Item 2 - Management’s Discussion
and Analysis of Financial Condition and
Results of Operations
August 4, 2018 and July 29, 2017
Overview
Management’s Discussion and Analysis of Financial Condition
and Results of Operations provides information that the Company’s management believes necessary to achieve an understanding
of its financial statements and results of operations. To the extent that such analysis contains statements which are not of a
historical nature, such statements are forward-looking statements, which involve risks and uncertainties. These risks include,
but are not limited to, changes in the competitive environment, availability of new products, change in vendor policies or relationships,
general economic factors in markets where the Company’s merchandise is sold; and other factors discussed in the Company’s
filings with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition
and results of operations should be read in conjunction with the interim condensed consolidated financial statements and related
notes included elsewhere in this report and the audited consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended February 3, 2018.
The Company operates in two reportable segments: fye and etailz.
The fye segment operates a chain of retail entertainment stores and e-commerce sites,
www.fye.com
and
www.secondspin.com
.
As of August 4, 2018, the fye segment operated 241 stores totaling approximately 1.3 million square feet in the United States,
the District of Columbia and the U.S. Virgin Islands. fye stores offer predominantly entertainment products. The etailz segment
is a leading digital marketplace retailer and generates substantially all of its revenue through Amazon Marketplace. The Company’s
business is seasonal in nature, for both segments, with the peak selling period being the holiday season which falls in the Company’s
fourth fiscal quarter.
The Company’s results have been, and will continue to
be, contingent upon management’s ability to understand trends and to manage the business in response to those trends and
general economic trends. Management monitors a number of key performance indicators to evaluate its performance, including:
Net sales and comparable store net sales:
The fye segment
measures the rate of comparable store net sales change. A store is included in comparable store net sales calculations at the beginning
of its thirteenth full month of operation. Stores relocated, expanded or downsized are excluded from comparable store sales if
the change in square footage is greater than 20% until the thirteenth full month following relocation, expansion or downsizing.
Closed stores that were open for at least thirteen months are included in comparable store sales through the month immediately
preceding the month of closing. The fye segment further analyzes net sales by store format and by product category. The etailz
segment measures total year over year sales growth by product category and evaluates product sales by supplier.
Cost of Sales and Gross Profit
: Gross profit is calculated
based on the cost of product in relation to its retail selling value. Changes in gross profit are impacted primarily by net sales
levels, mix of products sold, vendor discounts and allowances, shrinkage, obsolescence and distribution costs. Distribution expenses
include those costs associated with receiving, inspecting & warehousing merchandise, Amazon fulfillment fees, and costs associated
with product returns to vendors.
Selling, General and Administrative (“SG&A”)
Expenses:
Included in SG&A expenses are payroll and related costs, occupancy charges, general operating and overhead expenses
and depreciation charges (excluding
those related to distribution operations, see Note 5 to the
Condensed Consolidated Financial Statements in this Form 10-Q). SG&A expenses also include fixed assets write-offs associated
with store closures, if any, and miscellaneous income and expense items, other than interest.
Balance Sheet and Ratios:
The Company views cash, net
inventory investment (merchandise inventory less accounts payable) and working capital (current assets less current liabilities)
as relevant indicators of its financial position. See Liquidity and Capital Resources for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen and Twenty-six Weeks Ended August
4, 2018
Compared to the Thirteen and Twenty-six
Weeks Ended July 29, 2017
Segment Highlights
($ in thousands):
|
|
Thirteen Weeks Ended
|
|
|
Twenty-six Weeks Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
50,545
|
|
|
$
|
58,958
|
|
|
$
|
104,608
|
|
|
$
|
123,902
|
|
etailz
|
|
|
51,629
|
|
|
|
43,521
|
|
|
|
94,169
|
|
|
|
80,544
|
|
Total Company
|
|
$
|
102,174
|
|
|
$
|
102,479
|
|
|
$
|
198,777
|
|
|
$
|
204,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
20,634
|
|
|
$
|
25,085
|
|
|
$
|
42,905
|
|
|
$
|
51,995
|
|
etailz
|
|
|
11,539
|
|
|
|
10,085
|
|
|
|
20,956
|
|
|
|
19,480
|
|
Total Company
|
|
$
|
32,173
|
|
|
$
|
35,170
|
|
|
$
|
63,861
|
|
|
$
|
71,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
(6,629
|
)
|
|
$
|
(5,467
|
)
|
|
$
|
(12,001
|
)
|
|
$
|
(9,853
|
)
|
etailz
|
|
|
(2,760
|
)
|
|
|
98
|
|
|
|
(5,547
|
)
|
|
|
(723
|
)
|
Total Company
|
|
$
|
(9,389
|
)
|
|
$
|
(5,369
|
)
|
|
$
|
(17,548
|
)
|
|
$
|
(10,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of etailz Income (Loss) from Operations to etailz Adjusted Income (Loss) from Operations
|
etailz income (loss) fom operations
|
|
$
|
(2,760
|
)
|
|
$
|
98
|
|
|
$
|
(5,547
|
)
|
|
$
|
(723
|
)
|
Acquisition related intangibles amortization
|
|
|
972
|
|
|
|
965
|
|
|
|
1,944
|
|
|
|
1,943
|
|
Acquisition related compensation expense, net of contingency benefit
|
|
|
1,118
|
|
|
|
(319
|
)
|
|
|
2,240
|
|
|
|
583
|
|
etailz
adjusted income (loss) from operations
(1)
|
|
$
|
(670
|
)
|
|
$
|
744
|
|
|
$
|
(1,363
|
)
|
|
$
|
1,803
|
|
(1)
In
addition to the results of operations determined in accordance with generally accepted accounting principles in the United
States (“U.S. GAAP”), we reported non-GAAP adjusted operating income for the etailz segment as shown above.
Total Revenue.
The following table
sets forth a year-over-year comparison of the Company’s total revenue:
|
|
Thirteen
Weeks Ended
|
|
|
Change
|
|
|
Twenty-six
Weeks Ended
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4,
2018
|
|
|
July 29,
2017
|
|
|
$
|
|
|
%
|
|
|
August 4,
2018
|
|
|
July 29,
2017
|
|
|
$
|
|
|
%
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye revenue
|
|
$
|
50,545
|
|
|
|
58,958
|
|
|
$
|
(8,413
|
)
|
|
|
-14.3
|
%
|
|
$
|
104,608
|
|
|
|
123,902
|
|
|
$
|
(19,294
|
)
|
|
|
-15.6
|
%
|
etailz revenue
|
|
|
51,629
|
|
|
|
43,521
|
|
|
|
8,108
|
|
|
|
18.6
|
%
|
|
|
94,169
|
|
|
|
80,544
|
|
|
|
13,625
|
|
|
|
16.9
|
%
|
Total revenue
|
|
$
|
102,174
|
|
|
$
|
102,479
|
|
|
$
|
(305
|
)
|
|
|
-0.3
|
%
|
|
$
|
198,777
|
|
|
$
|
204,446
|
|
|
$
|
(5,669
|
)
|
|
|
-2.8
|
%
|
Total revenue decreased 0.3% and 2.8% for the thirteen and twenty-six
weeks ended August 4, 2018 as compared to the same period last year.
fye Segment
The following table sets forth a period over period comparison
of net fye sales by merchandise category:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
|
|
|
Twenty-six Weeks Ended
|
|
|
Change
|
|
|
|
|
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye net sales
|
|
$
|
49,410
|
|
|
$
|
57,393
|
|
|
$
|
(7,983
|
)
|
|
|
-13.9
|
%
|
|
|
-6.7
|
%
|
|
$
|
102,102
|
|
|
$
|
121,121
|
|
|
$
|
(19,019
|
)
|
|
|
-15.7
|
%
|
|
|
-7.6
|
%
|
Other revenue
|
|
|
1,135
|
|
|
|
1,565
|
|
|
|
(430
|
)
|
|
|
-27.5
|
%
|
|
|
|
|
|
|
2,506
|
|
|
|
2,781
|
|
|
|
(275
|
)
|
|
|
-9.9
|
%
|
|
|
|
|
Total revenue
|
|
$
|
50,545
|
|
|
$
|
58,958
|
|
|
$
|
(8,413
|
)
|
|
|
-14.3
|
%
|
|
|
|
|
|
$
|
104,608
|
|
|
$
|
123,902
|
|
|
$
|
(19,294
|
)
|
|
|
-15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of fye net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trend/Lifestyle
|
|
|
40.9
|
%
|
|
|
37.0
|
%
|
|
|
|
|
|
|
|
|
|
|
-1.7
|
%
|
|
|
39.3
|
%
|
|
|
34.6
|
%
|
|
|
|
|
|
|
|
|
|
|
0.4
|
%
|
Video
(1)
|
|
|
29.0
|
%
|
|
|
31.2
|
%
|
|
|
|
|
|
|
|
|
|
|
-9.9
|
%
|
|
|
30.5
|
%
|
|
|
33.6
|
%
|
|
|
|
|
|
|
|
|
|
|
-12.6
|
%
|
Music
|
|
|
18.4
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
-14.4
|
%
|
|
|
18.5
|
%
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
-17.4
|
%
|
Electronics
|
|
|
11.7
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
1.4
|
%
|
|
|
11.7
|
%
|
|
|
10.7
|
%
|
|
|
|
|
|
|
|
|
|
|
2.3
|
%
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Count:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241
|
|
|
|
269
|
|
|
|
(28
|
)
|
|
|
-10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Square footage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,338,638
|
|
|
|
1,497,500
|
|
|
|
(158,862
|
)
|
|
|
-10.6
|
%
|
|
|
|
|
|
(1)
|
Includes Video Games category, which represented 0.1% of fye fiscal second quarter net sales. Fiscal 2017 data was adjusted
to include this immaterial reclassification.
|
Net sales.
Net sales decreased 13.9% and 15.7% during
the thirteen weeks and twenty-six weeks ended August 4, 2018 as compared to the same period last year. The decline in net sales
resulted from a 10.4% decline in total stores in operation and a 6.7% and 7.6% decline in comparable store net sales for the thirteen
and twenty-six weeks ended August 4, 2018, respectively.
Trend/Lifestyle:
Comparable store net sales in the trend/lifestyle category decreased
1.7% during the thirteen weeks ended August 4, 2018 and increased 0.4% for the twenty-six weeks ended August 4, 2018, impacted
by fidget spinners sales which represented 4% of sales in the second quarter last year. Trend/lifestyle products represented 40.9%
and 39.3% of total net sales for the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared to 37.0% and 34.6%
in the comparable periods last year. The Company continues to take advantage of opportunities to strengthen its selection and shift
product mix to growing categories of entertainment-related merchandise.
Video:
Comparable store sales in the video category decreased 9.9%
and 12.6% during the thirteen and twenty-six week periods ended August 4, 2018, respectively. The video category represented 29.0%
and 30.5% of total net sales for the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared to 31.2% and 33.6%
in the comparable periods last year due to continued industry-wide decline in physical media sales
Music:
During the thirteen and twenty-six weeks ended August 4, 2018,
music sales in comparable stores decreased 14.4% and 17.4%, respectively, versus the thirteen and twenty-six weeks ended July 29,
2017. The music category represented 18.4% and 18.5% of total net sales for the thirteen and twenty-six weeks ended August 4, 2018,
respectively, compared to 20.6% and 21.1% for the thirteen and twenty-six weeks ended July 29, 2017 due to continued industry-wide
decline in physical media sales.
Electronics:
Comparable store net sales in the electronics category increased
1.4% and 2.3% during the thirteen and twenty-six weeks ended August 4, 2018, respectively. Electronics net sales represented 11.7%
of total net sales for both the thirteen and twenty-six weeks ended August 4, 2018, compared to 11.2% and 10.7% in the comparable
periods last year.
Other Revenue.
Other revenue, which was primarily related
to commissions and fees earned from third parties, was approximately $1.1 million and $2.5 million for the thirteen and twenty-six
weeks ended August 4, 2018, respectively, compared to $1.6 million and $2.8 million in the comparable periods last year. The decline
in other revenue was primarily due to lower number of stores in operation.
etailz Segment
etailz reported sales of $51.6 million and $94.2 million
for the thirteen and twenty-six weeks ended August 4, 2018, respectively compared to $43.5 million and $80.5 million
sales for the thirteen and twenty-six weeks ended July 29, 2017. etailz generates revenue across a broad array of product
lines primarily through the Amazon Marketplace. Categories include: apparel, baby, beauty, electronics, health &
personal care, home/kitchen/grocery, pets, sporting goods, toys & art. During the twenty-six weeks ended August 4,
2018, etailz sold approximately 31,000 SKUs from approximately 2,200 suppliers, compared to approximately 21,000 SKUs from
approximately 1,700 suppliers during the twenty-six weeks ended July 29, 2017.
Gross Profit.
The following table
sets forth a year-over-year comparison of the Company’s Gross Profit:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
Twenty-six Weeks Ended
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4,
2018
|
|
July 29, 2017
|
|
|
$
|
|
%
|
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
$
|
|
%
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit
|
|
$
|
20,634
|
|
|
$
|
25,085
|
|
|
$
|
(4,451
|
)
|
|
|
-17.7
|
%
|
|
$
|
42,905
|
|
|
$
|
51,995
|
|
|
$
|
(9,090
|
)
|
|
|
-17.5
|
%
|
etailz gross profit
|
|
|
11,539
|
|
|
|
10,085
|
|
|
|
1,454
|
|
|
|
14.4
|
%
|
|
|
20,956
|
|
|
|
19,480
|
|
|
|
1,476
|
|
|
|
7.6
|
%
|
Total gross profit
|
|
$
|
32,173
|
|
|
$
|
35,170
|
|
|
$
|
(2,997
|
)
|
|
|
-8.5
|
%
|
|
$
|
63,861
|
|
|
$
|
71,475
|
|
|
$
|
(7,614
|
)
|
|
|
-10.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit as a % of fye revenue
|
|
|
40.8
|
%
|
|
|
42.5
|
%
|
|
|
|
|
|
|
|
|
|
|
41.0
|
%
|
|
|
42.0
|
%
|
|
|
|
|
|
|
|
|
etailz gross profit as a % of etailz revenue
|
|
|
22.3
|
%
|
|
|
23.2
|
%
|
|
|
|
|
|
|
|
|
|
|
22.3
|
%
|
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
Total gross profit as a % of total revenue
|
|
|
31.5
|
%
|
|
|
34.3
|
%
|
|
|
|
|
|
|
|
|
|
|
32.1
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit decreased 8.5% to $32.2 million for the thirteen
weeks ended August 4, 2018 compared to $35.2 million for the thirteen weeks ended July 29, 2017. For the twenty-six weeks ended
August 4, 2018, gross profit decreased 10.7% to $63.9 million compared to $71.5 million for the comparable period last year.
fye Segment
fye gross profit as a percentage of total
revenue for the thirteen and twenty-six weeks ended August 4, 2018 was 40.8% and 41.0%, respectively, compared to 42.5% and 42.0%
for the comparable periods last year. The decline in rate was primarily driven by a higher number of closing stores during the
quarter this year, and higher gross margin related to fidget spinners last year.
etailz Segment
etailz gross profit as a percentage of
total revenue for both the thirteen and twenty-six weeks ended August 4, 2018 was 22.3%, compared to 23.2% and 24.2% for the comparable
periods last year. The decline in the gross profit rate was primarily due to higher marketplace fulfillment and warehousing fees.
SG&A Expenses.
The following table sets forth a period
over period comparison of the Company’s SG&A expenses:
|
|
Thirteen Weeks Ended
|
|
|
Change
|
|
|
Twenty-six Weeks Ended
|
|
|
Change
|
|
($ in thousands)
|
|
August 4,
2018
|
|
July 29,
2017
|
|
|
$
|
%
|
|
|
August 4,
2018
|
July 29,
2017
|
|
|
$
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye SG&A, excluding depreciation and amortization
|
|
$
|
26,103
|
|
|
$
|
28,226
|
|
|
($
|
2,123
|
)
|
|
|
-7.5
|
%
|
|
$
|
52,592
|
|
|
$
|
57,321
|
|
|
($
|
4,729
|
)
|
|
|
-8.3
|
%
|
As a % of total fye revenue
|
|
|
51.6
|
%
|
|
|
47.9
|
%
|
|
|
|
|
|
|
|
|
|
|
50.3
|
%
|
|
|
46.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
etailz SG&A, excluding depreciation and amortization
|
|
|
13,185
|
|
|
|
8,972
|
|
|
|
4,213
|
|
|
|
47.0
|
%
|
|
|
24,310
|
|
|
|
18,166
|
|
|
|
6,144
|
|
|
|
33.8
|
%
|
As a % of total etailz revenue
|
|
|
25.2
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
25.9
|
%
|
|
|
21.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,274
|
|
|
|
3,341
|
|
|
|
(1,067
|
)
|
|
|
-31.9
|
%
|
|
|
4,507
|
|
|
|
6,564
|
|
|
|
(2,057
|
)
|
|
|
-31.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
41,562
|
|
|
$
|
40,539
|
|
|
$
|
1,023
|
|
|
|
2.5
|
%
|
|
$
|
81,409
|
|
|
$
|
82,051
|
|
|
($
|
642
|
)
|
|
|
-0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total revenue
|
|
|
40.5
|
%
|
|
|
39.6
|
%
|
|
|
|
|
|
|
|
|
|
|
41.0
|
%
|
|
|
40.1
|
%
|
|
|
|
|
|
|
|
|
SG&A expenses increased $1.0 million
and decreased $0.6 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively.
fye Segment
fye SG&A, excluding depreciation and
amortization expenses, decreased $2.1 million, or 7.5%, and $4.7 million, or 8.3%, for the thirteen and twenty-six weeks ended
August 4, 2018, respectively. As a percentage of fye revenue, SG&A expenses in the fye segment for the thirteen and twenty-six
weeks ended August 4, 2018 were 51.6% and 50.3%, respectively, compared to 47.9% and 46.3% for the same period last year. The decline
in SG&A expenses was due to fewer stores in operation. The increase in the rate was primarily due to the comparable sales decline.
etailz Segment
etailz SG&A, excluding depreciation and amortization expenses,
increased $4.2 million and $6.1 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively. As a percentage
of etailz revenue, SG&A expenses in the etailz segment for the thirteen and twenty-six weeks ended August 4, 2018 were 25.2%
and 25.9%, respectively, compared to 20.6% and 21.8% for the same period last year. The increase in SG&A expenses was due to
investments in product identification and sourcing, technology, platform diversification, in addition to higher marketplace commissions
on the higher sales.
Depreciation and amortization.
Consolidated depreciation
and amortization expense decreased $1.1 million and $2.1 million for the thirteen and twenty-six weeks ended August 4, 2018, respectively,
primarily due to the $29.1 million net decrease in carrying value of fixed assets, resulting from impairment charges recorded for
the fye segment, during the fourth quarter of fiscal 2017. For a discussion of the Company’s impairment charges, see “Nature
of Operations and Summary of Significant
Accounting Policies” in the Notes to Consolidated Financial
Statements in the Company’s Annual Report on Form 10-K for the year ended February 3, 2018.
Income from Joint Venture.
Income
from joint venture was $83 thousand during the twenty-six weeks ended August 4, 2018.
Interest Expense.
Interest expense was $103 thousand
and $166 thousand during the thirteen and twenty-six weeks ended August 4, 2018, respectively. Interest expense consisted primarily
of unused commitment fees and the amortization of fees related to the Company’s credit facility. Interest expense during
the thirteen and twenty-six weeks ended July 29, 2017 was $59 thousand and $115 thousand, respectively. The increase in
interest expense was due to borrowings under the credit facility
as discussed in Note 8 to the condensed consolidated financial statements.
Gain on Insurance Proceeds.
During the twenty-six weeks
ended July 29, 2017, the fye segment recorded an $8.7 million gain on insurance proceeds related to the death of the Company’s
former Chairman.
Other Income.
Other
income was $49 thousand and $128 thousand during the thirteen and twenty-six weeks ended August 4, 2018, respectively, compared
to $43 thousand and $57 thousand for the same periods last year.
Income Tax Expense.
Based on available objective evidence, management concluded that a full valuation allowance should be recorded against the
Company’s deferred tax assets. There were insignificant tax expense amounts recorded during the thirteen and twenty-six weeks
ended August 4, 2018 and comparative periods last year due to the losses recognized each period.
Net Loss.
The
following table sets forth a period over period comparison of the Company’s net loss:
|
|
Thirteen Weeks ended
|
|
|
Twenty-six Weeks ended
|
|
|
|
August 4,
|
|
|
July 29,
|
|
|
|
|
|
August 4,
|
|
|
July 29,
|
|
|
|
|
($ in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(9,443
|
)
|
|
$
|
(5,514
|
)
|
|
$
|
(3,929
|
)
|
|
$
|
(17,586
|
)
|
|
$
|
(1,928
|
)
|
|
$
|
(15,658
|
)
|
Income tax expense
|
|
|
67
|
|
|
|
51
|
|
|
|
16
|
|
|
|
71
|
|
|
|
105
|
|
|
|
(34
|
)
|
Net loss
|
|
$
|
(9,510
|
)
|
|
$
|
(5,565
|
)
|
|
$
|
(3,945
|
)
|
|
$
|
(17,657
|
)
|
|
$
|
(2,033
|
)
|
|
$
|
(15,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
Liquidity and Cash Flows:
The Company’s primary
sources of working capital are cash provided by operations and borrowing capacity under its revolving credit facility. The Company’s
cash flows fluctuate from quarter to quarter due to various items, including seasonality of sales and earnings, merchandise inventory
purchases and returns, the related terms on the purchases and capital expenditures. Management believes it will have adequate resources
to fund its cash needs for the foreseeable future, including its capital spending, its seasonal increase in merchandise inventory
and other operating cash requirements and commitments.
Management anticipates any cash requirements
due to a shortfall in cash from operations will be funded by the Company’s revolving credit facility, as discussed in note
8 in the interim condensed consolidated financial statements.
In connection with the preparation of these unaudited interim
condensed consolidated financial statements, the Company has evaluated and concluded there are no conditions or events, considered
in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of
one year following the date that these financial statements are issued.
The following table sets forth a summary of key components of
cash flow and working capital:
|
|
|
As of or for the
|
|
|
|
|
|
|
Twenty-six Weeks Ended
|
|
|
Change
|
|
|
|
|
August 4,
|
|
|
July 29,
|
|
|
|
|
($ in thousands)
|
|
2018
|
|
|
2017
|
|
|
$
|
|
|
Operating Cash Flows
|
|
|
(32,944
|
)
|
|
|
(20,503
|
)
|
|
|
(12,441
|
)
|
|
Investing Cash Flows
|
|
|
(663
|
)
|
|
|
7,595
|
|
|
|
(8,258
|
)
|
|
Financing Cash Flows
|
|
|
4,841
|
|
|
|
(5,000
|
)
|
|
|
9,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
(1)
|
|
(1,800
|
)
|
|
|
(4,166
|
)
|
|
|
2,366
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
(2)
|
|
14,740
|
|
|
|
26,169
|
|
|
|
(11,429
|
)
|
|
Merchandise Inventory
|
|
|
114,920
|
|
|
|
126,687
|
|
|
|
(11,767
|
)
|
|
Working Capital
|
|
|
82,100
|
|
|
|
101,054
|
|
|
|
(18,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Investing Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Cash and cash equivalents per interim condensed consolidated balance sheets
|
|
$
|
4,477
|
|
|
$
|
13,985
|
|
|
$
|
(9,508
|
)
|
|
Add: restricted cash
|
|
|
10,263
|
|
|
|
12,184
|
|
|
|
(1,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash
|
|
$
|
14,740
|
|
|
$
|
26,169
|
|
|
$
|
(11,429
|
)
|
Cash used in operations was $32.9 million
for the twenty-six weeks ended August 4, 2018, primarily due to a net loss of $17.7 million, adding back depreciation and amortization
of $4.5 million and non-cash compensation of $1.6 million, less $2.0 million increase in accounts receivable, $5.5 million seasonal
increase in inventory, $2.0 million increase in prepaid expenses, and reductions in accounts payable, deferred revenue, and other
long-term liabilities of $7.6 million, $1.7 million, and $2.6 million, respectively. The Company’s merchandise inventory
and accounts payable are influenced by the seasonality of its business. A significant reduction of accounts payable occurs annually
in the fiscal first quarter, reflecting payments for merchandise inventory purchased during the prior year’s holiday season.
Cash used in investing activities was $0.7
million for the twenty-six weeks ended August 4, 2018, which consisted of $1.8 million in capital expenditures, offset by
$1.1 million of capital distributions from the joint venture.
Cash provided by financing activities for the twenty-six weeks
ended August 4, 2018, was comprised of $6.3 million proceeds from short-term borrowings, offset by a $1.5 million payment to the
etailz shareholders as per the original etailz acquisition share purchase agreement.
Capital Expenditures.
During the thirteen
and twenty-six weeks ended August 4, 2018, respectively, the Company made capital expenditures of $0.9 million and $1.8 million,
respectively. The Company currently plans to spend approximately $3.0 million for capital expenditures during fiscal 2018.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in the United States requires that management apply accounting policies
and make estimates and assumptions that affect results of operations and the reported amounts of assets and liabilities in the
financial statements. Management continually evaluates its estimates and judgments including those related to merchandise inventory
and return costs and income taxes. Management bases its estimates and judgments on
historical experience and other factors that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in the Form 10-K for the year ended February 3, 2018 includes a summary of the critical
accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial statements.
There have been no material changes or modifications to the policies since February 3, 2018.
Recent Accounting Pronouncements:
The information set forth under Note 2, Recently Adopted
Accounting Pronouncements section, and Note 3, Recently Issued Accounting Pronouncements, contained in Item 1, “Notes
to Interim Condensed Consolidated Financial Statements”, is incorporated herein by reference.
Non-GAAP Measures:
This Form 10-Q contains
certain non-GAAP metrics, including: etailz adjusted income (loss) from operations and SG&A excluding depreciation and amortization,
expenses for each reporting segment. A non-GAAP
measure is not a recognized measure of financial performance
under GAAP in the United States, and should not be considered as a substitute for SG&A expenses, operating earnings, net earnings
from continuing operations or cash flows from operating activities, as determined in accordance with GAAP.
Non-GAAP items
are provided because management believes that, when reconciled from the GAAP items to which they relate, they provide additional
useful information to investors regarding the Company’s operational performance.
The Company calculates etailz
adjusted income (loss) from operations to evaluate its own operating performance and as an integral part of its planning process.
The Company presents etailz adjusted income (loss) from operations as a supplemental measure because it believes such a measure
provides management and investors with a more complete understanding of its business operating results, including underlying trends,
by excluding the effects of certain charges.
The Company calculates SG&A,
excluding depreciation and amortization expenses for each reporting segment, to evaluate its own operating performance and as an
integral part of its planning process. The Company presents SG&A, excluding depreciation and amortization expenses, as a supplemental
measure because it believes such a measure provides management and investors with a more complete understanding of its business
operating results, including underlying trends, by excluding the effects of certain charges.
TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
PART I – FINANCIAL INFORMATION