Item 1. Business
Overview
New York & Company, Inc. (together with its subsidiaries, the "Company") is an omni-channel women's fashion retailer providing
curated lifestyle solutions that are versatile, on-trend and stylish at a great value. The specialty retailer, first incorporated in 1918, has grown to now operate 432 retail stores, including 119 New
York & Company Outlet stores ("Outlets"), in 37 states while also growing a substantial eCommerce business. The Company's branded merchandise, including collaborations with Eva Mendes and
Gabrielle Union, is sold exclusively at these locations and online at
www.nyandcompany.com
. The target customers for the Company's merchandise are women
between the ages of 25 and 49.
The
Company offers a merchandise assortment consisting of wear-to-work, casual apparel and accessories, including pants, dresses, jackets, knit tops, blouses, sweaters, denim, t-shirts,
activewear, handbags, jewelry and shoes. The Company's merchandise reflects current fashions and fulfills a broad spectrum of its customers' lifestyle and wardrobe requirements, providing every woman
with a fashion strategy from work to weekend. The Company offers a wide range of merchandise sizes, including 00 to 20, XXS to XXL, petite, tall, and plus.
The
Company positions its retail stores and eCommerce store as a source of fashion, quality and value by providing its customers with an appealing merchandise assortment at attractive
price points,
generally below those of department stores and other specialty retailers. Over the past several years the Company has invested in its omni-channel infrastructure, including its website and mobile
platforms, in order to provide its customers with the ability to shop where, when and how they would like. The Company continues to transform from a traditional brick-and-mortar retailer to an
omni-channel platform with a dominant digital channel. The Company's stores are typically concentrated in medium to large population centers of the United States and are located in shopping malls,
lifestyle centers, outlet centers, and off-mall locations, including urban street locations.
The
Company was founded in 1918 and operated as a subsidiary of L Brands, Inc. (NYSE: LB) ("L Brands"), formerly known as Limited Brands, Inc., from 1985 to 2002. New
York & Company, Inc., formerly known as NY & Co. Group, Inc., was incorporated in the state of Delaware on November 8, 2002. It was formed to acquire all of
the outstanding stock of Lerner New York Holding, Inc. ("Lerner Holding") and its subsidiaries from L Brands, an unrelated company. On November 27, 2002, Irving Place Capital, formerly
known as Bear Stearns Merchant Banking, completed the acquisition of Lerner
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Holding
and its subsidiaries from L Brands (the "acquisition of Lerner Holding"). On October 6, 2004, the Company completed an initial public offering and listed its common stock on the New
York Stock Exchange.
The
Company's fiscal year is a 52- or 53-week year that ends on the Saturday closest to January 31. The 53-week year ended February 3, 2018, and the 52-week years ended
January 28, 2017 and January 30, 2016 are referred to herein as "fiscal year 2017," "fiscal year 2016," and "fiscal year 2015," respectively. The 52-week year ending February 2,
2019 is referred to herein as "fiscal year 2018."
The Company's Growth Strategies
Evolve as a Broader Lifestyle Brand
The Company's celebrity partnerships and sub-brand strategy deliver a differentiated experience for its customers, provide trending fashion and
a versatile assortment that the Company believes will continue to broaden its reach as a lifestyle brand. Net sales from the Company's partnerships with Eva Mendes and Gabrielle Union grew at a
double-digit percentage rate in fiscal year 2017. The Company believes that its successful celebrity partnerships have also elevated the performance of the Company's other sub-brands and will continue
to do so in the future. The Company currently has the following sub-brands: 7
th
Avenue Design Studio, Soho Jeans and Soho Street, the Eva Mendes Collection, and the Gabrielle
Union Collection. The Company believes that its key merchandise initiatives and sub-brand strategy differentiate it from its competitors and provides its customers fashion, quality and value with an
appealing merchandise assortment at attractive price points.
On
February 2, 2018, the Company acquired certain assets of Fashion to Figure, a U.S. based retailer of trendy plus-size fashions, including intellectual property rights related
to the Fashion to Figure® brand, for a total cash purchase price of $2.4 million including fees and expenses which was funded with cash on hand ("FTF Asset Acquisition"). The
Company believes that the development and growth of its newest brand will allow it to successfully compete in the plus-size market and further differentiate its merchandise offering.
Looking
forward, with approximately $91 million of cash on-hand and no borrowings outstanding under its revolving credit facility, the Company will continue to evaluate new
opportunities, such as acquisitions, investments in celebrity collaborations, investments in omni-channel capabilities, among other areas, to expand its merchandise offering and evolve as a broader
lifestyle brand.
Enhance Brand Awareness, Increase Customer Engagement, and Drive Traffic
The Company seeks to build and enhance the recognition, appeal and reach of its New York & Company® brand through its
merchandise assortment, celebrity partnerships, expansion of its private label credit card and loyalty program ("Runway Rewards"), best-in-class customer service, and consistent marketing in-store, on
its website and through mobile devices, including tablets. The Company believes that its celebrity partnerships with Eva Mendes and Gabrielle Union elevate and differentiate its brand. The Company
leverages its celebrity partnerships to create an emotional connection with its customers and increase overall brand awareness. The Company continually explores the addition of new celebrity
partnerships, and expects to partner with a third celebrity brand ambassador in the Fall of 2018 to be the face of the Soho Jeans sub-brand.
As
mall traffic continues to decline, the Company has heightened its focus and resources towards its strategic marketing efforts to drive customer traffic into its brick-and-mortar
stores and online. As part of the company-wide focus to increase traffic and conversion, the Company plans to leverage its celebrity collaborations, further develop its brand ambassador program,
invest in digital marketing
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campaigns,
and maintain new and fresh in-store marketing initiatives, such as hosting exciting events and experiences that resonate with its customers.
Drive eCommerce Growth and Expand Omni-Channel Capabilities
The Company is an omni-channel retailer with the goal of providing a seamless and consistent shopping experience across all channels of its
business, allowing its customers to shop in stores, on mobile or desktop. In fiscal year 2017, net sales from eCommerce represented approximately 30% of the Company's business. The Company views the
eCommerce channel (
www.nyandcompany.com
) as its largest store providing the broadest selection of merchandise, including exclusive styles and extended
sizes. The Company's eCommerce store is integral to the success of its omni-channel retail strategy, driving increased sales and traffic across all channels.
The
Company intends to continue to invest resources into omni-channel retail initiatives and leverage the enhanced customer shopping experience to drive additional traffic and increase
sales across all channels of the business. Current omni-channel capabilities allow a customer to order from the Company's eCommerce website and pick up or return merchandise in-store. In addition, the
Company has the ability to ship items from a store to fulfill a customer's order that came through the eCommerce website or from another store.
Optimize Existing Store Base
The Company is continually focused on optimizing the size and productivity of its existing New York & Company store base by
relocating and remodeling/refreshing a portion of its existing
stores annually. The reduction of non-productive selling square feet is an integral component of the Company's goal to improve productivity and profitability across its chain of stores. Since the
beginning of fiscal year 2012, the Company has closed 165 locations and in fiscal year 2018 expects to close between 35 and 45 stores. In addition, the Company will continue leveraging selling
square feet in existing locations by converting a select number of New York & Company stores to side-by-side or shop-in-shop formats with a New York & Company store and Eva Mendes
boutique. As of February 3, 2018, the Company operated 72 of these converted New York & Company stores, including 18 Eva Mendes side-by-side stores and 54 Eva Mendes
shop-in-shop stores, as well as 1 free-standing Eva Mendes store.
The
Company plans to open a select number of new New York & Company stores and Outlets annually. The Company has targeted locations where it believes it can increase market
penetration and operate highly profitable stores. During fiscal year 2018, the Company plans to open approximately five New York & Company stores and one Outlet store in highly desirable
locations, with short-term leases and competitively priced rents, which were previously occupied by a competitor and therefore require relatively low capital investment prior to opening.
In
connection with the FTF Asset Acquisition, the Company negotiated new store lease agreements in eight locations previously occupied by Fashion to Figure. These eight new Fashion to
Figure stores opened in the first quarter of fiscal year 2018.
Design and Merchandising
In connection with the Company's corporate reorganization, the Company recently integrated its Outlet and traditional New York & Company
design and merchandising teams. The Company's product development group, led by its merchant and design teams in collaboration with celebrity partners, is dedicated to consistently delivering
high-quality and on trend fashion apparel and accessories at competitive prices to its customers. The Company seeks to provide its customers with key fashion items of the season and a versatile
wardrobe that addresses customers' specific lifestyle needs. The Company offers multiple lifestyle assortments through its successful celebrity partnerships and sub-brands and a
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broad
assortment of coordinating apparel items and accessories. The Company's merchandising, marketing and promotional efforts encourage multiple-unit and outfit purchases.
While
the Company delivers select new items every two to four weeks to its stores in order to keep the merchandise current and to keep customers engaged, new product lines are introduced
into the Company's stores in five major deliveries each year (spring, summer, fall, holiday and pre-spring). Product line development begins with the introduction of design concepts, key styles and
its initial assortment selection for the product line. From a speed to market perspective, the Company has made several improvements to its product development calendar, which have shortened the total
supply chain timeline. These changes, along with the implementation of a formalized "Fast Track" product development process, enables the Company to more effectively leverage runway and trend
intelligence; and combined with improvements to the Company's logistics network provides more rapid delivery of product from concept to in-store. The Company's designers focus on overall concepts and
identify and interpret the fashion trends for the season, identifying those particular apparel items and accessories that will appeal to its target customer, designing the product line and presenting
it to the Company's merchants for review. The Company's merchants are responsible for developing seasonal strategies in partnership with their planners, in addition to a detailed list of desired
apparel pieces and accessories to guide the designers, as well as buying, testing, editing, product placement and pricing the line during the season on an ongoing basis. This integrated approach to
design, merchandising and sourcing enables the Company to carry a versatile merchandise assortment that addresses customer demand while attempting to minimize inventory risk and maximize sales and
profitability.
Sourcing
The Company's sourcing approach focuses on quality, speed and cost in order to provide timely delivery of quality goods. This is accomplished by
closely managing the product development cycle, from raw materials and garment production to store-ready packaging, logistics and customs clearance.
Sourcing Relationships.
The Company purchases apparel and accessories products directly from manufacturers and in some instances from
importers. The
Company's relationships with its direct manufacturers are supported by independent buying agents, who help coordinate the Company's purchasing requirements with the factories. The Company's unit
volumes, long-established vendor relationships and knowledge of fabric and production costs, combined with a flexible, diversified sourcing base, enable it to buy high-quality, low-cost goods. The
Company is not subject to long-term production contracts with any of its vendors, manufacturers or buying agents. The Company's broad sourcing network allows it to meet its factory workplace
standards; objectives of quality, cost, speed to market; and inventory efficiency by shifting merchandise purchases as required, and allows it to react quickly to changing market or regulatory
conditions. The Company sources nearly all of its merchandise from three countries, with China, Vietnam and Indonesia representing approximately 97% of all merchandise purchases made during fiscal
year 2017. The Company utilized three major apparel agents, which together represented approximately 74% of the Company's merchandise purchases during fiscal year 2017; however, no individual factory
represented more than approximately 6% of the Company's merchandise purchases. The Company expects to continue to utilize three major apparel agents for a large portion of its merchandise in fiscal
year 2018, while maintaining a broad factory base, in order to
reduce costs, maximize production and logistics assistance, and increase speed to market without sacrificing quality.
Quality Assurance and Compliance Monitoring.
The Company entered into a transition services agreement with L Brands on November 27,
2002, as
amended, in connection with the acquisition of Lerner Holding (the "transition services agreement"). As part of the transition services agreement, Independent Production Services ("IPS"), a unit of L
Brands, provided the Company with monitoring of country of origin, point of fabrication compliance, compliance with the Company's Code of Business Conduct for Suppliers, labor standards, and supply
chain security up until September 2017, at which
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point
the Company launched the New York & Company Global Compliance Program ("the Compliance Program"). The Compliance Program includes supply chain labor standards and Customs-Trade
Partnership Against Terrorism (C-TPAT) security audits, both announced and unannounced, conducted by the Company's in-house compliance team, as well as the Company's primary third party audit firm and
two additional secondary independent audit firms. Annual overseas visits and audits with select vendors and their respective factories are conducted by the Company's in-house compliance team, and the
Company's in-house compliance team visits factories to ensure that the factory associates understand and comply with the Company's Code of Business Conduct for Suppliers, labor standards and supply
chain security standards. The Company's independent buying agents and importers also conduct in-line factory and final quality audits. In addition, all of the factories that manufacture merchandise
for New York & Company enter into a master sourcing agreement with the Company that specifies their obligations with respect to quality, safety and ethical business practices. As of
February 3, 2018, the sourcing of Fashion to Figure merchandise was not monitored under the Compliance Program, but the Company plans to incorporate Fashion to Figure into the Compliance
Program during fiscal year 2018.
Distribution and Logistics
L Brands provides the Company with certain warehousing and distribution services under the transition services agreement. All of the Company's
merchandise is received, processed, warehoused and distributed through L Brands' distribution center in Columbus, Ohio. Details about each receipt are supplied to the Company's store inventory
planners, who determine how the product should be distributed among the Company's stores based on current inventory levels, sales trends and specific product characteristics. Advance shipping notices
are electronically communicated to the stores.
Under
the transition services agreement, as amended, these services will terminate upon the earliest of the following: (i) 24 months from the date that L Brands
notifies the Company that L Brands wishes to terminate the services; (ii) 24 months from the date that the Company notifies L Brands that the Company wishes to terminate
the services; (iii) 60 days after the Company has given notice to L Brands that L Brands has failed to perform any material obligations under the agreement and such failure
shall be continuing; (iv) 30 days after L Brands has given notice to the Company that the Company has failed to perform any material obligations under the agreement and such failure
shall be continuing; (v) within 75 days of receipt of the annual proposed changes to the agreement schedules which outline the cost methodologies and estimated costs of the services for
the coming year, if such proposed changes would result in a significant increase in the amount of service costs that the Company would be obligated to pay; (vi) 15 months after a change
of control of the Company, at the option of L Brands; or (vii) upon reasonable notice under the prevailing circumstances by the Company to L Brands after a disruption of services due to force
majeure that cannot be remedied or restored within a reasonable period of time. The Company believes that these services are provided at a competitive price and the Company anticipates continuing to
use L Brands for these services.
The
Company relies on a third-party to operate its eCommerce store, including fulfillment services. The third-party warehouse facility is located in Martinsville, Virginia. Merchandise
is received in this location from L Brands' distribution center. The operation of the Company's eCommerce store is covered by a master services agreement that is in effect through April 30,
2018, and the Company expects to renew the agreement.
Real Estate
As of February 3, 2018, the Company operated 432 stores in 37 states, with an average of 5,026 selling square feet per store. The
Company's growth and productivity statistics are reported based on selling square footage because management believes the use of selling square footage yields a more accurate measure of store
productivity than gross square footage. All of the Company's stores are
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leased
and are primarily located in medium to large population centers of the United States in shopping malls, lifestyle centers, outlet centers, and off-mall locations, including urban street
locations. As of February 3, 2018, approximately 65% of the Company's store leases could be terminated by the Company before fiscal year end 2019.
Historical Store Count
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Total stores open
at beginning of
fiscal year
|
|
Number of stores
opened during
fiscal year
|
|
Number of stores
closed during
fiscal year
|
|
Number of stores
remodeled during
fiscal year
|
|
Total stores
open at end of
fiscal year
|
|
2013
|
|
|
519
|
|
|
8
|
|
|
(20
|
)
|
|
7
|
|
|
507
|
|
2014
|
|
|
507
|
|
|
12
|
|
|
(15
|
)
|
|
11
|
|
|
504
|
|
2015
|
|
|
504
|
|
|
12
|
|
|
(26
|
)
|
|
8
|
|
|
490
|
|
2016
|
|
|
490
|
|
|
2
|
|
|
(26
|
)
|
|
2
|
|
|
466
|
|
2017
|
|
|
466
|
|
|
11
|
|
|
(45
|
)
|
|
1
|
|
|
432
|
|
Historical Selling Square Footage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Total selling
square feet at
beginning
of fiscal year
|
|
Increase in
selling square
feet for stores
opened during
fiscal year
|
|
Reduction of
selling square
feet for stores
closed during
fiscal year
|
|
Net reduction of
selling square
feet for stores
remodeled during
fiscal year
|
|
Total selling
square feet
at end of
fiscal year
|
|
2013
|
|
|
2,725,273
|
|
|
30,445
|
|
|
(106,256
|
)
|
|
(12,388
|
)
|
|
2,637,074
|
|
2014
|
|
|
2,637,074
|
|
|
46,161
|
|
|
(74,478
|
)
|
|
(11,769
|
)
|
|
2,596,988
|
|
2015
|
|
|
2,596,988
|
|
|
50,638
|
|
|
(120,559
|
)
|
|
(15,638
|
)
|
|
2,511,429
|
|
2016
|
|
|
2,511,429
|
|
|
10,536
|
|
|
(150,697
|
)
|
|
(4,074
|
)
|
|
2,367,194
|
|
2017
|
|
|
2,367,194
|
|
|
48,826
|
|
|
(235,743
|
)
|
|
(8,948
|
)
|
|
2,171,329
|
|
Store Count by State as of February 3, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
# of
Stores
|
|
State
|
|
# of
Stores
|
|
State
|
|
# of
Stores
|
|
Alabama
|
|
|
6
|
|
Maryland
|
|
|
16
|
|
Ohio
|
|
|
16
|
|
Arizona
|
|
|
5
|
|
Massachusetts
|
|
|
9
|
|
Oklahoma
|
|
|
1
|
|
Arkansas
|
|
|
2
|
|
Michigan
|
|
|
8
|
|
Pennsylvania
|
|
|
28
|
|
California
|
|
|
49
|
|
Minnesota
|
|
|
3
|
|
Rhode Island
|
|
|
2
|
|
Colorado
|
|
|
3
|
|
Mississippi
|
|
|
2
|
|
South Carolina
|
|
|
10
|
|
Connecticut
|
|
|
8
|
|
Missouri
|
|
|
5
|
|
South Dakota
|
|
|
1
|
|
Delaware
|
|
|
2
|
|
Nebraska
|
|
|
1
|
|
Tennessee
|
|
|
10
|
|
Florida
|
|
|
30
|
|
Nevada
|
|
|
3
|
|
Texas
|
|
|
37
|
|
Georgia
|
|
|
18
|
|
New Hampshire
|
|
|
1
|
|
Utah
|
|
|
1
|
|
Illinois
|
|
|
17
|
|
New Jersey
|
|
|
31
|
|
Virginia
|
|
|
20
|
|
Indiana
|
|
|
6
|
|
New Mexico
|
|
|
1
|
|
Wisconsin
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kentucky
|
|
|
6
|
|
New York
|
|
|
46
|
|
Grand Total
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louisiana
|
|
|
5
|
|
North Carolina
|
|
|
19
|
|
|
|
|
|
|
Site Selection.
The Company's real estate department is responsible for new store site selection. While selecting a specific location
for a new
store, the Company targets high-traffic real estate in locations with demographics reflecting concentrations of the Company's target customers and a complementary tenant mix.
Each
New York & Company store is typically 4,000 to 6,000 selling square feet. Each Outlet store is typically 3,000 to 5,000 selling square feet. In fiscal year 2018, the Company
expects to open approximately 5 New York & Company stores with short-term leases, open 1 new Outlet store,
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open 8 Fashion
to Figure stores, convert 1 existing New York & Company store to an Outlet store, remodel/refresh 11 existing locations, and close 35 stores to 45 stores, ending
the fiscal year with roughly 401 stores to 411 stores, and approximately 2.0 million selling square feet.
Store Display and Merchandising.
The Company's stores are designed to effectively display its merchandise and create an upbeat
atmosphere. Expansive
front windows allow potential customers to see easily into the store and are used as a vehicle to highlight major merchandising and promotional events. The open floor design allows customers to
readily view the majority of the merchandise on display, while store fixtures allow for the efficient display of garments and accessories. Merchandise displays are modified on a weekly basis based on
sales trends and inventory receipts. The Company's in-store product presentation utilizes a variety of different fixtures to highlight the product line's breadth and versatility. Complete outfits are
displayed throughout the store using garments from a variety of product categories. The Company displays complete outfits to demonstrate how its customers can combine different pieces in order to
increase unit sales.
Pricing and Promotional Strategy.
The Company's pricing and promotional strategy is designed to drive customer traffic, maximize
conversion and
promote brand loyalty. The promotional pricing strategy is designed to encourage multiple-unit sales. Select key items are also prominently displayed in store windows at competitive prices to drive
traffic into the stores.
Inventory Management.
The Company's inventory management systems, which support the Company's omni-channel retail strategy, are designed
to maximize
merchandise profitability and increase inventory turns. The Company constantly monitors inventory turns on the selling floor and uses pricing and promotions to maximize sales and profitability and to
achieve inventory turn goals. The Company's inventory loss prevention program is integrated with the store operations and finance departments of its business. This program includes electronic article
surveillance systems in a majority of stores, including sensor and ink tagging, as well as the use of data analytics, fraud prevention technology, the monitoring of merchandise returns, merchandise
voids, employee sales and deposits, and educating store personnel on loss prevention.
Field Sales Organization.
New York & Company store and Outlet operations are organized into 4 regions. The 4 regions are
organized into
35 districts. Each region is managed by a regional manager. The Company staffs approximately 35 district managers, with each typically responsible for the sales and operations of 12 stores on average.
Each store is usually staffed with a store manager and 2 additional support staff. Higher volume stores may have additional positions as required. All stores are staffed with hourly sales
associates. The Company has approximately 1,200 full-time in-store managers. The goal of the Company's field sales organization is to provide a memorable customer experience by creating an environment
that is inspirational, exciting and fun. To accomplish this goal, the field sales organization is continuously engaged in various initiatives to improve talent assessment and acquisition processes,
enhance brand education and communication training and increase engagement with the customer in store to drive sales and profitability. The Company seeks to instill enthusiasm and dedication in its
store management personnel by maintaining an incentive/bonus plan for its field managers. The program is currently based on monthly sales performance and seasonal inventory loss targets. The Company
believes that this program effectively creates incentives for its senior field leaders
and aligns their interests with the financial goals of the Company. The Company evaluates the selling and fitting room experience, visual merchandising standards, and the operational execution of
running a productive store. Stores are required to meet or exceed established store standards to ensure the quality of the customers' overall in-store experience.
The
Company typically employs between 4,000 and 5,000 full- and part-time store sales associates, depending on the Company's seasonal needs. The Company has store operating policies and
procedures and efficient point-of-sale ("POS") terminals and an in-store training program for new store employees. Detailed product descriptions are also provided to sales associates to enable them to
gain familiarity with product offerings. The Company offers its sales associates a discount on the Company's apparel and accessories.
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Brand Building and Marketing
The Company believes that its New York & Company brand is among its most important assets. The Company's ability to continuously evolve
its brand to appeal to the changing needs and priorities of its target customer is a key source of its competitive advantage. The Company believes its exclusive merchandise and sub-brands, including
7
th
Avenue Design Studio, Soho Jeans and Soho Street, Eva Mendes Collection, and Gabrielle Union Collection, combined with accessories, proprietary merchandise designs, value
pricing, merchandise quality, in-store merchandise display and store service differentiate its brand from its competitors and drives strong brand recognition and endorsement by its target customers.
The Company is leveraging its existing partnerships with celebrities Eva Mendes and Gabrielle Union, and expects to partner with a third celebrity brand ambassador in the Fall of 2018 to be the face
of the Soho Jeans sub-brand. The Company believes its celebrity partnerships create an emotional connection with its customers and increase overall brand awareness.
The
Company continues to invest in the development of its brand through, among other things, direct mail, Fashion Books, in-store marketing, digital marketing, email and text messaging
programs, social mediaFacebook, Instagram, Twitter, and Pinterest, public relations programs and select advertising. The Company also makes investments to enhance the overall customer
experience through opening new stores, remodeling/refreshing existing stores, broadening its assortment online and consistently upgrading the online experience, both in desktop and mobile
applications, including tablets, and focusing on customer service. The Company consistently communicates its brand image across all
aspects of its business, including product design, store merchandising and shopping environments, channels of distribution, and marketing and advertising.
The
Company believes that it is strategically important to communicate directly with its current customer base and with potential customers on a regular basis. The Company uses its
customer database, which includes over four million customers who have made purchases within the last twelve months, to design marketing programs to attract its core customers.
Customer Credit
The Company has a credit card processing agreement with Comenity Bank, a bank subsidiary of Alliance Data Systems Corporation ("ADS"), that
provides the services of the Company's proprietary credit card program ("NY&C PLCC"). The Company allows payments on this credit card to be made at its stores as a service to its customers. ADS
owns the credit card accounts, with no recourse to the Company. All of the Company's proprietary credit cards carry the New York & Company brand. These cards provide purchasing power to
customers and an additional channel for the Company to communicate product offerings.
On
July 14, 2016, the Company entered into a Second Amended and Restated Private Label Credit Card Program Agreement, effectively dated May 1, 2016, with Comenity Bank,
which replaced the existing agreement with ADS and has a term through April 30, 2026 (the "ADS Agreement"). Pursuant to the terms of the ADS Agreement, ADS has the exclusive right to provide
private label credit cards to customers of the Company. In connection with the execution of the ADS Agreement, the Company received $40.0 million in signing bonuses. The signing bonuses were
payable in two installments, of which $17.5 million was received on July 28, 2016, and $22.5 million was received on January 10, 2017. In addition, over the 10-year term of
the ADS Agreement, the Company will receive an increased level of royalty payments based on a percentage of private label credit card sales. During fiscal year 2017 and fiscal year 2016, the Company
recognized $24.8 million and $11.0 million of revenue from royalties and the amortization of signing bonuses in connection with the ADS Agreement, respectively. This compared to
recognizing $4.2 million of marketing credits in fiscal year 2015 under the previous agreement with ADS, which were recorded as a reduction to marketing expense within selling, general and
administrative expenses.
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The Company has a strong strategic focus on its private label credit card and its Runway Rewards loyalty program to increase the number of credit card holders and
sales to such customers. NY&C PLCC sales increased 0.9% in fiscal year 2017 and accounted for 43% of total company sales, up from 41% in fiscal year 2016. NY&C PLCC customers spend two
to three times more annually than customers that are not NY&C PLCC holders.
Information Technology
Information technology is a key component of the Company's business strategy and the Company is committed to utilizing technology to enhance its
competitive position. The Company's information systems integrate data from field sales, eCommerce sales, design, merchandising, planning and distribution, and financial reporting functions. The
Company's core business systems consist of both purchased and internally developed software, operating on Microsoft,
Oracle, and IBM platforms. These systems are accessed over a company-wide network through which associates have access to many key business applications.
Sales,
cash deposit and related credit card information are electronically collected from the stores' POS terminals and eCommerce website on a daily basis. During this process, the
Company also obtains information concerning inventory receipts and transmits pricing, markdown and shipment notification data. In addition, where and as permitted by law, the Company collects customer
transaction data to grow and update its customer database. The merchandising staff and merchandise planning staff evaluate the sales and inventory information collected from the stores to make key
merchandise planning decisions, including orders and markdowns. These systems enhance the Company's ability to optimize sales while limiting markdowns, achieve planned inventory turns, reorder
successful styles, and effectively distribute new inventory to the stores.
One
of the Company's top priorities is optimizing its omni-channel retail strategy to provide a seamless and consistent customer shopping experience across store and eCommerce channels.
The Company believes that its omni-channel retail strategy has improved its customers' shopping experiences, which will continue to enhance brand image and increase customer loyalty. The Company
intends to continue to invest resources into omni-channel retail initiatives and leverage the enhanced customer shopping experience to drive additional traffic and increase sales across store and
eCommerce channels. Currently, the Company is testing in-store digital kiosks, which provide customers the ability to browse and order product assortment that is not available in the store but can be
accessed from another sales channel. The Company continues to evaluate the use of beacon technology and social shopping platforms as part of its technology innovation roadmap. The Company is investing
in additional technology and services to enhance the customer experience on its digital channels: desktop and tablet, mobile web and mobile applications.
The
Company has implemented measures to prevent and detect security breaches and cyber incidents, and continues to invest in the fortification of its information systems, networks and
infrastructure. The Company is dedicated to safeguarding the storage and transmission of customers' personal information, shopping preferences and credit card information, in addition to employee
information and the Company's financial and strategic data.
Competition
The retail and apparel industries are highly competitive. The Company has positioned its stores as a source of fashion, quality and value by
providing its customers with an appealing merchandise assortment at attractive price points generally below those of department stores and other specialty retailers. The Company competes with
traditional department stores, specialty store retailers, discount apparel stores, international retailers opening large numbers of stores in the United States, and direct marketers for, among other
things, customers, raw materials, market share, retail space, finished goods,
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sourcing
and personnel. The Company differentiates itself from its competitors on the basis of its exclusive merchandise and sub-brands, including 7
th
Avenue Design Studio, Soho
Jeans and Soho Street, Eva Mendes Collection, and Gabrielle Union Collection, combined with accessories, proprietary merchandise designs, value pricing, merchandise quality, in-store merchandise
display and store service. In fiscal year 2018, the Company expects that the development and growth of its newest brand, Fashion to Figure, will allow it to successfully compete in the plus-size
market and further differentiate its merchandise offering. The Company believes that its talented, in-house design, marketing, sourcing and production teams, in partnership with a global network of
vendors and factories provide a competitive advantage.
Seasonality
The Company views the retail apparel market as having two principal selling seasons: spring (first and second quarter) and fall (third and
fourth quarter). The Company's business experiences seasonal fluctuations in net sales and operating income, with a significant portion of its operating income typically realized during the fourth
quarter. Seasonal fluctuations also affect inventory levels. The Company must carry a significant amount of inventory, especially before the holiday season selling period in the fourth quarter and
prior to the Easter and Mother's Day holidays toward the latter part of the first quarter and beginning of the second quarter.
Intellectual Property
The Company's trademarks, including New York & Company®, NY&C®, NY Style®, Soho
New York & Company Jeans®, Lerner®, Lerner New York®, and Fashion to Figure® brands, are registered or are subject to pending trademark
applications with the United States Patent and Trademark Office and with registries of many foreign countries.
Employees and Labor Relations
As of February 3, 2018, the Company had a total of 6,789 employees of which 1,547 were full-time employees and 5,242 were part-time
employees, who are primarily store associates. The number of part-time employees fluctuates depending on the Company's seasonal needs. The collective bargaining agreement with the Local 1102 unit of
the Retail, Wholesale and Department Store Union (RWDSU) AFL-CIO is in effect through August 31, 2018. Approximately 6% of the Company's total employees are covered by collective bargaining
agreements and are primarily non-management store associates. The Company believes its relationship with its employees is good.
Government Regulation
The Company is subject to employment laws and regulations, including minimum wage requirements, intellectual property laws, consumer protection
laws and regulations (including those relating to advertising and promotions, privacy and product safety), truth-in-lending and other laws and regulations with respect to the operation of the
Company's stores and business generally, such as zoning and occupancy ordinances governing the importation and exportation of merchandise and the use of the Company's proprietary credit cards. The
Company monitors changes in these laws and believes that it is in material compliance with applicable laws with respect to these practices. Congress and many states are still considering cybersecurity
legislation that, if enacted, could impose additional obligations upon the Company. In addition, the Company is subject to Securities and Exchange Commission rules and regulations, state laws,
Sarbanes-Oxley requirements, new rules and regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, other U.S. public company regulations, and various other
requirements mandated for the textiles and apparel industries such as the Consumer Product Safety Improvement Act of 2008, California's Proposition 65 and similar state laws.
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The
majority of the Company's merchandise is manufactured by factories located outside of the United States. These products are imported and are subject to U.S. customs laws, which
impose tariffs for textiles and apparel. Any major changes in United States tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of
unilateral tariffs on imported goods, could have a material adverse effect on the Company's business, results of operations and liquidity. In addition, some of the Company's imported products are
eligible for certain
duty-advantaged programs, including but not limited to the North American Free Trade Agreement, the Andean Trade Preference Act, the U.S. Caribbean Basin Trade Partnership Act and the Caribbean Basin
Initiative.
The
U.S. government is contemplating various actions regarding trade with China, including the possibility of levying various tariffs on imports from China. The Company sources
approximately 60% of its goods from China so any tariffs or other trade restrictions impacting the import of apparel and accessories from China could have a material adverse impact on the Company.
Available Information
The Company makes available free of charge on its website,
www.nyandcompany.com,
copies of its
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as soon as reasonably practicable after filing or furnishing such material electronically with the United States
Securities and Exchange Commission. Copies of the charters of each of the Company's Audit Committee, Compensation Committee, and Nomination & Governance Committee, as well as the Company's
Corporate Governance Guidelines, Code of Business Conduct for Associates, Code of Conduct for Principal Executive Officers and Key Financial Associates, and Code of Business Conduct for Suppliers, are
also available on the website.
Item 1A. Risk Factors
A continued reduction in the volume of mall traffic could significantly reduce the Company's sales and leave
it with unsold inventory, reducing the Company's profits or creating losses.
Many of the Company's stores are located in shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those
malls. The Company's sales volume and store traffic will be adversely affected by a continued decrease in the popularity of malls or other shopping centers in which the Company's stores are located,
the closing of anchor stores important to driving
mall traffic and therefore the Company's business, a decline in popularity of other stores in the malls or shopping centers in which the Company's stores are located, or a deterioration in the
financial condition of shopping center operators or developers which could, for example, limit their ability to invest in improvements and finance tenant improvements for the Company and other
retailers. Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, competition from internet retailers, non-mall retailers and other malls where the Company
does not have stores. A continued reduction in mall traffic as a result of these or any other factors could materially adversely affect the Company's business.
If the Company is not able to respond to fashion trends in a timely manner, develop new merchandise or launch
new product lines successfully, it may be left with unsold inventory, experience decreased profits or incur losses or suffer reputational harm to its brand image.
The Company's success depends in part on management's ability to anticipate and respond to changing fashion tastes and consumer demands and to
translate market trends into appropriate, saleable product offerings. Customer tastes and fashion trends change rapidly. If the Company is unable to successfully identify or react to changing styles
or trends and misjudges the market for its
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products
or any new product lines, its sales may be lower, gross margins may be lower and the Company may be faced with a significant amount of unsold finished goods inventory. In response, the
Company may be forced to increase its marketing promotions or price markdowns, which could have a material adverse effect on its financial condition and results of operations. The Company's brand
image may also suffer if customers believe that it is no longer able to offer the latest fashions. The Company's Eva Mendes Collection and Gabrielle Union Collection are affiliated with celebrities.
If the Company experiences an unplanned interruption in the collaboration with Eva Mendes or Gabrielle Union, for any reason, it may result in a decrease in net sales and profitability.
Economic conditions may cause a decline in business and consumer spending which could adversely affect the
Company's business and financial performance.
The Company's business is impacted by general economic conditions and their effect on consumer confidence and the level of consumer spending on
the merchandise the Company offers. These economic factors include recessionary cycles, interest rates, currency exchange rates,
economic growth, wage rates, unemployment levels, energy prices, availability of consumer credit, and consumer confidence, among others. Economic conditions could negatively affect consumer purchases
of the Company's merchandise and adversely impact the Company's business, financial condition and results of operations. Economic conditions could also negatively impact the Company's merchandise
vendors and their ability to deliver products and sustain profits and sufficient liquidity. To counteract potential cash flow problems, the Company's merchandise vendors may require letters of credit
or attempt to increase prices, pass through increased costs or seek some other form of relief, which may adversely impact the Company's business, financial condition and results of operations. In
addition, economic conditions could negatively impact the Company's retail landlords and their ability to maintain their shopping centers in a first-class condition and otherwise perform their
obligations, which could negatively impact traffic in the Company's stores leading to a decrease in sales and profitability.
The raw materials used to manufacture the Company's products and its distribution and labor costs are subject
to availability constraints and price volatility, which could result in increased costs.
The raw materials used to manufacture the Company's products are subject to availability constraints and price volatility caused by high demand
for petroleum-based synthetic fabrics, weather, supply conditions, government regulations, economic climate and other unpredictable factors. The Company sources nearly all of its merchandise from
three countries, with China, Vietnam and Indonesia representing approximately 97% of all merchandise purchases during fiscal year 2017. Any one of these countries could experience increased
inflationary pressure, which could lead to increased costs for the Company. In addition, the Company's transportation and labor costs are subject to price volatility caused by the price of oil, supply
of labor, governmental regulations, economic climate and other unpredictable factors. Increases in demand for, or the price of, raw materials, distribution services and labor, could have a material
adverse effect on the Company's business, financial condition and results of operations.
Fluctuations in comparable store sales in any one of the Company's channels, including New York &
Company stores, Outlets and eCommerce, or fluctuations in the Company's results of operations could cause the price of the Company\'s common stock to decline substantially.
A store is included in the comparable store sales calculation after it has completed 13 full fiscal months of operations from the store's
opening date or once it has been reopened after remodeling if the gross square footage did not change by more than 20%. Sales from the Company's eCommerce store are included in comparable store sales.
In addition, recognized royalty revenue and the amortization of signing bonuses received in connection with the new ADS Agreement are also included in comparable store sales.
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The
Company's results of operations have fluctuated in the past and can be expected to fluctuate in the future. The Company cannot ensure that it will be able to achieve consistency in
its future sales and cannot ensure a high level of comparable store sales in the future.
The
Company's comparable store sales and results of operations are affected by a variety of factors, including but not limited to:
-
-
fashion trends;
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-
mall traffic;
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-
the Company's ability to effectively market to its customers and drive traffic both online and into its stores;
-
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calendar shifts of holiday or seasonal periods;
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the effectiveness of the Company's supply chain and inventory management;
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changes in the Company's merchandise mix;
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the timing of promotional events;
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weather conditions;
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changes in general economic conditions and consumer spending patterns;
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the Company's ability to retain, recruit and train qualified personnel; and
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actions of competitors or mall anchor tenants.
If
the Company's future comparable store sales fail to meet expectations, then the market price of the Company's common stock could decline substantially.
The Company's net sales, operating income and inventory levels fluctuate on a seasonal basis and decreases in
sales or margins during the Company's peak seasons could have a disproportionate effect on its overall financial condition and results of operations.
The Company's business experiences seasonal fluctuations in net sales and operating income, with a significant portion of its operating income
typically realized during its fourth quarter. Any decrease in sales or margins during this period could have a disproportionate effect on
the Company's financial condition and results of operations. For further information related to seasonality and quarterly results, please refer to Note 14, "Quarterly Results," in the Notes to
Consolidated Financial Statements appearing elsewhere in this Annual Report on Form 10-K.
Seasonal
fluctuations also affect the Company's inventory levels. The Company must carry a significant amount of inventory, especially before the holiday season selling period in the
fourth quarter and prior to the Easter and Mother's Day holidays toward the latter part of the first quarter and beginning of the second quarter. If the Company is not successful in selling its
inventory, it may have to write down the value of its inventory or sell it at significantly reduced prices or the Company may not be able to sell such inventory at all, which could have a material
adverse effect on the Company's financial condition and results of operations.
Since the Company relies significantly on international sources of production, it is at risk from a variety
of factors that could leave it with inadequate or excess inventories, resulting in decreased profits or losses.
The Company purchases apparel and accessories in international markets, with a significant portion coming from China, Vietnam and Indonesia. Any
major changes in United States tax policy or trade relations, such as the disallowance of tax deductions for imported merchandise or the imposition of unilateral tariffs on imported goods, could have
a material adverse effect on the Company's business,
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results
of operations and liquidity. The Company does not have any long-term merchandise supply contracts and many of its imports are subject to existing or potential duties and tariffs. The Company
competes with other companies for production facilities.
The
U.S. government is contemplating various actions regarding trade with China, including the possibility of levying various tariffs on imports from China. The Company sources
approximately 60% of its goods from China so any tariffs or other trade restrictions impacting the import of apparel and accessories from China could have a material adverse impact on the Company.
The
Company also faces a variety of other risks generally associated with doing business in international markets and importing merchandise from abroad, such
as:
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-
political or labor instability in countries where vendors are located;
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-
political or military conflict involving the United States, which could cause a delay in the transportation of the Company's products and an
increase in transportation costs;
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-
heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading
to delays in deliveries or impoundment of goods for extended periods or could result in decreased scrutiny by customs officials for counterfeit goods, leading to lost sales and damage to the
reputation of the Company's brand;
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natural disasters, disease epidemics and health related concerns, which could result in closed factories, reduced workforces, scarcity of raw
materials and scrutiny or embargoing of goods produced in infected areas;
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the migration and development of manufacturers, which can affect where the Company's products are or will be produced;
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imposition of regulations relating to imports and the Company's ability to adjust in a timely manner to changes in trade regulations, which
among other things, could limit the Company's ability to source products from countries that have the labor and expertise needed to manufacture its products on a cost-effective basis;
-
-
imposition of duties, taxes and other charges on imports;
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-
labor disputes, such as labor strikes or unrest or disruptions at the ports through which the Company imports its goods; and
-
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currency volatility.
Any
of the foregoing factors, or a combination thereof, could have a material adverse effect on the Company's business.
The Company's manufacturers may be unable to manufacture and deliver products in a timely manner or meet its
quality standards, which could result in lost sales, cancellation charges or excessive markdowns.
The Company purchases apparel and accessories directly from third-party manufacturers and in some instances from importers. The Company utilized
three major apparel agents, which together represented approximately 74% of the Company's merchandise purchases made during fiscal year 2017; however, no individual factory represented more than
approximately 6% of the Company's merchandise purchases. The Company expects to continue to utilize three major apparel agents for a large portion of its merchandise in fiscal year 2018, while
maintaining a broad factory base, in order to reduce costs, maximize production and logistics assistance, and increase speed to market without sacrificing quality. Similar to most other specialty
retailers, the Company has short selling seasons for much of its inventory. Factors outside of the Company's control, such as manufacturing or shipping delays or
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quality
problems, could disrupt merchandise deliveries and result in lost sales, product recalls, cancellation charges or excessive markdowns.
The Company plans to open a select number of new stores, while relocating and remodeling/refreshing a portion
of its existing store base annually. The Company may not be able to successfully open new stores, or relocate or remodel/refresh existing stores on a timely basis or at all. In addition, opening new
stores and relocating or remodeling/refreshing existing stores may strain its resources and cause the performance of its existing stores to suffer.
The Company plans to open a select number of new stores, while relocating and remodeling/refreshing a portion of its existing store base
annually. The success of this strategy is dependent upon, among other things, the identification of suitable markets and sites for store locations, the negotiation of acceptable lease and renewal
terms, including the renegotiation of existing rent concessions, the hiring, training and retention of competent sales personnel, and the effective management of inventory to meet the needs of new and
existing stores on a timely basis. To the extent that the Company's new store openings are in existing markets, the Company may experience reduced net sales volumes in existing stores in those
markets. The Company expects to fund its new stores through cash flow from operations and, if necessary, by borrowings under its revolving credit facility; however, if the Company experiences a
decline in performance, the Company may slow or discontinue store openings. The Company may not be able to successfully execute any of these strategies on a timely basis. If the Company fails to
successfully implement these strategies, its financial condition and results of operations would be adversely affected.
In
addition, continued consolidation in the commercial retail real estate market could affect the Company's ability to successfully negotiate favorable lease and renewal terms for its
stores in the future. Should significant consolidation continue, a large portion of the Company's store base could be concentrated with one or a few entities that could then be in a position to
dictate unfavorable terms due to their significant negotiating leverage. If the Company is unable to negotiate favorable lease terms with these entities, this could affect its ability to profitably
operate its stores, which could adversely affect the Company's financial condition and results of operations.
Because of the Company's focus on keeping its inventory at the forefront of fashion trends, extreme and/or
unseasonable weather conditions could have a disproportionately large effect on the Company's business, financial condition and results of operations because it would be forced to mark down inventory.
Extreme weather conditions in the areas in which the Company's stores are located could have a material adverse effect on the Company's
business, financial condition and results of operations. For example, heavy snowfall or other extreme weather conditions over a prolonged period might make it difficult for the Company's customers to
travel to its stores. The Company's business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool
weather during the summer season could render a portion of the Company's inventory incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions could adversely
affect the Company's business, financial condition and results of operations.
If third parties who manage some aspects of the Company's business do not adequately perform their functions,
the Company might experience disruptions in its business, leaving it with inadequate or excess inventories, among other adverse effects, resulting in decreased profits or losses.
L Brands handles the distribution of the Company's merchandise through its distribution facility in Columbus, Ohio pursuant to a transition
services agreement. The efficient operation of the Company's stores is dependent on its ability to distribute merchandise to locations throughout the United States in a timely manner. The Company
depends on L Brands to receive, sort, pack and distribute substantially
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all
of the Company's merchandise. As part of the transition services agreement, L Brands contracts with third-party transportation companies to deliver the Company's merchandise from international
ports to their warehouses and to the Company's stores. Any failure by any of these third parties to respond adequately to the Company's warehousing and distribution needs would disrupt the Company's
operations and negatively impact its profitability.
Additional
services were also provided by L Brands and its subsidiaries and affiliates pursuant to the transition services agreement. IPS assisted the Company with its monitoring of
country of origin and point of fabrication compliance for U.S. Customs up until September 2017, at which point the Company launched the Compliance Program. Since the launch of the Compliance Program,
the Company's in-house compliance team confirms, in partnership with various third party providers, country of origin and point of fabrication compliance for U.S. Customs. Any failure of the Company,
or its third party providers, to fulfill their obligations under the Compliance Program, could disrupt the Company's operations and negatively impact its profitability. As of February 3, 2018,
the sourcing of Fashion to Figure merchandise was not monitored under the Compliance Program which may result in a heightened risk of disruptions in the Company's business. The Company plans to
incorporate Fashion to Figure into the Compliance Program during fiscal year 2018.
Under
the transition services agreement, as amended, these services will terminate upon the earliest of the following: (i) 24 months from the date that L Brands
notifies the Company that L Brands wishes to terminate the services; (ii) 24 months from the date that the Company notifies L Brands that the Company wishes to terminate
the services; (iii) 60 days after the Company has given notice to L Brands that L Brands has failed to perform any material obligations under the agreement and such failure shall be
continuing; (iv) 30 days after L Brands has given notice to the Company that the Company has failed to perform any material obligations under the agreement and such failure shall be
continuing; (v) within 75 days of receipt of the annual proposed changes to the agreement schedules which outline the cost methodologies and estimated costs of the services for the
coming year, if such proposed changes would
result in a significant increase in the amount of service costs that the Company would be obligated to pay; (vi) 15 months after a change of control of the Company, at the option of L
Brands; or (vii) upon reasonable notice under the prevailing circumstances by the Company to L Brands after a disruption of services due to force majeure that cannot be remedied or restored
within a reasonable period of time. The Company believes that these services are provided at a competitive price and the Company anticipates continuing to use L Brands for these services. The
Company's failure to successfully replace the services could have a material adverse effect on the Company's business and prospects.
The
Company uses a third party for its eCommerce operations, including order management, order fulfillment, customer care, and channel management services. A failure by the third party
to adequately manage the Company's eCommerce operations may negatively impact the Company's profitability.
The
Company may rely on third parties for the implementation and/or management of certain aspects of its information technology infrastructure. Failure by any of these third parties to
implement and/or manage the Company's information technology infrastructure effectively could disrupt its operations and negatively impact its profitability.
The
Company relies on a third party to administer its proprietary credit card program. The inability of the administration company to effectively service the credit card program could
materially limit credit availability for the Company's customers, which would negatively impact the Company's revenues and, consequently, its profitability.
A
work stoppage resulting from, among other things, a dispute over a collective bargaining agreement covering employees of a third party relied on by the Company or employees of the
Company, may cause disruptions in the Company's business and negatively impact its profitability.
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The Company's marketing efforts rely upon the use of customer information. Restrictions on the availability
or use of customer information could adversely affect the Company's marketing program, which could result in lost sales and a decrease in profits.
The Company uses its customer database to market to its customers. Any limitations imposed on the use of such consumer data, whether imposed by
federal or state governments or business partners, could have an adverse effect on the Company's future marketing
activity. In addition, while the Company is compliant with Payment Card Industry Data Security Standards ("PCI DSS"), to the extent the Company's or its business partners' security procedures and
protection of customer information prove to be insufficient or inadequate, the Company may become subject to litigation or other claims, which could expose it to liability and cause damage to its
reputation or brand.
The Company relies on its manufacturers to use acceptable ethical business practices, and if they fail to do
so, the New York & Company brand name could suffer reputational harm and the Company's sales could decline or its inventory supply could be interrupted.
The Company requires its manufacturers to operate in compliance with applicable laws, rules and regulations regarding working conditions,
employment practices, product quality and safety, and environmental compliance. Additionally, the Company imposes upon its business partners operating guidelines that require additional obligations in
order to promote ethical business practices. The Company's in-house compliance team, staff of third party inspection services companies, and the staff of the Company's non-exclusive buying agents and
importers periodically visit and monitor the operations of the Company's manufacturers to determine compliance. However, the Company does not control its manufacturers or their labor and other
business practices. If one of the Company's manufacturers violates labor or other laws or implements labor or other business practices that are generally regarded as unethical in the United States,
the shipment of finished products to the Company could be interrupted, orders could be canceled, relationships could be terminated and the Company's reputation could be damaged. Any of these events
could have a material adverse effect on the Company's revenues and, consequently, its results of operations.
The Company is subject to numerous laws and regulations, including federal and state minimum wage laws, that
could affect its operations. Changes in such laws and regulations could affect its profitability and impact the operation of its business through delayed shipments of its goods, increased costs, fines
or penalties.
The Company is subject to employment laws and regulations, including minimum wage requirements, intellectual property laws (including those
relating to advertising and promotions, privacy and product safety), truth-in-lending and other laws and regulations with respect to the operation of the Company's stores and business generally, such
as zoning and occupancy ordinances governing the importation and exportation of merchandise and the use of the Company's proprietary credit cards. In addition, the Company is subject to Securities and
Exchange Commission rules and regulations, state laws, Sarbanes-Oxley requirements, new rules and regulations issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, other
U.S. public company regulations, and various other requirements mandated for the textiles and apparel industries such as the Consumer Product Safety Improvement Act of 2008, California's Proposition
65 and similar state laws. Although the Company monitors changes in these laws, if these laws change without the Company's knowledge, or are violated by the Company's employees, importers, buying
agents, manufacturers or distributors, the Company could experience delays in shipments and receipt of goods or be subject to fines or other
penalties under the controlling laws or regulations, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
On
April 4, 2016, the State of California passed legislation raising the hourly minimum wage to $15 by the end of year 2022. On the same day, the State of New York enacted similar
legislation increasing the hourly minimum wage to $15 in New York City by the end of year 2018, and in other
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parts
of the state by the end of year 2021. Such legislation requires mandatory annual increases to the hourly minimum wage in the interim. As a result, on January 1, 2017 and again on
January 1, 2018, the Company increased the hourly minimum wage in California, New York City, and other parts of New York State, as well as a number of other states, as required. In
addition, Congress and many states are still considering cybersecurity legislation that, if enacted, could impose additional obligations upon the Company.
Compliance
with changes in these laws or regulations, including increasing minimum wage requirements throughout the United States, could result in increased costs to the Company and
could impact operational efficiency, which could have a material adverse effect on the Company's financial condition and results of operations.
The Company may be unable to compete favorably in the highly competitive retail industry, and if it loses
customers to its competitors, its sales could decrease causing a decrease in profits or losses.
The sale of apparel and accessories is highly competitive. Increased competition could result in price reductions, increased marketing
expenditures and loss of market share, all of which could have a material adverse effect on the Company's financial condition and results of operations.
The
Company competes for sales with a broad range of other retailers, including individual and chain fashion specialty stores, department stores, and international retailers opening
large numbers of stores in the United States. In addition to the traditional store-based retailers, the Company also competes with direct marketers that sell similar lines of merchandise and target
customers through catalogs and eCommerce.
Some
of the Company's competitors may have greater financial, marketing and other resources available to them. In many cases, the Company's competitors sell their products in stores that
are located in the same shopping malls as the Company's stores. In addition to competing for sales, the Company competes for favorable site locations and lease terms in shopping malls.
The Company may be unable to protect its trademarks, which could diminish the value of its brand.
The Company's trademarks are important to its success and competitive position. The Company's major trademarks are New York & Company,
NY&C, NY Style, Soho New York & Company Jeans, Lerner, and Fashion to Figure, and are protected in the United States and in some cases internationally. The Company engages in the following
steps to protect and enforce its trademarks: file and prosecute trademark applications for registration in those countries where the marks are not yet registered; respond to office actions and
examining attorneys in those countries where the marks are not yet registered; maintain its trademark portfolio in the United States; file statements of use, renewal documents, assignments, policing
of marks and third party infringements; and handle the initiation and defense of opposition and/or cancellation proceedings. The Company is susceptible to others imitating the Company's products and
infringing on the Company's intellectual property rights. Imitation or counterfeiting of the Company's products or other infringement of the Company's intellectual property rights could diminish the
value of its brand or otherwise adversely affect its revenues. The actions the Company has taken to establish and protect its trademarks may not be adequate to prevent imitation of its products by
others or to prevent others from seeking to invalidate its trademarks or block sales of its products as a violation of the trademarks and intellectual property rights of others. In addition, others
may assert rights in, or ownership of, trademarks and other intellectual property rights of the Company or in marks that are similar to the Company's or marks that the Company licenses and/or markets
and the Company may not be able to successfully resolve these types of conflicts to its satisfaction. In some cases, there may be trademark owners who have prior rights to the Company's marks because
the laws of certain countries may not protect intellectual property rights to the same extent as do the laws of the United States. In other cases, there may be holders who have prior rights
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similar marks. Failure to protect the Company's trademarks could result in a material adverse effect on the Company's business.
The Company relies on its information technology infrastructure, which includes third party and internally
developed software, and purchased or leased hardware that support the Company's information technology, cybersecurity and various business processes. The Company's business, reputation and brand image
could suffer if its infrastructure fails to perform as intended.
The Company relies on purchased or leased hardware and software licensed from third parties or internally developed in order to manage its
business. The Company's ability to maintain and upgrade its information technology infrastructure is critical to the success of its business and the continued enhancement of its omni-channel retail
strategy. This hardware and software may not continue to be available on commercially reasonable terms or at all. Any disruptions to the Company's infrastructure or loss of the right to use any of
this hardware or software could affect the Company's operations, which could negatively affect the Company's business until corrected or until equivalent technology is either developed by the Company
or, if available, is identified, obtained and integrated. In addition, the software underlying the Company's operations can contain undetected errors. The Company may be forced to modify its
operations until such problems are corrected and, in some cases, may need to implement enhancements to correct errors that it does not detect. Problems with the software underlying the Company's
operations could result in loss of revenue, unexpected expenses and capital costs, diversion of resources, loss of market share and damage to the Company's reputation which could adversely affect the
Company's business, financial condition and results of operations.
Furthermore,
the Company's information systems initiatives and omni-channel retail strategy are complex and require managerial and financial expertise to implement successfully. If the
Company is unable to successfully implement new information system initiatives and execute its omni-channel retail strategy, or if the Company's customers are not provided with the intended benefits,
the Company's financial condition and results of operations could be adversely affected.
The
Company and third parties that manage portions of the Company's secure data are subject to cybersecurity risks and incidents. The Company's business involves the storage and
transmission of customers' personal information, shopping preferences and credit card information, in addition to employee information and the Company's financial and strategic data. The protection of
the Company's customer, employee and Company data is vitally important to the Company. While the Company has implemented measures to prevent and detect security breaches and cyber incidents, and
continues to invest in the fortification of its information systems, networks and infrastructure, any failure of these measures and any failure of third parties that assist the Company in managing its
secure data could adversely affect the Company's business, financial condition and results of operations.
Because
the Company's brand is associated with all of its New York & Company merchandise in addition to its stores, the Company's success depends heavily on the value associated
with its brand. The New York & Company name is integral to the Company's existing business, as well as to the implementation of its strategy for growing and expanding its business. The New
York & Company brand could be adversely affected if the Company's public image or reputation were to be tarnished, which could result in a material adverse effect on the Company's business. If
the value associated with the Company's brand were to diminish, the Company's sales could decrease, causing decreased profits or losses.
Risks associated with the Company's eCommerce store.
The Company operates an online store at
www.nyandcompany.com
, which is integral to the success
of the Company's omni-channel retail strategy and where it sells its largest assortment of its merchandise. The Company's eCommerce operations are subject to numerous risks, including
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unanticipated
operating problems, reliance on third-party computer hardware and software providers, system failures, cybersecurity incidents and the need to invest in additional computer systems. The
eCommerce operations also involve other risks that could have an impact on the Company's results of operations, including but not limited to diversion of sales from the Company's other stores, rapid
technological change, liability for online content, credit card fraud and risks related to the failure of the computer systems that operate the website and its related support systems. If the Company
is unable to successfully address and respond to these risks, revenues could be lost, costs could increase, and the Company's reputation may be damaged.
If the Company is unable to successfully develop and maintain a relevant and reliable omni-channel shopping
experience for its customers, the Company's reputation could be adversely affected, sales could be lost and its profits could decrease.
One of the Company's long-term growth initiatives is the expansion of the omni-channel shopping experience it provides customers through the
integration of its retail stores, eCommerce store and mobile applications. Omni-channel retailing is rapidly evolving and the Company's success depends on its ability to anticipate and implement
innovations in customer experience and logistics in order to appeal to customers who increasingly rely on multiple channels to meet their shopping needs. If the Company is unable to innovate and
successfully implement its omni-channel initiatives or does not meet customer expectations, revenues could be lost, costs could increase, and the Company's reputation may be damaged.
The Company is subject to customer payment-related risks that could increase its operating costs, expose it
to fraud or theft, subject it to potential liability and potentially disrupt its business.
The Company accepts payments using a variety of methods, including cash, checks, credit and debit cards, PayPal, its private label credit cards
and gift cards. Acceptance of these payment options subjects the Company to rules, regulations, contractual obligations and compliance requirements, including payment network rules and operating
guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more
difficult or costly. The Company completed the implementation of the chip-and-PIN (or signature) technology in all of its stores and received certification during the third quarter of fiscal year
2016. The payment methods that the Company offers also subject it to potential fraud and theft by criminals. As a result, a data breach could have a material adverse effect on the Company's brand
image, results of operations and financial condition.
The covenants in the Company's revolving credit facility impose restrictions that may limit its operating and
financial flexibility.
The Company's credit facility contains a number of significant restrictions and covenants that limit its ability
to:
-
-
incur additional indebtedness;
-
-
declare dividends, make distributions or redeem or repurchase capital stock, including the Company's common stock, or to make certain other
restricted payments or investments;
-
-
sell assets, including capital stock of restricted subsidiaries;
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-
agree to payment restrictions affecting the Company's restricted subsidiaries;
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-
consolidate, merge, sell or otherwise dispose of all or substantially all of the Company's assets;
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-
incur liens;
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-
alter the nature of the Company's business;
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enter into sale/leaseback transactions;
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-
conduct transactions with affiliates; and
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-
designate the Company's subsidiaries as unrestricted subsidiaries.
In
addition, the Company's credit facility include other and more restrictive covenants and prohibit it from prepaying its other indebtedness while indebtedness under its credit facility
is outstanding. The agreement governing the Company's credit facility also requires it to achieve specified financial and operating results and maintain compliance with specified financial ratios. The
Company's ability to comply with these ratios may be affected by events beyond the Company's control.
The
restrictions contained in the agreement governing the Company's credit facility could:
-
-
limit the Company's ability to plan for or react to market conditions or meet capital needs or otherwise restrict its activities or business
plans; and
-
-
adversely affect the Company's ability to finance its operations, strategic acquisitions, investments or other capital needs or to engage in
other business activities that would be in the Company's interest.
A
breach of any of these restrictive covenants or the Company's inability to comply with the required financial ratios could result in a default under the agreement governing its credit
facility. If a default occurs, the lender under the credit facility may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable.
The
lender also has the right in these circumstances to terminate any commitments the lender has to provide further borrowings. If the Company is unable to repay outstanding borrowings
when due, the lender under the credit facility also has the right to proceed against the collateral, including the Company's available cash, granted to the lender to secure the indebtedness.
The Company may lose key personnel.
The Company believes that it has benefited from the leadership and experience of its Chief Executive Officer, Gregory J. Scott, and its other
key executives. The loss of the services of any of these individuals could have a material adverse effect on the business and the prospects of the
Company. Competition for key personnel in the retail industry is intense and the Company's future success will depend upon its ability to retain, recruit and train qualified personnel.
Provisions in the Company's restated certificate of incorporation and Delaware law may delay or prevent the
Company's acquisition by a third party.
The Company's restated certificate of incorporation contains a "blank check" preferred stock provision. Blank check preferred stock enables the
Company's Board of Directors, without stockholders' approval, to designate and issue additional series of preferred stock with such dividend, liquidation, conversion, voting or other rights, including
the right to issue convertible securities with no limitation on conversion, as the Company's Board of Directors may determine, including rights to dividends and proceeds in a liquidation that are
senior to the common stock.
These
provisions may make it more difficult or expensive for a third party to acquire a majority of the Company's outstanding voting common stock. The Company is also subject to certain
provisions of Delaware law which could delay, deter or prevent the Company from entering into a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in the
Company's stockholders receiving a premium over the market price for their stock.
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