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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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You should read this discussion and analysis of our financial condition and results of operations in conjunction with our “Selected Historical Consolidated Financial and Other Data,” and our consolidated financial statements and related notes appearing elsewhere in this report. Some of the statements in the following discussion are forward-looking statements. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for more information.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in seven sections:
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Critical Accounting Estimates
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•
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Liquidity and Capital Resources
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•
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Contractual Obligations
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Off Balance Sheet Items
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Overview
hhgregg, Inc. is a specialty retailer of home appliances, televisions, computers, tablets, consumer electronics, home furniture, mattresses, fitness equipment and related services operating under the name hhgregg
™
. As of
March 31, 2014
, we operated
228
stores in
Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin
. We operate in one reportable segment. We do not have international operations. References to fiscal years in this report relate to the respective 12 month period ended March 31. Our
2014
fiscal year is the 12 month period that ended on
March 31, 2014
.
Throughout our MD&A, we refer to comparable store sales. Comparable store sales is comprised of net sales at stores in operation for at least 14 full months, including remodeled and relocated stores, as well as net sales for our website. The method of calculating comparable store sales varies across the retail industry and our method of calculating comparable store sales may not be the same as other retailers’ methods.
This overview section is divided into three sub-sections discussing our operating strategy and performance, business strategy and core philosophies and seasonality.
Operating Strategy and Performance.
We focus the majority of our floor space, advertising expense and distribution infrastructure on the marketing, delivery and installation of a wide selection of premium appliance, consumer electronics and home furniture products. We carry approximately 350 models of major appliances in stock, and a large selection of TVs, as well as, computers, consumer electronics, furniture, fitness equipment, mattresses, and tablets. Appliance and consumer electronics sales comprised
85%
and
86%
of our net sales mix for the
twelve months ended March 31, 2014 and 2013
, respectively.
We strive to differentiate ourselves through our customer purchase experience starting with a highly-trained, consultative commissioned sales force which educates our customers on the features and benefits of our products, followed by rapid product delivery and installation, and ending with post-sales support services. We carefully monitor our competition to ensure that our prices are competitive in the market place. Our experience has been that informed customers often choose to buy a more heavily-featured product once they understand the applicability and benefits of its features. Heavily-featured products typically carry higher average selling prices and higher margins than less-featured, entry-level price point products.
In response to the declines in our overall comparable store sales largely resulting from the performance of the consumer electronics category, we have developed four major initiatives for fiscal 2015. These include continuing to redefine our sales mix, further differentiating our customer experience, expanding our e-commerce capabilities and launching new customer facing technologies. We have also developed a new “purpose” statement, “To inspire and delight our customers with a truly
differentiated purchase experience to help bring their homes to life.” We believe that our fiscal 2015 initiatives support this “purpose”, and that the success of these strategies will result in consumers recognizing hhgregg as a “home products” retailer.
Our first initiative for fiscal 2015 is redefining our sales mix through a continued investment and focus on the appliance, and furniture categories while stabilizing the consumer electronics category. Our sales in the appliance category have increased on a comparative basis over the past eleven quarters, and this category has proven to be the cornerstone of our business. To continue to drive growth, we are enhancing our displays of complete kitchen solutions, providing a differentiated product assortment based on geography and demographics, more than doubling our current number of 5 Fine Lines locations, and enhancing our special order capabilities. In addition, we will continue to place a greater emphasis on the appliances category in our branding and advertisement messages. The U.S. Census Bureau’s data on New Residential Construction shows that 2014 U.S. Housing Start-Up’s experienced a 9% increase for the twelve month period ended March 31, 2014 over the prior year comparable period. Additionally, according to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption expenditures for home appliances increased 3.6% from $43.9 billion in 2012 to $45.5 billion in 2013. We expect that as the U.S. housing market and general economy continues to improve, the appliance industry will experience increases in demand. While this data indicates that the housing market has improved year over year, there is no guarantee that the improvement in the housing market will continue and will not be impacted in the future by factors such as rising interest rates. Despite these trends, the appliance industry has had a slow start in the first half of the calendar year. We believe that part of this impact was weather related and expect the industry to perform better the remainder of the calendar year. Additionally, during our previous fiscal year we rolled out an expanded offering of furniture products. In the current year we are in the process of transitioning our furniture assortment by increasing the number of brands that we sell, resulting in a greater assortment of furniture merchandise at a variety of price-points, which we believe better match our customers’ taste. While we do not expect to dedicate any incremental floor space to this new selection of furniture at this time, we will continue to optimize our floor space that is already dedicated to furniture. The consumer electronics category will continue to be an important category for us during this fiscal year and beyond. During fiscal 2015, we will seek to stabilize consumer electronics sales through further investing in large screen sizes, OLED technology and having an expansive selection of ultra HD/4K products. Despite the new technology and innovations in this category, we expect to continue to see negative comparable store sales within consumer electronics, driven by continued pressure in the video category. As it relates to our computing and wireless category, we plan to exit the contract-based mobile phone business during the first fiscal quarter of 2015. Historically, this business has negatively impacted the Company’s overall operating profitability, and the decision to exit this business better aligns with our long-term strategic initiatives. Additionally, we plan to continue to drive traffic through consistent marketing of the Apple iPad and iPod products that we began offering in fiscal 2014. We expect that with the continued innovations to connected devices, we will utilize these products to drive greater traffic to our stores. Our ultimate goal of redefining our sales mix is to lift the average sales units of our stores.
During fiscal 2015 we plan to continue to develop and enhance our credit offerings. Over the past 12 months, our non-recourse private label credit card penetration has increased approximately
282
basis points to
36%
. We continue to encourage the use of the card, through unique benefits such as in store payment options, reward offers and extended financing options. Over the past two years we have grown our credit offerings, beginning with the roll out of a “lease to own” option in fiscal 2013, and the roll out of a secondary finance offering in fiscal 2014, both through third party providers and non-recourse to our business. We are continuing to modify our credit offerings to best meet the ongoing needs of our customers. We believe that continuing to enhance our credit offerings will generate greater brand loyalty, higher average sales per transaction, and increased premium service plan sales.
Our second initiative for fiscal
2015
is continuing to enhance and differentiate our customer experience. hhgregg provides customers an educated sales force to assist them in making informed decisions about their purchase. We are continuing to refine our selling techniques to embrace technology, and utilize omni-channel strategies to better connect with our customer base in store. Our goal will be to better serve and engage our customers by providing a truly differentiated shopping and purchase experience. We plan to establish trust in this experience through a very transparent online price comparison tool inside of the store. Additionally, our goal will be to eliminate pain points that most often frustrate customers who are buying large products for their homes. We believe that the key to unlocking our brand potential is through a truly differentiated purchase experience.
Our third initiative for fiscal 2015 is enhancing our e-commerce capabilities to provide our customers a truly omni-channel shopping experience, allowing them to move seamlessly across the various mediums, including, store, web, mobile, social and call center. During fiscal 2015, we plan to invest in infrastructure upgrades, additional web-application capabilities, enhancing our mobile application and continue to add greater selection to our expanded assortment. During fiscal 2014, we implemented an expanded aisle concept which tripled our product assortment online by carrying products that are not available in stores. During fiscal 2015 we plan to grow our current partner base by seeking opportunities with other vendors, and adding an in-store kiosk where our associates can assist our customers in purchasing these products. Additional enhancements include improving our nationwide delivery model, adding additional payment options for efficient checkout, and making
personalization updates such as profile improvements, recommendations and communication. We are pleased with the continued growth in e-commerce as we have seen nearly 60% sales growth calendar year to date. We know that many consumers start their research online and we want to continue to make hhgregg.com an advantage for our brand.
Our fourth initiative for fiscal 2015 is to launch new customer facing technologies. We are currently implementing our new point of sale system, and expect to be completed by the end of the fiscal second quarter of 2015. The new system will provide operational improvements, customer service improvements and a streamlined checkout process. The new point of sale system that we plan to implement will not only have new digital capabilities, but expedite the check-out process. Additionally, we expect to implement a new delivery tracking system. The goal of the system is to not only provide more efficient delivery routes, but more importantly, to provide an integrated tool that allows for communication before, during and after the delivery process. We understand that having a delivery come to a customer’s house may require a customer to leave work or juggle their schedule, with that in mind, we will be deploying a solution that allows constant communication between the delivery team and the customer. This will help ensure that we provide the customer with a seamless, on-schedule, best in class home delivery. We expect to have the core functionality of this system in place in all of our distribution centers by the end of May, fiscal 2015.
Key Metrics
The following table summarizes certain operating data that we believe are important to an understanding of our operating model:
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Fiscal Year Ended March 31,
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2014
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2013
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2012
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Inventory turnover
(1)
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5.5x
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5.9x
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7.2x
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Working capital (as a percentage of net sales)
(2)
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6.5
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%
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7.0
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%
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7.4
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%
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Net capital expenditures (as a percentage of net sales)
(3)
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1.0
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%
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2.2
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%
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3.3
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%
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Income from operations (as a percentage of net sales)
(4)
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0.1
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%
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1.8
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%
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4.4
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%
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(1)
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Inventory turnover for the specified period is calculated by dividing our cost of goods sold for the fiscal year by the average of the beginning and ending inventory for that period.
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(2)
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Working capital represents current assets excluding customer deposits and the current portion of deferred income taxes less current liabilities as of the end of the respective fiscal year-end, expressed as a percentage of net sales.
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(3)
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Net capital expenditures represent capital expenditures less proceeds and deposits from sale and leaseback transactions, expressed as a percentage of net sales.
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(4)
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For the fiscal year ended March 31, 2012, income from operations includes $40.0 million of life insurance proceeds.
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We focus on leveraging our semi-fixed expenditures in advertising, distribution and regional management through closely managing our inventory, working capital and store development expenditures. Our inventory has averaged
6.2
turns per year over the past three fiscal years. During fiscal 2014, our net sales decline had a negative impact on our inventory turnover calculation. During fiscal 2013, we rolled out new product categories of furniture and fitness equipment, which elevated inventory levels as compared to the prior year. Our working capital, expressed as a percentage of net sales, has averaged
7.0%
over the past three fiscal years. Our net capital expenditures, measured as a percentage of net sales, have averaged
2.2%
over the past three fiscal years.
Business Strategy and Core Philosophies.
Our business strategy is focused around offering our customers a superior customer purchase experience. From the time the customers walk in the door, they experience a well-designed, customer-friendly store. Our stores are brightly lit and have clearly distinguished departments that allow our customers to find what they are looking for. We greet and assist our customers with our highly-trained consultative sales force, who educate the customers about the different product features.
We believe our products are rich in features and innovation. We believe that customers find it helpful to have someone explain the features and benefits of a product as this assistance allows them the opportunity to buy the product that most closely matches their needs. We focus our product assortment on big box items requiring in-home delivery and installation in order to utilize service offerings. We follow up on the customer purchase experience by offering delivery capabilities on many of our products and in-home installation service.
While we believe many of our product offerings are considered essential items by our customers, other products and certain features are viewed as discretionary purchases. As a result, our results of operations are susceptible to a challenging macro-economic environment. Factors such as changes in consumer confidence, unemployment, consumer credit availability and the condition of the housing market have negatively impacted our core product categories and added volatility to our overall business. As consumers show a more cautious approach to purchases of discretionary items, customer traffic and spending patterns continue to be difficult to predict. By providing a knowledgeable consultative sales force, delivery capabilities, credit offerings and expanded product offerings, we believe we offer our customers a differentiated value proposition. There are many variables that affect consumer demand for the home product purchases that we offer, including:
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•
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Real disposable personal income is projected to grow at a stronger pace in 2014 than in 2013. The 2013 gain was depressed by tax increases, and dividend and bonus payments that were accelerated in 2012. Real disposable personal income is forecasted to increase 2.3% in calendar 2014, up from the 0.7% gain recorded in 2013, based on the March 2014 Blue Chip Economic Indicators
®
. *
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•
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The average unemployment rate for 2014 is forecasted to decline to 6.4%, according to the March 2014 Blue Chip Economic Indicators, which would be an improvement from the 7.4% average recorded in 2013. The unemployment rate should continue to trend lower as the job market continues to expand at a moderate pace.
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•
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Recent evidence suggests that home prices will continue to increase. In 2013, home price appreciation improved to an estimated 4.0%, according to the Federal Home Finance Agency index, up from flat growth in 2012. The gains were driven by increasing demand and lower inventories of homes for sale. Economists generally expect home price increases to moderate in 2014 but remain positive.
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•
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Housing turnover increased 9.0% in 2013, according to The National Association of Realtors and U.S. Census Bureau, compared with 9.7% growth in 2012. However, turnover remains 34% below its peak in 2005. Turnover is generally expected to continue to increase in 2014, though at a more moderate rate.
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*
Blue Chip Economic Indicators
® (ISSN: 0193-4600) is published monthly by Aspen Publishers, 76 Ninth Avenue, New York, NY 10011, a division of Wolters Kluwer Law and Business. Printed in the U.S.A.
Retail appliance sales are correlated to the housing industry and housing turnover. As more people purchase existing homes in the market, appliance sales tend to trend upward. Conversely, when demand in the housing market declines, appliance sales are negatively impacted. The appliance industry has benefited from increased innovation in energy efficient products. While these energy efficient products typically carry a higher average selling price than traditional products, they save the consumer significant dollars in annual energy savings. Average unit selling prices of major appliances are not expected to change dramatically in the foreseeable future. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for home appliances were $45.5 billion in 2013, an increase of 3.6% from $43.9 billion in 2012. Major household appliances, such as refrigerators, stovetops, dishwashers and washer/dryers, account for approximately 86.7% of this total at $39.4 billion in 2013. For the fiscal year ended 2014, we generated
47%
of total product sales from the sale of home appliances.
The consumer electronics industry depends on new product innovations to drive sales and profitability. Innovative, heavily-featured products are typically introduced at relatively high price points. Over time, price points are gradually reduced to drive consumption. Accordingly, there has been consistent price compression in flat panel televisions for equivalent screen sizes in recent years without a widely accepted innovation in technology to offset this compression. As new technology has not been sufficient to keep demand constant, the industry has seen falling demand, gross margin rate declines, and average selling price declines. The price compression was heightened especially during the third fiscal quarter of 2014 due to greater than normal promotional environment of the holiday season. We chose to not fully participate in the promotional environment and instead chose to focus on managing inventory levels to match the product demand of our business. This resulted in lost market share. Over the last couple of years, we have proactively shifted our focus towards larger screen sizes with higher profit margins, which has also resulted in lost market share in the consumer electronics category, as we offered fewer smaller screen size televisions. As we look forward, we believe the video industry will have a stronger innovation cycle in the coming year. This should drive higher average selling prices in the category as consumer preference shifts towards new products such as OLED and ultra HD TV’s and larger screen sizes. In addition, we have seen the evolution of traditional consumer electronics devices change to connected devices in the last few years. We have added product SKU’s related to connected devices, and will continue to utilize product innovations in this category to generate traffic. Despite the new technology innovations aforementioned, we may continue to experience a decline in overall consumer electronics sales for a variety of the reasons discussed herein. In future years, we will continue to evaluate our mix of product offerings in the consumer electronics category to maximize profit margins without significant loss of market share, while also featuring key opening price points to drive traffic. While the direction of consumer electronics sales for our Company are not certain, we believe there is opportunity for growth based on the following statistical information. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for consumer electronics was $212.2 billion in 2013, a 3.5% increase from 2012.
From this total, televisions accounted for $38.3 billion compared to $37.3 billion in the prior year, and personal computers and equipment accounted for $53.7 billion compared to $50.9 billion in the prior year. For the fiscal year ended 2014, we generated 48% of total product sales from the sale of consumer electronics and computing.
During fiscal 2014 we expanded our newest product categories within home products by adding room settings, additional mattresses and dinette sets. We will continue to refine our assortment in the furniture category by expanding our selection from one brand to several brands. We expect to test various products such as other types of home furniture including, but not limited to, outdoor casual living and bedroom pieces. As we are currently experiencing growth in this product category, we are optimistic about the growth experienced by the industry as well. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for household furniture was $95.3 billion in 2013, an increase of 1.4% from $94.0 billion in 2012. For the fiscal year ended 2014, we generated
5%
of total product sales from the sale of furniture and mattresses. For fiscal 2015 we plan to expand our offerings in this product category.
Seasonality.
Our business is seasonal, with a higher portion of net sales, operating costs, and operating profit realized during the quarter that ends December 31 due to the overall demand for consumer electronics during the holiday shopping season. Appliance sales are impacted by seasonal weather patterns, but are less seasonal than our electronics business and helps to offset the seasonality of our overall business. During the fourth fiscal quarter of 2014 extreme weather conditions negatively impacted traffic and operating performance in the majority of our stores.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
Vendor Allowances
We receive funds from our vendors for various programs including volume purchase rebates, marketing support, inventory markdowns, margin protection, product training and sales incentives. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an expense reduction when the cost is incurred. All other vendor allowances are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold.
We have two primary types of vendor allowances that do not represent reimbursements of specific, incremental and identifiable costs. The first type of allowance is calculated based on a specific percentage of our purchases. In most cases the percentage is not dependent on any monthly, quarterly or annual purchase volumes or any other performance terms with our vendors. Additionally, these allowances are deducted directly from the amounts we owe to the vendor for the product. For this type of vendor allowance, we record inventory at net cost (i.e. invoice cost less vendor allowance) at the time of receipt.
The second type of vendor allowance is based on the satisfaction of certain terms of the vendor program. We determine the amount of the accrued vendor allowance by estimating the point at which we will have completed our performance under the program and estimate the earned allowance at the balance sheet date using the rates negotiated with our vendors and actual purchase volumes to date.
During the year, due to complexity and diversity of the individual vendor programs, we perform analyses and review historical trends to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes. Additionally, on a monthly basis we review the collectability of the accrued vendor allowances and adjust for any valuation concerns.
We have not made any material changes in the accounting methodology used to record vendor allowances in the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our vendor allowances. If actual results are not consistent with the assumptions and estimates used, we may be exposed to additional adjustments that could materially impact, positively or negatively, our gross margin and inventory. However, substantially all vendor allowance receivables and deferrals outstanding at year end are collected and recognized within the following quarter, and therefore do not require subjective long-term estimates. Adjustments to gross margin and inventory in the following fiscal year have historically not been material. A 10% difference in our vendor allowance receivables at
March 31, 2014
, would have affected net earnings by approximately
$0.3 million
in fiscal
2014
.
Inventory Reserves
We value our inventory at the lower of the cost of the inventory or fair market value through the establishment of markdown and inventory loss reserves. Our markdown reserve represents the excess of the carrying amount, typically average cost, over the amount we expect to realize from the ultimate sale or other disposal of the inventory. Markdowns establish a new cost basis for our inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded markdowns or an increase in the newly established cost basis. During fiscal 2014, we increased our reserve approximately $1.8 million in anticipation of our planned exit from the contract-based mobile phone business.
Our markdown reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding inventory aging, forecasted consumer demand, the promotional environment and technological obsolescence. We have not made any material changes in the accounting methodology used to establish our markdown reserve during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our markdown reserve. However, if estimates regarding consumer demand are inaccurate or changes in technology or customer preferences affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material. A 10% difference in our actual markdown reserve at
March 31, 2014
, would have affected net earnings by approximately
$0.3 million
in fiscal
2014
.
Our inventory loss reserve represents anticipated physical inventory losses (e.g., theft) that have occurred since the last physical inventory date. Physical inventory counts are taken on a regular basis to ensure the inventory reported in our consolidated financial statements is properly stated. During the interim period between physical inventory counts, we reserve for anticipated physical inventory losses on a consolidated basis.
Our inventory loss reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding a number of factors, including historical results and current inventory loss trends. We have not made any material changes in the accounting methodology used to establish our inventory loss reserve during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our inventory loss reserve. However, if our estimates regarding physical inventory losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in actual physical inventory losses reserved for at
March 31, 2014
, would have affected net earnings by less than
$0.1 million
in fiscal
2014
.
Long-Lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
When evaluating long-lived assets for potential impairment, we first compare the carrying amount of the asset or asset group to the asset’s or asset group’s estimated undiscounted future cash flows. If the estimated future cash flows are less than the carrying amount of the asset or asset group, we calculate an impairment loss. The impairment loss calculation compares the carrying amount of the asset or asset group to the asset’s or asset group’s estimated fair value, which may be based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset’s or asset group’s carrying amount exceeds the asset’s or asset group’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset or asset group becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset or asset group.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. For the fiscal years ended
March 31, 2014
,
2013
and
2012
, we recorded a pre-tax impairment loss of
$0.6 million
,
$0.5 million
, and
$0.8 million
, respectively.
Accruals for Uncertain Tax Positions and Income Taxes
Accounting guidance on income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
We are subject to U.S. federal and certain state and local income taxes. Our income tax returns, like those of most companies, are periodically audited by federal and state tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record a liability for more likely than not exposures. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
We use significant estimates that require management’s judgment in calculating our provision for income taxes. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and the deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial position, results of operations, or cash flows.
Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits. In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment and ensuring that the deferred tax asset valuation allowance is adjusted as appropriate.
Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.
To the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution. At
March 31, 2014
and
2013
, we had no liability for unrecognized tax benefits.
Revenue Recognition
We recognize revenue, net of estimated returns, at the time the customer takes possession of the merchandise or receives service. We honor returns from customers within 30 days from the date of sale and provide allowances for estimated returns based on historical experience.
We sell gift cards to our customers in our retail stores and online. We do not charge administrative fees on unused gift cards and our gift cards do not have an expiration date. We recognize revenue from gift cards when: (i) the gift card is redeemed by the customer or (ii) the likelihood of the gift card being redeemed by the customer is remote, which we refer to as gift card breakage, and we determine that we do not have a legal obligation to remit the value of unredeemed gift cards to the
relevant jurisdictions. We determine our gift card breakage rate based on historical redemption patterns. Breakage recognized was not material to our results of operations during fiscal
2014
,
2013
or
2012
.
We sell premium service plans (“PSPs”) on appliance and electronic merchandise for periods ranging up to 10 years. For PSPs sold by us on behalf of a third party, the net commission revenue is recognized at the time of sale. We are not the primary obligor on PSPs sold on behalf of third parties. Funds received for PSPs in which we are the primary obligor are deferred and the incremental direct costs of selling the PSPs are capitalized and amortized on a straight-line basis over the term of the service agreement. Costs of services performed pursuant to the PSPs are expensed as incurred.
Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions regarding and to apply judgment to estimate future sales returns. Our estimate of the amount and timing of sales returns is based primarily on historical transaction experience.
We have not made any material changes in the accounting methodology used to measure sales returns or recognize revenue for PSPs sold during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to measure sales returns or recognize revenue for our gift card program. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% change in our sales return reserve at
March 31, 2014
would have affected net earnings by less than
$0.1 million
in fiscal
2014
.
Self-Insured Liabilities
We are self-insured for certain losses related to workers’ compensation, medical insurance, general liability and motor vehicle insurance claims. However, we obtain third-party insurance coverage to limit our exposure to these claims.
The following table provides our stop loss coverage for the fiscal years ended
March 31, 2014
,
2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Workers’ Compensation — per occurrence
|
|
$300
|
|
$300
|
|
$300
|
|
Workers’ Compensation — per occurrence (OH)
|
|
$500
|
|
$500
|
|
$500
|
|
General Liability — per occurrence
|
|
$250
|
|
$250
|
|
$250
|
|
Motor Vehicles — per occurrence
|
|
$100
|
|
$100
|
|
$100
|
|
Medical Insurance — per participant, per year
|
|
$300
|
|
$300
|
|
$300
|
When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. On a quarterly basis, management reviews its assumptions and the valuation provided by an independent third-party actuary to determine the adequacy of our self-insured liabilities.
Our self-insured liabilities contain uncertainties because management makes assumptions and applies judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date.
We have not made any material changes in the accounting methodology used to establish and adjust our self-insured liabilities during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our self-insured liabilities at
March 31, 2014
, would have affected net earnings by approximately
$0.4 million
in fiscal
2014
.
Results of Operations
Operating Performance.
The following table presents selected consolidated financial data (in thousands, except share amounts, per share amounts, and store count data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
March 31,
|
|
|
2014
|
|
2013
|
|
2012
|
|
Net sales
|
$
|
2,338,570
|
|
|
$
|
2,474,759
|
|
|
$
|
2,493,392
|
|
|
Net sales % (decrease) increase
|
(5.5
|
)%
|
|
(0.7
|
)%
|
|
20.0
|
%
|
|
Comparable store sales % decrease
(1)
|
(7.3
|
)%
|
|
(8.7
|
)%
|
|
(1.1
|
)%
|
|
Gross profit as a % of net sales
|
28.4
|
%
|
|
29.0
|
%
|
|
28.9
|
%
|
|
SG&A as a % of net sales
|
21.1
|
%
|
|
20.5
|
%
|
|
20.0
|
%
|
|
Net advertising expense as a % of net sales
|
5.3
|
%
|
|
5.1
|
%
|
|
4.7
|
%
|
|
Depreciation and amortization expense as a % of net sales
|
1.8
|
%
|
|
1.6
|
%
|
|
1.4
|
%
|
|
Life insurance proceeds as a % of net sales
|
—
|
%
|
|
—
|
%
|
|
1.6
|
%
|
|
Income from operations as a % of net sales
|
0.1
|
%
|
|
1.8
|
%
|
|
4.4
|
%
|
|
Net interest expense as a % of net sales
|
0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
Net income
|
$
|
228
|
|
|
$
|
25,369
|
|
|
$
|
81,373
|
|
|
Net income per diluted share
|
$
|
0.01
|
|
|
$
|
0.74
|
|
|
$
|
2.14
|
|
|
Weighted average shares outstanding—diluted
|
30,683,989
|
|
|
34,496,788
|
|
|
38,079,685
|
|
|
Number of stores open at the end of period
|
228
|
|
228
|
|
|
208
|
|
|
|
|
|
(1)
|
Comprised of net sales at stores in operation for at least 14 full months, including remodeled and relocated stores, as well as net sales for our website.
|
Net income was
$0.2 million
, or
$0.01
per diluted share, for fiscal
2014
compared with net income of
$25.4 million
, or
$0.74
per diluted share for fiscal
2013
and
$81.4 million
, or
$2.14
per diluted share for fiscal
2012
. The
decrease
in net income for fiscal
2014
as compared to fiscal
2013
was largely due to a comparable store sales decrease of
7.3%
and a decrease in the gross margin rate from
29.0%
to
28.4%
. The decrease in net income for fiscal 2013 as compared to fiscal 2012 was primarily the result of the receipt of $40.0 million of life insurance proceeds in fiscal 2012, a comparable store sales
decrease
of
8.7%
, an increase in SG&A as a percentage of net sales and an increase in net advertising as a percentage of net sales, partially offset by the net addition of 20 stores during fiscal 2013 and a modest increase in gross margin as a percentage of net sales.
Net sales
decreased
5.5%
in fiscal
2014
to
$2.34 billion
from
$2.47 billion
in fiscal
2013
. Net sales decreased
0.7%
in fiscal
2013
to
$2.47 billion
from
$2.49 billion
in fiscal
2012
. The
decrease
in net sales for fiscal
2014
was attributable to a comparable store sales
decrease
of
7.3%
. The decrease in net sales for fiscal
2013
was attributable to a comparable store sales decrease of
8.7%
, partially offset by the net addition of 20 stores during fiscal
2013
.
Net sales mix and comparable store sales percentage changes by product category for fiscal
2014
,
2013
and
2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Mix Summary
|
|
Comparable Store Sales Summary
|
|
|
Twelve Months Ended March 31,
|
|
Twelve Months Ended March 31,
|
|
|
2014
|
|
2013
|
|
2012
|
|
2014
|
|
2013
|
|
2012
|
|
Appliances
|
47
|
%
|
|
42
|
%
|
|
37
|
%
|
|
3.0
|
%
|
|
4.6
|
%
|
|
3.0
|
%
|
|
Consumer electronics
(1)
|
38
|
%
|
|
44
|
%
|
|
53
|
%
|
|
(18.8
|
)%
|
|
(22.7
|
)%
|
|
(9.6
|
)%
|
|
Computing and wireless
(2)
|
10
|
%
|
|
11
|
%
|
|
9
|
%
|
|
(14.7
|
)%
|
|
7.2
|
%
|
|
53.0
|
%
|
|
Home products
(3)
|
5
|
%
|
|
3
|
%
|
|
1
|
%
|
|
35.8
|
%
|
|
24.5
|
%
|
|
31.4
|
%
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
(7.3
|
)%
|
|
(8.7
|
)%
|
|
(1.1
|
)%
|
|
|
|
|
(1)
|
Primarily consists of accessories, audio, personal electronics and televisions.
|
|
|
|
|
(2)
|
Primarily consists of computers, mobile phones and tablets. We will exit the contract-based mobile phone business during the first fiscal quarter of 2015.
|
|
|
|
|
(3)
|
Primarily consists of fitness equipment, furniture and mattresses.
|
Fiscal Year Ended
March 31, 2014
Compared to
Fiscal Year Ended
March 31, 2013
The increase in comparable store sales within the appliance category for the 12 month period ended
March 31, 2014
as compared to the 12 month period ended
March 31, 2013
was due to an increase in both unit demand and average selling prices. The decrease in comparable store sales for the consumer electronics category for the 12 month period ended
March 31, 2014
was due primarily to double digit declines in units sold within the video category, largely resulting from our strategy of offering fewer entry level models and a greater mix of larger screen televisions. The decrease in comparable store sales within the computing and wireless category for the 12 month period was driven by decreased demand for computers and mobile phones and a decrease in the average selling prices for computers and tablets, partially offset by double digit increased demand for tablets. The increase in comparable store sales within the home products category was a result of sales of furniture and fitness equipment.
Gross profit margin, expressed as gross profit as a percentage of net sales,
decreased
approximately 58 basis points for the 12 months ended
March 31, 2014
to
28.4%
from
29.0%
for the comparable prior year period. The decrease in gross profit margin for the period was a result of decreases in gross profit margin rates across the majority of our categories, partially offset by a favorable product sales mix shift.
SG&A expense, as a percentage of net sales,
increased
58 basis points for the 12 months ended
March 31, 2014
, compared to the prior year period. The
increase
in SG&A as a percentage of net sales was a result of a 36 basis points increase in occupancy costs as a percentage of net sales due to the deleveraging effect of the net sales decline, a 37 basis points increase in-home delivery expense as a percentage of net sales due to a higher sales mix of deliverable product, and the write-off of store fixtures associated with the Company’s changing product mix. This
increase
was partially offset by an 18 basis points decrease in bank transaction fees as a result of the increased use of the private-label credit card which carries a lower fee than other credit transactions, as well as decreases in other SG&A expenses as a result of cost control measures.
Net advertising expense, as a percentage of net sales,
increased
24 basis points during the 12 months ended
March 31, 2014
, compared to the prior year period. The
increase
as a percentage of net sales was driven largely by the deleveraging effect of the net sales decline.
Depreciation and amortization expense, as a percentage of net sales,
increased
22 basis points for the 12 months ended
March 31, 2014
compared to the prior year period. The
increase
as a percentage of net sales was primarily due to the deleveraging effect of our net sales decline.
Our effective income tax rate for the 12 months ended
March 31, 2014
decreased
to
(2.7)%
from
38.8%
in the comparable prior year period. The decrease in the adjusted effective income tax rate is primarily the result of a proportionate increase in federal income tax credits and the decrease in pretax income when compared to the prior year period.
Fiscal Year Ended
March 31, 2013
Compared to
Fiscal Year Ended
March 31, 2012
The increase in comparable store sales within the appliance category for the 12 month period ended
March 31, 2013
as compared to 12 month period ended March 31, 2012 was due to an increase in both unit demand and average selling prices. The decrease in comparable store sales for the video category for the 12 month period ended March 31, 2013 was due primarily to double digit declines in units sold, slightly offset by low single digit increases in average selling prices, largely resulting from our strategy of offering fewer entry level models and a greater mix of larger screen televisions. The increase in comparable store sales within the computing and mobile phones category for the 12 month period was driven by increased demand for tablets and mobile phones, partially offset by decreased demand for notebook computers. The decrease in comparable store sales within the other category was primarily the result of double digit comparable store sales decreases in cameras, camcorders and small electronics partially offset by sales increases in mattresses and sales from the home entertainment furniture and fitness equipment categories.
Gross profit margin, expressed as gross profit as a percentage of net sales, increased approximately 10 basis points for the 12 months ended March 31, 2013 to 29.0% from 28.9% for the comparable prior year period. The increase in gross profit margin for the period was due to increases in gross margin rates within the appliance, video and other categories coupled with a positive shift in our overall net sales mix to the appliance category, partially offset by declines in the computing and mobile phones category. The appliance category was favorably impacted by a continued mix shift to higher efficiency products which generate higher gross margin rates. The increase in the video category gross margin rate was largely due to a favorable mix of larger LED model screen sizes, which generate higher gross margin rates than smaller screen LCD models. The increase in the other category was due to an increase in sales of mattresses and the addition of home entertainment furniture and fitness equipment, partially offset by gross margin pressure in audio and accessories. The decrease in computing and mobile phones was the result of gross margin rate declines largely within mobile phones, which was primarily due to an assortment change within mobile phones that occurred during the fourth fiscal quarter.
SG&A expense, as a percentage of net sales, increased 52 basis points for the 12 months ended March 31, 2013, compared to the prior year period. The increase in SG&A as a percentage of net sales was largely a result of increases in occupancy costs as a percentage of net sales due to the deleveraging effect of the comparable store sales decline in addition to an increase in-home delivery expense as a percentage of net sales due to a higher sales mix of deliverable product. This increase was partially offset by decreases in other SG&A expenses as a result of cost control measures.
Net advertising expense, as a percentage of net sales, increased 36 basis points during the 12 months ended March 31, 2013, compared to the prior year period. The increase as a percentage of net sales was driven largely by the deleveraging effect of our net sales decline.
Depreciation and amortization expense, as a percentage of net sales, increased 27 basis points for the 12 months ended March 31, 2013 compared to the prior year period. The increase as a percentage of net sales was primarily due to the capital spend associated with the 20 new stores opened during fiscal 2013 and the deleveraging effect of our net sales decline.
Our effective income tax rate for the 12 months ended March 31, 2013 increased to 38.8% from 24.1% in the comparable prior year period. Excluding the impact of the non-taxable life insurance proceeds received in fiscal 2012, the adjusted effective income tax rate was 38.4% for the fiscal year ended March 31, 2012. The increase in the adjusted effective income tax rate, which excludes the impact of the non-taxable life insurance proceeds, is primarily the result of federal income tax credits recognized in fiscal 2012 under the Hiring Incentives to Restore Employment Act of 2010. These credits were no longer available in fiscal 2013.
Liquidity and Capital Resources
The following table presents a summary on a consolidated basis of our net cash provided by (used in) operating, investing and financing activities (dollars are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2014
|
|
March 31,
2013
|
|
March 31,
2012
|
|
Net cash provided by operating activities
|
$
|
82,651
|
|
|
$
|
66,053
|
|
|
$
|
117,037
|
|
|
Net cash used in investing activities
|
(22,724
|
)
|
|
(53,986
|
)
|
|
(81,349
|
)
|
|
Net cash used in financing activities
|
(60,355
|
)
|
|
(22,719
|
)
|
|
(49,238
|
)
|
Our liquidity requirements arise primarily from our need to fund working capital requirements and capital expenditures. We make capital expenditures in investments in new stores and new distribution facilities, remodeling and relocation of existing stores, and information technology and other infrastructure-related projects that support our operations.
During fiscal
2015
, we plan to open two to four new stores, relocate several stores, downsize one store from 60,000 square feet to 37,000 square feet, add several Fine Lines to existing stores, and move one regional distribution center. In addition, we plan to continue to invest in our infrastructure, including management information systems and distribution capabilities. We expect capital expenditures, net of sale and leaseback proceeds and tenant allowances from landlords, for fiscal
2015
store openings and relocations to range between
$20 million
and
$23 million
. We expect capital expenditures for fiscal
2015
will be funded through cash and cash equivalents, income from operations, borrowings under our Amended Facility and tenant allowances from landlords.
Net cash provided by operating activities
.
Net cash provided by operating activities
primarily consists of net income as adjusted for increases or decreases in working capital and non-cash charges such as depreciation, asset impairment, deferred taxes and stock-based compensation expense. Cash provided by operating activities was $
82.7
million, $
66.1
million and
$117.0 million
for fiscal
2014
,
2013
and
2012
, respectively. The increase in cash provided by operating activities from fiscal
2014
to fiscal
2013
is primarily a result of an increase in net cash provided by working capital, offset by a decrease in other operating activities and net income. Net cash provided by working capital was $28.9 million, an increase of $53.0 million from the comparable prior period. Adjustments for other operating activities positively impacted operating cash flows by $53.6 million, a decrease of $11.3 million from the comparable prior period, primarily due to a decrease of $8.9 million in cash received from landlords for tenant allowances due to opening fewer stores in the current period compared to the prior period, a decrease of $8.0 million in our deferred income tax provision, offset by various increases in other operating activities. The decrease in cash provided by operating activities from fiscal
2012
to fiscal
2013
is primarily due to life insurance proceeds of $40.0 million received in fiscal 2012, a decrease in our net investment in merchandise inventories (merchandise inventories less accounts payable) and the net change in our other current operating assets and liabilities, and the decrease in cash received from landlords for tenant allowances due to opening fewer stores in the current period compared to the prior period. The net change in other current operating assets and liabilities was primarily a result of differences in timing of customer sales and vendor payments.
Net cash used in investing activities
.
Net cash used in investing activities
was $
22.7
million, $
54.0
million, and
$81.3 million
for fiscal
2014
,
2013
and
2012
, respectively. The decrease for fiscal
2014
compared to fiscal
2013
in cash used in investing activities is due to lower purchases of property and equipment associated with the opening of new stores. In fiscal
2014
, we did not open any new stores as compared to 20 new store openings in fiscal
2013
. Capital expenditures in fiscal 2014 related to store relocations and remodels, as well as management information systems and infrastructure. The decrease for fiscal
2013
compared to fiscal
2012
is primarily due to lower purchases of property and equipment associated with the opening of new stores. We opened 20 new stores in fiscal
2013
compared to 35 new stores in fiscal
2012
.
Net cash used in financing activities
.
Net cash used in financing activities
was $
60.4
million, $
22.7
million, and
$49.2 million
for fiscal
2014
,
2013
and
2012
respectively. The increase in cash used in financing activities from fiscal
2014
to fiscal
2013
is due to a decrease in net borrowings provided by an inventory financing facility of
$12.7 million
, a decrease in cash provided by bank overdrafts of
$23.0 million
, an increase in funds used for treasury stock repurchases of
$0.9 million
, offset by an increase in proceeds from exercise of stock options of
$1.5 million
. The decrease in cash used in financing activities from fiscal
2013
to fiscal
2012
was primarily due to net borrowings provided by an inventory financing facility entered into during fiscal 2013 of $9.0 million, an increase in cash provided by bank overdrafts of $16.3 million, an increase in proceeds from exercise of stock options of $1.9 million, offset by an increase in funds used for treasury stock repurchases of $0.7 million.
Amended Facility.
On July 29, 2013, Gregg Appliances entered into Amendment No. 1 to the Amended and Restated Loan and Security Agreement (the “Amended Facility”) to increase the maximum credit available to
$400 million
from
$300 million
, subject to borrowing base availability, and extend the term of the facility to expire on July 29, 2018. The facility was set to expire on
March 29, 2016
.
Interest on borrowings (other than Eurodollar rate borrowings) is payable monthly at a fluctuating rate based on the bank’s prime rate or LIBOR plus an applicable margin. Interest on Eurodollar rate borrowings is payable on the last day of each “interest period” applicable to such borrowing or on the three month anniversary of the beginning of such “interest period” for interest periods greater than three months. The unused line rate is determined based on the amount of the daily average of the outstanding borrowings for the immediately preceding calendar quarter period (the “Daily Average”). For a Daily Average greater than or equal to 50% of the defined borrowing base, the unused line rate is
0.25%
. For a Daily Average less than 50% of the defined borrowing base, the unused line rate is
0.375%
. The Amended Facility is guaranteed by Gregg Appliances’ wholly-owned subsidiary, HHG Distributing, which has no assets or operations. The guarantee is full and unconditional, and Gregg Appliances has no other subsidiaries.
Pursuant to the Amended Facility, the borrowing base is equal to the sum of (i)
90%
of the amount of the eligible commercial accounts, (ii)
75%
of the amount of eligible commercial and credit card receivables of Gregg Appliances and (iii)
90%
of the net recovery percentage multiplied by the value of eligible inventory consistent with the most recent appraisal of such eligible inventory.
Under the Amended Facility, Gregg Appliances is not required to comply with any financial maintenance covenant unless “excess availability” is less than the greater of (i)
10.0%
of the lesser of (A) the defined borrowing base or (B) the defined maximum credit or (ii)
$20.0 million
during the continuance of which event Gregg Appliances is subject to compliance with a fixed charge coverage ratio of
1.0
to
1.0
.
Pursuant to the Amended Facility, if Gregg Appliances has “excess availability” of less than
12.5%
of the lesser of (A) the defined borrowing base or (B) the defined maximum credit, it may, in certain circumstances more specifically described in the Amended Facility, become subject to cash dominion control.
The Amended Facility places limitations on the ability of Gregg Appliances to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions, enter into unrelated businesses, open collateral locations outside of the United States, or enter into consignment assignments or floor plan financing arrangements. The Amended Facility also contains various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Gregg Appliances was in compliance with the restrictions and covenants of the Amended Facility at
March 31, 2014
.
As of
March 31, 2014
and
2013
, Gregg Appliances had
no
borrowings outstanding under the Amended Facility. As of
March 31, 2014
, Gregg Appliances had
$5.3 million
of letters of credit outstanding, which expire through December 31,
2014
. As of
March 31, 2013
, Gregg Appliances had
$4.9 million
of letters of credit outstanding which expired by
December 31, 2013
. The total borrowing availability under the Amended Facility was
$169.5 million
and
$189.8 million
as of
March 31, 2014
and
2013
, respectively. The interest rate based on the bank’s prime rate was
3.75%
and
4.25%
as of
March 31, 2014
and
2013
, respectively.
Inventory Financing Facility.
We also have an inventory financing facility, which is a $20 million unsecured credit line that is non-interest bearing and is not collateralized with the inventory purchased. The facility includes customary covenants as well as customary events of default.
Long Term Liquidity
. Anticipated cash flows from operations and funds available from our Revolving Credit Facility, together with cash on hand, should provide sufficient funds to finance our operations for the next 12 months. As a normal part of our business, we consider opportunities to refinance our existing indebtedness, based on market conditions. Although we may refinance all or part of our existing indebtedness in the future, there can be no assurances that we will do so. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee that financing will be available on acceptable terms or at all. Additional debt financing, if available, could impose additional cash payment obligations, additional covenants and operating restrictions.
Impact of Inflation
The impact of inflation and changing prices has not been material to our net sales or net income in any of the last three fiscal years. Highly competitive market conditions and the general economic environment have minimized inflation’s impact on the selling prices of our products and our expenses. In addition, price deflation and the continued commoditization of key technology products in the consumer electronics category affect our ability to increase our gross profit margin in the consumer electronics category.
Contractual Obligations
Our contractual obligations at
March 31, 2014
were as follows (dollars are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
4-5 years
|
|
More than
5 years
|
|
Operating lease obligations
|
|
$
|
561,620
|
|
|
$
|
87,425
|
|
|
$
|
165,224
|
|
|
$
|
148,379
|
|
|
$
|
160,592
|
|
|
Advertising commitments
|
|
4,013
|
|
|
1,810
|
|
|
2,203
|
|
|
—
|
|
|
—
|
|
|
Revolving Credit Facility
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
565,633
|
|
|
$
|
89,235
|
|
|
$
|
167,427
|
|
|
$
|
148,379
|
|
|
$
|
160,592
|
|
The above contractual obligation table excludes any future payments made in connection with our Non-Qualified Deferred Compensation Plan. The aggregate balance outstanding for all participants in the plan as of
March 31, 2014
was approximately
$5.2 million
. We are unable to estimate the timing of these future payments under the plan.
We lease our retail stores, warehouse and office space, corporate airplane and certain vehicles under operating leases. Our noncancelable lease agreements expire at various dates through fiscal year 2026, require various minimum annual rentals, and contain certain options for renewal. The majority of the real estate leases require payment of property taxes, normal
maintenance and insurance on the properties. Total rent expense with respect to real property was approximately
$90.4 million
,
$88.2 million
and
$80.9 million
in fiscal
2014
,
2013
or
2012
, respectively. Contingent rentals based upon sales are applicable to certain of the store leases. Contingent rent expense was approximately
$0.1 million
in each of fiscal
2014
,
2013
and
2012
. Total rental expense with respect to real property has increased as a result of store relocations in fiscal 2014, and the increase in the number of our stores from fiscal 2012 to 2013.
Off Balance Sheet Items
We do not have any off balance sheet arrangements. We finance some of our development programs through sale and leaseback transactions, which involve selling stores to third parties and then leasing the stores back under leases that are accounted for as operating leases in accordance with U.S. GAAP. A summary of our operating lease obligations by fiscal year is included in the “Contractual Obligations” section above. Additional information regarding our operating leases is available in “Business—Properties,” and Note 8, Leases, in the Notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|
|
|
|
|
|
|
ITEM 8.
|
Financial Statements and Supplementary Data.
|
|
|
|
|
|
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
HHGREGG, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Management’s Report on the Consolidated Financial Statements
|
|
|
|
|
|
Management’s Report on Internal Control Over Financial Reporting
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated Statements of Income for Fiscal Years Ended March 31, 2014, 2013 and 2012
|
|
|
|
|
|
Consolidated Balance Sheets as of March 31, 2014 and 2013
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity for Fiscal Years Ended March 31, 2014, 2013 and 2012
|
|
|
|
|
|
Consolidated Statements of Cash Flows for Fiscal Years Ended March 31, 2014, 2013 and 2012
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
Management’s Report on the Consolidated Financial Statements
Our management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The consolidated financial statements have been prepared in conformity with U.S. GAAP and necessarily include certain amounts that are based on estimates and informed judgments. Our management also prepared the related financial information included in this Annual Report on Form 10-K and is responsible for its accuracy and consistency with the consolidated financial statements.
The accompanying consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, which conducted its audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). The independent registered public accounting firm’s responsibility is to express an opinion on the consolidated financial statements based on its audits in accordance with the standards of the PCAOB.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed under the supervision of our principal executive officer and principal financial and accounting officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:
|
|
|
|
(1)
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets;
|
|
|
|
|
(2)
|
Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and
|
|
|
|
|
(3)
|
Provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
|
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we assessed the effectiveness of our internal control over financial reporting as of
March 31, 2014
, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (1992). Based on our assessment, we have concluded that our internal control over financial reporting was effective as of
March 31, 2014
. During our assessment, we did not identify any material weaknesses in our internal control over financial reporting. KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as a part of this audit, has issued their report, included in Item 8, Financial Statements and Supplementary Data, on the effectiveness of our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of a change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
|
|
|
|
|
|
/s/ D
ENNIS
L. M
AY
|
|
/s/ ANDREW S. GIESLER
|
|
Dennis L. May
|
|
Andrew S. Giesler
|
|
Chief Executive Officer
|
|
Interim Chief Financial Officer
|
|
(Principal Executive Officer)
|
|
(Principal Financial and Accounting Officer)
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
hhgregg, Inc.:
We have audited the accompanying consolidated balance sheets of hhgregg, Inc. and subsidiaries (the “Company”) as of
March 31, 2014
and
2013
, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
March 31, 2014
. We also have audited the Company’s internal control over financial reporting as of
March 31, 2014
, based on criteria established in
Internal Control – Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting under Item 8. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of hhgregg, Inc. and subsidiaries as of
March 31, 2014
and
2013
, and the results of their operations and their cash flows for each of the years in the three-year period ended
March 31, 2014
, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
March 31, 2014
, based on criteria established in
Internal Control — Integrated Framework
(1992) issued by COSO.
/s/ KPMG LLP
Indianapolis, Indiana
May 20, 2014
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended March 31,
2014
,
2013
, and
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
|
(In thousands, except share and per share data)
|
|
Net sales
|
$
|
2,338,570
|
|
|
$
|
2,474,759
|
|
|
$
|
2,493,392
|
|
|
Cost of goods sold
|
1,674,031
|
|
|
1,757,173
|
|
|
1,773,004
|
|
|
Gross profit
|
664,539
|
|
|
717,586
|
|
|
720,388
|
|
|
Selling, general and administrative expenses
|
493,950
|
|
|
507,755
|
|
|
498,600
|
|
|
Net advertising expense
|
124,179
|
|
|
125,433
|
|
|
117,423
|
|
|
Depreciation and amortization expense
|
43,120
|
|
|
40,135
|
|
|
33,752
|
|
|
Life insurance proceeds
|
—
|
|
|
—
|
|
|
(40,000
|
)
|
|
Asset impairment charges
|
613
|
|
|
504
|
|
|
813
|
|
|
Income from operations
|
2,677
|
|
|
43,759
|
|
|
109,800
|
|
|
Other expense (income):
|
|
|
|
|
|
|
Interest expense
|
2,465
|
|
|
2,344
|
|
|
2,658
|
|
|
Interest income
|
(10
|
)
|
|
(9
|
)
|
|
(23
|
)
|
|
Total other expense
|
2,455
|
|
|
2,335
|
|
|
2,635
|
|
|
Income before income taxes
|
222
|
|
|
41,424
|
|
|
107,165
|
|
|
Income tax (benefit) expense
|
(6
|
)
|
|
16,055
|
|
|
25,792
|
|
|
Net income
|
$
|
228
|
|
|
$
|
25,369
|
|
|
$
|
81,373
|
|
|
Net income per share
|
|
|
|
|
|
|
Basic
|
$
|
0.01
|
|
|
$
|
0.74
|
|
|
$
|
2.16
|
|
|
Diluted
|
$
|
0.01
|
|
|
$
|
0.74
|
|
|
$
|
2.14
|
|
|
Weighted average shares outstanding-basic
|
30,209,928
|
|
|
34,430,641
|
|
|
37,749,354
|
|
|
Weighted average shares outstanding-diluted
|
30,683,989
|
|
|
34,496,788
|
|
|
38,079,685
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
2014
and
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
(In thousands, except share data)
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
$
|
48,164
|
|
|
$
|
48,592
|
|
|
Accounts receivable—trade, less allowances of $132 and $1, respectively
|
15,121
|
|
|
24,271
|
|
|
Accounts receivable—other
|
16,467
|
|
|
18,748
|
|
|
Merchandise inventories, net
|
298,542
|
|
|
315,562
|
|
|
Prepaid expenses and other current assets
|
6,694
|
|
|
5,567
|
|
|
Income tax receivable
|
1,380
|
|
|
1,414
|
|
|
Deferred income taxes
|
6,220
|
|
|
5,758
|
|
|
Total current assets
|
392,588
|
|
|
419,912
|
|
|
Net property and equipment
|
193,882
|
|
|
217,911
|
|
|
Deferred financing costs, net
|
2,334
|
|
|
1,992
|
|
|
Deferred income taxes
|
35,182
|
|
|
35,252
|
|
|
Other assets
|
1,977
|
|
|
1,354
|
|
|
Total long-term assets
|
233,375
|
|
|
256,509
|
|
|
Total assets
|
$
|
625,963
|
|
|
$
|
676,421
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
140,806
|
|
|
$
|
150,333
|
|
|
Customer deposits
|
41,518
|
|
|
38,042
|
|
|
Accrued liabilities
|
50,898
|
|
|
49,422
|
|
|
Income tax payable
|
122
|
|
|
2,145
|
|
|
Total current liabilities
|
233,344
|
|
|
239,942
|
|
|
Long-term liabilities:
|
|
|
|
|
Deferred rent
|
73,493
|
|
|
77,777
|
|
|
Other long-term liabilities
|
11,992
|
|
|
12,044
|
|
|
Total long-term liabilities
|
85,485
|
|
|
89,821
|
|
|
Total liabilities
|
318,829
|
|
|
329,763
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, par value $.0001; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2014 and 2013, respectively
|
—
|
|
|
—
|
|
|
Common stock, par value $.0001; 150,000,000 shares authorized; 41,121,390 and 40,640,743 shares issued; and 28,460,218 and 31,468,453 outstanding as of March 31, 2014 and March 31, 2013, respectively
|
4
|
|
|
4
|
|
|
Additional paid-in capital
|
297,199
|
|
|
287,806
|
|
|
Retained earnings
|
154,878
|
|
|
154,650
|
|
|
Common stock held in treasury at cost, 12,661,172 and 9,172,290 shares as of March 31, 2014 and March 31, 2013, respectively
|
(144,947
|
)
|
|
(95,802
|
)
|
|
Total stockholders’ equity
|
307,134
|
|
|
346,658
|
|
|
Total liabilities and stockholders’ equity
|
$
|
625,963
|
|
|
$
|
676,421
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years Ended
March 31, 2014
,
2013
, and
2012
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Note Receivable
For Common
Stock
|
|
Common Stock
Held in
Treasury
|
|
Total
Stockholders’
Equity
|
|
Balance at March 31, 2011
|
39,724,737
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
268,715
|
|
|
$
|
47,908
|
|
|
$
|
(41
|
)
|
|
$
|
—
|
|
|
$
|
316,586
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81,373
|
|
|
—
|
|
|
—
|
|
|
81,373
|
|
|
Exercise of stock options
|
341,268
|
|
|
—
|
|
|
—
|
|
|
2,464
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,464
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
5,935
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,935
|
|
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
732
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
732
|
|
|
Repurchase of common stock
|
(3,714,289
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(47,570
|
)
|
|
(47,570
|
)
|
|
Balance at March 31, 2012
|
36,351,716
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
277,846
|
|
|
$
|
129,281
|
|
|
$
|
(41
|
)
|
|
$
|
(47,570
|
)
|
|
$
|
359,520
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,369
|
|
|
—
|
|
|
—
|
|
|
25,369
|
|
|
Payments received on notes receivable for issuance of common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
41
|
|
|
—
|
|
|
41
|
|
|
Exercise of stock options
|
574,738
|
|
|
—
|
|
|
—
|
|
|
4,356
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,356
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
5,150
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,150
|
|
|
Excess tax benefit from stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
454
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
454
|
|
|
Repurchase of common stock
|
(5,458,001
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(48,232
|
)
|
|
(48,232
|
)
|
|
Balance at March 31, 2013
|
31,468,453
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
287,806
|
|
|
$
|
154,650
|
|
|
$
|
—
|
|
|
$
|
(95,802
|
)
|
|
$
|
346,658
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
228
|
|
|
—
|
|
|
—
|
|
|
228
|
|
|
Exercise of stock options
|
480,647
|
|
|
—
|
|
|
—
|
|
|
5,814
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,814
|
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
4,428
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,428
|
|
|
Excess tax deficiency from stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
(849
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(849
|
)
|
|
Repurchase of common stock
|
(3,488,882
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(49,145
|
)
|
|
(49,145
|
)
|
|
Balance at March 31, 2014
|
28,460,218
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
297,199
|
|
|
$
|
154,878
|
|
|
$
|
—
|
|
|
$
|
(144,947
|
)
|
|
$
|
307,134
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended
March 31, 2014
,
2013
, and
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
|
(In thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
$
|
228
|
|
|
$
|
25,369
|
|
|
$
|
81,373
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
43,120
|
|
|
40,135
|
|
|
33,752
|
|
|
Amortization of deferred financing costs
|
604
|
|
|
664
|
|
|
664
|
|
|
Stock-based compensation
|
4,428
|
|
|
5,150
|
|
|
5,935
|
|
|
Excess tax deficiency (benefits) from stock-based compensation
|
849
|
|
|
(586
|
)
|
|
(732
|
)
|
|
Loss (gain) on sales of property and equipment
|
1,646
|
|
|
(216
|
)
|
|
(332
|
)
|
|
Deferred income taxes
|
(392
|
)
|
|
7,599
|
|
|
9,382
|
|
|
Asset impairment charges
|
613
|
|
|
504
|
|
|
813
|
|
|
Tenant allowances received from landlords
|
2,705
|
|
|
11,608
|
|
|
22,895
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable—trade
|
9,150
|
|
|
(4,804
|
)
|
|
(10,536
|
)
|
|
Accounts receivable—other
|
2,407
|
|
|
507
|
|
|
(2,836
|
)
|
|
Merchandise inventories
|
17,020
|
|
|
(33,153
|
)
|
|
(70,401
|
)
|
|
Income tax receivable
|
(815
|
)
|
|
(960
|
)
|
|
—
|
|
|
Prepaid expenses and other assets
|
(1,066
|
)
|
|
575
|
|
|
4,606
|
|
|
Accounts payable
|
6,125
|
|
|
6,932
|
|
|
38,374
|
|
|
Customer deposits
|
3,476
|
|
|
9,049
|
|
|
7,202
|
|
|
Income tax payable
|
(2,023
|
)
|
|
(2,213
|
)
|
|
3,037
|
|
|
Accrued liabilities
|
1,476
|
|
|
5,687
|
|
|
(3,403
|
)
|
|
Deferred rent
|
(7,115
|
)
|
|
(5,760
|
)
|
|
(2,819
|
)
|
|
Other long-term liabilities
|
215
|
|
|
(34
|
)
|
|
63
|
|
|
Net cash provided by operating activities
|
82,651
|
|
|
66,053
|
|
|
117,037
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Purchases of property and equipment
|
(22,257
|
)
|
|
(54,020
|
)
|
|
(83,054
|
)
|
|
Net proceeds from sale leaseback transactions
|
—
|
|
|
—
|
|
|
1,625
|
|
|
Proceeds from sales of property and equipment
|
217
|
|
|
34
|
|
|
80
|
|
|
Purchases of corporate-owned life insurance
|
(684
|
)
|
|
—
|
|
|
—
|
|
|
Net cash used in investing activities
|
(22,724
|
)
|
|
(53,986
|
)
|
|
(81,349
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Purchases of treasury stock
|
(49,145
|
)
|
|
(48,232
|
)
|
|
(47,570
|
)
|
|
Proceeds from exercise of stock options
|
5,814
|
|
|
4,356
|
|
|
2,464
|
|
|
Excess tax (deficiency) benefits from stock-based compensation
|
(849
|
)
|
|
586
|
|
|
732
|
|
|
Net (decrease) increase in bank overdrafts
|
(11,506
|
)
|
|
11,506
|
|
|
(4,776
|
)
|
|
Net (repayments) borrowings on inventory financing facility
|
(3,723
|
)
|
|
9,024
|
|
|
—
|
|
|
Payment of financing costs
|
(946
|
)
|
|
—
|
|
|
(88
|
)
|
|
Other, net
|
—
|
|
|
41
|
|
|
—
|
|
|
Net cash used in financing activities
|
(60,355
|
)
|
|
(22,719
|
)
|
|
(49,238
|
)
|
|
Net decrease in cash and cash equivalents
|
(428
|
)
|
|
(10,652
|
)
|
|
(13,550
|
)
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
Beginning of period
|
48,592
|
|
|
59,244
|
|
|
72,794
|
|
|
End of period
|
$
|
48,164
|
|
|
$
|
48,592
|
|
|
$
|
59,244
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Interest paid
|
$
|
1,881
|
|
|
$
|
1,903
|
|
|
$
|
2,119
|
|
|
Income taxes paid
|
$
|
3,418
|
|
|
$
|
11,629
|
|
|
$
|
13,219
|
|
|
Capital expenditures included in accounts payable
|
$
|
1,068
|
|
|
$
|
1,491
|
|
|
$
|
1,216
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
(1)
|
Summary of Significant Accounting Policies
|
Description of Business
hhgregg, Inc. is a specialty retailer of home appliances, televisions, computers, tablets, wireless devices, consumer electronics, home furniture, mattresses, fitness equipment and related services operating under the name hhgregg
™
. As of
March 31, 2014
, the Company had
228
stores located in
Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin
. The Company operates in
one
reportable segment.
hhgregg was formed in Delaware on April 12, 2007. As part of a corporate reorganization effected on July 19, 2007, the stockholders of Gregg Appliances Inc. (“Gregg Appliances”) contributed all of their shares of Gregg Appliances to hhgregg in exchange for common stock of hhgregg. As a result, Gregg Appliances became a wholly-owned subsidiary of hhgregg.
|
|
|
|
(b)
|
Principles of Consolidation
|
The consolidated financial statements include the accounts of hhgregg and its wholly-owned subsidiary, Gregg Appliances (the “Company” or “hhgregg”). The financial statements of Gregg Appliances include its wholly-owned subsidiary HHG Distributing LLC (“HHG Distributing”), which has no assets or operations. All intercompany balances and transactions have been eliminated upon consolidation.
Management uses estimates and assumptions in preparing financial statements in conformity with accounting principles generally accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates and assumptions.
The Company’s fiscal year is the twelve month period ended March 31.
|
|
|
|
(e)
|
Cash and Cash Equivalents
|
Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of money market accounts and other highly liquid investments with an original maturity of three months or less. The Company had
no
cash equivalents at
March 31, 2014
and
$45.0 million
at March 31,
2013
. The Company had
no
outstanding checks in excess of funds on deposit (book overdrafts) at
March 31, 2014
and
$11.5 million
at March 31,
2013
.
Accounts receivable are recorded at the invoiced amount and are subject to finance charges. Accounts receivable-trade primarily consists of credit card receivables. Accounts receivable-other consists mainly of amounts due from vendors for advertising and volume rebates. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.
|
|
|
|
(g)
|
Merchandise Inventories
|
Inventory is valued at the lower of the cost of the inventory or fair market value through the establishment of markdown and inventory loss reserves. The Company’s markdown reserve represents the excess of the carrying amount, typically average cost, over the amount it expects to realize from the ultimate sale or other disposal of the inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded markdowns or an increase in that newly established cost basis.
The Company purchases a significant portion of its merchandise from
two
vendors. For the year ended
March 31, 2014
, two vendors accounted for
29.2%
and
17.1%
, respectively, of merchandise purchases. For the year ended
March 31, 2013
,
two
vendors accounted for
27.5%
and
17.0%
, respectively, of merchandise purchases. For the year ended
March 31, 2012
,
two
vendors accounted for
20.5%
and
15.2%
, respectively, of merchandise purchases.
The Company included amounts due to a third party financing company for use under an inventory financing facility, entered into during the first quarter of fiscal
2013
, within accounts payable in the accompanying consolidated balance sheet. Borrowings and payments on the inventory financing facility are classified as financing activities in the consolidated statements of cash flows. The inventory financing facility is a
$20 million
unsecured credit line that is non-interest bearing and is not collateralized with the inventory purchased. The facility includes customary covenants as well as customary events of default. The amounts borrowed on the credit line fluctuate on a daily basis. The amount of borrowings included within accounts payable as of March 31, 2014 and 2013 were
$5.3 million
and
$9.0 million
, respectively. As of March 31, 2014 and 2013, the Company had
$14.7 million
and
$11.0 million
available under the facility, respectively. The Company incurred no interest on the borrowings for the years ended March 31, 2014 and 2013.
|
|
|
|
(h)
|
Property and Equipment
|
Property and equipment are recorded at cost and are depreciated over their expected useful lives on a straight-line basis. Leasehold improvements are depreciated over the shorter of the lease term or expected useful life. Repairs and maintenance costs are charged directly to expense as incurred. In certain lease arrangements, the Company is considered the owner of the building during the construction period. At the end of the construction period, the Company will sell and lease the location back applying provisions of lease accounting guidance. Any gains on sale and leaseback transactions are deferred and amortized over the life of the respective lease. The Company does not have any continuing involvement with the sale and leaseback locations, other than a normal leaseback, and the locations are accounted for as operating leases. In fiscal
2014
and
2013
, the Company did not execute any sale and leaseback transactions.
Property and equipment consisted of the following at March 31,
2014
and
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Machinery and equipment
|
|
$
|
28,478
|
|
|
$
|
25,328
|
|
|
Store fixtures and furniture
|
|
180,799
|
|
|
175,659
|
|
|
Vehicles
|
|
2,207
|
|
|
2,269
|
|
|
Signs
|
|
19,545
|
|
|
19,163
|
|
|
Leasehold improvements
|
|
178,888
|
|
|
172,952
|
|
|
Construction in progress
|
|
8,167
|
|
|
5,995
|
|
|
|
|
418,084
|
|
|
401,366
|
|
|
Less accumulated depreciation and amortization
|
|
(224,202
|
)
|
|
(183,455
|
)
|
|
Net property and equipment
|
|
$
|
193,882
|
|
|
$
|
217,911
|
|
Estimated useful lives by major asset category are as follows:
|
|
|
|
|
|
|
Asset
|
|
Life
(in years)
|
|
Machinery and equipment
|
|
5-7
|
|
Store fixtures and furniture
|
|
3-7
|
|
Vehicles
|
|
5
|
|
Signs
|
|
7
|
|
Leasehold improvements
|
|
5-15
|
Depreciation and amortization expense for the years ended
March 31, 2014
,
2013
and
2012
was
$43.1 million
,
$40.1 million
and
$33.8 million
, respectively.
|
|
|
|
(i)
|
Impairment of Long-Lived Assets
|
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When evaluating long-lived assets for potential impairment, the Company compares the carrying amount of the asset or asset group to the asset’s or asset group’s estimated undiscounted future cash flows. If the estimated future cash flows are less than the carrying amount of the asset or asset group, an impairment loss is calculated. The impairment loss calculation
compares the carrying amount of the asset or asset group to the asset’s or asset group’s estimated fair value, which may be based on estimated discounted future cash flows. An impairment loss is recognized for the amount by which the asset’s or asset group’s carrying amount exceeds the asset’s or asset group’s estimated fair value. If an impairment loss is recognized, the adjusted carrying amount of the asset or asset group becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset or asset group.
For the fiscal year ended
March 31, 2014
, the Company recorded an asset impairment charge as a result of entering into a lease modification to downsize a store. In conjunction with the downsize, the Company determined that certain of the assets in use would be abandoned at the time construction to downsize begins, and as a result determined this to be a triggering event for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value. In addition, the Company recorded an asset impairment charge during fiscal 2014 as a result of idling certain store fixtures associated with the Company’s changing product mix. The Company determined this to be a triggering event for an impairment analysis to be performed, and the carrying amount of the assets were reduced to fair value. During fiscal years ended March 31,
2013
and
2012
, the Company had
one
and
two
separate stores in each year respectively, whose profit contributions were significantly lower than the chain average due to decreased sales at each respective location. This decrease in profit in all instances triggered the need for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. Based on the above reasons, the carrying amounts of the assets related to these stores were reduced to fair value, resulting in a pre-tax charge of
$0.6 million
,
$0.5 million
and
$0.8 million
for the years ended
March 31, 2014
,
2013
and
2012
, respectively.
|
|
|
|
(j)
|
Deferred Financing Costs
|
Costs incurred related to debt financing are capitalized and amortized over the life of the related debt as a component of interest expense. Debt financing costs are related to the Company’s Revolving Credit Facility as discussed in note 5 below. The Company recognized related amortization expense of deferred financing costs of
$0.6 million
,
$0.7 million
and
$0.7 million
for the years ended
March 31, 2014
,
2013
and
2012
, respectively.
|
|
|
|
(k)
|
Self-Insured Liabilities
|
The Company is self-insured for certain losses related to workers’ compensation, medical insurance, general liability and motor vehicle insurance claims. However, the Company obtains third-party insurance coverage to limit its exposure to these claims. The following table provides the Company’s stop loss coverage for the fiscal years ended
March 31, 2014
,
2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Workers’ Compensation — per occurrence
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
300
|
|
|
Workers’ Compensation — per occurrence (OH)
|
|
$
|
500
|
|
|
$
|
500
|
|
|
$
|
500
|
|
|
General Liability — per occurrence
|
|
$
|
250
|
|
|
$
|
250
|
|
|
$
|
250
|
|
|
Motor Vehicles — per occurrence
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
100
|
|
|
Medical Insurance — per participant, per year
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
300
|
|
When estimating self-insured liabilities, a number of factors are considered, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Quarterly, management reviews its assumptions and the valuations provided by independent third-party actuaries to determine the adequacy of the self-insured liabilities.
|
|
|
|
(l)
|
Accrued Straight-Line Rent
|
Retail and distribution operations are conducted from leased locations. The leases generally require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of the lease agreements generally range from
10
to
15
years. Most of the leases contain renewal options and escalation clauses, and certain store leases require contingent rents based on factors such as specified percentages of revenue or the consumer price index.
For leases that contain predetermined fixed escalations of the minimum rent, the related rent expense is recognized on a straight-line basis from the date the Company takes possession of the property to the end of the lease term. Any difference
between the straight-line rent amounts and amounts payable under the leases are recorded as part of deferred rent. Cash or lease incentives received upon entering into certain store leases (tenant allowances) are recognized on a straight-line basis as a reduction to rent from the date the Company takes possession of the property through the end of the lease term. The unamortized portion of tenant allowances is recorded as a part of deferred rent. For leases that require contingent rents, management makes an estimate of the contingent rent annually and recognizes the related rent expense on a straight-line basis over the year. As of
March 31, 2014
and
2013
, deferred rent included in long-term liabilities in the Company’s consolidated balance sheets was
$73.5 million
and
$77.8 million
, respectively.
Transaction costs associated with the sale and leaseback of properties and any related deferred gain or loss are recognized on a straight-line basis over the initial period of the lease agreements. The Company does not have any retained or contingent interests in the properties, nor does the Company provide any guarantees in connection with the sale and leaseback of properties, other than a corporate-level guarantee of lease payments. At
March 31, 2014
and
2013
, deferred gains of
$1.7 million
and
$2.0 million
, respectively, were recorded in other long term liabilities relating to sale and leaseback transactions.
The Company recognizes revenue from the sale of merchandise at the time the customer takes possession of the merchandise. The Company recognizes revenue related to the delivery of merchandise at the time the merchandise is delivered. The Company honors returns from customers within 30 days from the date of sale and provides allowances for returns based on historical experience. The Company recorded an allowance for sales returns in accrued liabilities of
$0.6 million
and
$0.5 million
at
March 31, 2014
and
2013
, respectively. The Company recognizes service revenue at the time that evidence of an agreement exists, the service is completed, the price is fixed or determinable, and collectability is reasonably assured.
The Company sells gift cards to its customers in its retail stores and online. The Company does not charge administrative fees on unused gift cards and the Company’s gift cards (other than promotional rebate gift cards) do not have an expiration date. Revenue is recognized from gift cards when: (i) the gift card is redeemed by the customer or (ii) the likelihood of the gift card being redeemed by the customer is remote, referred to as gift card breakage, and the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines it’s gift card breakage rate based on historical redemption patterns. Breakage recognized was not material to the Company’s results of operations during fiscal
2014
,
2013
or
2012
.
The Company sells premium service plans (“PSPs”) on appliance and electronic merchandise for periods ranging up to
10 years
. For PSPs sold by the Company on behalf of a third party, the net commission revenue is recognized at the time of sale. The Company is not the primary obligor on PSPs sold on behalf of third parties. Funds received for PSPs in which the Company is the primary obligor are deferred in accrued liabilities and other long-term liabilities in the Company’s consolidated balance sheets, and the incremental direct costs of selling the PSPs are capitalized and amortized on a straight-line basis over the term of the service agreement. Costs of services performed pursuant to the PSPs are expensed as incurred.
The information below provides the changes in the Company’s deferred revenue on extended service agreements for the years ended
March 31, 2014
,
2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Deferred revenue on extended service agreements:
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
1,048
|
|
|
$
|
623
|
|
|
$
|
485
|
|
|
Revenue deferred on new agreements
|
|
5,439
|
|
|
4,111
|
|
|
2,403
|
|
|
Revenue recognized
|
|
(5,064
|
)
|
|
(3,686
|
)
|
|
(2,265
|
)
|
|
Balance at end of year
|
|
$
|
1,423
|
|
|
$
|
1,048
|
|
|
$
|
623
|
|
For revenue transactions that involve multiple deliverables, we defer the revenue associated with any undelivered elements. The amount of revenue deferred in connection with the undelivered elements is determined using the relative fair value of each element, which is generally based on each element’s relative retail price. The Company frequently offers sales incentives that entitle customers to receive a reduction in the price of a product or service by submitting a claim for a refund or rebate. When certain purchase requirements are met, the customer is eligible to receive a hhgregg rebate gift card that may be redeemed on future purchases at hhgregg stores. Rebate gift cards expire six months from the date of issuance. The Company defers revenue at the time an eligible transaction occurs, based on the percentage of gift cards that are projected to be redeemed which includes an estimate of breakage and the relative fair value of the gift cards. The Company recognizes revenue when: (i) a gift card is redeemed by the customer, or (ii) a rebate gift card expires. Deferred revenue related to the rebate gift cards included within accrued liabilities within our Consolidated Balance Sheets was
$3.4 million
and
$5.2 million
at
March 31, 2014
and
2013
, respectively.
The Company offers a private-label credit card agreement through a lending institution for the issuance of promotional financing bearing the hhgregg brand name. Under the agreement, the lending institution manages and directly extends credit to the customers. Cardholders who choose a private-label credit card can receive zero-interest promotional financing on qualifying purchases. The bank is the sole owner of the accounts receivable generated under the program and absorbs losses associated with non-payment by the cardholders and fraudulent usage of the accounts. Accordingly, we do not hold any consumer receivables related to these programs. We pay financing fees to the lending institution and these fees are variable based on certain factors such as the London Interbank Offered Rate (“LIBOR”) and types of promotional financing offers.
Cost of goods sold is defined as the cost of gross inventory sold, including any handling charges, in-bound freight expenses and physical inventory losses, less the recognized portion of certain vendor allowances. Because the Company does not include costs related to its store distribution facilities, including depreciation expense, in cost of goods sold, the Company’s gross profit may not be comparable to that of other retailers that include these costs in cost of goods sold and in the calculation of gross profit.
|
|
|
|
(o)
|
Selling, General and Administrative Expenses
|
Selling, general and administrative expenses includes wages, rent, taxes (other than income taxes), insurance, utilities, delivery costs, distribution costs, service expense, repairs and maintenance of stores and equipment, store opening costs, stock-based compensation and other general administrative expenses.
Shipping and handling costs and expenses of
$111.3 million
,
$105.9 million
, and
$102.9 million
for fiscal
2014
,
2013
and
2012
, respectively, were included in selling, general, and administrative expenses. Included in these costs were home delivery expenses of
$59.8 million
,
$55.9 million
, and
$51.0 million
for the years ended March 31,
2014
,
2013
, and
2012
, respectively.
The Company receives funds from its vendors for various programs including volume purchase rebates, marketing support, markdowns, margin protection, training and sales incentives. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an expense reduction when the cost is incurred. All other vendor allowances are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold.
Advertising costs are expensed as incurred, with the exception of television production costs which are expensed the first time the advertisement is aired. These amounts have been reduced by vendor allowances under cooperative advertising which totaled
$37.0 million
,
$43.1 million
, and
$44.4 million
for the years ended
March 31, 2014
,
2013
and
2012
, respectively.
Store opening costs, other than capital expenditures, are expensed as incurred and recorded in selling, general and administrative expenses.
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company is subject to U.S. federal and certain state and local income taxes. The Company’s income tax returns, like those of most companies, are periodically audited by federal and state tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with the Company’s various tax filing positions, the Company records a liability for more likely than not exposures. A number of years may elapse before a particular matter, for which the Company has established a liability, is
audited and fully resolved or clarified. The Company adjusts its liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which temporary differences are expected to reverse, the Company believes it is more likely than not that it will realize the benefits of these deductible differences.
The Company collects certain taxes from their customers at the time of sale and remits the collected taxes to government authorities. These taxes are excluded from net sales and cost of goods sold in the Company’s consolidated statements of income.
|
|
|
|
(t)
|
Stock-Based Compensation
|
The Company records all stock-based compensation, including grants of employee stock options and restricted stock units, using the fair value-based method. Refer to note 7 for additional information regarding the Company’s stock-based compensation.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
|
|
|
|
(2)
|
Fair Value Measurements
|
The Company uses a three-tier valuation hierarchy for its fair value measurements based upon observable and non-observable inputs:
Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 — inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 — unobservable inputs for the asset or liability, as there is little, if any, market activity at the measurement date.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The underlying investments within the Company’s deferred compensation plan for company-owned life insurance, recorded within Other long-term assets, totaled
$0.7 million
as of March 31, 2014 and consist of equity index funds and fixed income assets, which are considered Level 2 in the hierarchy described above. The Company had no assets or liabilities that were measured at fair value on a recurring basis as of March 31,
2013
.
Assets and Liabilities that are Measured at Fair Value on a Non-Recurring Basis
The Company has property and equipment that are measured at fair value on a non-recurring basis when impairment indicators are present. The assets are adjusted to fair value only when the carrying values exceed the fair values. The categorization of the framework used to price the assets is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. Property and equipment fair values were derived using a discounted cash flow model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the discounted cash flow model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as certain capital expenditures, as well as an appropriate discount rate. During fiscal 2014,
the Company recorded an asset impairment charge as a result of entering into a lease modification to downsize a store. In conjunction with the downsize, the Company determined that certain of the assets in use would be abandoned at the time construction to downsize begins, and as a result determined this to be a triggering event for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value. In addition, the Company recorded an asset impairment charge during fiscal 2014 as a result of idling certain store fixtures. The Company determined this to be a triggering event for an impairment analysis to be performed, and the carrying amount of the assets were reduced to fair value. During fiscal 2013, the Company had
one
store and in fiscal 2012, the Company had
two
stores, whose profit contributions were significantly lower than the chain average due to decreased sales. This decrease in profit triggered the need for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value.
The following table summarizes the fair value remeasurements recorded during the years ended
March 31, 2014
,
2013
, and
2012
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Carrying value (pre-asset impairment)
|
|
$
|
1.0
|
|
|
$
|
0.9
|
|
|
$
|
2.1
|
|
|
Asset impairment loss (included in income from operations)
|
|
0.6
|
|
|
0.5
|
|
|
0.8
|
|
|
Remaining net carrying value
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
|
$
|
1.3
|
|
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable — trade, accounts receivable — other, accounts payable and customer deposits approximate fair value because of the short maturity of these instruments.
Net income per basic share is calculated based on the weighted-average number of outstanding common shares. Net income per diluted share is calculated based on the weighted-average number of outstanding common shares plus the effect of potential dilutive common shares. When the Company reports net income, the calculation of net income per diluted share excludes shares underlying outstanding stock options with exercise prices that exceed the average market price of the Company’s common stock for the period and certain options and restricted stock units with unrecognized compensation cost, as the effect would be antidilutive. Potential dilutive common shares are composed of shares of common stock issuable upon the exercise of stock options and restricted stock units. The following table presents net income per basic and diluted share for the years ended March 31,
2014
,
2013
and
2012
(in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Net income (A)
|
$
|
228
|
|
|
$
|
25,369
|
|
|
$
|
81,373
|
|
|
Weighted average outstanding shares of common stock (B)
|
30,209,928
|
|
|
34,430,641
|
|
|
37,749,354
|
|
|
Dilutive effect of employee stock options and restricted stock units
|
474,061
|
|
|
66,147
|
|
|
330,331
|
|
|
Common stock and potential dilutive common shares (C)
|
30,683,989
|
|
|
34,496,788
|
|
|
38,079,685
|
|
|
Net income per share:
|
|
|
|
|
|
|
Basic (A/B)
|
$
|
0.01
|
|
|
$
|
0.74
|
|
|
$
|
2.16
|
|
|
Diluted (A/C)
|
$
|
0.01
|
|
|
$
|
0.74
|
|
|
$
|
2.14
|
|
Antidilutive shares not included in the net income per diluted share calculation for the years ended March 31,
2014
,
2013
and
2012
were
1,225,819
,
3,529,249
and
2,660,197
, respectively.
Net merchandise inventories consisted of the following at
March 31, 2014
and
2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Appliances
|
$
|
134,053
|
|
|
$
|
120,972
|
|
|
Consumer electronics
|
108,193
|
|
|
90,441
|
|
|
Computing and wireless
|
36,039
|
|
|
45,964
|
|
|
Home products
|
20,257
|
|
|
58,185
|
|
|
Net merchandise inventory
|
$
|
298,542
|
|
|
$
|
315,562
|
|
A summary of debt at
March 31, 2014
and
2013
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Line of credit
|
$
|
—
|
|
|
$
|
—
|
|
Amended Facility
On July 29, 2013, Gregg Appliances entered into Amendment No. 1 to the Amended and Restated Loan and Security Agreement (the “Amended Facility”) to increase the maximum credit available to
$400 million
from
$300 million
, subject to borrowing base availability, and extend the term of the facility to expire on
July 29, 2018
. The facility was set to expire on
March 29, 2016
.
Interest on borrowings (other than Eurodollar rate borrowings) is payable monthly at a fluctuating rate based on the bank’s prime rate or LIBOR plus an applicable margin based on the average quarterly excess availability. Interest on Eurodollar rate borrowings is payable on the last day of each “interest period” applicable to such borrowing or on the three month anniversary of the beginning of such “interest period” for interest periods greater than three months. The unused line rate is determined based on the amount of the daily average of the outstanding borrowings for the immediately preceding calendar quarter period (the “Daily Average”). For a Daily Average greater than or equal to
50%
of the defined borrowing base, the unused line rate is
0.25%
. For a Daily Average less than 50% of the defined borrowing base, the unused line rate is
0.375%
. The Amended Facility is guaranteed by Gregg Appliances’ wholly-owned subsidiary, HHG Distributing, which has no assets or operations. The guarantee is full and unconditional and Gregg Appliances has no other subsidiaries.
Pursuant to the Amended Facility, the borrowing base is equal to the sum of (i)
90%
of the amount of the eligible commercial accounts, (ii)
75%
of the amount of eligible commercial and credit card receivables of Gregg Appliances and (iii)
90%
of the net recovery percentage multiplied by the value of eligible inventory consistent with the most recent appraisal of such eligible inventory.
Under the Amended Facility, Gregg Appliances is not required to comply with any financial maintenance covenant unless “excess availability” is less than the greater of (i)
10.0%
of the lesser of (A) the defined borrowing base or (B) the defined maximum credit or (ii)
$20.0 million
during the continuance of which event Gregg Appliances is subject to compliance with a fixed charge coverage ratio of
1.0
to
1.0
.
Pursuant to the Amended Facility, if Gregg Appliances has “excess availability” of less than
12.5%
of the lesser of (A) the defined borrowing base or (B) the defined maximum credit, it may, in certain circumstances more specifically described in the Amended Facility, become subject to cash dominion control.
The Amended Facility places limitations on the ability of Gregg Appliances to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions, enter into unrelated businesses, open collateral locations outside of the United States, or enter into consignment assignments or floor plan financing arrangements. The Amended Facility also contains various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Gregg Appliances was in compliance with the restrictions and covenants of the Amended Facility at
March 31, 2014
.
As of
March 31, 2014
and
2013
, Gregg Appliances had
no
borrowings outstanding under the Amended Facility. As of
March 31, 2014
, Gregg Appliances had
$5.3 million
of letters of credit outstanding, which expire through December 31,
2014
. As of
March 31, 2013
, Gregg Appliances had
$4.9 million
of letters of credit outstanding which expired by
December 31, 2013
. The total borrowing availability under the Amended Facility was
$169.5 million
and
$189.8 million
as of
March 31, 2014
and
2013
, respectively. The interest rate based on the bank’s prime rate was
3.75%
and
4.25%
as of
March 31, 2014
and
2013
, respectively.
Income tax (benefit) expense for the years ended
March 31, 2014
,
2013
and
2012
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,528
|
|
|
$
|
6,448
|
|
|
$
|
12,428
|
|
|
State
|
|
(246
|
)
|
|
2,008
|
|
|
3,982
|
|
|
Total current
|
|
1,282
|
|
|
8,456
|
|
|
16,410
|
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
(1,618
|
)
|
|
7,163
|
|
|
8,960
|
|
|
State
|
|
330
|
|
|
436
|
|
|
422
|
|
|
Total deferred
|
|
(1,288
|
)
|
|
7,599
|
|
|
9,382
|
|
|
Total (benefit) expense
|
|
$
|
(6
|
)
|
|
$
|
16,055
|
|
|
$
|
25,792
|
|
Deferred income taxes at
March 31, 2014
and
2013
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Deferred tax assets:
|
|
|
|
|
|
Goodwill for tax purposes
|
|
$
|
38,447
|
|
|
$
|
45,038
|
|
|
Accrued expenses
|
|
11,618
|
|
|
11,086
|
|
|
Long-term deferred compensation
|
|
2,344
|
|
|
2,145
|
|
|
Inventories
|
|
3,083
|
|
|
3,259
|
|
|
Stock-compensation expense
|
|
7,960
|
|
|
8,114
|
|
|
Other
|
|
3,856
|
|
|
2,165
|
|
|
Credit carryforwards
|
|
239
|
|
|
286
|
|
|
Net operating loss carryforward
|
|
193
|
|
|
—
|
|
|
Total deferred tax assets
|
|
67,740
|
|
|
72,093
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment
|
|
25,180
|
|
|
29,958
|
|
|
Other
|
|
1,158
|
|
|
1,125
|
|
|
Total deferred tax liabilities
|
|
26,338
|
|
|
31,083
|
|
|
Net deferred tax assets
|
|
$
|
41,402
|
|
|
$
|
41,010
|
|
The Company recognizes interest and penalties in income tax expense in its consolidated statements of income. At
March 31, 2014
and
2013
, the Company had no accrued interest and penalties.
The Company files a consolidated U.S. federal income tax return, as well as income tax returns in various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before fiscal 2011.
The (benefit) expense for income taxes differs from the amount of income tax determined by applying the U.S. federal income tax rate of
35%
to income before income taxes due to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Computed “expected” tax expense
|
|
$
|
78
|
|
|
$
|
14,498
|
|
|
$
|
37,508
|
|
|
State income tax expense, net of federal income tax benefit
|
|
49
|
|
|
1,516
|
|
|
2,901
|
|
|
Non-taxable Life Insurance Proceeds
|
|
—
|
|
|
—
|
|
|
(14,000
|
)
|
|
Other
|
|
(133
|
)
|
|
41
|
|
|
(617
|
)
|
|
|
|
$
|
(6
|
)
|
|
$
|
16,055
|
|
|
$
|
25,792
|
|
|
|
|
|
(7)
|
Stock-based Compensation
|
Stock Options
The Company maintains stock-based compensation plans which allow for the issuance of non-qualified stock options and restricted stock to officers, other key employees and members of the Board of Directors. On April 12, 2007, the Company’s Board of Directors approved the adoption of the hhgregg, Inc. 2007 Equity Incentive Plan (“Equity Incentive Plan”). The Equity Incentive Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, awards of restricted stock, awards of restricted stock units, awards of performance units, and stock grants. On June 23, 2010, an amendment (the “Amendment”) to the Equity Incentive Plan was adopted by the Company’s Board of Directors that increased the number of shares of common stock reserved for issuance under the Equity Incentive Plan from
3,000,000
to
6,000,000
. The Amendment was ratified and approved by the Company’s stockholders at the annual meeting of stockholders on August 3, 2010. If an option expires, is terminated or canceled without having been exercised or repurchased by the Company, or common stock is used to exercise an option, the terminated portion of the option or the common stock used to exercise the option will become available for future grants under the Equity Incentive Plan unless the plan is terminated. The term of the Company’s Equity Incentive Plan commenced on the date of approval by the Company’s Board of Directors and continues until the tenth anniversary of the approval by the Company’s Board of Directors. The Company’s Equity Incentive Plan is administered by the Company’s Compensation Committee. Prior to the Equity Incentive Plan being adopted, the Company utilized the Gregg Appliances, Inc. 2005 Stock Option Plan (“Stock Option Plan”). The Stock Option Plan provided for the grant of incentive stock options and nonqualified stock options to the Company’s officers, directors, consultants, and key employees.
On April 2, 2013, the Company’s Board of Directors approved a one-time voluntary stock option exchange program (the “Offer”), as amended on April 17, 2013. On April 2, 2013, the Company commenced the Offer, which allowed employees to surrender all outstanding and unexercised stock options, whether vested or unvested, that were granted subsequent to July 18, 2007 (the “Eligible Options”), in a
one
-for-one exchange for new options (the “New Options”). Under the Offer, employees who chose to participate would receive New Options with an exercise price per share equal to the greater of (a)
$10.00
or (b) the closing price of the Company’s Common Stock as reported on the New York Stock Exchange on the New Option grant date. Additionally, the Offer did not allow partial tenders of any one particular option grant, however employees could choose to exchange some but not all Eligible Option grants held by any optionee. Options granted prior to July 19, 2007 were not eligible for exchange.
The Offer expired on April 30, 2013. Pursuant to the Offer, a total of
58
eligible participants tendered, and the Company accepted for cancellation, options to purchase an aggregate of
898,665
shares of the Company’s common stock. The eligible stock options that were accepted for cancellation represented approximately
31%
of the options eligible for participation in the Exchange Offer. Pursuant to the terms and conditions of the Amended Exchange Offer, on May 1, 2013, the Company issued
898,665
New Options in exchange for the tendered stock options. The Company will recognize the incremental expense resulting from this exchange, aggregating
$1.4 million
, over the
three
-year vesting period, in accordance with the Exchange Offer.
During the years ended March 31,
2014
,
2013
and
2012
the Company granted options for
1,820,805
,
795,000
, and
813,400
shares of common stock under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The options vest in equal amounts over a
three
-year period beginning on the first anniversary of the date of grant and expire
7 years
from the date of the grant. The fair value of each option grant is estimated on the date of grant and is amortized on a straight-line basis over the vesting period.
The weighted-average estimated fair value of options granted to employees and directors under the 2007 Equity Incentive Plan was
$7.08
,
$5.34
, and
$6.06
during the 12 months ended March 31,
2014
,
2013
and
2012
, respectively, using the Black-Scholes model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Risk-free interest rate
|
0.06% - 1.53
|
|
|
0.56% - 0.69
|
|
|
1.3
|
%
|
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected volatility
|
63.0
|
%
|
|
61.9
|
%
|
|
52.2
|
%
|
|
Expected life of the options (years)
|
4.5
|
|
|
4.5
|
|
|
4.5
|
|
The following table summarizes the activity under the Company’s Stock Option Plans for the fiscal year ended March 31,
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Outstanding at March 31, 2013
|
3,322,462
|
|
|
$
|
15.81
|
|
|
|
|
|
|
Granted
|
1,820,805
|
|
|
13.97
|
|
|
|
|
|
|
Exercised
|
(480,647
|
)
|
|
12.10
|
|
|
|
|
|
|
Canceled
|
(1,403,410
|
)
|
|
19.58
|
|
|
|
|
|
|
Expired
|
(27,002
|
)
|
|
23.53
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
3,232,208
|
|
|
$
|
13.61
|
|
|
4.43
|
|
$
|
30
|
|
|
Vested or expected to vest at March 31, 2014
|
3,096,686
|
|
|
$
|
13.61
|
|
|
4.36
|
|
$
|
29
|
|
|
Exercisable at March 31, 2014
|
1,274,575
|
|
|
$
|
14.08
|
|
|
2.38
|
|
$
|
6
|
|
During fiscal
2014
,
2013
and
2012
,
$4.2 million
(
$2.5 million
net of tax),
$5.2 million
(
$3.1 million
net of tax) and
$5.7 million
(
$3.4 million
net of tax), respectively, was charged to expense related to the stock option plans. The total intrinsic value of options exercised during the years ended March 31,
2014
,
2013
and
2012
was
$2.6 million
,
$1.6 million
and
$2.5 million
, respectively. Total unrecognized stock option compensation cost (adjusted for forfeitures) at March 31,
2014
was
$6.2 million
and is expected to be recognized over a weighted average period of
1.9 years
. Net cash proceeds from the exercise of stock options were
$5.8 million
,
$4.4 million
and
$2.5 million
in fiscal
2014
,
2013
and
2012
, respectively. The total grant date fair value of stock options vested during the years ended March 31,
2014
,
2013
and
2012
was
$2.6 million
,
$5.3 million
and
$5.4 million
, respectively.
Time Vested Restricted Stock Units
During the years ended March 31,
2014
,
2013
and
2012
the Company granted
30,595
,
93,900
and
81,300
time vested restricted stock units (“RSUs”) under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The time vested RSUs vest
three
years from the date of grant. Upon vesting, the outstanding number of time vested RSUs will be converted into shares of common stock. Time vested RSUs are forfeited if they have not vested before the employment of the participant terminates for any reason other than death or total permanent disability or certain other circumstances as described in such participant’s RSU agreement. Upon death or disability, the participant is entitled to receive a portion of the award based upon the period of time lapsed between the date of grant of the time vested RSU and the termination of employment. The fair value of time vested RSU awards is based on the Company’s stock price at the close of the market on the date of grant. The weighted average grant date fair value for the time vested RSUs issued during the fiscal year ended March 31,
2014
was
$14.38
. Total unrecognized compensation cost for the time vested RSUs (adjusted for forfeitures) at March 31,
2014
was
$0.7 million
and is expected to be recognized over a weighted average period of
1.40
years.
The following table summarizes time vested RSU vesting activity for the fiscal year ended March 31,
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested RSU’s
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Nonvested at March 31, 2013
|
155,600
|
|
|
$
|
12.38
|
|
|
|
|
|
|
Granted
|
30,595
|
|
|
14.38
|
|
|
|
|
|
|
Vested
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
(42,692
|
)
|
|
12.68
|
|
|
|
|
|
|
Nonvested at March 31, 2014
|
143,503
|
|
|
$
|
12.72
|
|
|
1.40
|
|
$
|
—
|
|
The composition of net rent expense for all operating leases, including leases of property and equipment, was as follows for the years ended March 31,
2014
,
2013
and
2012
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Minimum rentals
|
|
$
|
91,174
|
|
|
$
|
89,407
|
|
|
$
|
82,615
|
|
|
Contingent rentals
|
|
52
|
|
|
74
|
|
|
147
|
|
|
Total rent expense
|
|
$
|
91,226
|
|
|
$
|
89,481
|
|
|
$
|
82,762
|
|
Future minimum required rental payments for noncancelable operating leases, with terms of one year or more, consist of the following as of March 31,
2014
(in thousands):
|
|
|
|
|
|
|
|
|
Rental Payments
|
|
Payable in fiscal year:
|
|
|
2015
|
$
|
87,425
|
|
|
2016
|
84,302
|
|
|
2017
|
80,922
|
|
|
2018
|
76,475
|
|
|
2019
|
71,904
|
|
|
Thereafter
|
160,592
|
|
|
Total required payments
|
$
|
561,620
|
|
Total minimum rental lease payments have not been reduced by minimum sublease rent income of approximately
$1.1 million
due under future noncancelable subleases.
|
|
|
|
(9)
|
Employee Benefit Plans
|
The Company sponsors a 401(k) retirement savings plan (“Plan”) covering all employees who have attained the age of
21
and have worked at least
1000
hours within a
12
-month period. Plan participants may elect to contribute
1%
to
12%
of their compensation to the Plan, subject to IRS limitations. The Company provides a discretionary matching contribution up to
7%
of each participant’s compensation, with total Company expense, including payment of administrative fees, aggregating approximately
$0.6 million
,
$0.9 million
, and
$0.7 million
for the years ended March 31,
2014
,
2013
, and
2012
, respectively.
During the fiscal year ended March 31,
2014
, the Company established a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under the qualified defined contribution plan. Amounts contributed and deferred under the deferred compensation plans are credited or charged with the performance of investment options offered under the plans and elected by the participants. In the event of bankruptcy, the assets of these plans are available to satisfy the claims of general creditors. The liability for compensation deferred under the the plan was
$0.7 million
at March 31,
2014
and is included in “Other long-term liabilities”. Total expense recorded under the plan was
$0.1 million
for fiscal year
2014
.
The Company has another unfunded, non-qualified deferred compensation plan for members of executive management which was frozen during the current year. Benefits accrue to individual participants annually based on a predetermined formula, as defined, which considers operating results of the Company and the participant’s base salary. Vesting of benefits is attained upon reaching
55
years of age or
10
years of continuous service, measurement of which is retroactive to the participant’s most recent start date. Annual interest is credited to participant accounts at an interest rate determined at the sole discretion of the Company. Benefits will be paid to individual participants upon the later of terminating employment with the Company or the participant attaining the age of
55
. The Company recorded
$0.2 million
in expense related to this plan for the years ended March 31,
2014
,
2013
and
2012
representing interest earned, but did not contribute additional amounts as the Company did not achieve the predetermined operating results target prior to the date which the plan was frozen. Amounts accrued in other long-term liabilities at March 31,
2014
and
2013
were
$5.3M
and
$5.4M
.
The Company is engaged in various legal proceedings in the ordinary course of business and has certain unresolved claims pending. The ultimate liability or range of loss, if any, for the aggregate amounts claimed cannot be determined at this time. However, management believes, based on the examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided for in the consolidated financial statements is not likely to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
|
|
|
|
(11)
|
Interim Financial Results (Unaudited)
|
The following table sets forth certain unaudited quarterly information for each of the eight fiscal quarters for the years ended March 31,
2014
and
2013
(in thousands, except net (loss) income per share data). In management’s opinion, this unaudited quarterly information has been prepared on a consistent basis with the audited financial statements and includes all necessary adjustments, consisting only of normal recurring adjustments that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended March 31, 2014
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Net sales
|
|
$
|
524,922
|
|
|
$
|
568,315
|
|
|
$
|
707,053
|
|
|
$
|
538,280
|
|
|
Cost of goods sold
|
|
370,157
|
|
|
400,365
|
|
|
517,773
|
|
|
385,736
|
|
|
Gross profit
|
|
154,765
|
|
|
167,950
|
|
|
189,280
|
|
|
152,544
|
|
|
Selling, general and administrative expenses
|
|
119,309
|
|
|
120,389
|
|
|
132,360
|
|
|
121,892
|
|
|
Net advertising expense
|
|
25,896
|
|
|
30,539
|
|
|
36,964
|
|
|
30,780
|
|
|
Depreciation and amortization expense
|
|
11,038
|
|
|
10,406
|
|
|
10,785
|
|
|
10,891
|
|
|
Asset impairment charge
|
|
—
|
|
|
—
|
|
|
310
|
|
|
303
|
|
|
(Loss) income from operations
|
|
(1,478
|
)
|
|
6,616
|
|
|
8,861
|
|
|
(11,322
|
)
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
604
|
|
|
557
|
|
|
695
|
|
|
609
|
|
|
Interest income
|
|
(5
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
Total other expense
|
|
599
|
|
|
555
|
|
|
693
|
|
|
608
|
|
|
(Loss) income before income taxes
|
|
(2,077
|
)
|
|
6,061
|
|
|
8,168
|
|
|
(11,930
|
)
|
|
Income tax (benefit) expense
|
|
(817
|
)
|
|
2,382
|
|
|
3,120
|
|
|
(4,691
|
)
|
|
Net (loss) income
|
|
$
|
(1,260
|
)
|
|
$
|
3,679
|
|
|
$
|
5,048
|
|
|
$
|
(7,239
|
)
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
(0.25
|
)
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended March 31, 2013
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
Net sales
|
|
$
|
489,856
|
|
|
$
|
587,636
|
|
|
$
|
799,635
|
|
|
$
|
597,632
|
|
|
Cost of goods sold
|
|
343,197
|
|
|
413,489
|
|
|
581,450
|
|
|
419,037
|
|
|
Gross profit
|
|
146,659
|
|
|
174,147
|
|
|
218,185
|
|
|
178,595
|
|
|
Selling, general and administrative expenses
|
|
118,773
|
|
|
125,794
|
|
|
139,303
|
|
|
123,885
|
|
|
Net advertising expense
|
|
27,616
|
|
|
31,754
|
|
|
38,715
|
|
|
27,348
|
|
|
Depreciation and amortization expense
|
|
9,414
|
|
|
9,843
|
|
|
10,416
|
|
|
10,462
|
|
|
Asset impairment charge
|
|
—
|
|
|
—
|
|
|
504
|
|
|
—
|
|
|
(Loss) income from operations
|
|
(9,144
|
)
|
|
6,756
|
|
|
29,247
|
|
|
16,900
|
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
478
|
|
|
510
|
|
|
704
|
|
|
652
|
|
|
Interest income
|
|
(2
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(1
|
)
|
|
Total other expense
|
|
476
|
|
|
507
|
|
|
701
|
|
|
651
|
|
|
(Loss) income before income taxes
|
|
(9,620
|
)
|
|
6,249
|
|
|
28,546
|
|
|
16,249
|
|
|
Income (benefit) tax expense
|
|
(3,920
|
)
|
|
2,489
|
|
|
11,157
|
|
|
6,329
|
|
|
Net (loss) income
|
|
$
|
(5,700
|
)
|
|
$
|
3,760
|
|
|
$
|
17,389
|
|
|
$
|
9,920
|
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
0.11
|
|
|
$
|
0.51
|
|
|
$
|
0.31
|
|
|
Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
0.11
|
|
|
$
|
0.51
|
|
|
$
|
0.31
|
|
|
|
|
|
(12)
|
Stock Repurchase Program
|
On
May 16, 2013
, the Company’s Board of Directors authorized a stock repurchase program (the “
May 2013 Program
”) allowing the Company to repurchase up to
$50 million
of its common stock. The stock repurchase program allows the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on
May 22, 2014
. The previous stock repurchase program expired on May 21, 2013.
The following table shows the number and cost of shares repurchased during the
twelve months ended March 31, 2014
and
2013
, respectively ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
March 31, 2014
|
|
March 31, 2013
|
|
May 2013 Program
|
|
|
|
|
Number of shares repurchased
|
3,488,882
|
|
|
—
|
|
|
Cost of shares repurchased
|
$
|
49,145
|
|
|
$
|
—
|
|
|
May 2012 Program
|
|
|
|
|
Number of shares repurchased
|
—
|
|
|
5,458,001
|
|
|
Cost of shares repurchased
|
$
|
—
|
|
|
$
|
48,232
|
|
As of
March 31, 2014
, the Company had
$0.9 million
remaining under the
May 2013 Program
. The repurchased shares are classified as treasury stock within stockholders’ equity in the accompanying consolidated balance sheets.
|
|
|
|
(13)
|
Life Insurance Proceeds
|
During the fiscal year ended March 31, 2012, the Company received
$40.0 million
in proceeds on a key man life insurance policy that was held on our Executive Chairman of the Board, who passed away on January 22, 2012. The proceeds were non-taxable and are recorded in income from operations in the accompanying consolidated statements of income for fiscal 2012.
On May 14, 2014, the Company’s Board of Directors authorized a new stock repurchase program allowing it to repurchase up to
$40 million
of its common stock, which becomes effective on May 20, 2014. The stock repurchase program allows the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on May 20, 2015 unless shortened or extended by the Company’s Board of Directors.
|
|
|
|
|
|
ITEM 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
None.