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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 Item 1A. “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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•
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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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•
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Off Balance Sheet Items
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Overview
hhgregg, Inc. is an appliance, electronics and furniture retailer that is committed to providing customers with a truly differentiated purchase experience through superior customer service, highest quality product selections and customer satisfaction. Founded in 1955, hhgregg is a multi-regional retailer with 226 brick-and-mortar stores in 20 states that also offers market-leading global and local brands at value prices nationwide via hhgregg.com. We operate in one reportable segment and do not have international operations. References to fiscal years in this report relate to the respective 12-month period ended March 31. Our
2016
fiscal year is the 12-month period that ended on
March 31, 2016
.
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. Stores that are closed are excluded from the calculation the month before closing. 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. In addition, we offer additional products not available in our store locations online at www.hhgregg.com. Appliance and consumer electronics sales comprised
89%
and
88%
of our net sales mix for the 12 months ended
March 31, 2016
and
2015
, 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 in fiscal 2016, for fiscal 2017 we are focusing on revenue growth, productivity and focusing and realigning the organization of our business.
Our first focus for fiscal 2017 is revenue growth. Similar to previous years, the appliance category will continue to be the centerpiece of our business, and as such, we will continue to drive specific initiatives around the category. We will continue to enhance our product selection by adding additional Fine Lines departments. Fine Lines departments incorporate ultra premium appliances brands that are not currently in our hhgregg stores and historically have improved our appliance revenues in stores. During fiscal 2016, we opened one Fine Lines department and plan on opening up to 15 additional F
ine Lines departments in fiscal 2017, throughout the fiscal year
. T
o grow revenues in the consumer electronics category, we intend to expand our product selection and grow our online revenues through www.hhgregg.com. We plan on optimizing www.hhgregg.com to increase the online purchase of televisions and other consumer electronics by consumers as well as expand the endless aisle concept, offering products not available in stores. This will also allow us to broaden our footprint by shipping to customers throughout the entire United States.
During fiscal 2016, we transformed the layout of 25 stores to better showcase our selection of appliances, consumer electronics, home products and computers and tablets. These changes were designed to make our stores more visually appealing to our customers, as well as to display merchandise by functionality. Furniture and appliances are prominently displayed in the front of the store. Due to the connected nature of the products, consumer electronics and computers and tablets are displayed together. We expect to complete the redesign of up to 100 existing stores before the fiscal 2017 holiday selling season.
In all of our categories we plan on continuing to offer delivery and installation capabilities and will invest in the infrastructure and revenue generating capabilities of these areas by improving upon the Store2Door service. Store2Door allows the customer to purchase online and have the product delivered and/or installed in their home or to allow the customer to pick the product up in the store seamlessly. In order to accomplish this, we will refine our processes and offerings. We also plan on adding a Store2Door kiosk in appliance and furniture categories which will allow customers who visit our store to purchase products not available in the store and have them delivered to their home.
We believe that a happy customer is a customer who returns to our stores or our website and will become a customer for life. We want to gain our customer's trust during the sales process. In order to reach this goal, we will continue to train and develop our consultative sales staff so they are able to educate our customers on the benefits of feature-rich products. We also offer the ultimate price center which shows the customer the competitor's price in the store so that the customer can be assured that they are paying the lowest price possible. By putting the customer first, we plan on gaining our customer's trust and ensuring that the customer has a positive sales experience which will lead to repeat business.
Our second focus for fiscal 2017 is productivity. We will continue to focus on reducing our overall selling, general and administrative expenses including store level, corporate and logistics expenses. We have plans to evaluate our logistics network to determine the best logistics design for optimization efficiency. We will also evaluate inventory productivity to determine ways to reduce inventory in all categories. Using the knowledge we obtained during fiscal 2016, we will optimize our fiscal 2017 marketing spend to the most effective mediums with the goal to drive in-store and online traffic.
Our third focus for fiscal 2017 relates to our organization. We will increase the focus on growing our talent pool and investing in our people throughout the organization through training and development programs. We will align strategic goals to our key performance indicators so we can evaluate our progression.
Key Metrics
The following table summarizes certain operating data that we believe are important to understanding our operating model:
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Fiscal Year Ended March 31,
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2016
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2015
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2014
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Inventory turnover
(1)
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5.5x
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5.5x
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5.5x
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Working capital (as a percentage of net sales)
(2)
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5.1
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%
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5.4
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%
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|
6.5
|
%
|
Net capital expenditures (as a percentage of net sales)
|
0.7
|
%
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|
1.1
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%
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|
1.0
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%
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(Loss) income from operations (as a percentage of net sales)
|
(2.6
|
)%
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(4.7
|
)%
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0.1
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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 the year.
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(2)
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Working capital represents current assets excluding 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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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
5.5
turns per year
over the past three fiscal years. During fiscal 2015 and 2016, we were able to maintain appropriate inventory levels given the continued decline in our net sales from fiscal 2014 and 2015. During fiscal 2014, our net sales decline had a negative impact on our inventory turnover calculation. Our working capital, expressed as a percentage of net sales, has averaged
5.7%
over the past three fiscal years. Our net capital expenditures, measured as a percentage of net sales, have averaged
0.9%
over the past three fiscal years.
Business Strategy and Core Philosophies.
Our business strategy is centered 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. 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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Growth in real disposable personal income is projected to moderate to 2.9% in 2016 as compared with 3.4% growth in 2015, based on the March 2016 Blue Chip Economic Indicators®. *
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•
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The average unemployment rate for 2016 is forecasted to decline to 4.7%, according to the March 2016 Blue Chip Economic Indicators, which would be an improvement from the 5.3% average in 2015. 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 2015, home price appreciation increased 5.5% which was consistent with the 2014 increase, according to the Federal Housing Finance Agency index. Economists generally expect the rate of home price growth to moderate to 3.2% in 2016.
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•
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Housing turnover increased an estimated 7.4% in 2015 after a 2.6% decrease in 2014, according to The National Association of Realtors and U.S. Census Bureau. Turnover is generally expected to continue to increase in 2016, supported by a strengthening jobs market, rising incomes, and historically low mortgage rates.
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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 U.S. Census Bureau’s data on New Residential Construction shows that U.S. Housing Start-Up’s experienced a 13.3% increase for the twelve-month period ended March 31, 2016 over the prior year comparable period. 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. For fiscal 2016, we had an increase in average unit selling prices compared to fiscal 2015. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for home appliances increased 1.5% from $46.1 billion in 2014 to $46.8 billion in 2015. Major household appliances, such as refrigerators, stovetops, dishwashers and washer and dryers, account for approximately 86.3% of this total at $40.4 billion in 2015. For the fiscal year ended 2016, we generated
53%
of total product sales from the sale of home appliances. Despite the improvement in the U.S. housing market and general economy, we experienced a decline of units sold in our appliance sales in fiscal 2016. As we are a multi-regional retailer, the housing market and general economy national trends vary from the markets we serve. In addition there was strong promotional competition. The Association of Home Appliance Manufactures estimates 2-3% of growth for calendar 2016 compared to calendar 2015. Based on this, for fiscal 2017 we believe the appliance industry will continue to experience an increase in demand and with the addition of the Fine Lines departments, promotions aimed towards appliances and refined product assortments by geography, we hope to drive additional traffic converting into additional revenues for the appliance category.
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. 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 a result we experienced 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 will continue to assort and promote value products across all segments of the category to drive the video business both in-store and online. As vendor models transition for the year, we will add additional online skus in both value and premium brands. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for consumer electronics was $216.1 billion in 2015, a 2.5% increase from 2014. From this total, televisions accounted for $36.6 billion compared to $36.7 billion in the prior year, a 0.1% decrease, and personal computers and equipment accounted for $55.4 billion compared to $52.7 billion in the prior year, a 5.1% increase. For fiscal 2016, we had a comparable store sales decrease of
10.3%
for consumer electronics due to the fact, relative to our competitors, we were highly indexed in large premium televisions. For the fiscal year ended 2016, we generated
41%
of total product sales from the sale of consumer electronics and computers and tablets. For calendar 2016, U.S. Consumer Technology Association projects that unit sales of digital displays will be down 1% compared to calendar 2015 and total computing will be down 7% for calendar 2016 compared to calendar 2015.
In previous years, we have introduced new products with the hope of offsetting falling market demand and market share losses of our product categories. We will continue to monitor the performance of these new categories, along with market share shifts between the competitive set in our existing categories. We continue to refine our assortment in the furniture category and plan on focusing on the great room, a large room in a modern house that combines features of a living room with those of a dining room or family room. 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 $103.1 billion in 2015, an increase of 5.0% from $98.2 billion in 2014. Our home products comparable store sales for fiscal 2016 was an increase of
5.4%
. For the fiscal year ended 2016, we generated
6%
of total product sales from the sale of furniture and mattresses.
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.
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 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, 2016
, would have affected net earnings by approximately
$0.2 million
in fiscal
2016
.
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.
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 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, 2016
, would have affected net earnings by approximately
$0.2 million
in fiscal
2016
.
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 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, 2016
, would have affected net earnings by less than
$0.1 million
in fiscal
2016
.
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 undiscounted 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 net book value exceeds the asset’s or asset group’s estimated fair value. If we recognize an impairment loss, the adjusted net book value 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, 2016
,
2015
and
2014
, we recorded pre-tax impairment losses of
$20.9 million
,
$47.9 million
, and
$0.6 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. During fiscal 2015, the Company recorded a full valuation allowance on its deferred tax assets. As of March 31, 2016 and 2015, the valuation allowance was $82.9 and $66.1 million, respectively.
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 would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution. At
March 31, 2016
and
2015
, 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
2016
,
2015
or
2014
.
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 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, 2016
would have affected net earnings by less than
$0.1 million
in fiscal
2016
.
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, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Workers’ Compensation — per occurrence
|
|
$300
|
|
$300
|
|
$300
|
Workers’ Compensation — per occurrence (OH)
|
|
$300
|
|
$300
|
|
$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, 2016
, would have affected net earnings by approximately
$0.2 million
in fiscal
2016
.
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,
|
|
2016
|
|
2015
|
|
2014
|
Net sales
|
$
|
1,959,998
|
|
|
$
|
2,129,374
|
|
|
$
|
2,338,570
|
|
Net sales % decrease
|
(8.0
|
)%
|
|
(8.9
|
)%
|
|
(5.5
|
)%
|
Comparable store sales % decrease
(1)
|
(7.7
|
)%
|
|
(9.2
|
)%
|
|
(7.3
|
)%
|
Gross profit as a % of net sales
|
28.3
|
%
|
|
28.5
|
%
|
|
28.4
|
%
|
SG&A as a % of net sales
|
22.8
|
%
|
|
22.9
|
%
|
|
21.1
|
%
|
Net advertising expense as a % of net sales
|
5.4
|
%
|
|
6.0
|
%
|
|
5.3
|
%
|
Depreciation and amortization expense as a % of net sales
|
1.6
|
%
|
|
1.9
|
%
|
|
1.8
|
%
|
Asset impairment charges as a % of net sales
|
1.1
|
%
|
|
2.2
|
%
|
|
—
|
%
|
(Loss) income from operations as a % of net sales
|
(2.6
|
)%
|
|
(4.7
|
)%
|
|
0.1
|
%
|
Net interest expense as a % of net sales
|
0.1
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
Net (loss) income
|
$
|
(54,879
|
)
|
|
$
|
(132,746
|
)
|
|
$
|
228
|
|
Net (loss) income per diluted share
|
$
|
(1.98
|
)
|
|
$
|
(4.72
|
)
|
|
$
|
0.01
|
|
Weighted average shares outstanding—diluted
|
27,701,055
|
|
|
28,129,596
|
|
|
30,683,989
|
|
Number of stores open at the end of period
|
226
|
|
|
228
|
|
|
228
|
|
|
|
(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. Stores that are closed are excluded from the calculation the month before closing.
|
Net loss was
$54.9 million
, or
$1.98
per diluted share, for fiscal
2016
compared with net loss of
$132.7 million
, or
$4.72
per diluted share, for fiscal
2015
and net income of
$0.2 million
, or
$0.01
per diluted share, for fiscal
2014
. The results for the twelve months ended
March 31, 2016
include a
$20.9 million
pre-tax, non-cash charge related to impairment of property and equipment. The results for the twelve months ended March 31, 2015 include a
$47.9 million
pre-tax, non-cash charge related to impairment of property and equipment and a $66.1 million non-cash charge related to establishing a valuation allowance for deferred tax assets, which was comprised of $41.4 million of tax expense for previously recognized deferred tax assets and $24.7 million of tax benefits not recognized related to losses incurred during fiscal 2015. The balance of the
increase
in net income for fiscal
2016
as compared to fiscal
2015
was largely due to a decrease in SG&A expense, net advertising expense and depreciation and amortization expenses, partially offset by a comparable store sales decrease of
7.7%
and a decrease in gross profit as a percentage of net sales from
28.5%
to
28.3%
. The decrease in net income for fiscal
2015
as compared to fiscal
2014
was largely due to the
$47.9 million
asset impairment charge and the $66.1 million charge establishing a valuation allowance for deferred tax assets, as detailed above, coupled with a comparable store sales
decrease
of
9.2%
.
Net sales
decreased
8.0%
in fiscal
2016
to
$1.96 billion
from
$2.13 billion
in fiscal
2015
. Net sales decreased
8.9%
in fiscal
2015
to
$2.13 billion
from
$2.34 billion
in fiscal
2014
. The
decrease
in net sales for fiscal
2016
as compared to fiscal 2015 was attributable to a comparable store sales
decrease
of
7.7%
. The decrease in net sales for fiscal
2015
as compared to fiscal 2014 was attributable to a comparable store sales decrease of
9.2%
.
Net sales mix and comparable store sales percentage changes by product category for fiscal
2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Mix Summary
|
|
Comparable Store Sales Summary
|
|
Twelve Months Ended March 31,
|
|
Twelve Months Ended March 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
Appliances
|
53
|
%
|
|
51
|
%
|
|
47
|
%
|
|
(3.2
|
)%
|
|
(3.1
|
)%
|
|
3.0
|
%
|
Consumer electronics
(1)
|
36
|
%
|
|
37
|
%
|
|
38
|
%
|
|
(10.3
|
)%
|
|
(10.9
|
)%
|
|
(18.8
|
)%
|
Home products
(2)
|
6
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5.4
|
%
|
|
(4.7
|
)%
|
|
35.8
|
%
|
Computers and tablets
|
5
|
%
|
|
7
|
%
|
|
10
|
%
|
|
(35.0
|
)%
|
|
(34.0
|
)%
|
|
(14.7
|
)%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
(7.7
|
)%
|
|
(9.2
|
)%
|
|
(7.3
|
)%
|
|
|
(1)
|
Primarily consists of televisions, audio, personal electronics and accessories.
|
|
|
(2)
|
Primarily consists of furniture and mattresses.
|
Fiscal Year Ended
March 31, 2016
Compared to
Fiscal Year Ended
March 31, 2015
The Company's comparable store sales drivers for the twelve months ended
March 31, 2016
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Comparable Store Sales
|
|
Average Selling Price
|
|
Sales Unit Volume
|
Appliances
|
|
(3.2
|
)%
|
|
Increase
|
|
Decrease
|
Consumer electronics
(1)
|
|
(10.3
|
)%
|
|
Increase
|
|
Decrease
|
Home products
(2)
|
|
5.4
|
%
|
|
Increase
|
|
Increase
|
Computers and tablets
|
|
(35.0
|
)%
|
|
Decrease
|
|
Decrease
|
Total
|
|
(7.7
|
)%
|
|
|
|
|
|
|
(1)
|
Primarily consists of televisions, audio, personal electronics and accessories.
|
|
|
(2)
|
Primarily consists of furniture and mattresses.
|
The decrease in comparable store sales for the
twelve months ended March 31, 2016
was
7.7%
. The decrease in comparable store sales was driven by decreases in appliances, consumer electronics and computer and tablets, partially offset by an increase in home products. The
3.2%
decrease in comparable store sales of the appliance category was due to a decrease in sales unit volume offset by an increase in average selling prices. The consumer electronics category comparable store sales decline of
10.3%
was primarily due to a double digit decline in units sold offset slightly by an increase in average selling price, which was driven by an increase in sales of larger screen and more premium-featured televisions. The increase of
5.4%
in comparable store sales for the home product category was the result of both an increase in units sold and average selling prices driven by furniture. The decrease in comparable store sales of
35.0%
for the computers and tablets category for the twelve-month period was driven by double digit decreases in both unit demand and average selling prices for computers and tablets.
Gross profit margin, expressed as gross profit as a percentage of net sales,
decreased
slightly for the twelve months ended
March 31, 2016
to
28.3%
from
28.5%
as compared to the twelve months ended March 31, 2015. The decrease was due to lower gross profit margin rates in all categories, except home products, partially offset by a favorable sales mix shift to product categories with higher gross profit rates, such as appliances and furniture.
Selling, general and administrative expense (“SG&A”), as a percentage of net sales,
decreased
10 basis points, from
22.9%
to
22.8%
, for the twelve months ended
March 31, 2016
. The
decrease
in SG&A as a percentage of net sales was a result of a (i) a 59 basis points decrease, or $26.7 million, in wages due to our continuing effort to drive efficiencies in our labor structure, (ii) a decrease of 12 basis points, or $8.1 million, in delivery services due to efficiencies in routing and lower fuel prices, and (iii) a 17 basis point decrease, or $5.8 million, in employee benefits due to a reduction of medical expenses and payroll taxes driven by the efficiencies in our labor structure. These decreases were partially offset by a 57 basis point increase, or $1.3 million, in occupancy costs due primarily to increased property tax rates and a 30 basis point increase, or $4.2 million, in fees associated with offering higher-cost customer financing options and higher private label credit card penetration.
Net advertising expense, as a percentage of net sales, decreased 69 basis points, or $23.8 million, during the twelve months ended March 31, 2016, as compared to the twelve months ended March 31, 2015. The decrease as a percentage of net
sales was primarily due to a reduction of gross advertising spend primarily driven by reductions in print media along with rebalancing of spending among more efficient advertising mediums.
Depreciation and amortization expense, as a percentage of net sales,
decreased
25 basis points, or $8.2 million, for the twelve months ended
March 31, 2016
as compared to the twelve months ended March 31, 2015. The reduction of expense was the result of a lower depreciable asset base due to the $47.9 million asset impairment charge recorded in fiscal 2015 and the $20.9 million asset impairment charge recorded in the third quarter of fiscal 2016.
For the twelve months ended
March 31, 2016
, we recorded $0.4 million income tax expense compared to $30.8 million tax expense for the twelve months ended March 31, 2015. For fiscal 2016, the income tax expense recorded was due primarily to a $1.2 million settlement of an Internal Revenue Service examination for prior years, partially offset by monetizing a $0.8 million federal tax credit that was previously fully reserved. There was no income tax expense or benefit related to the results of fiscal 2016 operations due to our full valuation allowance. In fiscal 2015, we recognized income tax expense on a pretax loss resulting from the full valuation allowance that was recorded to reduce the net deferred tax assets of the Company to zero.
Fiscal Year Ended
March 31, 2015
Compared to
Fiscal Year Ended
March 31, 2014
The Company's comparable store sales drivers for the twelve months ended
March 31, 2015
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Store Sales
|
|
Comparable Store Sales Excluding Mobile and Fitness
(3)
|
|
Average Selling Price
|
|
Sales Unit Volume
|
Appliances
|
|
(3.1
|
)%
|
|
(3.1
|
)%
|
|
Decrease
|
|
Decrease
|
Consumer electronics
(1)
|
|
(10.9
|
)%
|
|
(10.9
|
)%
|
|
Increase
|
|
Decrease
|
Home products
(2)
|
|
(4.7
|
)%
|
|
0.5
|
%
|
|
Increase
|
|
Decrease
|
Computers and tablets
|
|
(34.0
|
)%
|
|
(28.6
|
)%
|
|
Decrease
|
|
Decrease
|
Total
|
|
(9.2
|
)%
|
|
(8.3
|
)%
|
|
|
|
|
|
|
(1)
|
Primarily consists of televisions, audio, personal electronics and accessories.
|
|
|
(2)
|
Primarily consists of furniture and mattresses.
|
|
|
(3)
|
We exited the mobile and fitness product lines in fiscal 2015.
|
The decrease in comparable store sales for the twelve months ended March 31, 2015 was 9.2%. The decrease in comparable store sales was driven by decreases in all major product categories. Excluding mobile phones and fitness equipment, due to the exit from these product lines, the decrease in comparable store sales for the twelve months ended March 31, 2015 was 8.3%. The decrease in comparable store sales of the appliance category was due to a decrease in both average selling price and units sold. The consumer electronics category comparable store sales decline was primarily due to a double digit decline in units sold within the video category offset slightly by an increase in average selling price, which was driven by an increase in sales of larger screen and more premium-featured televisions. The decrease in comparable store sales for the computers and tablets category for the twelve-month period was driven by a decrease in unit demand for computers and tablets as well as a decrease in the average selling prices for computers and tablets and the exit from the contract-based mobile phone business. Excluding mobile phones, the decrease in comparable store sales for the twelve months ended March 31, 2015 for the computers and tablets category was 28.6%. The decrease in comparable store sales for the home products category was largely a result of the exit from fitness equipment and a double digit unit sales decline within the television stand and the recliner product lines, offset slightly by increased average selling prices among nearly all product lines within this category. Excluding fitness equipment, comparable store sales for the twelve-month period for the home products category increased by 0.5%.
Gross profit margin, expressed as gross profit as a percentage of net sales, increased slightly for the twelve months ended March 31, 2015 to 28.5% from 28.4% for the comparable prior year period. The twelve month period ended March 31, 2014 includes an approximately $1.7 million charge related to the write down of inventory for the exit from the contract-based mobile phone business. Excluding this charge, the gross profit margin, as adjusted, for the twelve month period ended March 31, 2014 was 28.5%. The gross profit margin for the period had a favorable sales mix shift to product categories with higher gross profit margin rates and an increase in gross profit margin for the video category due to an increase in sales of larger screen and more premium featured televisions, offset by a decrease in gross profit margin rates across the remaining categories.
Selling, general and administrative expense (“SG&A”), as a percentage of net sales, increased 181 basis points from 21.1% to 22.9% for the twelve months ended March 31, 2015 compared to the twelve months ended March 31, 2014. Excluding the $1.9 million charge for the write-off of store fixtures associated with our changing product mix, SG&A, as a
percentage of net sales, for the twelve month period ended March 31, 2014 was 21.0%. The increase in SG&A as a percentage of net sales was a result of a 43 basis point increase in occupancy costs as a percentage of net sales due to the deleveraging effect of the net sales decline, a 26 basis point increase in bank transaction fees associated with higher cost financing options to the customer and higher private-label credit card penetration, a 19 basis point increase in product services from a higher percentage of home delivery, an 18 basis point increase in consulting expenses to assist in rationalizing our marketing spend, optimizing our logistics network and accelerating our transformation efforts, and increases in other SG&A expenses primarily due to the deleveraging effect of the net sales decline. During fiscal 2015, we incurred $3.2 million in fees associated with consulting expenses to assist in the transformation efforts. The impact of these expenses was $0.11 of net loss per diluted share.
Net advertising expense, as a percentage of net sales, increased 74 basis points during the twelve months ended March 31, 2015, compared to the twelve months ended March 31, 2014. The increase as a percentage of net sales was primarily due to the deleveraging effect of the net sales decline and less vendor support due to programs being based on a percentage of sales.
Depreciation and amortization expense, as a percentage of net sales, increased slightly for the twelve months ended March 31, 2015 compared to the twelve months ended March 31, 2014. The increase as a percentage of net sales was primarily due to the deleveraging effect of our net sales decline, offset by lower depreciable assets from the asset impairment in the third quarter of fiscal 2015.
As of March 31, 2015, the Company had recognized income tax expense on a pretax loss resulting from the full valuation allowance that was recorded to reduce the net deferred tax assets of the Company to zero. We evaluate our deferred income tax assets and liabilities quarterly to determine whether or not a valuation allowance is necessary. We are required to assess the available positive and negative evidence to estimate if sufficient income will be generated to utilize deferred tax assets. The establishment of valuation allowances requires significant judgment and is impacted by various estimates. A significant piece of negative evidence that we consider is cumulative losses in recent periods. Such evidence is a significant piece of objective negative evidence that is difficult to overcome. While we believe positive evidence exists with regard to the realizability of these deferred tax assets, it is not considered sufficient to outweigh the objectively verifiable negative evidence. The significant negative evidence of our losses generated before income taxes and the unfavorable shift in our business could not be overcome by considering other sources of taxable income in recent periods, which included tax planning strategies. The full valuation allowance will remain until there exists significant objective positive evidence, such as sustained achievement of cumulative profits.
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,
2016
|
|
March 31,
2015
|
|
March 31,
2014
|
Net cash provided by (used in) operating activities
|
$
|
(21,782
|
)
|
|
$
|
12,763
|
|
|
$
|
82,651
|
|
Net cash used in investing activities
|
(12,928
|
)
|
|
(23,123
|
)
|
|
(22,724
|
)
|
Net cash provided by (used in) financing activities
|
8,012
|
|
|
(7,403
|
)
|
|
(60,355
|
)
|
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
2017
, we plan to relocate one store, add up to 15 Fine Lines departments to existing stores and remodel the sales floor of up to 100 existing stores. 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
2017
to range between
$20 million
and
$25 million
. We expect capital expenditures for fiscal
2017
will be funded through cash, cash flow from operations, and borrowings under our Amended Facility (described below).
Net cash provided by (used in) operating activities
.
Net cash provided by (used in) operating activities
primarily consists of net income (loss) 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. Net cash provided by (used in) operating activities was $(
21.8
) million, $
12.8
million and
$82.7 million
for fiscal
2016
,
2015
and
2014
, respectively. The decrease in cash provided by operating activities in fiscal 2016 as compared to fiscal 2015 is primarily due to a net loss of $54.9 million coupled with changes in depreciation expense, deferred income taxes, asset impairment charges and changes in operating assets and liabilities. The net change in other current operating assets and liabilities was primarily a result of a decrease in inventory levels and differences in timing of customer sales and vendor payments. The decrease in cash provided by operating activities from fiscal
2015
to fiscal
2014
is primarily due to the net loss experienced in fiscal 2015 compared to the net income experienced in fiscal 2014, as adjusted for the increase in income tax expense and asset impairment charges. The net change in other current operating assets and liabilities was primarily a result of a decrease in inventory levels and differences in timing of customer sales and vendor payments.
Net cash used in investing activities
.
Net cash used in investing activities
was $
12.9
million, $
23.1
million, and
$22.7 million
for fiscal
2016
,
2015
and
2014
, respectively. The decrease in cash used for in investing activities in fiscal 2016 as compared to fiscal 2015 is primarily due to a decrease in capital expenditures. In fiscal
2016
, we opened one new store with a Fine Lines department, began a multi-store sales floor renovation project which will continue into fiscal 2017 and invested in infrastructure and e-commerce. In fiscal 2015, we opened one new store, relocated four stores, relocated a distribution center, opened five Fine Lines departments and began construction related to one new store which opened during the first quarter of fiscal 2016. Capital expenditures in fiscal 2016 also related to management information systems, e-commerce improvements and IT infrastructure. Cash used in investing activities remained relatively consistent for fiscal 2015 compared to fiscal 2014. Capital expenditures in fiscal 2014 related to store relocations and remodels, as well as management information systems and IT infrastructure.
Net cash provided by (used in) financing activities
.
Net cash provided by (used in) financing activities
was $
8.0
million, $(
7.4
) million, and $(
60.4
) million for fiscal
2016
,
2015
and
2014
respectively. The increase in cash provided by financing activities from fiscal 2016 to fiscal 2015 is due to $8.0 million in net borrowings on the inventory financing facility in fiscal 2016 compared to $2.1 million in net repayments on the inventory financing facility in fiscal 2015. In addition, we did not have any treasury stock repurchases in fiscal 2016 compared to repurchases of $5.3 million in fiscal 2015. The decrease in funds used in financing activities from fiscal 2015 to fiscal 2014 is primarily due to a decrease in funds used for treasury stock repurchases of $43.9 million, a decrease in cash used by bank overdrafts of $11.5 million, partially offset by a decrease in funds provided by the exercise of stock options of $5.8 million.
Amended Facility.
On July 29, 2013, Gregg Appliances, Inc. (“Gregg Appliances”) , a wholly owned subsidiary, 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.
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 LLC (“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)
90%
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, 2016
.
As of
March 31, 2016
and
2015
, Gregg Appliances had
no
borrowings outstanding under the Amended Facility. As of
March 31, 2016
, Gregg Appliances had
$5.5 million
of letters of credit outstanding, which expire at various dates through February 22, 2017. As of
March 31, 2015
, Gregg Appliances had
$6.5 million
of letters of credit outstanding which expired by
December 31, 2015
. The total borrowing availability under the Amended Facility was
$139.9 million
and
$134.6 million
as of
March 31, 2016
and
2015
, respectively. The interest rate based on the bank’s prime rate was
4.25%
and 3.75% as of
March 31, 2016
and
2015
, respectively.
Inventory Financing Facility.
We also have an inventory financing facility, which is a $10 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 amount of borrowings included within accounts payable as of
March 31, 2016
and
2015
were
$10.0 million
and
$3.2 million
, respectively.
Long Term Liquidity
. Anticipated cash flows from operations and funds available from our Amended 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, changes in vendor terms, 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, 2016
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
|
|
$
|
454,596
|
|
|
$
|
92,068
|
|
|
$
|
171,287
|
|
|
$
|
125,251
|
|
|
$
|
65,990
|
|
Advertising commitments
|
|
2,758
|
|
|
729
|
|
|
2,029
|
|
|
—
|
|
|
—
|
|
Revolving credit facility
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
457,354
|
|
|
$
|
92,797
|
|
|
$
|
173,316
|
|
|
$
|
125,251
|
|
|
$
|
65,990
|
|
The above contractual obligation table excludes any future payments made in connection with our Frozen Non-Qualified Deferred Compensation Plan. The aggregate balance outstanding for all participants in the plan as of
March 31, 2016
was approximately
$4.0 million
. We are unable to estimate the timing of these future payments under the plan. Refer to Note 9 of our Consolidated Financial Statements included in this report for further information.
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 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
$89.9 million
,
$90.4 million
and
$90.4 million
in fiscal
2016
,
2015
and
2014
, respectively. Contingent rentals based upon sales are applicable to certain of the store leases. There was no contingent rent expense in 2016. For each of fiscal 2015 and 2014 the contingent rent expense was approximately $0.1 million.
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 Operations for Fiscal Years Ended March 31, 2016, 2015 and 2014
|
|
|
|
Consolidated Balance Sheets as of March 31, 2016 and 2015
|
|
|
|
Consolidated Statements of Stockholders’ Equity for Fiscal Years Ended March 31, 2016, 2015 and 2014
|
|
|
|
Consolidated Statements of Cash Flows for Fiscal Years Ended March 31, 2016, 2015 and 2014
|
|
|
|
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.) (PCAOB). 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, 2016
, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessment, we have concluded that our internal control over financial reporting was effective as of
March 31, 2016
. 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/ ROBERT J. RIESBECK
|
|
/s/ KEVIN J. KOVACS
|
Robert J. Riesbeck
|
|
Kevin J. Kovacs
|
Interim Chief Executive Officer and Chief Financial Officer
|
|
Vice President, Controller
|
(Principal Executive and Financial Officer)
|
|
(Principal 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, 2016
and
2015
, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended
March 31, 2016
. We also have audited the Company’s internal control over financial reporting as of
March 31, 2016
, based on criteria established in
Internal Control – Integrated Framework
(2013) 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, 2016
and
2015
, and the results of their operations and their cash flows for each of the years in the three-year period ended
March 31, 2016
, 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, 2016
, based on criteria established in
Internal Control — Integrated Framework
(2013) issued by COSO.
/s/ KPMG LLP
Indianapolis, Indiana
May 19, 2016
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended March 31,
2016
,
2015
, and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands, except share and per share data)
|
Net sales
|
$
|
1,959,998
|
|
|
$
|
2,129,374
|
|
|
$
|
2,338,570
|
|
Cost of goods sold
|
1,406,216
|
|
|
1,523,536
|
|
|
1,674,031
|
|
Gross profit
|
553,782
|
|
|
605,838
|
|
|
664,539
|
|
Selling, general and administrative expenses
|
447,508
|
|
|
488,391
|
|
|
493,950
|
|
Net advertising expense
|
105,046
|
|
|
128,826
|
|
|
124,179
|
|
Depreciation and amortization expense
|
32,043
|
|
|
40,200
|
|
|
43,120
|
|
Asset impairment charges
|
20,910
|
|
|
47,869
|
|
|
613
|
|
(Loss) income from operations
|
(51,725
|
)
|
|
(99,448
|
)
|
|
2,677
|
|
Other expense (income):
|
|
|
|
|
|
Interest expense
|
2,742
|
|
|
2,600
|
|
|
2,465
|
|
Interest income
|
(22
|
)
|
|
(63
|
)
|
|
(10
|
)
|
Total other expense
|
2,720
|
|
|
2,537
|
|
|
2,455
|
|
(Loss) income before income taxes
|
(54,445
|
)
|
|
(101,985
|
)
|
|
222
|
|
Income tax expense (benefit)
|
434
|
|
|
30,761
|
|
|
(6
|
)
|
Net (loss) income
|
$
|
(54,879
|
)
|
|
$
|
(132,746
|
)
|
|
$
|
228
|
|
Net (loss) income per share
|
|
|
|
|
|
Basic
|
$
|
(1.98
|
)
|
|
$
|
(4.72
|
)
|
|
$
|
0.01
|
|
Diluted
|
$
|
(1.98
|
)
|
|
$
|
(4.72
|
)
|
|
$
|
0.01
|
|
Weighted average shares outstanding-basic
|
27,701,055
|
|
|
28,129,596
|
|
|
30,209,928
|
|
Weighted average shares outstanding-diluted
|
27,701,055
|
|
|
28,129,596
|
|
|
30,683,989
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
2016
and
2015
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(In thousands, except share data)
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
|
3,703
|
|
|
$
|
30,401
|
|
Accounts receivable—trade, less allowances of $5 and $19, respectively
|
11,106
|
|
|
11,901
|
|
Accounts receivable—other
|
14,937
|
|
|
16,715
|
|
Merchandise inventories, net
|
256,559
|
|
|
257,469
|
|
Prepaid expenses and other current assets
|
6,333
|
|
|
6,581
|
|
Income tax receivable
|
1,130
|
|
|
5,326
|
|
Total current assets
|
293,768
|
|
|
328,393
|
|
Net property and equipment
|
87,472
|
|
|
128,107
|
|
Deferred financing costs, net
|
1,257
|
|
|
1,796
|
|
Deferred income taxes
|
—
|
|
|
6,489
|
|
Other assets
|
2,855
|
|
|
2,844
|
|
Total long-term assets
|
91,584
|
|
|
139,236
|
|
Total assets
|
$
|
385,352
|
|
|
$
|
467,629
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
107,474
|
|
|
$
|
112,143
|
|
Customer deposits
|
43,235
|
|
|
48,742
|
|
Accrued liabilities
|
43,370
|
|
|
46,723
|
|
Deferred income taxes
|
—
|
|
|
6,489
|
|
Total current liabilities
|
194,079
|
|
|
214,097
|
|
Long-term liabilities:
|
|
|
|
Deferred rent
|
59,101
|
|
|
67,935
|
|
Other long-term liabilities
|
10,818
|
|
|
12,009
|
|
Total long-term liabilities
|
69,919
|
|
|
79,944
|
|
Total liabilities
|
263,998
|
|
|
294,041
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, par value $.0001; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2016 and 2015, respectively
|
—
|
|
|
—
|
|
Common stock, par value $.0001; 150,000,000 shares authorized; 41,204,660 and 41,161,753 shares issued; and 27,707,978 and 27,665,071 outstanding as of March 31, 2016 and March 31, 2015, respectively
|
4
|
|
|
4
|
|
Additional paid-in capital
|
304,325
|
|
|
301,680
|
|
Retained earnings (accumulated deficit)
|
(32,747
|
)
|
|
22,132
|
|
Common stock held in treasury at cost, 13,496,682 shares as of March 31, 2016 and March 31, 2015, respectively
|
(150,228
|
)
|
|
(150,228
|
)
|
Total stockholders’ equity
|
121,354
|
|
|
173,588
|
|
Total liabilities and stockholders’ equity
|
$
|
385,352
|
|
|
$
|
467,629
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years Ended
March 31, 2016
,
2015
, and
2014
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings (Accumulated Deficit)
|
|
Common Stock
Held in
Treasury
|
|
Total
Stockholders’
Equity
|
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
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(132,746
|
)
|
|
—
|
|
|
(132,746
|
)
|
Vesting of RSU's, net of withholdings
|
40,363
|
|
|
—
|
|
|
—
|
|
|
(142
|
)
|
|
—
|
|
|
—
|
|
|
(142
|
)
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
4,623
|
|
|
—
|
|
|
—
|
|
|
4,623
|
|
Repurchase of common stock
|
(835,510
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,281
|
)
|
|
(5,281
|
)
|
Balance at March 31, 2015
|
27,665,071
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
301,680
|
|
|
$
|
22,132
|
|
|
$
|
(150,228
|
)
|
|
$
|
173,588
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(54,879
|
)
|
|
—
|
|
|
(54,879
|
)
|
Vesting of RSU's, net of tax withholdings
|
42,907
|
|
|
—
|
|
|
—
|
|
|
(64
|
)
|
|
—
|
|
|
—
|
|
|
(64
|
)
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
2,709
|
|
|
—
|
|
|
—
|
|
|
2,709
|
|
Balance at March 31, 2016
|
27,707,978
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
304,325
|
|
|
$
|
(32,747
|
)
|
|
$
|
(150,228
|
)
|
|
$
|
121,354
|
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended
March 31, 2016
,
2015
, and
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(In thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
Net (loss) income
|
$
|
(54,879
|
)
|
|
$
|
(132,746
|
)
|
|
$
|
228
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
32,043
|
|
|
40,200
|
|
|
43,120
|
|
Amortization of deferred financing costs
|
539
|
|
|
538
|
|
|
604
|
|
Stock-based compensation
|
2,709
|
|
|
4,623
|
|
|
4,428
|
|
Excess tax deficiency from stock-based compensation
|
—
|
|
|
—
|
|
|
849
|
|
Loss (gain) on sales of property and equipment
|
(19
|
)
|
|
252
|
|
|
1,646
|
|
Deferred income taxes
|
—
|
|
|
41,402
|
|
|
(392
|
)
|
Asset impairment charges
|
20,910
|
|
|
47,869
|
|
|
613
|
|
Tenant allowances received from landlords
|
812
|
|
|
986
|
|
|
2,705
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable—trade
|
795
|
|
|
3,220
|
|
|
9,150
|
|
Accounts receivable—other
|
986
|
|
|
384
|
|
|
2,407
|
|
Merchandise inventories
|
910
|
|
|
41,073
|
|
|
17,020
|
|
Income tax receivable
|
4,196
|
|
|
(3,946
|
)
|
|
(815
|
)
|
Prepaid expenses and other assets
|
454
|
|
|
(108
|
)
|
|
(1,066
|
)
|
Accounts payable
|
(12,537
|
)
|
|
(26,882
|
)
|
|
6,125
|
|
Customer deposits
|
(5,507
|
)
|
|
7,224
|
|
|
3,476
|
|
Income tax payable
|
—
|
|
|
(122
|
)
|
|
(2,023
|
)
|
Accrued liabilities
|
(3,417
|
)
|
|
(4,317
|
)
|
|
1,476
|
|
Deferred rent
|
(8,854
|
)
|
|
(7,176
|
)
|
|
(7,115
|
)
|
Other long-term liabilities
|
(923
|
)
|
|
289
|
|
|
215
|
|
Net cash provided by (used in) operating activities
|
(21,782
|
)
|
|
12,763
|
|
|
82,651
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
(12,828
|
)
|
|
(22,522
|
)
|
|
(22,257
|
)
|
Proceeds from sales of property and equipment
|
117
|
|
|
45
|
|
|
217
|
|
Purchases of corporate-owned life insurance
|
(217
|
)
|
|
(646
|
)
|
|
(684
|
)
|
Net cash used in investing activities
|
(12,928
|
)
|
|
(23,123
|
)
|
|
(22,724
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Purchases of treasury stock
|
—
|
|
|
(5,281
|
)
|
|
(49,145
|
)
|
Proceeds from exercise of stock options
|
—
|
|
|
—
|
|
|
5,814
|
|
Excess tax deficiency from stock-based compensation
|
—
|
|
|
—
|
|
|
(849
|
)
|
Net decrease in bank overdrafts
|
—
|
|
|
—
|
|
|
(11,506
|
)
|
Net (repayments) borrowings on inventory financing facility
|
8,012
|
|
|
(2,122
|
)
|
|
(3,723
|
)
|
Payment of financing costs
|
—
|
|
|
—
|
|
|
(946
|
)
|
Net cash provided by (used in) financing activities
|
8,012
|
|
|
(7,403
|
)
|
|
(60,355
|
)
|
Net decrease in cash
|
(26,698
|
)
|
|
(17,763
|
)
|
|
(428
|
)
|
Cash
|
|
|
|
|
|
Beginning of period
|
30,401
|
|
|
48,164
|
|
|
48,592
|
|
End of period
|
$
|
3,703
|
|
|
$
|
30,401
|
|
|
$
|
48,164
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Interest paid
|
$
|
2,205
|
|
|
$
|
2,085
|
|
|
$
|
1,881
|
|
Income taxes (received) paid
|
$
|
(3,523
|
)
|
|
$
|
(6,411
|
)
|
|
$
|
3,418
|
|
Capital expenditures included in accounts payable
|
$
|
1,265
|
|
|
$
|
1,409
|
|
|
$
|
1,068
|
|
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 an appliance, electronics and furniture retailer that is committed to providing customers with a truly differentiated purchase experience through superior customer service, knowledgeable sales associates and the highest quality product selections. Founded in 1955, hhgregg is a multi-regional retailer with
226
brick-and-mortar stores in
20
states that also offers market-leading global and local brands at value prices nationwide via hhgregg.com. The Company reports its results as
one
reportable segment.
hhgregg, Inc. 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, Inc. in exchange for common stock of hhgregg, Inc. As a result, Gregg Appliances became a wholly-owned subsidiary of hhgregg, Inc.
On August 31, 2015, hhgregg Inc., a Delaware corporation, changed its state of incorporation from Delaware to Indiana. This reincorporation was effectuated by a merger ("Reincorporation Merger") of the Company with and into hhgregg Indiana, Inc., an Indiana corporation (“hhgregg Indiana”), then a wholly-owned Indiana subsidiary of the Company established for such purpose. At that time, hhgregg Indiana changed its name to “hhgregg, Inc.”
|
|
(b)
|
Principles of Consolidation
|
The consolidated financial statements include the accounts of hhgregg, Inc. 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 significant estimates include vendor allowances, inventory reserves, long-lived assets, accruals for uncertain tax positions and income taxes, revenue recognition and self-insured liabilities.
The Company’s fiscal year is the twelve-month period ended March 31.
Cash primarily consists of cash on hand and bank deposits. The Company had
no
outstanding checks in excess of funds on deposit (book overdrafts) at
March 31, 2016
and
2015
.
Accounts receivable are recorded at the invoiced amount and are subject to finance charges. Accounts receivable-trade consists of credit card and trade 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, 2016
, two vendors accounted for
38.5%
and
15.6%
, respectively, of merchandise purchases. For the year ended
March 31, 2015
,
two
vendors accounted for
32.4%
and
16.3%
, respectively, of merchandise purchases. For the year ended
March 31, 2014
,
two
vendors accounted for
29.2%
and
17.1%
, respectively, of merchandise purchases.
The Company included amounts due to a third party financing company for use of an inventory financing facility, entered into during 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. Originally the inventory financing facility was a
$20 million
unsecured credit line; however, during the fourth fiscal quarter of 2015 it was amended and is now a
$10 million
facility. The facility 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, 2016
and
2015
were
$10.0 million
and
$3.2 million
, respectively. As of
March 31, 2016
the Company did
no
t have any availability under the facility. As of March 31,
2015
the Company had
$6.8 million
available under the facility. The Company incurred
no
interest on these borrowings for the years ended
March 31, 2016
and
2015
.
|
|
(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
2016
and
2015
, the Company did not execute any sale and leaseback transactions.
Property and equipment consisted of the following at March 31,
2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Machinery and equipment
|
$
|
23,700
|
|
|
$
|
25,956
|
|
Store fixtures and furniture
|
150,390
|
|
|
162,737
|
|
Vehicles
|
1,757
|
|
|
1,962
|
|
Signs
|
11,959
|
|
|
15,070
|
|
Leasehold improvements
|
103,908
|
|
|
130,887
|
|
Construction in progress
|
1,792
|
|
|
3,862
|
|
|
293,506
|
|
|
340,474
|
|
Less accumulated depreciation and amortization
|
(206,034
|
)
|
|
(212,367
|
)
|
Net property and equipment
|
$
|
87,472
|
|
|
$
|
128,107
|
|
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, 2016
,
2015
and
2014
was
$32.0 million
,
$40.2 million
and
$43.1 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 undiscounted 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. Refer to Note 2.
|
|
(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 Amended Facility as discussed in Note 5 below. The Company recognized related amortization expense of deferred financing costs of
$0.5 million
,
$0.5 million
and
$0.6 million
for the years ended
March 31, 2016
,
2015
and
2014
, 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, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
March 31,
|
|
2016
|
|
2015
|
|
2014
|
Workers’ Compensation — per occurrence
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
300
|
|
Workers’ Compensation — per occurrence (OH)
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
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, 2016
and
2015
, deferred rent included in long-term liabilities in the Company’s consolidated balance sheets was
$59.1 million
and
$67.9 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, 2016
and
2015
, deferred gains of
$1.2 million
and
$1.5 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
$0.4 million
and
$0.5 million
at
March 31, 2016
and
2015
, 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. 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 its gift card breakage rate based on historical redemption patterns. Breakage recognized was not material to the Company’s results of operations during fiscal
2016
,
2015
or
2014
.
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 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, 2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Deferred revenue on extended service agreements:
|
|
|
|
|
|
Balance at beginning of year
|
$
|
2,338
|
|
|
$
|
1,423
|
|
|
$
|
1,048
|
|
Revenue deferred on new agreements
|
1,561
|
|
|
2,190
|
|
|
1,360
|
|
Revenue recognized
|
(1,913
|
)
|
|
(1,275
|
)
|
|
(985
|
)
|
Balance at end of year
|
$
|
1,986
|
|
|
$
|
2,338
|
|
|
$
|
1,423
|
|
For revenue transactions that involve multiple deliverables, the Company defers 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
$4.3 million
and
$3.8 million
at
March 31, 2016
and
2015
, 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, the Company does not hold any consumer receivables related to these programs. The Company pays 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.
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.
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 (“SG&A”) 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
$104.5 million
,
$109.0 million
, and
$111.3 million
for fiscal
2016
,
2015
and
2014
, respectively, were included in SG&A expenses. Included in these costs were home delivery expenses of
$50.7 million
,
$56.7 million
, and
$59.8 million
for the years ended March 31,
2016
,
2015
, and
2014
, 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
$29.9 million
,
$32.4 million
, and
$37.0 million
for the years ended
March 31, 2016
,
2015
and
2014
, 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.
The Company evaluates its deferred income tax assets and liabilities quarterly to determine whether or not a valuation allowance is necessary. It is required to assess the available positive and negative evidence to estimate if sufficient income will be generated to utilize deferred tax assets. Refer to note 6 for additional information regarding the Company's process and the deferred tax valuation allowance.
|
|
(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 loss can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Refer to note 10 for additional information on the Company's contingencies.
|
|
(v)
|
Recently Issued Accounting Pronouncements
|
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, ("ASU 2016-09") which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes certain aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years with early adoption permitted. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU No. 2016-02"), which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods and early adoption is permitted. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.
In November 2015, the FASB issued Accounting Standards Update ("ASU") 2015-17, Balance Sheet Classification of Deferred Taxes, which will require entities to present deferred tax assets ("DTA") and deferred tax liabilities ("DTL") as non-current in a classified balance sheet. The ASU simplified the current guidance, which requires entities to separately present DTAs and DTLs as current and non-current in a classified balance sheet. This standard is effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2016 but permits entities to early adopt at the beginning of any interim or annual period. The Company adopted ASU 2015-17 in the period ending December 31, 2015, prospectively, as it believes the adoption of this standard reduces complexity of its condensed consolidated financial statements as well as enhances the usefulness of the related financial information. Prior periods presented in the consolidated balance sheet are not retrospectively adjusted.
In April 2015, the FASB issued an accounting pronouncement, FASB ASU 2015-03, related to the presentation of debt issuance costs (FASB ASC Subtopic 835-30). This standard will require debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. These costs will continue to be amortized to interest expense using the effective interest method. In August 2015, FASB issued ASU No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangement.” ASU 2015-15 clarifies the presentation and measurement of debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. For line-of-credit arrangements, an entity can continue to present debt issuance costs as an asset and amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. These pronouncements are effective for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2015, and retrospective adoption is required. The Company adopted these pronouncement for its fiscal year beginning April 1, 2016 and it did not have an effect on its consolidated financial statements.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles used to recognize revenue for all entities. The original standard was to be effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. While the Company is still in the process of evaluating the impact the adoption of this guidance will have on its financial position and results of operations, the Company does not currently expect a material impact on its consolidated financial statements.
|
|
(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
$1.5 million
and
$1.4 million
as of
March 31, 2016
and
2015
, respectively, and consist of equity index funds and fixed income assets, which are considered Level 2 in the hierarchy described above.
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. 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 undiscounted 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 net book value of the asset or asset group to the asset’s or asset group’s estimated fair value, which is determined based on estimated discounted future cash flows. An impairment loss is recognized for the amount by which the asset’s or asset group’s net book value exceeds the asset’s or asset group’s estimated fair value. If an impairment loss is recognized, the adjusted net book value 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
The categorization of the framework used to value such assets is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. Property and equipment fair values are derived using a discounted cash flow model to estimate the present value of net cash flows that the asset group expected to generate. The key inputs to the discounted cash flow model generally included the Company's forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as certain capital expenditures, as well as a discount rate.
The need for an impairment analysis to be performed was triggered by declining sales and overall profitability in recent periods. The Company had several locations whose profit contributions were significantly lower than chain average due to decreased sales in the fiscal years ended
March 31, 2016
and 2015. As a result of these analyses, for the fiscal year ended March 31, 2016, property and equipment at
40
locations with a net book value of
$21.7 million
were reduced to estimated aggregate fair value of
$0.8 million
based on their projected cash flows, discounted at
15%
. For the fiscal year ended March 31, 2015, property and equipment at
56
locations with a net book value of
$48.7 million
were reduced to estimated aggregate fair value of
$0.8 million
based on their projected cash flows, discounted at
15%
. This resulted in asset impairment charges of
$20.9 million
and
$47.9 million
for the fiscal years ended March 31, 2016 and 2015, respectively. The fair values were
determined using a probability based cash flow analysis based on management's estimates of future store-level sales, gross margins, and direct expenses. 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.
The following table summarizes the fair value remeasurements recorded during the years ended
March 31, 2016
,
2015
, and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net book value (pre-asset impairment)
|
$
|
21.7
|
|
|
$
|
48.7
|
|
|
$
|
1.0
|
|
Asset impairment charges (included in income from operations)
|
20.9
|
|
|
47.9
|
|
|
0.6
|
|
Remaining net book value
|
$
|
0.8
|
|
|
$
|
0.8
|
|
|
$
|
0.4
|
|
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable — trade, accounts receivable — other, accounts payable and customer deposits approximate fair value because of the short maturity of these instruments.
|
|
(3)
|
Net (Loss) Income per Share
|
Net (loss) income per basic share is calculated based on the weighted-average number of outstanding common shares. Net (loss) income per diluted share is calculated based on the weighted-average number of outstanding common shares plus the effect of potential dilutive common shares. Potential dilutive common shares are composed of shares of common stock issuable upon the exercise of stock options and restricted stock units. When the Company reports net income, the calculation of net income per diluted share excludes shares underlying outstanding stock options and restricted stock units 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. For the years ended March 31, 2016 and 2015, the diluted loss per common share calculation represents the weighted average common shares outstanding with no additional dilutive shares as the Company incurred a net loss for the period and such shares would be antidilutive.
The following table presents net (loss) income per basic and diluted share for the years ended March 31,
2016
,
2015
and
2014
(in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net (loss) income (A)
|
$
|
(54,879
|
)
|
|
$
|
(132,746
|
)
|
|
$
|
228
|
|
Weighted average outstanding shares of common stock (B)
|
27,701,055
|
|
|
28,129,596
|
|
|
30,209,928
|
|
Dilutive effect of employee stock options and restricted stock units
|
—
|
|
|
—
|
|
|
474,061
|
|
Common stock and potential dilutive common shares (C)
|
27,701,055
|
|
|
28,129,596
|
|
|
30,683,989
|
|
Net (loss) income per share:
|
|
|
|
|
|
Basic (A/B)
|
$
|
(1.98
|
)
|
|
$
|
(4.72
|
)
|
|
$
|
0.01
|
|
Diluted (A/C)
|
$
|
(1.98
|
)
|
|
$
|
(4.72
|
)
|
|
$
|
0.01
|
|
Antidilutive shares not included in the net (loss) income per diluted share calculation for the years ended March 31,
2016
,
2015
and
2014
were
3,303,153
,
3,746,721
and
1,225,819
, respectively.
Net merchandise inventories consisted of the following at
March 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Appliances
|
$
|
126,025
|
|
|
$
|
119,396
|
|
Consumer electronics
|
91,080
|
|
|
94,441
|
|
Computers and tablets
|
18,338
|
|
|
24,697
|
|
Home products
|
21,116
|
|
|
18,935
|
|
Net merchandise inventory
|
$
|
256,559
|
|
|
$
|
257,469
|
|
A summary of debt at
March 31, 2016
and
2015
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
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”) The capacity for borrowings under the Company's Amended Facility is
$400 million
, subject to borrowing base availability, and extend the term of the facility to expire on
July 29, 2018
.
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)
90%
of the amount of eligible 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, 2016
.
As of
March 31, 2016
and
2015
, Gregg Appliances had
no
borrowings outstanding under the Amended Facility. As of
March 31, 2016
, Gregg Appliances had
$5.5 million
of letters of credit outstanding, which expire at various dates through February 22, 2017. As of
March 31, 2015
, Gregg Appliances had
$6.5 million
of letters of credit outstanding which expired by
December 31, 2015
. The total borrowing availability under the Amended Facility was
$139.9 million
and
$134.6 million
as of
March 31, 2016
and
2015
, respectively. The interest rate based on the bank’s prime rate was
4.25%
as of
March 31, 2016
and
3.75%
as of
March 31, 2015
.
Income tax expense (benefit) for the years ended
March 31, 2016
,
2015
and
2014
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
478
|
|
|
$
|
(9,949
|
)
|
|
$
|
1,528
|
|
State
|
(44
|
)
|
|
(692
|
)
|
|
(246
|
)
|
Total current
|
434
|
|
|
(10,641
|
)
|
|
1,282
|
|
Deferred:
|
|
|
|
|
|
Federal
|
—
|
|
|
33,815
|
|
|
(1,618
|
)
|
State
|
—
|
|
|
7,587
|
|
|
330
|
|
Total deferred
|
—
|
|
|
41,402
|
|
|
(1,288
|
)
|
Total expense (benefit)
|
$
|
434
|
|
|
$
|
30,761
|
|
|
$
|
(6
|
)
|
Deferred income taxes at
March 31, 2016
and
2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Goodwill for tax purposes
|
$
|
25,009
|
|
|
$
|
31,534
|
|
Accrued expenses
|
12,286
|
|
|
12,341
|
|
Long-term deferred compensation
|
2,153
|
|
|
2,281
|
|
Property and equipment
|
7,275
|
|
|
—
|
|
Stock-compensation expense
|
6,776
|
|
|
7,239
|
|
Other
|
1,876
|
|
|
2,303
|
|
Credit carryforwards
|
5,716
|
|
|
6,509
|
|
Net operating loss carryforward
|
30,294
|
|
|
13,979
|
|
Valuation allowance
|
(82,873
|
)
|
|
(66,122
|
)
|
Total deferred tax assets
|
8,512
|
|
|
10,064
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment
|
—
|
|
|
(2,986
|
)
|
Inventories
|
(7,414
|
)
|
|
(5,903
|
)
|
Other
|
(1,098
|
)
|
|
(1,175
|
)
|
Total deferred tax liabilities
|
(8,512
|
)
|
|
(10,064
|
)
|
Net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
As of March 31, 2016, the Company had federal and state income tax credit carryforwards of approximately
$5.9 million
, comprised primarily of an Alternative Minimum Tax (“AMT”) credit of
$4.5 million
. The AMT credit does not expire and will be carried forward indefinitely. The Company also has federal net operating loss carryforwards of approximately
$72.9 million
and state net operating loss carryforwards of approximately
$108.6 million
. The federal net operating loss carryforwards will expire at various dates through fiscal 2036 if unused prior to that time. The state net operating loss carryforwards will begin to expire in fiscal 2026 through fiscal 2036 if unused prior to that time as states have varying carryforward periods.
The Company evaluates its deferred income tax assets and liabilities quarterly to determine whether or not a valuation allowance is necessary. The Company is required to assess the available positive and negative evidence to estimate if sufficient income will be generated to utilize deferred tax assets. The establishment of valuation allowances requires significant judgment and is impacted by various estimates. A significant piece of negative evidence that we consider is cumulative losses
in recent periods. Such evidence is a significant piece of objective negative evidence that is difficult to overcome. While management believes positive evidence exists with regard to the realizability of these deferred tax assets, it is not considered sufficient to outweigh the objectively verifiable negative evidence. The significant negative evidence of its losses generated before income taxes in recent periods and the unfavorable shift in its business could not be overcome by considering other sources of taxable income, which included tax planning strategies. Therefore, we recorded a valuation allowance of
$66.1 million
as of March 31, 2015. Due to fiscal 2016 net loss, we increased the valuation allowance by
$16.8 million
to
$82.9 million
as of March 31, 2016. The full valuation allowance will remain until there exists significant objective positive evidence, such as sustained achievement of cumulative profits.
The Company recognizes interest and penalties in income tax expense in its consolidated statements of income. At
March 31, 2016
and
2015
, 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 2013.
The expense (benefit) 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Computed “expected” tax (benefit) expense
|
$
|
(19,056
|
)
|
|
$
|
(35,695
|
)
|
|
$
|
78
|
|
State income tax (benefit) expense, net of federal income tax impact
|
(2,293
|
)
|
|
(4,295
|
)
|
|
49
|
|
Valuation allowance
|
16,751
|
|
|
66,122
|
|
|
—
|
|
Stock compensation
|
1,542
|
|
|
2,254
|
|
|
26
|
|
Other
|
3,490
|
|
|
2,375
|
|
|
(159
|
)
|
|
$
|
434
|
|
|
$
|
30,761
|
|
|
$
|
(6
|
)
|
|
|
(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. Effective June 20, 2014, the Company adopted an Amendment to the hhgregg, Inc. 2007 Equity Incentive Plan which increased the number of shares of common stock reserved for issuance under the Equity Incentive Plan to
9,000,000
. 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 Equity Incentive 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 Equity Incentive Plan is administered by the Company’s Compensation Committee.
During the years ended March 31,
2016
,
2015
and
2014
the Company granted options for
312,625
,
1,133,640
, and
1,820,805
shares of common stock under the 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
$1.84
,
$4.06
, and
$7.08
during the fiscal years ended March 31,
2016
,
2015
and
2014
, respectively, as determined using the Black-Scholes model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
1.23% - 1.55
|
|
|
1.22% - 1.6
|
|
|
0.06% - 1.53
|
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
Expected volatility
|
58.7% - 58.9%
|
|
|
57.0
|
%
|
|
63.0
|
%
|
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,
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value (in thousands)
|
Outstanding at March 31, 2015
|
3,497,922
|
|
|
$
|
12.41
|
|
|
|
|
|
Granted
|
312,625
|
|
|
3.79
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Canceled
|
(462,807
|
)
|
|
9.30
|
|
|
|
|
|
Expired
|
(520,572
|
)
|
|
12.96
|
|
|
|
|
|
Outstanding at March 31, 2016
|
2,827,168
|
|
|
$
|
11.86
|
|
|
3.09
|
|
$
|
—
|
|
Vested or expected to vest at March 31, 2016
|
2,770,438
|
|
|
$
|
11.97
|
|
|
3.04
|
|
$
|
—
|
|
Exercisable at March 31, 2016
|
1,991,869
|
|
|
$
|
13.16
|
|
|
2.20
|
|
$
|
—
|
|
During fiscal
2016
,
2015
and
2014
,
$2.1 million
,
$4.2 million
and
$4.2 million
(
$2.5 million
net of tax), respectively, was charged to expense related to the stock option plans. The total intrinsic value of options exercised during the fiscal year ended March 31,
2014
was
$2.6 million
; there were
no
options exercised during the fiscal years ended March 31, 2016 and 2015. Total unrecognized stock option compensation cost (adjusted for forfeitures) at March 31,
2016
was
$1.6 million
and is expected to be recognized over a weighted average period of
1.23 years
. Net cash proceeds from the exercise of stock options was
$5.8 million
in fiscal
2014
; there were
no
proceeds from the exercise of stock options in fiscal years ended March 31, 2016 and 2015. The total grant date fair value of stock options vested during the fiscal years ended March 31,
2016
,
2015
and
2014
was
$3.7 million
,
$4.1 million
and
$2.6 million
, respectively.
Time Vested Restricted Stock Units
During the fiscal years ended March 31,
2016
,
2015
and
2014
the Company granted
415,121
,
45,150
and
30,595
time vested restricted stock units (“RSUs”) under the Equity Incentive Plan to certain employees and directors of the Company. The time vested RSUs granted in the fiscal year ended March 31, 2016 vest in equal amounts over a three-year period beginning on the first anniversary of the date of grant. The time vested RSUs granted in the fiscal years ended March 31, 2015 and 2014, 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 the Company’s stock price at the close of the market on the date of grant. Total unrecognized compensation cost for the time vested RSUs (adjusted for forfeitures) at March 31,
2016
was
$1.2 million
and is expected to be recognized over a weighted average period of
1.92
years.
The following table summarizes time vested RSU vesting activity for the fiscal year ended March 31,
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested RSU’s
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Weighted Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value (in thousands)
|
Nonvested at March 31, 2015
|
126,953
|
|
|
$
|
11.07
|
|
|
|
|
|
Granted
|
415,121
|
|
|
3.79
|
|
|
|
|
|
Vested
|
(58,900
|
)
|
|
10.86
|
|
|
|
|
|
Forfeited
|
(112,791
|
)
|
|
4.87
|
|
|
|
|
|
Nonvested at March 31, 2016
|
370,383
|
|
|
$
|
4.83
|
|
|
1.92
|
|
$
|
—
|
|
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,
2016
,
2015
and
2014
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Minimum rentals
|
|
$
|
90,548
|
|
|
$
|
90,868
|
|
|
$
|
91,174
|
|
Contingent rentals
|
|
—
|
|
|
13
|
|
|
52
|
|
Total rent expense
|
|
$
|
90,548
|
|
|
$
|
90,881
|
|
|
$
|
91,226
|
|
Future minimum required rental payments for noncancelable operating leases, with terms of one year or more, consist of the following as of March 31,
2016
(in thousands):
|
|
|
|
|
|
Rental Payments
|
Payable in fiscal year:
|
|
2017
|
$
|
92,068
|
|
2018
|
88,211
|
|
2019
|
83,076
|
|
2020
|
73,784
|
|
2021
|
51,467
|
|
Thereafter
|
65,990
|
|
Total required payments
|
$
|
454,596
|
|
Total minimum rental lease payments have not been reduced by minimum sublease rent income of approximately
$0.4 million
due under future noncancelable subleases.
|
|
(9)
|
Employee Benefit Plans
|
The Company sponsors a 401(k) retirement savings plan (the “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. Total Company expense, including payment of administrative fees, aggregated approximately
$0.4 million
,
$0.7 million
, and
$0.6 million
for the years ended March 31,
2016
,
2015
, and
2014
, 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
$1.5 million
and
$1.4 million
at March 31,
2016
and
2015
, respectively and is included in “Other long-term liabilities”. Total expense recorded under the plan was
$0.2 million
for each of the fiscal years ended March 31,
2016
and
2015
.
The Company has another unfunded, non-qualified deferred compensation plan for members of executive management which was frozen during the fiscal year ended March 31, 2014. 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
. Amounts accrued in other long-term liabilities at March 31,
2016
and
2015
related to this plan were
$4.0 million
and
$4.5 million
. The Company made distributions of
$0.3 million
and
$0.6 million
for the years ended March 31, 2016 and 2015, respectively. The Company recorded forfeitures of
$0.2 million
for the years ended March 31, 2016 and 2015. The Company recorded
$0.2 million
in expense related to this plan for the year ended March 31,
2014
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.
The Company is engaged in various legal proceedings in the ordinary course of business and has certain unresolved claims pending. The ultimate liability, 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 unaudited condensed consolidated financial statements is not likely to have a material effect on its consolidated financial position, results of operations or cash flows.
The Company is the defendant in a class action lawsuit captioned, Dwain Underwood, on behalf of himself and all others similarly situated v. Gregg Appliances, Inc. and hhgregg, Inc., filed in the Superior Court in Marion County, Indiana, where a former employee alleged that the Company breached a contract by failing to correctly calculate his (and other class members) incentive bonus. On July 9, 2014, the judge granted the plaintiff’s motion for class certification, and on July 17, 2015, the judge granted the plaintiff’s motion for summary judgment, although no finding on damages was made. The Company's interlocutory appeal was accepted on October 23, 2015. The Company has completed the appeal briefing process and oral argument is scheduled for June 29, 2016. If the Company does not ultimately prevail in this case, the potential liability is approximately
$2.4 million
based on those individuals included in the class, excluding potential interest and other fees which cannot be determined at this time. The Company believes the loss is not probable, and thus, as of March 31, 2016, a liability has not been recorded for this matter.
|
|
(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,
2016
and
2015
(in thousands, except net loss 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, 2016
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Net sales
|
|
$
|
441,063
|
|
|
$
|
486,876
|
|
|
$
|
593,219
|
|
|
$
|
438,840
|
|
Cost of goods sold
|
|
306,706
|
|
|
348,231
|
|
|
438,189
|
|
|
313,090
|
|
Gross profit
|
|
134,357
|
|
|
138,645
|
|
|
155,030
|
|
|
125,750
|
|
Selling, general and administrative expenses
|
|
111,104
|
|
|
113,479
|
|
|
116,533
|
|
|
106,392
|
|
Net advertising expense
|
|
23,054
|
|
|
26,254
|
|
|
34,168
|
|
|
21,570
|
|
Depreciation and amortization expense
|
|
8,369
|
|
|
8,391
|
|
|
8,355
|
|
|
6,928
|
|
Asset impairment charge
|
|
—
|
|
|
—
|
|
|
20,910
|
|
|
—
|
|
Loss from operations
|
|
(8,170
|
)
|
|
(9,479
|
)
|
|
(24,936
|
)
|
|
(9,140
|
)
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
590
|
|
|
649
|
|
|
727
|
|
|
776
|
|
Interest income
|
|
(5
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(13
|
)
|
Total other expense
|
|
585
|
|
|
647
|
|
|
725
|
|
|
763
|
|
Loss before income taxes
|
|
(8,755
|
)
|
|
(10,126
|
)
|
|
(25,661
|
)
|
|
(9,903
|
)
|
Income tax (benefit) expense
|
|
—
|
|
|
—
|
|
|
1,252
|
|
|
(818
|
)
|
Net loss
|
|
$
|
(8,755
|
)
|
|
$
|
(10,126
|
)
|
|
$
|
(26,913
|
)
|
|
$
|
(9,085
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.32
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(0.33
|
)
|
Diluted
|
|
$
|
(0.32
|
)
|
|
$
|
0.37
|
|
|
$
|
(0.97
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended March 31, 2015
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Net sales
|
|
$
|
472,293
|
|
|
$
|
505,862
|
|
|
$
|
665,616
|
|
|
$
|
485,603
|
|
Cost of goods sold
|
|
331,954
|
|
|
358,817
|
|
|
486,114
|
|
|
346,651
|
|
Gross profit
|
|
140,339
|
|
|
147,045
|
|
|
179,502
|
|
|
138,952
|
|
Selling, general and administrative expenses
|
|
116,589
|
|
|
119,112
|
|
|
132,563
|
|
|
120,127
|
|
Net advertising expense
|
|
27,224
|
|
|
33,049
|
|
|
38,915
|
|
|
29,638
|
|
Depreciation and amortization expense
|
|
10,475
|
|
|
10,823
|
|
|
10,062
|
|
|
8,840
|
|
Asset impairment charge
|
|
—
|
|
|
—
|
|
|
42,987
|
|
|
4,882
|
|
Loss from operations
|
|
(13,949
|
)
|
|
(15,939
|
)
|
|
(45,025
|
)
|
|
(24,535
|
)
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
629
|
|
|
678
|
|
|
615
|
|
|
678
|
|
Interest income
|
|
(5
|
)
|
|
(2
|
)
|
|
(47
|
)
|
|
(9
|
)
|
Total other expense
|
|
624
|
|
|
676
|
|
|
568
|
|
|
669
|
|
Loss before income taxes
|
|
(14,573
|
)
|
|
(16,615
|
)
|
|
(45,593
|
)
|
|
(25,204
|
)
|
Income tax (benefit) expense
|
|
(4,304
|
)
|
|
(6,231
|
)
|
|
41,272
|
|
|
24
|
|
Net loss
|
|
$
|
(10,269
|
)
|
|
$
|
(10,384
|
)
|
|
$
|
(86,865
|
)
|
|
$
|
(25,228
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.36
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(3.10
|
)
|
|
$
|
(0.91
|
)
|
Diluted
|
|
$
|
(0.36
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(3.10
|
)
|
|
$
|
(0.91
|
)
|
|
|
(12)
|
Stock Repurchase Program
|
On
May 14, 2014
, the Company’s Board of Directors authorized a stock repurchase program, which became effective on May 20, 2014 (the “
May 2014 Program
”) allowing the Company to repurchase up to
$40 million
of its common stock. The May 2014 Program allowed the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expired on
May 20, 2015
.
The following table shows the number and cost of shares repurchased during the
twelve months ended March 31, 2016
and
2015
, respectively ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
March 31, 2016
|
|
March 31, 2015
|
May 2014 Program
|
|
|
|
Number of shares repurchased
|
—
|
|
|
835,510
|
|
Cost of shares repurchased
|
$
|
—
|
|
|
$
|
5,281
|
|
The repurchased shares are classified as treasury stock within stockholders’ equity in the accompanying consolidated balance sheets.