(6
|
)%
|
|
|
(10
|
)%
|
|
|
(6
|
)%
|
Comparable
sales results for the period (1)
|
|
|
(5
|
)%
|
|
|
(13
|
)%
|
|
|
(9
|
)%
|
|
|
(15
|
)%
|
Number
of boutiques open at end of period
|
|
|
718
|
|
|
|
742
|
|
|
|
718
|
|
|
|
742
|
|
Net
sales per average square foot for period (2)
|
|
$
|
101
|
|
|
$
|
105
|
|
|
$
|
184
|
|
|
$
|
202
|
|
Average
square feet per boutique (3)
|
|
|
1,459
|
|
|
|
1,448
|
|
|
|
1,459
|
|
|
|
1,448
|
|
Total
gross square feet at end of period
|
|
|
1,047,000
|
|
|
|
1,074,000
|
|
|
|
1,047,000
|
|
|
|
1,074,000
|
|
|
(1)
|
A boutique is included in comparable sales on the first day of the fifteenth full month following the boutique’s opening.
If a boutique is closed for four or more days within a given fiscal week for any reason, we exclude sales from that boutique from
comparable sales for that full fiscal week. If a boutique is permanently closed, we exclude sales from that boutique from comparable
sales on the first day of the fiscal month that it did not register full month of sales. Comparable sales include our ecommerce
sales and exclude gift card breakage income.
|
|
(2)
|
Net sales per average square foot is calculated by dividing net sales for the period by the average square feet during the
period. For purposes of providing net sales per square foot measure, we use average square feet during the period as opposed to
total gross square feet at the end of the period. For individual quarterly periods, average square feet is calculated as (a) the
sum of total gross square feet at the beginning and end of the period divided by (b) two. For periods consisting of more than
one fiscal quarter, average square feet is calculated as (a) the sum of total gross square feet at the beginning of the period
and total gross square feet at the end of each fiscal quarter within the period, divided by (b) the number of fiscal quarters
within the period plus one (which, for a fiscal year, is five). There may be variations in the way in which some of our competitors
and other retailers calculate sales per square foot or similarly titled measures. As a result, average square feet and net sales
per average square foot for the period may not be comparable to similar data made available by other retailers.
|
|
(3)
|
Average square feet per boutique is calculated by dividing total gross square feet at the end of the period by the number of
boutiques open at the end of the period.
|
Boutique Count
The following table summarizes the number of boutiques open
at the beginning and end of the periods indicated.
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
Number
of boutiques open at beginning of period
|
|
|
722
|
|
|
|
744
|
|
|
|
727
|
|
|
|
721
|
|
Boutiques
added
|
|
|
1
|
|
|
|
4
|
|
|
|
4
|
|
|
|
31
|
|
Boutiques
closed
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
(13
|
)
|
|
|
(10
|
)
|
Number
of boutiques open at the end of period
|
|
|
718
|
|
|
|
742
|
|
|
|
718
|
|
|
|
742
|
|
Thirteen Weeks Ended August 3, 2019 Compared to Thirteen
Weeks Ended August 4, 2018
|
|
Thirteen
Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
Variance
|
|
|
|
In
USD
|
|
|
As
a %
of
Net
Sales
(1)
|
|
|
In
USD
|
|
|
As
a %
of
Net
Sales
(1)
|
|
|
In
USD
|
|
|
%
|
|
|
Basis
Points
|
|
|
|
(in thousands, except
percentages and basis points)
|
|
Net sales
|
|
$
|
105,972
|
|
|
|
100.0
|
%
|
|
$
|
113,025
|
|
|
|
100.0
|
%
|
|
$
|
(7,053
|
)
|
|
|
(6
|
)%
|
|
|
-
|
|
Cost
of goods sold and occupancy costs
|
|
|
65,469
|
|
|
|
61.8
|
%
|
|
|
68,918
|
|
|
|
61.0
|
%
|
|
|
(3,449
|
)
|
|
|
(5
|
)%
|
|
|
80
|
|
Gross profit
|
|
|
40,503
|
|
|
|
38.2
|
%
|
|
|
44,107
|
|
|
|
39.0
|
%
|
|
|
(3,604
|
)
|
|
|
(8
|
)%
|
|
|
(80
|
)
|
Selling,
general and administrative expenses
|
|
|
39,124
|
|
|
|
36.9
|
%
|
|
|
43,277
|
|
|
|
38.3
|
%
|
|
|
(4,153
|
)
|
|
|
(10
|
)%
|
|
|
(140
|
)
|
Income from operations
|
|
|
1,379
|
|
|
|
1.3
|
%
|
|
|
830
|
|
|
|
0.7
|
%
|
|
|
549
|
|
|
|
66
|
%
|
|
|
60
|
|
Interest expense
|
|
|
152
|
|
|
|
0.1
|
%
|
|
|
112
|
|
|
|
0.1
|
%
|
|
|
40
|
|
|
|
36
|
%
|
|
|
-
|
|
Other
income
|
|
|
259
|
|
|
|
0.2
|
%
|
|
|
102
|
|
|
|
0.1
|
%
|
|
|
157
|
|
|
|
154
|
%
|
|
|
10
|
|
Income before income
tax (benefit) expense
|
|
|
1,486
|
|
|
|
1.4
|
%
|
|
|
820
|
|
|
|
0.7
|
%
|
|
|
666
|
|
|
|
81
|
%
|
|
|
70
|
|
Income
tax (benefit) expense
|
|
|
(326
|
)
|
|
|
(0.3
|
)%
|
|
|
366
|
|
|
|
0.3
|
%
|
|
|
(692
|
)
|
|
|
(189
|
)%
|
|
|
(60
|
)
|
Net
income
|
|
$
|
1,812
|
|
|
|
1.7
|
%
|
|
$
|
454
|
|
|
|
0.4
|
%
|
|
$
|
1,358
|
|
|
|
299
|
%
|
|
|
130
|
|
|
(1)
|
Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.
|
Net Sales
Net sales decreased 6% to $106.0 million in the thirteen
weeks ended August 3, 2019 from $113.0 million in the thirteen weeks ended August 4, 2018. This decrease was primarily
due to a 5% decrease in comparable sales following a 13% decrease in the same period of the prior year. The decrease in
comparable sales was the result of lower average unit retail prices associated with deeper markdowns. This was partially
offset by higher boutique conversion rates and higher average units per transaction. There were 704 comparable boutiques and
14 non-comparable boutiques open at August 3, 2019 compared to 663 and 79, respectively, at August 4, 2018.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs decreased 5% to $65.5
million in the thirteen weeks ended August 3, 2019 from $68.9 million in the thirteen weeks ended August 4, 2018. Cost of merchandise
and shipping expenses decreased by $2.3 million primarily due to decreased sales volume during the quarter. Occupancy costs decreased
by $1.1 million due to lower depreciation associated with boutiques impaired in fiscal year 2018 and lower demolition costs associated
with boutique remodels.
As a percentage of net sales, cost of goods sold and
occupancy costs increased to 61.8% in the thirteen weeks ended August 3, 2019 from 61.0% in the thirteen weeks ended August
4, 2018, an unfavorable variance of 80 basis points. This change was due to lower merchandise margins and deleveraging of
occupancy costs as a result of lower sales. The decrease in merchandise margins was due to deeper markdowns but
was partially offset by lower marked-out-of-stock charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 10% to
$39.1 million in the thirteen weeks ended August 3, 2019 from $43.3 million in the thirteen weeks ended August 4, 2018. This
decrease was primarily due to a $2.5 million decrease in boutique payroll and supplies associated with our cost reduction initiatives
under our turnaround plan. Additionally, corporate payroll, stock-based compensation and other payroll related expenses decreased
$0.7 million primarily due to lower headcount as a result of the workforce reduction in February 2019, marketing expenses decreased
by $0.4 million, and asset write-off charges related to remodels decreased by $0.3 million.
As a percentage of net sales, selling, general and administrative
expense decreased to 36.9% in the thirteen weeks ended August 3, 2019 as compared to 38.3% in the thirteen weeks ended August 4,
2018 due to leveraging of expenses.
Income Tax (Benefit) Expense
Income tax benefit was $(0.3) million in the thirteen weeks
ended August 3, 2019 compared to an income tax expense of $0.4 million in the thirteen weeks ended August 4, 2018 while the effective
income tax (benefit) expense rate was (22.0)% compared to 44.6% over the same period, respectively. The income tax benefit recognized
in the thirteen weeks ended August 3, 2019 was based on our revised estimate of the Company’s annualized taxable income for
fiscal year 2019.
Twenty-Six Weeks August 3, 2019 Compared to Twenty-Six
Weeks Ended August 4, 2018
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
|
August 4, 2018
|
|
|
Variance
|
|
|
|
In USD
|
|
|
As a %
of Net
Sales (1)
|
|
|
In USD
|
|
|
As a %
of Net
Sales (1)
|
|
|
In USD
|
|
|
%
|
|
|
Basis
Points
|
|
|
|
(in thousands, except percentages and basis points)
|
|
Net sales
|
|
$
|
193,097
|
|
|
|
100.0
|
%
|
|
$
|
213,430
|
|
|
|
100.0
|
%
|
|
$
|
(20,333
|
)
|
|
|
(10
|
)%
|
|
|
-
|
|
Cost of goods sold and occupancy costs
|
|
|
122,267
|
|
|
|
63.3
|
%
|
|
|
130,960
|
|
|
|
61.4
|
%
|
|
|
(8,693
|
)
|
|
|
(7
|
)%
|
|
|
200
|
|
Gross profit
|
|
|
70,830
|
|
|
|
36.7
|
%
|
|
|
82,470
|
|
|
|
38.6
|
%
|
|
|
(11,640
|
)
|
|
|
(14
|
)%
|
|
|
(200
|
)
|
Selling, general and administrative expenses
|
|
|
79,118
|
|
|
|
41.0
|
%
|
|
|
86,160
|
|
|
|
40.4
|
%
|
|
|
(7,042
|
)
|
|
|
(8
|
)%
|
|
|
60
|
|
Loss from operations
|
|
|
(8,288
|
)
|
|
|
(4.3
|
)%
|
|
|
(3,690
|
)
|
|
|
(1.7
|
)%
|
|
|
4,598
|
|
|
|
125
|
%
|
|
|
260
|
|
Interest expense
|
|
|
325
|
|
|
|
0.2
|
%
|
|
|
229
|
|
|
|
0.1
|
%
|
|
|
96
|
|
|
|
42
|
%
|
|
|
10
|
|
Other income
|
|
|
372
|
|
|
|
0.2
|
%
|
|
|
252
|
|
|
|
0.1
|
%
|
|
|
120
|
|
|
|
48
|
%
|
|
|
10
|
|
Loss before income tax expense (benefit)
|
|
|
(8,241
|
)
|
|
|
(4.3
|
)%
|
|
|
(3,667
|
)
|
|
|
(1.7
|
)%
|
|
|
4,574
|
|
|
|
125
|
%
|
|
|
250
|
|
Income tax expense (benefit)
|
|
|
96
|
|
|
|
0.0
|
%
|
|
|
(236
|
)
|
|
|
(0.1
|
)%
|
|
|
332
|
|
|
|
141
|
%
|
|
|
20
|
|
Net loss
|
|
$
|
(8,337
|
)
|
|
|
(4.3
|
)%
|
|
$
|
(3,431
|
)
|
|
|
(1.6
|
)%
|
|
$
|
4,906
|
|
|
|
143
|
%
|
|
|
270
|
|
|
(1)
|
Percentage totals or differences in the above table may not equal the sum or difference of the components due to rounding.
|
Net Sales
Net sales decreased 10% to $193.1 million in the
twenty-six weeks ended August 3, 2019 from $213.4 million in the twenty-six weeks ended August 4, 2018. This decrease
was primarily due to a 9% decrease in comparable sales following a 15% decrease in the same period of the prior year. The
decrease in comparable sales was primarily due a decline in traffic as well as lower average unit retail prices as a result
of deeper markdowns. There were 704 comparable boutiques and 14 non-comparable boutiques open at August 3, 2019 compared to
663 and 79, respectively, at August 4, 2018.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs decreased 7% to $122.3
million in the twenty-six weeks ended August 3, 2019 from $131.0 million in the twenty-six weeks ended August 4, 2018. Cost of
merchandise and shipping expenses decreased by $7.2 million primarily due to decreased sales volume. Occupancy costs decreased
by $1.5 million due to lower depreciation associated with boutiques impaired in fiscal year 2018 and lower demolition costs associated
with boutique remodels.
As a percentage of net sales, cost of goods sold and occupancy
costs increased to 63.3% in the twenty-six weeks ended August 3, 2019 from 61.4% in the twenty-six weeks ended August 4, 2018,
an unfavorable variance of 200 basis points. This change was due to deleveraging of occupancy costs as a result of lower sales.
Merchandise margins slightly decreased as the increase in markdowns were partially offset by lower marked-out-stock charges.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 8% to
$79.1 million in the twenty-six weeks ended August 3, 2019 from $86.2 million in the twenty-six weeks ended August 4, 2018.
This decrease was primarily due to a $5.7 million decrease in boutique payroll and supplies associated with our cost reduction
initiatives under our turnaround plan. Additionally, stock-based compensation decreased $1.0 million primarily due to certain employee
departures, marketing expenses decreased $0.7 million and freight expenses decreased $0.5 million as a result of lower sales volume.
These decreases were partially offset by $2.2 million of consulting expenses associated with our review of strategic and financial
alternatives and the implementation of our turnaround plan as well as higher audit and legal fees.
As a percentage of net sales, selling, general and administrative
expense increased to 41.0% in the twenty-six weeks ended August 3, 2019 as compared to 40.4% in the twenty-six weeks ended August 4,
2018 due to deleveraging of expenses as a result of lower sales.
Income Tax Expense (Benefit)
Income tax expense was $0.1 million in the twenty-six
weeks ended August 3, 2019 compared to an income tax benefit of $0.2 million in the twenty-six weeks ended August 4, 2018 while
the effective income tax expense (benefit) rate was 1.2% compared to (6.4)% over the same period, respectively. The income tax
expense in the current year-to-date period was related to state taxes while the prior year income tax benefit included a provision
for net operating loss carryover partially offset by additional income tax expense related to the vesting of certain stock-based
awards.
Sales by Merchandise
Department
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 3, 2019
|
|
|
August 4, 2018
|
|
|
August 3, 2019
|
|
|
August 4, 2018
|
|
|
|
In Dollars
|
|
|
As a % of
Net Sales(1)
|
|
|
In Dollars
|
|
|
As a % of
Net Sales(1)
|
|
|
In Dollars
|
|
|
As a % of
Net Sales(1)
|
|
|
In Dollars
|
|
|
As a % of
Net Sales(1)
|
|
|
|
(in thousands, except percentages)
|
|
Apparel
|
|
$
|
52,389
|
|
|
|
49.4
|
%
|
|
$
|
56,807
|
|
|
|
50.3
|
%
|
|
$
|
94,213
|
|
|
|
48.8
|
%
|
|
$
|
106,341
|
|
|
|
49.8
|
%
|
Jewelry
|
|
|
27,957
|
|
|
|
26.4
|
%
|
|
|
26,984
|
|
|
|
23.9
|
%
|
|
|
51,835
|
|
|
|
26.8
|
%
|
|
|
50,842
|
|
|
|
23.8
|
%
|
Accessories
|
|
|
16,211
|
|
|
|
15.3
|
%
|
|
|
17,181
|
|
|
|
15.2
|
%
|
|
|
29,851
|
|
|
|
15.5
|
%
|
|
|
32,664
|
|
|
|
15.3
|
%
|
Gifts
|
|
|
8,532
|
|
|
|
8.1
|
%
|
|
|
11,337
|
|
|
|
10.0
|
%
|
|
|
16,375
|
|
|
|
8.5
|
%
|
|
|
22,442
|
|
|
|
10.5
|
%
|
Other (2)
|
|
|
883
|
|
|
|
0.8
|
%
|
|
|
716
|
|
|
|
0.6
|
%
|
|
|
823
|
|
|
|
0.4
|
%
|
|
|
1,140
|
|
|
|
0.5
|
%
|
|
|
$
|
105,972
|
|
|
|
100.0
|
%
|
|
$
|
113,025
|
|
|
|
100.0
|
%
|
|
$
|
193,097
|
|
|
|
100.0
|
%
|
|
$
|
213,430
|
|
|
|
100.0
|
%
|
|
(1)
|
Percentage totals in the above table may not equal the
sum of the components due to rounding.
|
|
(2)
|
Includes gift card breakage income, shipping and change
in return reserve.
|
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations
and borrowings under our Amended ABL Credit Agreement (see “Asset Based Revolving Credit Facility” below for more information)
and Term Loan Credit Agreement (see “Term Loan Credit Agreement” below for more information). Our primary cash needs
are for funding normal working capital requirements, the operation of our existing boutiques and ecommerce website, the implementation
of our turnaround plan, and payments of interest and principal, if any, under our Amended ABL Credit Agreement and Term Loan Credit
Agreement. We may use cash or our asset based revolving credit facility to issue letters of credit to support merchandise
receipts or for other corporate purposes. The most significant components of our working capital are cash and cash equivalents,
merchandise inventories, accounts payable, operating lease liabilities and other current liabilities. Our working capital position
benefits from the fact that we generally collect cash from sales to customers the day of or, in the case of credit or debit card
transactions, within several days of the related sales and we typically have up to 45 days to pay our inventory vendors and up
to 60 days to pay other vendors.
At August 3, 2019, we had $22.0 million of cash and cash equivalents,
and $10.0 million of borrowings outstanding, with $10.0 million of borrowing base availability under our ABL Credit Agreement.
Of the total borrowing base availability as of August 3, 2019, $4.0 million was available to be drawn without consideration of
the fixed charge coverage ratio requirement (as defined below). We were in compliance with all covenants under our ABL Credit Agreement
as of August 3, 2019.
On August 13, 2019, we entered into a Term Loan Credit Agreement
with Tiger Finance, LLC for an aggregate term loan of $10.0 million and matures on August 13, 2022. See “Term Loan Credit
Agreement” below for more information. We used the proceeds from this Term Loan to pay the $10.0 million outstanding amount
under our ABL Credit Agreement.
We expect that our cash flow from operations and any available
borrowings under our Amended ABL Credit Agreement will be sufficient to fund capital expenditures and our working capital requirements
for at least the next twelve months.
Cash Flow
A summary of our operating, investing and financing activities
are shown in the following table:
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
|
(in
thousands)
|
|
Provided
by operating activities
|
|
$
|
5,375
|
|
|
$
|
10,936
|
|
Used
in investing activities
|
|
|
(3,372
|
)
|
|
|
(14,436
|
)
|
Used
in financing activities
|
|
|
(144
|
)
|
|
|
(4,477
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
1,859
|
|
|
$
|
(7,977
|
)
|
Operating Activities
Operating activities consist of net income (loss) adjusted for
non-cash items, including depreciation and amortization, deferred taxes, and the effect of working capital changes. Net cash provided
by operating activities was $5.4 million in the twenty-six weeks ended August 3, 2019 compared to $10.9 million in the twenty-six
weeks ended August 4, 2018. The decrease in cash provided by operating activities in the current period as compared to the same
period of the prior year was primarily due to the increase in net loss and timing of payments of accounts payable partially offset
by the $8.5 million income tax refund received in April 2019.
Investing Activities
Investing activities consist primarily of capital expenditures
for new boutiques, improvements to existing boutiques, as well as investments in information technology and our distribution facility.
|
|
Twenty-Six Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
|
|
(in
thousands)
|
|
Capital expenditures
for:
|
|
|
|
|
|
|
|
|
Remodels
|
|
$
|
1,575
|
|
|
$
|
4,186
|
|
New
boutiques
|
|
|
620
|
|
|
|
7,807
|
|
Existing
boutiques
|
|
|
738
|
|
|
|
980
|
|
Technology
|
|
|
282
|
|
|
|
891
|
|
Corporate
and distribution
|
|
|
157
|
|
|
|
572
|
|
|
|
$
|
3,372
|
|
|
$
|
14,436
|
|
Our total capital expenditures for the twenty-six weeks ended
August 3, 2019 and August 4, 2018 were $3.4 million and $14.4 million, respectively. Our spending in the twenty-six weeks ended
August 3, 2019 was associated with the payment of prior year accrued constructions costs. Total net capital expenditure additions,
on an accrual basis, for the twenty-six weeks ended August 3, 2019 totaled $1.4 million. As previously disclosed, we have substantially
decreased, and expect to continue to substantially decrease, our investments in new boutiques, remodels and relocations in fiscal
year 2019 until the desired results of our turnaround plan are achieved. For the twenty-six weeks ended August 4, 2018, our capital
expenditures were mostly related to new boutique openings and remodels.
The following table summarizes new boutique openings and existing
boutique remodels information for the periods presented.
|
|
Twenty-Six
Weeks Ended
|
|
|
|
August
3, 2019
|
|
|
August
4, 2018
|
|
New boutiques:
|
|
|
|
|
|
|
|
|
Number
of new boutiques opened
|
|
|
4
|
|
|
|
31
|
|
Average cost per new
boutique
|
|
$
|
420,000
|
|
|
$
|
315,000
|
|
Average
tenant allowance per new boutique
|
|
$
|
-
|
|
|
$
|
43,000
|
|
|
|
|
|
|
|
|
|
|
Remodels:
|
|
|
|
|
|
|
|
|
Number
of boutiques remodeled
|
|
|
-
|
|
|
|
45
|
|
Average cost per remodeled
boutique
|
|
$
|
-
|
|
|
$
|
140,000
|
|
The increase in average cost per new boutique in the twenty-six
weeks ended August 3, 2019 compared to the comparable prior year period was primarily due to costs associated with bringing one
new boutique in compliance with certain requirements. Additionally, we did not receive any tenant allowances for new boutiques
opened during the current year period as we continued our focus on lowering rental rates.
Management anticipates that additional capital expenditures
for the remainder of fiscal year 2019 will be approximately $2.6 million. The majority of this amount will be spent on improvements
to existing boutiques and investments in existing technology.
Financing Activities
Financing activities consist of borrowings and payments under
our Asset Based Revolving Credit Facility as well as repurchases of our common stock.
Net cash used in financing activities in the twenty-six weeks
ended August 3, 2019 consisted of $5.0 million proceeds from borrowings under our ABL Credit Agreement that was subsequently repaid
during the quarter and $0.1 million payment of debt issuance costs associated with our Term Loan Credit Agreement. Net cash used
in financing activities in the twenty-six weeks ended August 4, 2018 was $4.4 million which primarily consisted of repurchases
of common stock.
Asset Based Revolving Credit Facility
On May 25, 2018, the Borrowers, entered into the ABL Credit
Agreement with JPMorgan Chase Bank, N.A., as administrative agent and the lenders party thereto. The ABL Credit Agreement provided
for an Aggregate Revolving Commitments (as defined in the ABL Credit Agreement) of $50.0 million (including up to $10.0 million
for letters of credit) and was scheduled to mature on May 25, 2023. On August 3, 2019, we had $10.0 million of borrowings outstanding
and $10.0 million of borrowing base availability under the ABL Credit Agreement. Of the total borrowing base availability as of
August 3, 2019, $4.0 million was available to be drawn without consideration of the fixed charge coverage ratio requirement contained
in the ABL Credit Agreement. Additionally, there were no letters of credit outstanding as of August 3, 2019.
On August 13, 2019, concurrent with entering into the Term Loan
Credit Agreement (described below), the Borrowers, entered into the First Amendment to ABL Credit Agreement. The First Amendment
to ABL Credit Agreement, among other things, (i) reduced the Aggregate Revolving Commitment (as defined in the Amended ABL Credit
Agreement) from $50.0 million to $40.0 million; (ii) allowed the Loan Parties to enter into the Term Loan Credit Agreement; (iii)
changed the maturity date under the Amended ABL Credit Agreement from May 23, 2023 to the earlier of (a) May 23, 2023 and (b) the
date that is 90 days prior to any scheduled maturity of the Term Loan; (iv) removed the requirement to maintain the minimum fixed
charge coverage ratio previously contained in the ABL Credit Agreement; and (v) limits the amount of capital expenditures that
the Loan Parties may make through the fiscal year ending in 2021, provided that the Loan Parties may make unlimited amounts of
capital expenditures if certain payment conditions are met. The reduced Aggregate Revolving Commitment of $40.0 million exceeds
the current borrowing base under the Amended ABL Credit Agreement by a significant amount and such reduction therefore does not
result in any reduction in available borrowings under the Amended ABL Credit Agreement.
Availability under the Amended ABL Credit
Agreement is subject to a customary borrowing base comprised of: (a) a specified percentage of the Borrower’s credit card
accounts (as defined in the Amended ABL Credit Agreement); and (b) a specified percentage of the Borrower’s eligible
inventory (as defined in the Amended ABL Credit Agreement), and reduced by (c) certain customary reserves and adjustments
(as defined in the Amended ABL Credit Agreement).
All obligations of each Loan Party under
the Amended ABL Credit Agreement continue to be unconditionally guaranteed by the Company and each of the Company’s existing
and future direct and indirect wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Amended ABL
Credit Agreement, and the guarantees of those obligations (as well as banking services obligations and any interest rate hedging
or other swap agreements), are secured by substantially all of the assets of the Company and each of the Company’s existing
and future direct and indirect wholly owned domestic subsidiaries. Additionally, the Amended ABL Credit Agreement contains customary
events of default and requires the Loan Parties to comply with certain financial covenants, including a restriction prohibiting
the Loan Parties from declaring or making dividend payments, subject to certain exceptions. In addition, the Company may declare
or make dividend payments, subject to the satisfaction of the Payment Conditions (as defined in the Amended ABL Credit Agreement).
The Amended ABL Credit Agreement also requires that the auditor’s report on the Company’s audited financial statements
for the previous fiscal year does not contain a “going concern” or like qualification or exception.
Borrowings under the Amended ABL Credit
Agreement continue to bear interest at a rate equal to an applicable margin plus, at the option of the Borrowers, either (a) in
the case of base rate borrowings, a rate equal to the highest of (1) the prime rate of JPMorgan Chase Bank, N.A., (2) the federal
funds rate plus 1/2 of 1.00%, and (3) LIBOR for an interest period of one month plus 1.00% (subject to a 0.0% LIBOR floor), provided
that that the interest rate for base rate borrowings (including the addition of the applicable margin) shall be no less than 1.50%
per annum, or (b) in the case of LIBOR borrowings, a rate equal to the LIBOR for the interest period relevant to such borrowing
subject to a 0.00% floor. The applicable margin for borrowings under the Amended ABL Credit Agreement ranges from -0.50% to 0.00%
per annum with respect to base rate borrowings and from 1.25% to 1.75% per annum with respect to LIBOR borrowings, in each case
based upon the achievement of specified levels of the Fixed Charge Coverage Ratio (as defined in the Amended ABL Credit Agreement).
The Amended ABL Credit Agreement also requires the Borrowers to pay a commitment fee for the unused portion of the revolving credit
facility of 0.20% per annum.
The Amended ABL Credit Agreement contains
customary affirmative and negative covenants, including limitations, subject to customary exceptions, on the ability of the Company
and its subsidiaries to (i) incur additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances;
(iv) sell assets; (v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii)
engage in mergers or consolidations; (viii) change the business conducted by the Company and its subsidiaries; (ix) engage in certain
transactions with affiliates; (x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries
to grant liens upon their assets; and (xi) amend certain charter documents and material agreements governing subordinated and junior
indebtedness.
The Amended ABL Credit Agreement also contains customary events
of default, including: (i) failure to pay principal, interest, fees or other amounts under the Amended ABL Credit Agreement when
due taking into account any applicable grace period; (ii) any representation or warranty proving to have been materially incorrect
when made or deemed made; (iii) a cross default with respect to other material indebtedness; (iv) bankruptcy and insolvency events;
(v) unsatisfied material final judgments; (vi) a “change of control”; (vii) certain defaults under the Employee Retirement
Income Security Act of 1974; (viii) the invalidity or impairment of any loan document or any security interest; and (ix) breach
of covenants in the Amended ABL Credit Agreement and other loan documents.
Term Loan Credit Agreement
On August 13, 2019, the Loan Parties, entered into the Term
Loan Credit Agreement with Tiger Finance, LLC, as administrative agent and the lenders party thereto. The Term Loan Credit Agreement
provides for an aggregate term loan of $10.0 million and matures on August 13, 2022. The Term Loan Credit Agreement is subject
to a combined borrowing base together with the Company’s existing asset based revolving credit facility under the Amended
ABL Credit Agreement. As of August 31, 2019, the combined borrowing base availability was $16.3 million.
All obligations of each Loan Party under the Term Loan Credit
Agreement are unconditionally guaranteed by the Company and each of the Company’s existing and future direct and indirect
wholly owned domestic subsidiaries, including the Borrowers. All obligations under the Term Loan Credit Agreement, and the guarantees
of those obligations, are secured on a junior lien basis by substantially all of the assets of the Company and each of the Company’s
existing and future direct and indirect wholly owned domestic subsidiaries.
The loan under the Term Loan Credit Agreement (the “Term
Loan”) bears interest at a rate equal to LIBOR for the interest period relevant to the Term Loan, subject to a 0.00% floor,
plus 8.00%, provided that the interest rate on the Term Loan will not be less than 10.00%. The Term Loan Credit Agreement also
requires the Borrowers to pay a closing fee equal to 2.50% of the amount of the Term Loan and an annual agency fee of $50,000.
The Term Loan Credit Agreement contains customary affirmative
and negative covenants, including limitations, subject to customary exceptions, on the ability of the Company and its subsidiaries
to (i) incur additional debt; (ii) create liens; (iii) make certain investments, acquisitions, loans and advances; (iv) sell assets;
(v) pay dividends or make distributions or make other restricted payments; (vi) prepay other indebtedness; (vii) engage in mergers
or consolidations; (viii) change the business conducted by the Company and its subsidiaries; (ix) engage in certain transactions
with affiliates; (x) enter into agreements that restrict dividends from subsidiaries or the ability of subsidiaries to grant lines
upon their assets; and (xi) amend certain charter documents and material agreements governing subordinated and junior indebtedness.
In addition, the Term Loan Credit Agreement limits the amount
of capital expenditures that the Loan Parties may make through the fiscal year ending in 2021, provided that the Loan Parties may
make unlimited amounts of capital expenditures if certain payment conditions are met.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities
at the date of the financial statements. A summary of the Company’s significant accounting policies is included in Note 1
to the Company’s annual consolidated financial statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended February 2, 2019.
Certain of the Company’s accounting policies and estimates
are considered critical, as these policies and estimates are the most important to the depiction of the Company’s consolidated
financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently
uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” section of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019. Except as noted below,
as of August 3, 2019, there were no significant changes to any of our critical accounting policies and estimates as disclosed in
our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
Leases
On February 3, 2019, we adopted the provisions of Accounting
Standards Codification (“ASC”) 842, “Leases”, using the additional, optional transition method which allows
entities to initially apply the new standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings
at the date of adoption. Prior period amounts and disclosures were not adjusted and continue to be reported under ASC 840, “Leases.”
As a result of the adoption, we recorded an operating lease liability of $278.9 million and operating lease right-of-use (“ROU”)
asset of $242.9 million at February 3, 2019. Additionally, we recognized $1.8 million cumulative-effect adjustment to the beginning
balance of retained earnings related to the impairment of certain ROU assets subjected to impairment testing under existing accounting
guidance for which indicators of impairment existed at the time of the adoption of ASC 842. The adoption of ASC 842 did not have
a material impact to the unaudited consolidated statements of operations or cash flows. See Note 1 to our accompanying consolidated
financial statements for additional information.
We lease our boutiques, distribution center and office space,
and certain boutique and corporate office equipment under operating leases. In accordance with ASC 842, we determine if an arrangement
is a lease at inception and recognize operating lease ROU assets and operating lease liabilities at commencement date based on
the net present value of the fixed lease payments over the lease term and, for operating lease ROU assets, include initial direct
costs and exclude lease incentives. Variable lease payments are expensed as incurred. Lease terms may include options to extend
or terminate the lease when it is reasonably certain that we will elect that option. Subsequent to the recognition of its operating
lease ROU assets and operating lease liabilities, we recognize lease expense related to its operating lease payments on a straight-line
basis over the lease term.
Operating lease liabilities are calculated using the effective
interest method and recognized at the commencement date based on the present value of lease payments over the reasonably certain
lease term. As our leases generally do not provide an implicit rate, we use a collateralized incremental borrowing rate to determine
the present value of lease payments. The collateralized incremental borrowing rate is based on a synthetic credit rating that is
externally prepared at each measurement.
Impairment of Long-Lived Assets, Including Operating Lease
ROU Assets
We evaluate long-lived assets held for use, including operating
lease ROU assets, and held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets
may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash
flows, which is generally at a boutique level. In determining whether an impairment has occurred, we consider both qualitative
and quantitative factors.
The quantitative analysis involves estimating the undiscounted
future cash flows directly related to that asset and comparing it against its carrying value. If the carrying value of the asset
is greater than the sum of the undiscounted future cash flows, an impairment loss is recognized for the difference between the
carrying value of the asset and its fair value. The fair value of the asset group is generally determined using discounted future
cash flows or a market participant’s ability to generate economic benefits using the asset in its highest and best use, whichever
is appropriate. The determination of fair value takes into account the asset’s historical performance, current sales trends,
market conditions and other relevant factors deemed material, and discounted using a rate commensurate with the risk. The inputs
used in the determination of the fair value are considered as Level 3 inputs in the fair value hierarchy, which require a significant
degree of judgment and are based on our own assumptions.
Recent Accounting
Pronouncements
For information regarding recent accounting pronouncements,
please refer to Note 1 to our unaudited consolidated financial statements included in Part I of this Report, which is incorporated
herein by reference.
Contractual Obligations
There were no significant changes to our contractual obligations
and commercial commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019, other than
those which occur in the normal course of business. In addition, subsequent to August 3, 2019, we entered into the Term Loan Credit
Agreement and First Amendment to ABL Credit Agreement as discussed above.
Off Balance Sheet Arrangements
We are not party to any off-balance sheet arrangements.