MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical
fact included in this Quarterly Report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and
business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as anticipate, estimate, expect,
project, plan, intend, believe, may, will, should, can have, likely and other words and terms of similar meaning in connection with any
discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our
plans and objectives for future operations, growth or initiatives, or strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially from those that we expected, including the factors described in Item 1A Risk Factors in our fiscal year 2015 Annual Report on Form 10-K and in Part II,
Item 1A Risk Factors of this Quarterly Report on Form 10-Q.
The forward-looking statements are only predictions based on our
current expectations and our projections about future events. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are
reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us,
or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other Securities and Exchange Commission (SEC) filings
and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q
14
in the context of these risks and uncertainties. The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any
forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
The following
discussion and analysis should be read in conjunction with our fiscal year 2015 Annual Report on Form 10-K and the unaudited condensed consolidated financial statements and the related notes thereto included in Item 1. Consolidated Financial
Statements of this Quarterly Report.
Executive Overview
Gordmans is an everyday value price department store featuring a large selection of brands, fashions and styles at up to 60% off department and specialty store
prices every day in a fun, easy-to-shop environment. Our merchandise assortment includes apparel and footwear for men, women and children, accessories (including fragrances) and home fashions. The origins of Gordmans date back to 1915, and as of
October 29, 2016, we operated 106 stores in 22 states situated in a variety of shopping center developments, including lifestyle centers, power centers and enclosed regional shopping malls. We also operate an eCommerce site which provides a
broad selection of merchandise in a convenient, user-friendly digital platform.
We opened five new stores and closed one existing store during the
thirty-nine weeks ended October 29, 2016. This compares to opening six new stores and closing one existing store during the thirty-nine weeks ended October 31, 2015.
In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales and comparable
store sales and other individual store performance factors, gross profit and selling, general and administrative expenses.
Net
Sales
.
Net sales reflect our revenues from the sale of our merchandise less returns and discounts, eCommerce shipping revenue and excludes sales tax. Net sales include comparable store sales and non-comparable store sales.
Comparable Store Sales
.
Comparable store sales include retail stores that were open at least 16 months as of the end of the reporting
period and eCommerce sales. Comparable store sales include stores that were relocated or remodeled and exclude stores that were closed. Comparable store sales are assessed on both an owned and licensed basis, which includes the impact to growth in
comparable sales of departments where we own the inventory or departments which are licensed to a third party. We also review the average sale per transaction, comparable store transactions and store traffic. Comparable store sales are an important
indicator of current operating performance, with higher comparable store sales helping us to leverage our fixed expenses and positively impacting our operating results.
Gross Profit
.
Gross profit is equal to our net sales minus cost of sales, plus license fee income generated from sales of footwear and
maternity apparel in our leased departments. The license agreement related to our maternity business expired in March 2016 and was not renewed. Cost of sales includes the direct cost of purchased merchandise, inbound freight to our distribution
centers, inventory shrinkage and inventory write-downs. Gross profit margin measures gross profit as a percentage of our net sales. Our gross profit may not be comparable to other retailers, as some companies include all of the costs related to
their distribution network in cost of sales while others, like us, exclude a portion of these costs from cost of sales and include those costs in selling, general and administrative expenses. Our gross profit margin is a function of initial markup
less shrink and markdowns, with higher initial markup and lower markdowns positively impacting our operating results.
Selling, General and
Administrative Expenses
.
Selling, general and administrative expenses include all operating costs not included in cost of sales. These expenses include payroll and other expenses related to operations at our corporate office, store
and eCommerce expenses, occupancy costs, certain distribution and warehousing costs, pre-opening and closing expenses, depreciation and amortization and advertising expenses. Our ability to manage store level and certain other operating expenses
directly impacts our operating results.
Overview
The net loss for the thirteen and thirty-nine weeks ended October 29, 2016 was $4.8 million and $12.5 million, respectively, as compared to a net loss of
$2.8 million and $5.4 million, respectively, for the thirteen and thirty-nine weeks ended October 31, 2015. Below is a summary of our financial results for the thirteen and thirty-nine weeks ended October 29, 2016.
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Net sales decreased 6.7% and 5.7%, respectively, for the thirteen and thirty-nine weeks ended October 29,
2016 as compared to the thirteen and thirty-nine weeks ended October 31, 2015. Lower net sales were driven by a decrease in comparable store sales impacted by lower traffic during the thirteen and thirty-nine weeks ended October 29 2016,
partially offset by an increase in non-comparable stores and an increase in the average sale per transaction during the thirteen and thirty-nine weeks ended October 29, 2016. Comparable store sales on an owned basis decreased 9.5% and
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8.5%, respectively, for the thirteen and thirty-nine weeks ended October 29, 2016 as compared to an increase of 0.8% and a decrease of 0.8%, respectively, for the thirteen and thirty-nine
weeks ended October 31, 2015. On an owned and licensed basis, comparable store sales declined 9.3% and 8.3%, respectively, for the thirteen and thirty-nine weeks ended October 29, 2016 as compared an increase of 0.3% and a decrease of
0.8%, respectively, for the thirteen and thirty-nine weeks ended October 31, 2015.
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Gross profit margin decreased 60 basis points during the thirteen weeks ended October 29, 2016 and 70 basis points during the thirty-nine weeks ended October 29, 2016, as compared to the thirteen weeks and
thirty-nine weeks ended October 31, 2015, primarily as a result of higher merchandise inventory markdowns.
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Selling, general and administrative expenses increased 200 basis points to 48.7% of net sales for the thirteen weeks ended October 29, 2016 compared to 46.7% of net sales for the thirteen weeks ended
October 31, 2015 and increased 250 basis points to 47.6% of net sales for the thirty-nine weeks ended October 29, 2016 compared to 45.1% of net sales for the thirty-nine weeks ended October 31, 2015. The decrease in selling,
general and administrative expenses for the thirteen and thirty-nine weeks ended October 29, 2016 was primarily due to lower advertising and store expenses, partially offset by higher professional fees related to the comprehensive expense
review, eCommerce operations which were launched during the second quarter of fiscal 2015 and higher depreciation.
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Basis of Presentation
and Results of Operations
The consolidated financial statements include the accounts of Gordmans Stores, Inc. and its subsidiaries, Gordmans
Intermediate Holding Corp., Gordmans, Inc., Gordmans Management Company, Inc., Gordmans Distribution Company, Inc. and Gordmans LLC. All intercompany transactions and balances have been eliminated in consolidation. We utilize a typical retail 52-53
week fiscal year whereby the fiscal year ends on the Saturday nearest January 31. Fiscal years 2016 and 2015 represent fifty-two week years ending January 28, 2017 and ended January 30, 2016, respectively. All references to fiscal
years are to the calendar year in which the fiscal year begins. The thirteen weeks ended October 29, 2016 and October 31, 2015 represent the third quarters of fiscal 2016 and fiscal 2015, respectively. The thirty-nine weeks ended
October 29, 2016 and October 31, 2015 represent the first three quarters of fiscal 2016 and fiscal 2015, respectively.
The table below sets
forth the consolidated statements of operations data for the periods presented (in thousands):
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13 Weeks
Ended
October 29,
2016
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13 Weeks
Ended
October 31,
2015
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39 Weeks
Ended
October 29,
2016
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39 Weeks
Ended
October 31,
2015
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Statements of Operation Data:
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Net sales
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$
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143,483
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|
|
$
|
153,856
|
|
|
$
|
417,791
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|
|
$
|
443,230
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|
License fees from leased departments
|
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|
1,944
|
|
|
|
2,196
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|
|
|
5,941
|
|
|
|
6,615
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|
Cost of sales
|
|
|
(82,553
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)
|
|
|
(87,700
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)
|
|
|
(241,784
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)
|
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|
(253,698
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)
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|
|
|
|
|
|
|
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|
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Gross profit
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62,874
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|
|
|
68,352
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|
|
|
181,948
|
|
|
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196,147
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Selling, general and administrative expenses
|
|
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(69,906
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)
|
|
|
(71,915
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)
|
|
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(199,048
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)
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(200,052
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)
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Loss from operations
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(7,032
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)
|
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(3,563
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)
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|
(17,100
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)
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|
(3,905
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)
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Interest expense, net
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|
(874
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)
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|
(892
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)
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|
(2,539
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)
|
|
|
(2,966
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)
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Loss on extinguishment of debt
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(2,014
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)
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Loss before taxes
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(7,906
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)
|
|
|
(4,455
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)
|
|
|
(19,639
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)
|
|
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(8,885
|
)
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Income tax benefit
|
|
|
3,083
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|
|
|
1,692
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7,114
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3,465
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|
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|
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Net loss
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$
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(4,823
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)
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|
$
|
(2,763
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)
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$
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(12,525
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)
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$
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(5,420
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)
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The table below sets forth the components of the consolidated statements of operations as a percentage of net
sales:
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13 Weeks
Ended
October 29,
2016
(1)
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13 Weeks
Ended
October 31,
2015
(1)
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39 Weeks
Ended
October 29,
2016
(1)
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39 Weeks
Ended
October 31,
2015
(1)
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Net sales
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100.0
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%
|
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|
100.0
|
%
|
|
|
100.0
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%
|
|
|
100.0
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%
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License fees from leased departments
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1.4
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1.4
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1.4
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1.5
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Cost of sales
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(57.5
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)
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(57.0
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)
|
|
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(57.9
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)
|
|
|
(57.2
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)
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|
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Gross profit
|
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43.8
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|
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44.4
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43.6
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44.3
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Selling, general and administrative expenses
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(48.7
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)
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(46.7
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)
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(47.6
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)
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(45.1
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)
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Loss from operations
|
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(4.9
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)
|
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|
(2.3
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)
|
|
|
(4.1
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)
|
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|
(0.9
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)
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Interest expense, net
|
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|
(0.6
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)
|
|
|
(0.6
|
)
|
|
|
(0.6
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)
|
|
|
(0.7
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)
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Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(0.5
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)
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Loss before taxes
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(5.5
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)
|
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(2.9
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)
|
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(4.7
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)
|
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(2.0
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)
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Income tax benefit
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2.1
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1.1
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1.7
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0.8
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Net loss
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(3.4
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)%
|
|
|
(1.8
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)%
|
|
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(3.0
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)%
|
|
|
(1.2
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)%
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(1)
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Percentages may not foot due to rounding.
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Thirteen Weeks Ended October 29, 2016 Compared to Thirteen
Weeks Ended October 31, 2015
Net Sales
Net sales for the thirteen weeks ended October 29, 2016 decreased $10.4 million, or 6.7%, to $143.5 million as compared to $153.9 million
for the thirteen weeks ended October 31, 2015. This decrease was primarily the result of a decrease in comparable store sales due to lower guest traffic partially offset by an increase in non-comparable store sales due to the opening of
four net new stores in the thirty-nine weeks ended October 29, 2016. Owned comparable store sales decreased $13.9 million, or 9.5%, while owned and licensed comparable store sales decreased 9.3% during the thirteen weeks ended October 29,
2016. The comparable store sales decrease was primarily due to a low-double digit decrease in comparable transactions resulting from a decrease in guest traffic, partially offset by a low-single digit increase in the average sale per transaction.
From a major merchandising category perspective, Accessories (including fragrances) and Apparel generated low-double digit comparable store sales decreases, while Home Fashions experienced a mid-single digit comparable store sales decrease for the
thirteen weeks ended October 29, 2016 compared to the thirteen weeks ended October 31, 2015.
License Fees from Leased Departments
License fee income related to sales of merchandise in leased departments was $1.9 million, or 1.4% of net sales, for the thirteen weeks ended
October 29, 2016 and $2.2 million, or 1.4% of net sales, for the thirteen weeks ended October 31, 2015. This decrease was primarily due to the decrease in maternity license fees as our license agreement related to our maternity business
expired in March 2016 and was not renewed.
Gross Profit
Gross profit, which includes license fees from leased departments, for the thirteen weeks ended October 29, 2016 decreased $5.5 million, or 8.0%, to
$62.9 million as compared to $68.4 million for the thirteen weeks ended October 31, 2015. Gross profit margin decreased 60 basis points to 43.8% of net sales as compared to 44.4% of net sales for the thirteen weeks ended
October 31, 2015. The 60 basis point decrease in gross profit was due primarily to higher merchandise inventory markdowns.
Selling, General
and Administrative Expenses
Selling, general and administrative expenses during the thirteen weeks ended October 29, 2016 decreased $2.0
million, or 2.8%, to $69.9 million as compared to $71.9 million for the thirteen weeks ended October 31, 2015. As a percentage of net sales, selling, general and administrative expenses were 48.7% for the thirteen weeks ended October 29,
2016 compared to 46.7% for the thirteen weeks ended October 31, 2015, a 200 basis point increase.
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Advertising expenses decreased $1.5 million during the thirteen weeks ended October 29, 2016 as compared to
the thirteen weeks ended October 31, 2015 due primarily to a decrease in television advertising, direct mail and preprint expenses.
Store expenses
decreased $1.2 million during the thirteen weeks ended October 29, 2016 as compared to the thirteen weeks ended October 31, 2015 primarily due to in-store merchandise credit breakage recorded during the third quarter fiscal 2016. Breakage
for in-store merchandise credit is recognized as revenue when the likelihood of redemption becomes remote which has been determined to be three years from the date of issuance. Store expenses also decreased due to lower store payroll in existing
stores as a result of our comprehensive expense review, partially offset by an increase in expenses associated with new store openings and the launch of eCommerce operations in mid-2015. Store expenses were 120 basis points higher in the third
quarter of fiscal 2016 compared to the third quarter of fiscal 2015, primarily due to the deleveraging of store costs associated with the decrease in comparable store sales and the launch of eCommerce operations in mid-2015, partially offset by
in-store merchandise credit breakage.
Distribution center expenses decreased $0.5 million during the thirteen weeks ended October 29, 2016 primarily
due to lower delivery costs as a result of lower inventory receipts during the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015, partially offset by higher capitalized freight.
Pre-opening and closing expenses decreased $0.1 million during the thirteen weeks ended October 29, 2016 due to the opening of three new stores in the
third quarter of fiscal 2016 compared to the opening of two new stores and closing one existing store during the third quarter of fiscal 2015.
Depreciation and amortization expenses increased $0.4 million, or 50 basis points as a percentage of net sales, during the thirteen weeks ended
October 29, 2016 as compared to the thirteen weeks ended October 31, 2015 due to increased investment in technology, including the launch of eCommerce operations in mid-2015 and new store openings.
Corporate expenses increased $0.9 million, or 110 basis points, during the thirteen weeks ended October 29, 2016 as compared to the thirteen weeks ended
October 31, 2015, primarily due to higher professional service fees related to our engagement of an outside party to assist in identifying expense savings opportunities, partially offset by a decrease in share-based compensation expense due
primarily to forfeitures.
Interest Expense, Net
Interest expense, net for the thirteen weeks ended October 29, 2016 and October 31, 2015 was $0.9 million.
Loss before Taxes
The loss before taxes for the
thirteen weeks ended October 29, 2016 was $7.9 million compared to the loss before taxes of $4.5 million in the thirteen weeks ended October 31, 2015. As a percentage of net sales, the loss before taxes was 5.5% for the third quarter of
fiscal 2016 compared to the loss before taxes of 2.9% for the third quarter of fiscal 2015.
Income Tax Benefit
The income tax benefit for the thirteen weeks ended October 29, 2016 was $3.1 million compared to $1.7 million for the thirteen weeks ended
October 31, 2015. The effective tax rate for the third quarter of fiscal 2016 of 39.0% compared to the effective tax rate of 38.0% for the third quarter of fiscal 2015. The effective rate differed from the federal enacted rate of 35%
primarily due to federal tax credits and state taxes, net of federal benefits.
We have considered the future reversal of deferred tax liabilities,
projected operating results as well as projected taxable income and have concluded that it is more likely than not that existing gross deferred tax assets will be realized. If our financial performance does not improve or deteriorates, the reversals
of deferred tax liabilities may not be sufficient to offset current operating losses and an additional or a full valuation allowance may become necessary. We will continue to evaluate the ability to realize our deferred tax assets and related
valuation allowance on a quarterly basis.
Net Loss
The net loss for the thirteen weeks ended October 29, 2016 was $4.8 million compared to a net loss of $2.8 million for the thirteen weeks ended
October 31, 2015.
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Thirty-nine Weeks Ended October 29, 2016 Compared to Thirty-nine Weeks Ended October 31, 2015
Net Sales
Net sales for the thirty-nine
weeks ended October 29, 2016 decreased $25.4 million, or 5.7%, to $417.8 million as compared to $443.2 million for the thirty-nine weeks ended October 31, 2015. This decrease was primarily the result of a decrease in
comparable store sales due to lower guest traffic partially offset by an increase in non-comparable store sales due to the opening of four net new stores in the thirty-nine weeks ended October 29, 2016. Owned comparable store sales
decreased $36.5 million, or 8.5%, while owned and licensed comparable store sales decreased 8.3% during the thirty-nine weeks ended October 29, 2016. The comparable store sales decrease was primarily due to a low-double digit decrease in
comparable transactions resulting from a decrease in guest traffic, partially offset by a low-single digit increase in the average sale per transaction. From a major merchandising category perspective, Apparel and Accessories (including fragrances)
generated high-single digit comparable store sales decreases, while Home Fashions experienced a mid-single digit comparable store sales decrease for the thirty-nine weeks ended October 29, 2016 compared to the thirty-nine weeks ended
October 31, 2015.
License Fees from Leased Departments
License fee income related to sales of merchandise in leased departments for the thirty-nine weeks ended October 29, 2016 decreased $0.7 million, or
10.2%, to $5.9 million compared to the thirty-nine weeks ended October 31, 2015, primarily due to the decrease in maternity license fees as our license agreement related to our maternity business expired in March 2016 and was not renewed.
Gross Profit
Gross profit, which includes license
fees from leased departments, for the thirty-nine weeks ended October 29, 2016 decreased $14.2 million, or 7.2%, to $181.9 million as compared to $196.1 million for the thirty-nine weeks ended October 31, 2015. Gross profit
margin decreased 70 basis points to 43.6% of net sales as compared to 44.3% of net sales for the thirty-nine weeks ended October 31, 2015. The 70 basis point decrease was primarily due higher merchandise inventory markdowns.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the thirty-nine weeks ended October 29, 2016 decreased $1.0 million, or 0.5%, to $199.0 million as
compared to $200.1 million for the thirty-nine weeks ended October 31, 2015. As a percentage of net sales, selling, general and administrative expenses increased to 47.6% during the thirty-nine weeks ended October 29, 2016 as compared to
45.1% during the thirty-nine weeks ended October 31, 2015, a 250 basis point increase.
Distribution center expenses decreased $1.4 million in the
thirty-nine weeks ended October 29, 2016 primarily due to lower delivery, processing and payroll costs as a result of lower inventory receipts during the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015,
partially offset by lower capitalized freight.
Store expenses decreased $1.1 million for the thirty-nine weeks ended October 29, 2016 as compared to
the thirty-nine weeks ended October 31, 2015 primarily due to in-store merchandise credit breakage recorded during the third quarter fiscal 2016. Breakage for in-store merchandise credit is recognized as revenue when the likelihood of
redemption becomes remote which has been determined to be three years from the date of issuance. Store expense also decreased due to lower store payroll in existing stores as a result of our comprehensive expense review, partially offset by an
increase in expenses associated with new store openings and the launch of eCommerce operations in mid-2015. Store expenses were 140 basis points higher in the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015
primarily due to the deleveraging of store costs associated with the comparable store sales decline and the launch of eCommerce operations in mid-2015.
Advertising expenses decreased $1.0 million, or 10 basis points, during the thirty-nine weeks ended October 29, 2016 as compared to the thirty-nine weeks
ended October 31, 2015 primarily due to a decrease in television advertising, direct mail and preprint expenses during the thirty-nine weeks ended October 29, 2016.
Pre-opening and closing expenses decreased $0.8 million, or 10 basis points as a percentage of net sales, for the thirty-nine weeks ended October 29,
2016 compared to the thirty-nine weeks ended October 31, 2015 due to the opening of five new stores and closing one existing store during the first three quarters of fiscal 2016 compared to the opening of six new stores and closing one existing
store during the first three quarters of fiscal 2015.
Depreciation and amortization expenses increased $1.1 million, or 40 basis points as a percentage
of net sales, for the thirty-nine weeks ended October 29, 2016 as compared to the thirty-nine weeks ended October 31, 2015 due to increased investment in technology, including the launch of eCommerce operations in mid-2015 and new store
openings.
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Corporate expenses increased $2.2 million, or 90 basis points, during the thirty-nine weeks ended
October 29, 2016 as compared to the thirty-nine weeks ended October 31, 2015, primarily due to higher professional service fees related to our engagement of an outside party to assist in identifying expense savings opportunities, partially
offset by lower share-based compensation expense due primarily to forfeitures.
Interest Expense
Interest expense, net for the thirty-nine weeks ended October 29, 2016 decreased $0.4 million to $2.5 million compared to $3.0 million for the thirty-nine
weeks ended October 31, 2015 due primarily to a 225 basis point reduction in the interest rate on the refinanced term loan during the second quarter of fiscal 2015, partially offset by higher borrowings on the revolving line of credit facility.
Loss on Extinguishment of Debt
The loss on
extinguishment of debt for the thirty-nine weeks ended October 31, 2015 of $2.0 million was the result of extinguishing in full the senior term loan with Cerberus Business Finance, LLC. The loss on extinguishment of debt includes the write off
of deferred financing fees of $1.7 million related to the extinguished senior term loan during the second quarter of fiscal 2015, as well as a $0.3 million penalty on the early extinguishment of the term loan.
Loss before Taxes
The loss before taxes for the
thirty-nine weeks ended October 29, 2016 increased to $19.6 million compared to the loss before taxes of $8.9 million in the thirty-nine weeks ended October 31, 2015. As a percentage of net sales, the loss before taxes was 4.7% of net
sales for the thirty-nine weeks ended October 29, 2016 compared to the loss before taxes of 2.0% of net sales for the thirty-nine weeks ended October 31, 2015.
Income Tax Benefit
The income tax benefit for the
thirty-nine weeks ended October 29, 2016 was $7.1 million and included a partial valuation allowance on deferred tax assets of $0.5 million of expense related to certain long term leases, which was recorded during the second quarter of fiscal
2016. The income tax benefit was $3.5 million for the thirty-nine weeks ended October 31, 2015. The effective tax rate for the first three quarters of fiscal 2016 of 36.2% compared to the effective tax rate of 39.0% for the first
three quarters of fiscal 2015. The effective rate differed from the federal enacted rate of 35% primarily due to federal tax credits and state taxes, net of federal benefits, and the partial valuation allowance recorded in the second quarter of
fiscal 2016.
We have considered the future reversal of deferred tax liabilities, projected operating results as well as projected taxable income and have
concluded that it is more likely than not that existing gross deferred tax assets will be realized. If our financial performance does not improve or deteriorates, the reversals of deferred tax liabilities may not be sufficient to offset current
operating losses and additional or a full valuation allowance may become necessary. We will continue to evaluate the ability to realize our deferred tax assets and related valuation allowance on a quarterly basis.
Net Loss
The net loss for the thirty-nine weeks
ended October 29, 2016 was $12.5 million compared to $5.4 million for the thirty-nine weeks ended October 31, 2015. As a percentage of net sales, the net loss was 3.0% of net sales for the first three quarters of fiscal 2016 compared
to the net loss of 1.2% of net sales for the first three quarters of fiscal 2015.
Seasonality
Our business is subject to seasonal fluctuations, which are typical of retailers that carry a similar merchandise offering. A disproportionate amount of our
sales and net income are historically realized during the fourth fiscal quarter, which includes the holiday selling season. In fiscal years 2015, 2014 and 2013, respectively, 31.7%, 32.1%, and 32.3% of our net sales were generated in the fourth
quarter. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving and Christmas and regional fluctuations for events such as sales tax holidays.
20
Liquidity and Capital Resources
Our primary ongoing cash requirements are for operating expenses, inventory, store and distribution center capital improvements, investments in our information
technology, including our eCommerce operations which were launched in mid-2015 and the point-of-sale system completed in the third quarter of fiscal 2016, capital expenditures for existing store improvements and investments in our distribution
centers, as well as debt service. Our typical investment in a new store is approximately $1.2 million, which represents pre-opening expenses of $0.3 million and inventory of $0.9 million (of which $0.3 million is typically financed through trade
payables). The fixed assets and leasehold improvements associated with a new store opening, excluding structural costs, of approximately $1.2 million have typically been financed by landlords through favorable tenant improvement allowances. There
are no new store openings scheduled for fiscal 2017. Our primary sources of funds for our business activities are cash from operations, borrowings under our revolving line of credit facility and tenant improvement allowances.
We have experienced losses of $12.5 million during the thirty-nine week period ending October 29, 2016 and $4.3 million and $3.5 million during fiscal
years ended January 30, 2016 and January 31, 2015, respectively. Additionally, during the thirty-nine week period ended October 29, 2016, and the fiscal years ended January 30, 2016 and January 31, 2015, we had net cash
provided by (used in) operating activities of $(24.9) million, $8.6 million and $45.2 million, respectively. Cash flows from operating activities are typically the lowest during the third quarter which includes higher inventory levels in preparation
for the holiday selling period. We have generated positive operating cash flows in each of the years ended January 30, 2016, January 31, 2015 and February 1, 2014. Since the third quarter of fiscal 2013, we have relied on bank
borrowings for our capital needs to fund the Companys operations. If financial performance does not improve we will be required to rely more heavily on bank borrowings.
Our working capital at October 29, 2016 was $0.7 million compared to working capital of $22.2 million at January 30, 2016 and $17.7 million at
October 31, 2015. The decrease in working capital from January 30, 2016 to October 29, 2016 primarily relates to higher borrowings on our line of credit facility due to the timing of capital expenditures and higher seasonal
merchandise inventories and accounts payables during the third quarter of fiscal 2016 compared to fiscal year end 2015 and 2014.
Total long-term debt,
net of debt issue costs increased from $45.7 million at January 30, 2016 to $85.5 million at October 29, 2016 primarily due to higher borrowings on our line of credit facility at October 29, 2016. On September 2, 2016, the
Borrower entered into the Ninth Amendment (the Ninth Amendment) to Loan, Guaranty and Security agreement with Wells Fargo. The Ninth Amendment increases the maximum revolving loan commitment under its revolving credit facility from $80.0
million to $100.0 million. In connection with the revolving line of credit facility increase, the Companys borrowing base term loan reserve calculation now includes a minimum term loan reserve of $5.0 million. The majority of the secured term
loan principal is due on the maturity date of June 28, 2020, with quarterly principal payments of $0.4 million through the maturity date. We intend to pay down the revolving line of credit facility with available cash flows from operations. The
revolving line of credit facility matures in June 2020. We were in compliance with all of our debt covenants as of October 29, 2016, as such there are currently no requirements to pay down the facility until its maturity date.
The Company paid a prepayment premium of $0.3 million related to the Cerberus senior term loan early extinguishment during the second quarter of fiscal 2015,
which was equal to 1.0% of the outstanding principal balance at the time of the payoff of the Cerberus senior term loan.
There were $58.0 million of
borrowings outstanding under our revolving line of credit facility at October 29, 2016, as compared to $17.0 million at January 30, 2016 and $35.9 million at October 31, 2015. Cash and cash equivalents were $8.4 million, $7.0 million
and $8.9 million at October 29, 2016, January 30, 2016 and October 31, 2015, respectively. Net cash used in operating activities was $24.9 million during the thirty-nine weeks ended October 29, 2016 compared to net cash used
in operating activities of $11.8 million during the thirty-nine weeks ended October 31, 2015. Average borrowings under our revolving line of credit facility increased to $31.7 million for the thirty-nine weeks ended October 29, 2016 from
$19.5 million in thirty-nine weeks ended October 31, 2015. The largest amount borrowed at one time during the thirty-nine weeks ended October 29, 2016 was $58.0 million compared to $35.9 million during the thirty-nine weeks ended
October 31, 2015. Excess availability under our revolving line of credit facility, which includes up to $3.0 million of unrestricted cash, was $36.1 million at October 29, 2016 compared to $59.3 million at January 30, 2016 and $40.6
million at October 31, 2015. Stockholders equity was $22.7 million as of October 29, 2016 compared to $34.9 million as of January 30, 2016 and $34.1 million as of October 31, 2015.
During the course of our seasonal business cycle, working capital is needed to support inventory for existing stores, particularly during peak selling
seasons. Historically, our working capital needs are lowest in the first quarter and peak late in the third quarter or early in the fourth quarter in anticipation of the holiday selling season. Management believes that the net cash provided by
operating activities, bank borrowings, vendor trade terms, factor credit availability, tenant improvement allowances and the use of operating leases for new stores will be sufficient to fund anticipated current and long-term capital expenditures and
working capital requirements.
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Our ability to have sufficient liquidity in future periods in order to continue meeting all of our payment
obligations, including those under our loan agreement, will depend on generating positive operating cash flow, primarily through improvement in comparable store sales, operating with lower comparable store inventory levels, improved gross profit and
controlling and reducing our expenses, which in turn, may be impacted by prevailing economic conditions and other financial and business factors, some of which are beyond our control. See Part II, Item 1A. Risk Factors.
Capital Expenditures
Net capital expenditures
during the thirty-nine weeks ended October 29, 2016 and October 31, 2015 were $13.1 million and $10.7 million, respectively. The increase in net capital expenditures during the thirty-nine weeks ended October 29, 2016 is primarily
related to the timing of new store capital expenditures and increased investment in technology including the new point of sales system.
We lease all of
our store locations. In certain cases, we negotiate leases whereby we take responsibility for construction of a new store during the construction period and are reimbursed for our costs from the landlord. When this situation occurs, we report the
construction costs as part of our capital expenditures and, as reimbursements for structural assets, such as the building shell, are received from the landlord for construction costs where we are the accounting owner during the construction period,
we report the proceeds received from the landlord as proceeds from sale-leaseback transactions.
Cash Flow Analysis
A summary of operating, investing, and financing activities are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
39 Weeks
Ended
October 29,
2016
|
|
|
39 Weeks
Ended
October 31,
2015
|
|
Cash flows used in operating activities
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|
$
|
(24,863
|
)
|
|
$
|
(11,787
|
)
|
Cash flows used in investing activities
|
|
|
(13,202
|
)
|
|
|
(10,706
|
)
|
Cash flows provided by financing activities
|
|
|
39,533
|
|
|
|
23,719
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
1,468
|
|
|
|
1,226
|
|
Cash and cash equivalents at beginning of period
|
|
|
6,969
|
|
|
|
7,634
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
8,437
|
|
|
$
|
8,860
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities
Net cash used in operating activities for the thirty-nine weeks ended October 29, 2016 was $24.9 million, which included a net loss of $12.5 million and
noncash charges of $6.5 million comprised of depreciation and amortization expense of $13.5 million, deferred tax valuation allowance of $0.5 million, share-based compensation expense of $0.5 million, a loss on property disposals and impairment
charges of $0.4 million and amortization of deferred financing fees of $0.2 million, offset by the deferred tax asset shortfall related to share-based compensation of $0.2 million and changes in deferred income taxes of $8.5 million. Net cash used
in operating activities in the thirty-nine weeks ended October 29, 2016 was favorably impacted by an increase in accounts payable of $28.3 million due higher merchandise inventory receipts attributable to the seasonal inventory build for the
holiday season compared to fiscal year end 2015, a $2.3 million decrease in accounts, landlord and income taxes receivable due to the collection of the fiscal year 2015 federal tax refund and a decrease in other assets of $0.1 million. The increases
in operating cash flows for the thirty-nine weeks ended October 29, 2016 were partially offset by a $47.0 million increase in merchandise inventories primarily related to higher seasonal inventory levels for the holiday selling season, a
decrease in deferred rent primarily related to new stores of $1.3 million, an increase in prepaid and other current assets of $0.8 million primarily related to new store growth and prepaid advertising and a $0.3 million decrease in accrued expenses
and other liabilities.
Net cash used in operating activities for the thirty-nine weeks ended October 31, 2015 was $11.8 million, which included a
net loss of $5.4 million and noncash charges of $16.9 million comprised of depreciation and amortization expense of $12.4 million, write-off of deferred financing fees of $1.7 million, share-based compensation expense of $1.0 million, loss on
retirement of property and equipment of $0.7 million, changes in deferred income taxes of $0.7 million, amortization of deferred financing fees of $0.4 million and $26 thousand of expense associated with the deferred tax asset shortfall related to
share-based compensation. Net cash used in operating activities in the thirty-nine weeks ended October 31, 2015 was favorably impacted by an increase in accounts payable of
22
$46.9 million related to higher merchandise inventory receipts attributable to seasonality, new store growth and higher average comparable store inventory levels partially offset by the timing of
payments associated with earlier fall merchandise inventory receipts as well as a decrease in accounts, landlord and income taxes receivable of $3.8 million, a decrease in accrued expenses and other liabilities of $1.5 million, and a decrease in
other assets of $0.2 million. The increases in operating cash flows for the thirty-nine weeks ended October 31, 2015 were partially offset by a $70.6 million increase in merchandise inventories primarily related to higher average comparable
store inventory levels and earlier merchandise inventory receipts, the six new stores that opened during the first three quarters of fiscal 2015 and the launch of e-commerce at the end of the second quarter of fiscal 2015. Operating cash flows were
also reduced by a decrease in deferred rent primarily related to new stores of $4.2 million, an increase in prepaid and other current assets of $0.8 million primarily due to the timing of insurance renewals and new store growth.
Cash Flows from Investing Activities
Net cash
used in investing activities in the thirty-nine weeks ended October 29, 2016 and October 31, 2015 was $13.2 million and $10.7 million, respectively. Cash of $22.8 million and $14.3 million was used for purchases of property and equipment
during the thirty-nine weeks ended October 29, 2016 and October 31, 2015, respectively. This increase in purchases of property and equipment during the thirty-nine weeks ended October 29, 2016 is primarily due to timing differences in
new store capital expenditures impacted by sale-leaseback accounting as well as increased investment in the new point-of-sale system.
Proceeds from
sale-leaseback transactions were $9.6 million and $3.6 million for the thirty-nine weeks ended October 29, 2016 and October 31, 2015, respectively, where the Company was deemed the accounting owner of the structural property additions
during the new store construction period pursuant to the underlying lease agreement. This $6.0 million increase in cash generated from proceeds from sale-leaseback transactions primarily resulted from the timing of receipt of payments from
landlords.
Cash Flows from Financing Activities
Net cash provided by financing activities was $39.5 million during the thirty-nine weeks ended October 29, 2016, as compared to net cash provided by
financing activities of $23.7 million during the thirty-nine weeks ended October 31, 2015. Borrowings and repayments on our revolving line of credit facility were $179.5 million and $138.6 million, respectively, during the thirty-nine weeks
ended October 29, 2016, compared to $169.4 million and $144.5 million, respectively, during the thirty-nine weeks ended October 31, 2015. Cash of $1.4 million was also used during the thirty-nine weeks ended October 29, 2016 for
payments on our secured term loan and on capital lease obligations compared to cash of $30.0 million used during the thirty-nine weeks ended October 31, 2015 for payment of long term debt including the Cerberus senior term loan payoff. Cash
proceeds of $30.0 million were received from the new Wells Fargo secured term loan that were used to extinguish the Cerberus senior term loan in full during the thirty-nine weeks ended October 31, 2015. Cash of $48 thousand was paid for
debt financing fees during the thirty-nine weeks ended October 31, 2015 related to the Ninth Amendment to the loan agreement effective September 2, 2016. Additionally, the Company was subject to a penalty of $0.3 million, which was equal
to 1.0% of the outstanding principal balance and was paid during the second quarter of fiscal 2015 on the early extinguishment of debt. Proceeds of $31 thousand were received in connection with the exercise of stock options during the thirty-nine
weeks ended October 31, 2015.
Existing Credit Facilities
Gordmans, Inc. is the borrower under a loan, guaranty and security agreement dated as of February 20, 2009, as amended, with Wells Fargo Bank, National
Association as agent and a lender and with certain other lender parties thereto from time to time. Gordmans Stores, Inc., Gordmans Intermediate Holdings Corp., Gordmans Distribution Company, Inc., Gordmans Management Company, Inc. and Gordmans LLC
are all guarantors under the loan agreement. The description which follows includes the terms of the Ninth Amendment to the loan agreement, which became effective September 2, 2016 (the Ninth Amendment). The Ninth Amendment
increases the borrowing availability under its revolving line of credit facility from $80.0 million to $100.0 million. In connection with the revolving line of credit facility increase, the Companys borrowing base term loan reserve calculation
now includes a minimum term loan reserve of $5.0 million.
The loan, guaranty and security agreement provides for a $100.0 million revolving line of
credit facility. Our revolving line of credit facility is available for working capital and other general corporate purposes and is scheduled to expire on June 28, 2020. At October 29, 2016, we had $58.0 million of borrowings outstanding
under our revolving line of credit facility as compared to outstanding borrowings of $17.0 million at January 30, 2016 and $35.9 million at October 31, 2015. The availability of our revolving line of credit facility is subject to a
borrowing base, which is comprised of eligible credit card receivables and the liquidation value of eligible landed inventory, eligible distribution center inventory and eligible in-transit inventory less a minimum term loan reserve of $5.0 million.
The Company is required to maintain minimum excess availability under the revolving line of credit facility of at least $20.0 million, the calculation of which includes up to $3.0 million of unrestricted cash. Excess availability under our revolving
line of credit facility was $36.1 million at October 29, 2016 and included letters of credit issued with an aggregate face amount of $9.0 million.
23
There were borrowings under the facility of an aggregate of $179.5 million during the first three quarters of fiscal 2016 and repayments of $138.6 million during the first three quarters of
fiscal 2016.
Interest is payable on borrowings under our revolving line of credit facility monthly at a rate equal to LIBOR or the base rate as selected
by management, plus an applicable margin which ranges from 0.75% to 2.00% set quarterly dependent upon the whether excess availability is less than or greater than $40.0 million. Borrowings under this facility totaling $5.0 million bore interest at
a rate of 4.25% under the base rate option and $53.0 million bore interest at rates between 2.28% and 2.29% under the LIBOR option at October 29, 2016.
An unused line fee is payable quarterly in an amount equal to 0.25% of the sum of the average daily unused revolver amount during the immediately preceding
month plus the average daily balance of the letter of credit usage during the immediately preceding month. An administrative agent fee is also payable under the facility on an annual basis.
The revolving line of credit facility has a first lien on all collateral other than term loan priority collateral and a second lien on the term loan priority
collateral, as defined in the loan agreement.
The secured term loan matures on the same date as the revolving line of credit facility and has principal
payments of $0.4 million due on a quarterly basis beginning in October 2015 through the maturity date, with the remaining principal due on the maturity date of June 28, 2020. The Company may repay at any time all or a portion of the outstanding
principal amount of the secured term loan facility, subject to a prepayment premium equal to 3.0% in the first year, 1.5% in the second year, 0.5% in the third year and 0.0% thereafter. The term loan carries an interest rate equal to the LIBOR rate
plus 6.25% with a floor of 1.0%. The interest rate on the term loan was 7.25% at October 29, 2016, January 30, 2016, and October 31, 2015. The term loan is secured by the same collateral as the revolving line of credit facility
but has a priority lien on real estate, fixtures, equipment, intellectual property and books, records, permits, licenses, insurance, in each case related to term loan priority collateral, and proceeds thereof and a second lien on the revolving
priority collateral, as defined in the loan agreement.
Among other provisions, the Companys loan agreement with Wells Fargo contains customary
affirmative and negative covenants, including a negative covenant that restricts the level and form of indebtedness entered into by the Company or its wholly owned subsidiaries. Exceptions to this covenant include borrowings under our $30.0 million
senior term loan and, subject to certain conditions, indebtedness in connection with all acquisitions not to exceed $10.0 million. Our revolving line of credit facility also includes a negative covenant that restricts dividends and other upstream
distributions by the Company and its subsidiaries to the extent the Company does not meet minimum excess availability thresholds. Exceptions to this covenant include dividends or other upstream distributions: (i) by subsidiaries of
Gordmans, Inc. to Gordmans, Inc. and its other subsidiaries, (ii) that consist of repurchases of stock of employees in an amount not to exceed $0.5 million in any fiscal year, (iii) that consist of the payment of taxes on behalf of any
employee, officer or director of the Company for vested restricted stock of the Company owned by such employee, officer or director, (iv) to the Company to pay federal, state and local income taxes and franchise taxes solely arising out of the
consolidated operations of the Company and its subsidiaries, (v) to the Company to pay certain reasonable directors fees and out-of-pocket expenses, reasonable and customary indemnities to directors, officers and employees and other
expenses in connection with the ordinary corporate governance, overhead, legal and accounting and maintenance and (vi) dividends so long no event of default exists, projected excess availability for the next twelve months is greater than $35.0
million and 30% of the loan cap and the fixed charge coverage ratio is greater than 1.0 to 1.0 on a historical and projected basis. The agreement also includes a negative covenant that restricts subsidiaries of the Company from making any loans
to the Company. Should the Company default on scheduled repayment of the secured term loan facility, Wells Fargo may make any outstanding obligations under the agreement immediately due and payable.
As of October 29, 2016, the Company was in compliance with all of its debt covenants and expects to be in compliance with all of its debt covenants for
measurement periods occurring through the remainder of fiscal 2016.
We also entered into two capital leases to purchase computer hardware and software
during fiscal 2014. The Companys remaining obligation under theses capital leases was $0.6 million at October 29, 2016.
Contractual
Obligations and Off-Balance-Sheet Arrangements
There have been no material changes to our contractual obligations and off-balance sheet arrangements
as described on page 45 in our Form 10-K for the fiscal year ended January 30, 2016.
24
Critical Accounting Policies and Estimates
We have determined that our most critical accounting policies are those related to revenue recognition, merchandise inventories, property and equipment,
long-lived assets, operating leases, self-insurance, share-based compensation and income taxes. There have been no significant changes to critical accounting policies discussed in our fiscal year 2015 Annual Report on Form 10-K except for
the adoption of ASU 2015-03
Simplifying the Presentation of Debt Issuance Costs
, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability. We continue to monitor our accounting policies to ensure proper application of current rules and regulations.