NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited
condensed consolidated financial statements of Perry Ellis International, Inc. and subsidiaries (Perry Ellis or the Company) have been prepared in accordance with accounting principles generally accepted in the United States
of America (GAAP) for interim financial information and in accordance with the requirements of the Securities and Exchange Commission on Form
10-Q
and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of operations and changes in cash flows required by GAAP for annual financial statements. These condensed consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and related notes included in the Companys Annual Report on Form
10-K
for the year ended February 3, 2018, filed with the Securities
and Exchange Commission on April 17, 2018.
The information presented reflects all adjustments, which are in the opinion of
management of a normal and recurring nature, necessary for a fair presentation of the interim periods. Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606)
. This ASU creates a single comprehensive new revenue recognition standard. Under the new standard and its related
amendments (collectively known as Accounting Standards Codification (ASC 606)), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity
expects to receive in exchange for those goods or services. The new standard requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU
2014-09
is effective for annual reporting periods beginning after December 15, 2017. The Company adopted the standard as of February 4, 2018, using the modified retrospective method resulting in a
cumulative-effect reduction to retained earnings of $0.9 million, net of tax, as of the date of adoption. Under this approach, the Company did not restate the prior financial statements presented. The provisions under this ASU were
applied to contracts not completed as of that date.
The cumulative effects of the changes made to the condensed consolidated balance
sheet at February 4, 2018, as a result of the adoption of ASC 606 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Adjustments
|
|
|
Balance at
|
|
|
|
February 3,
|
|
|
due to ASC
|
|
|
February 4,
|
|
|
|
2018
|
|
|
606
|
|
|
2018
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Accounts receivable, net
|
|
|
156,863
|
|
|
|
13,017
|
|
|
|
169,880
|
|
Prepaid expenses and other current assets
|
|
|
8,151
|
|
|
|
1,420
|
|
|
|
9,571
|
|
Deferred income tax
|
|
|
411
|
|
|
|
43
|
|
|
|
454
|
|
Accrued expenses and other liabilities
|
|
|
35,768
|
|
|
|
14,294
|
|
|
|
50,062
|
|
Unearned revenues
|
|
|
2,907
|
|
|
|
1,313
|
|
|
|
4,220
|
|
Deferred income taxes
|
|
|
4,915
|
|
|
|
(239
|
)
|
|
|
4,676
|
|
Retained earnings
|
|
|
232,977
|
|
|
|
(888
|
)
|
|
|
232,089
|
|
In January 2016, the FASB issued ASU
No. 2016-01,
Financial Instruments Overall (subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities,
which addresses certain aspects of recognition,
measurement, presentation, and disclosure of financial instruments. The standard requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes recognized in net income and
6
also updates certain presentation and disclosure requirements. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. The adoption, during the first quarter of fiscal 2019, of ASU
No. 2016-01
did not have a material impact on the Companys results of operations or the Companys
financial position.
In February 2016, the FASB issued ASU No.
2016-02,
Leases (Topic
842)
which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from
leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach, and early adoption is permitted. The Company is
currently evaluating the effect that the adoption will have on its consolidated financial statements and related disclosures.
In June
2016, the FASB issued ASU
No. 2016-13,
Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
, which provides guidance for the
accounting for credit losses on instruments within its scope. The amendments guide on reporting credit losses for assets held at amortized cost basis and
available-for-sale
debt securities. The amendments require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected.
The amendments also require that credit losses on
available-for-sale
debt securities be presented as an allowance. The amendments should be applied on either a
prospective transition or modified-retrospective approach depending on the subtopic. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those annual periods. The
Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In August 2016, the
FASB issued ASU
No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force),
which is
intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update are effective for public entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The adoption, during the first quarter of fiscal 2019, of ASU
No. 2016-01
did not have a
material impact on the Companys results of operations or the Companys financial position.
In May 2017, the FASB issued ASU
No. 2017-09
, Compensation Stock Compensation (Topic718): Scope of Modification Accounting
, which amends the scope of modification accounting for share-based payment arrangements. This
update provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The amendments in this update are effective for all entities for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial
statements have not yet been issued. The guidance is required to be applied prospectively to an award modified on or after the adoption date. The Company will apply this guidance to any future changes made to the terms or conditions, of share-based
payment awards, after adoption. The adoption, during the first quarter of fiscal 2019, of ASU
No. 2016-01
did not have a material impact on the Companys results of operations or the Companys
financial position.
In July 2017, the FASB issued ASU
No. 2017-11,
Earnings Per
Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,
which is intended to reduce the complexity of accounting for certain financial
instruments with down round features and address the difficulty of accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update are effective for fiscal years beginning after
December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of this standard on its consolidated
financial statements.
In August 2017, the FASB issued ASU
No. 2017-12,
Derivatives
and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,
which simplifies the application of hedge accounting guidance to better portray the economic results of risk management activities in the financial
statements. The guidance aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to
the assessment of hedge effectiveness. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted in any interim period after
issuance of the update. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
7
On December 22, 2017, Staff Accounting Bulletin No. 118
(SAB
118)
was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting
for certain income tax effects of the Tax Cut and Jobs Act (Tax Act). In accordance with SAB 118, during fiscal 2018, the Company determined that the net ($3.9) million of the deferred tax expense recorded in connection with the
remeasurement of certain deferred tax assets and liabilities and the $5.8 million of current tax expense recorded in connection with the Transition tax on foreign earnings were provisional amounts and reasonable estimates at February 3,
2018. Over the SAB 118 measurement period, the Company intends to further analyze and update the calculated impacts noted above, as well as other potential correlative adjustments. During the three months ended May 5, 2018, the Company did
not record any adjustments to the provisional income tax benefit recorded in fiscal 2018. Any subsequent adjustment to these amounts or additional amounts identified will be recorded to current tax expense in the quarter when the analysis is
complete.
In January 2018, the FASB released guidance on the accounting for tax on the global intangible
low-taxed
income (GILTI) provisions of the Tax Act. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations. The guidance
indicates that either accounting for deferred taxes related to GILTI inclusions or to treat any taxes on GILTI inclusions as period cost are both acceptable methods subject to an accounting policy election. For the three months ended May 5,
2018, while the Company is completing its analysis of the GILTI tax rules and the two available accounting policy elections, it has included a reasonable estimate of $0.5 million for the impact of GILTI as an increase to its fiscal 2019 tax
expense for purposes of estimating the fiscal 2019 annual effective tax rate. As part of this estimate, the Company has not included GILTI as part of its deferred taxes. The Company does not expressly consider its methodology for calculating its
fiscal 2019 annual estimated tax rate to constitute an election of either of the acceptable accounting policy elections relative to the GILTI tax regime. The Company will continue to analyze the GILTI tax rules over the SAB 118 measurement period
and any subsequent adjustment pertaining to an ultimate accounting policy election will be recorded in the quarter when the analysis is complete.
In February 2018, the FASB issued ASU
No. 2018-02,
Income Statement Reporting
Comprehensive Income (Topic 220):Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects
resulting from the Tax Act. The amendments eliminate the stranded tax effects resulting from the Tax Act. The updates also require certain disclosures about stranded tax effects. The amendments in this update are effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In February 2018, the FASB issued ASU
No. 2018-03,
Technical Corrections and
Improvements to Financial Instruments Overall (Subtopic
825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities,
which makes minor changes to ASU
2016-01.
The update clarifies that entities must use a prospective transition approach only for equity securities they elect to measure using the new measurement alternative. The update also clarifies other aspects
of the guidance on how to apply the measurement alternative and the presentation requirements for financial liabilities measured under the fair value option. The amendments in this update are effective for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. The adoption, during the first quarter of fiscal 2019, of ASU
No. 2016-01
did not have a material impact on the Companys
results of operations or the Companys financial position.
In March 2018, the FASB issued ASU
No. 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.
118,
which provides guidance for companies that are
not able to complete their accounting for the income tax effects of the Tax Act in the period of enactment. The update also provides guidance on the financial statement disclosures that are required under a measurement period approach. The Company
is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
8
3. REVENUE RECOGNITION
The Company recognizes revenue pursuant to ASC 606. The majority of the Companys revenue is derived from the sales of its products, which
represents net sales recorded in the Companys condensed consolidated statements of income. The Company also recognizes revenues for sales-based royalties related to its licenses of its symbolic intellectual property principally consisting of
licenses of trade names and trademarks, which represents royalty income recorded in the Companys condensed consolidated statements of income.
Disaggregation of revenue
The Company
has four reportable segments: Mens Sportswear and Swim, Womens Sportswear,
Direct-to-Consumer
comprised of product sales and Licensing comprised of
sales-based royalties. For a presentation of the Companys revenues disaggregated by segment and geographical region, refer to footnote 17 in these notes to unaudited condensed consolidated financial statements.
Performance Obligations
Product sales
are recognized when performance obligations under the terms of the contract with the customer are satisfied. Typically, this would occur upon transfer of control, including passage of title to the customer and transfer of risk of loss related to
those goods. Transfer of title and risk of loss is based upon shipment under free on board shipping point for most goods. In some instances, transfer of title and risk of loss takes place at the point of sale at the Companys retail stores and
e-commerce
platforms. The Company measures revenue as the amount of consideration to which it expects to be entitled in exchange for transferring goods (transaction price). In order to determine the transaction
price, the Company estimates the amount of variable consideration, which principally relates to estimated customer returns, allowances,
co-op
advertising, markdowns and discounts, at the outset of the contract
utilizing the expected value. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When
determining if variable consideration should be constrained, management considers whether there are factors outside the Companys control that could result in a significant reversal of revenue. In making these assessments, the Company considers
the likelihood and magnitude of a potential reversal of revenue. These estimates are
re-assessed
each reporting period as required.
The Companys contracts with customers, for a license to symbolic intellectual property, typically include a nonrefundable
minimum
guarantee
(MG) establishing a floor for the amount of consideration to be paid to the Company in installments over the term of the license period. The Company earns additional sales-based royalties when the royalties exceed the
nonrefundable MG. As a result, the Companys contracts contain both a sales-based royalty and an MG and therefore, include both fixed and variable consideration. In order to determine the appropriate approach to utilize for the pattern of
recognition of transaction price for contracts that contain a MG and sales-based royalty, the Company has determined that the approach applied should be based on the Companys evaluation of whether it is expected that the MG would be
exceeded. For contracts, where the Company has determined that it is unlikely that the MG will be exceeded, the Company believes that these contracts, for the license of symbolic intellectual property, the measure of progress for the fixed
consideration would be based on time elapsed because the customer simultaneously receives and consumes the benefits as the entity performs. The Company will recognize additional sales-based royalties, if any, when the cumulative royalties
exceed the MG as the Company has concluded that the variable consideration is fully constrained as it is not expected to be entitled to the variable consideration. For contracts, where the Company anticipates that the MG will be exceeded, the
Company has determined that the substance of these arrangements is that it is paid consideration based on the sales-base royalties and therefore, would apply the recognition constraint on sales-based royalties in ASC 606 and will recognize the
consideration based on sales-based royalty earned in each distinct period of the series.
On the Companys consolidated balance
sheet, reserves for returns, allowances,
co-op
advertising and markdowns will be included within accrued expenses and other liabilities, rather than accounts receivable, net, and the asset for the
Companys right to recover products from a customer upon settling a return is recorded at the original carrying amount of the product less any expected cost to recover and any decreases in value of product, neither of which have been deemed
significant. This refund asset has been included within prepaid expenses and other current assets. On the Companys consolidated statement of income, advertising reimbursements received from licensees expenses will be considered a component of
the transaction price in its contracts with customers and therefore, will be recorded as revenue upon recognition. Previously, these amounts were recorded in selling, general and administrative expenses.
9
Contract Balances
The Company recognizes unearned royalty income when licensees pay contractual obligations before being earned or when
up-front
fees are collected and as such is included in current liabilities on the consolidated balance sheet. This liability is recognized as royalty income over the applicable term of the respective license
agreement. As of May 5, 2018 and February 3, 2018, unearned revenue was $4.7 million and $2.9 million, respectively. For the three months ended May 5, 2018, the Company recognized $2.8 million of revenue
that was previously included in unearned revenue as of February 3, 2018.
Certain of the Companys contracts with customers that
provide for the license of intellectual property do not meet the adopted practical expedients. As of May 5, 2018, the Company had approximately 163 contracts for the license of intellectual property with unsatisfied performance obligations
extending through December 2026. The total aggregate transaction price allocated to the unsatisfied performance obligations of these contracts was approximately $170.5 million, of which $39.5 million is expected to be realized in
fiscal 2019.
Significant Judgements
The Company records reductions to revenue for estimated customer returns, allowances,
co-op
advertising, markdowns and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by
the Company. The actual amount of customer returns and allowances is inherently uncertain and may differ from the Companys estimates. If the Company determines that actual or expected returns or allowances are significantly higher or lower
than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period in which it makes such a determination. Provisions for customer specific discounts are based on contractual obligations with
certain major customers. Reserves for returns, allowances,
co-op
advertising and markdowns are included within accrued expenses and other liabilities. Discounts are recorded in accounts receivable, net and the
value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the consolidated balance sheet.
Practical Expedients and Policy Elections
The Company has adopted or made a policy election related to the accounting for sales tax, shipping and handling, costs to obtain a contract,
significant financing components and
transaction price allocated to future performance obligations
.
The Company has elected to exclude sales tax and similar taxes from the
measurement of transaction price. As the Company historically has presented taxes on a net revenue basis, there is no change to the current presentation as a result of the adoption of ASC 606.
|
|
|
Shipping and Handling Costs
|
Costs associated for shipment of products to a customer are
accounted for as a fulfillment cost and are included in selling, general and administrative expenses. The Company has elected to apply the practical expedient for shipping costs and will account for shipping and handling activities performed after
control of a good has been transferred to the customer as a fulfillment cost and not a performance obligation. Therefore, both revenue and costs of shipping and handling will be recorded at the same time.
|
|
|
Costs to Obtain and Fulfill a Contract
|
The Company historically has recognized the
incremental costs of obtaining contracts as an expense when incurred, and if the amortization period of the assets that the Company otherwise would have recognized is one year or less, there is no change to the current presentation as a result of
the adoption of ASC 606. As such, the Company has elected to adopt the practical expedient for costs to obtain and fulfill a contract. The Company, as of February 3, 2018 and May 5, 2018, incurred no incremental costs to obtain or fulfill
the Companys contracts with customers that were required to be capitalized.
|
|
|
Significant Financing Component
|
The Company does not believe that there is a
significant financing component related to product sales or for licenses of symbolic intellectual property since at inception of the contract the Company expects to be paid within one year and the right to access the license is transferred over
time, respectively. As such, the Company has elected to adopt the practical expedient for evaluating whether there is a significant financing component.
10
|
|
|
Transaction Price Allocated to Future Performance Obligations
|
Certain of the
Companys contracts meet the following practical expedients:
(1)
the performance obligation is part of a contract that has an original expected duration of one year or less,
(2)
revenue is recognized from the
satisfaction of the performance obligations in the amount billable to the customer, and
(3)
the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or unsatisfied promise to transfer a distinct
good or service that forms part of a single performance obligation. The Company has elected to adopt the practical expedients that limit this requirement.
The impact of adoption of ASC 606 on the condensed consolidated balance sheet at May 5, 2018 and condensed consolidated statement of
income for the three months ended May 5, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 5, 2018
|
|
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
due to ASC
|
|
|
|
|
|
|
As Reported
|
|
|
606
(1)
|
|
|
As Adjusted
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Accounts receivable, net
|
|
|
201,818
|
|
|
|
(14,757
|
)
|
|
|
187,061
|
|
Prepaid expenses and other current assets
|
|
|
9,810
|
|
|
|
(1,953
|
)
|
|
|
7,857
|
|
Accrued expenses and other liabilities
|
|
|
44,858
|
|
|
|
(16,743
|
)
|
|
|
28,115
|
|
Accrued income tax payable
|
|
|
1,805
|
|
|
|
(60
|
)
|
|
|
1,745
|
|
Unearned revenues
|
|
|
4,651
|
|
|
|
(245
|
)
|
|
|
4,406
|
|
Retained earnings
|
|
|
242,336
|
|
|
|
338
|
|
|
|
242,674
|
|
|
|
|
|
Three Months Ended May 5, 2018
|
|
|
|
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
due to ASC
|
|
|
|
|
|
|
As Reported
|
|
|
606
(1)
|
|
|
As Adjusted
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Royalty income
|
|
|
9,799
|
|
|
|
(1,226
|
)
|
|
|
8,573
|
|
Total revenues
|
|
|
255,234
|
|
|
|
(1,226
|
)
|
|
|
254,008
|
|
Gross profit
|
|
|
93,867
|
|
|
|
(1,226
|
)
|
|
|
92,641
|
|
Selling, general and administrative expenses
|
|
|
75,549
|
|
|
|
(1,504
|
)
|
|
|
74,045
|
|
Total operating expenses
|
|
|
78,776
|
|
|
|
(1,504
|
)
|
|
|
77,272
|
|
Operating income
|
|
|
15,091
|
|
|
|
(278
|
)
|
|
|
14,813
|
|
Income tax provision
|
|
|
2,835
|
|
|
|
(60
|
)
|
|
|
2,775
|
|
Net income
|
|
|
10,247
|
|
|
|
(338
|
)
|
|
|
9,909
|
|
(1)
|
Refer to footnote 2: Accounting Standards Update,
No. 2014-09,
Revenue from Contracts with Customers (ASC
606).
|
11
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of:
|
|
|
|
|
|
|
|
|
|
|
May 5,
|
|
|
February 3,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Trade accounts
|
|
$
|
196,930
|
|
|
$
|
163,872
|
|
Royalties
|
|
|
6,540
|
|
|
|
7,107
|
|
Other receivables
|
|
|
912
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
204,382
|
|
|
|
171,881
|
|
Less: Allowances
(1)
|
|
|
(2,564
|
)
|
|
|
(15,018
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
201,818
|
|
|
$
|
156,863
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Due to the adoption of Accounting Standards Update No
2014-09,
Revenue from Contracts with Customers (ASC 606),
sales allowances and reserves for fiscal 2019
have been reclassified as other current liabilities. There was no reclassification made to sales allowances and reserves for fiscal 2018. Refer to footnote 2.
|
5. INVENTORIES
Inventories are stated at
the lower of cost (weighted moving average cost) or net realizable value. Cost principally consists of the purchase price, customs, duties, freight, and commissions to buying agents.
Inventories consisted of the following as of:
|
|
|
|
|
|
|
|
|
|
|
May 5,
|
|
|
February 3,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Finished goods
|
|
$
|
150,965
|
|
|
$
|
175,459
|
|
6. INVESTMENTS
The Companys investments include marketable securities and certificates of deposit at May 5, 2018 and February 3, 2018.
Certificates of deposit with maturity dates less than one year are classified as
available-for-sale.
Marketable securities are classified as
available-for-sale
and consist of corporate and government bonds with maturity dates less than one year. Investments are stated at fair value.
Investments consisted of the following as of May 5, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Marketable securities
|
|
$
|
905
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
905
|
|
Certificates of deposit
|
|
|
4,011
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
4,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
4,916
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
4,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Investments consisted of the following as of February 3, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Unrealized Gains
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Marketable securities
|
|
$
|
6,655
|
|
|
$
|
|
|
|
$
|
(5
|
)
|
|
$
|
6,650
|
|
Certificates of deposit
|
|
|
7,441
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
7,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
14,096
|
|
|
$
|
|
|
|
$
|
(10
|
)
|
|
$
|
14,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
|
|
|
|
|
|
|
|
|
|
|
May 5,
|
|
|
February 3,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Furniture, fixtures and equipment
|
|
$
|
98,158
|
|
|
$
|
97,414
|
|
Buildings and building improvements
|
|
|
22,288
|
|
|
|
22,341
|
|
Vehicles
|
|
|
537
|
|
|
|
537
|
|
Leasehold improvements
|
|
|
47,088
|
|
|
|
47,765
|
|
Land
|
|
|
9,431
|
|
|
|
9,430
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
177,502
|
|
|
|
177,487
|
|
Less: accumulated depreciation and amortization
|
|
|
(122,077
|
)
|
|
|
(121,323
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,425
|
|
|
$
|
56,164
|
|
|
|
|
|
|
|
|
|
|
The above table of property and equipment includes assets held under capital leases as of:
|
|
|
|
|
|
|
|
|
|
|
May 5,
|
|
|
February 3,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Furniture, fixtures and equipment
|
|
$
|
703
|
|
|
$
|
810
|
|
Less: accumulated depreciation and amortization
|
|
|
(18
|
)
|
|
|
(722
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
685
|
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
For the three months ended May 5, 2018 and April 29, 2017, depreciation and amortization expense
relating to property and equipment amounted to $3.1 and $3.3 million, respectively. These amounts include amortization expense for leased property under capital leases.
8. OTHER INTANGIBLE ASSETS
Trademarks
Trademarks included in other intangible assets, net, are considered indefinite-lived assets and totaled $184.1 million at May 5, 2018
and February 3, 2018.
Other
Other
intangible assets represent customer lists as of:
|
|
|
|
|
|
|
|
|
|
|
May 5,
|
|
|
February 3,
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Customer lists
|
|
$
|
8,450
|
|
|
$
|
8,450
|
|
Less: accumulated amortization
|
|
|
(6,578
|
)
|
|
|
(6,380
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,872
|
|
|
$
|
2,070
|
|
|
|
|
|
|
|
|
|
|
13
For the three months ended May 5, 2018 and April 29, 2017, amortization expense
relating to customer lists amounted to approximately $0.2 million for each of the periods. Other intangible assets are amortized over their estimated useful lives of 10 years. Assuming no impairment, the table sets forth the estimated
amortization expense for future periods based on recorded amounts as of February 3, 2018:
|
|
|
|
|
|
|
(in thousands)
|
|
2019
|
|
$
|
793
|
|
2020
|
|
$
|
734
|
|
2021
|
|
$
|
543
|
|
9. LETTER OF CREDIT FACILITIES
Borrowings and availability under letter of credit facilities consisted of the following as of:
|
|
|
|
|
|
|
|
|
|
|
May 5,
2018
|
|
|
February 3,
2018
|
|
|
|
(in thousands)
|
|
Total letter of credit facilities
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
Outstanding letters of credit
|
|
|
(10,268
|
)
|
|
|
(10,268
|
)
|
|
|
|
|
|
|
|
|
|
Total credit available
|
|
$
|
19,732
|
|
|
$
|
19,732
|
|
|
|
|
|
|
|
|
|
|
10. ADVERTISING AND RELATED COSTS
The Companys accounting policy relating to advertising and related costs is to expense these costs in the period incurred. Advertising
and related costs were approximately $5.7 million and $4.0 million for the three months ended May 5, 2018 and April 29, 2017, respectively, and are included in selling, general and administrative expenses.
11. NET INCOME PER SHARE
Basic net
income per share is computed by dividing net income by the weighted average shares of outstanding common stock. The calculation of diluted net income per share is similar to basic earnings per share except that the denominator includes potentially
dilutive common stock. The potentially dilutive common stock included in the Companys computation of diluted net income per share includes the effects of stock options, stock appreciation rights (SARS), and unvested restricted
shares as determined using the treasury stock method.
14
The following table sets forth the computation of basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
May 5,
2018
|
|
|
April 29,
2017
|
|
|
|
(in thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,247
|
|
|
$
|
12,771
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic-weighted average shares
|
|
|
15,156
|
|
|
|
15,009
|
|
Dilutive effect: equity awards
|
|
|
363
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
|
Diluted-weighted average shares
|
|
|
15,519
|
|
|
|
15,303
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.68
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.66
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
Antidilutive effect:
(1)
|
|
|
161
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents weighted average of stock options to purchase shares of common stock, SARS and restricted stock that were not included in computing diluted income per
share because their effects were antidilutive for the respective periods.
|
12. EQUITY
The following table reflects the changes in equity:
|
|
|
|
|
|
|
Changes in Equity
|
|
|
|
(in thousands)
|
|
Equity at February 3, 2018
|
|
$
|
377,550
|
|
Retained earnings adjustment
(1)
|
|
|
(888
|
)
|
Comprehensive income
|
|
|
9,122
|
|
Share transactions under employee equity compensation plans
|
|
|
1,526
|
|
|
|
|
|
|
Equity at May 5, 2018
|
|
$
|
387,310
|
|
|
|
|
|
|
Equity at January 30, 2017
|
|
$
|
313,687
|
|
Comprehensive income
|
|
|
12,694
|
|
Share transactions under employee equity compensation plans
|
|
|
1,486
|
|
|
|
|
|
|
Equity at April 29, 2017
|
|
$
|
327,867
|
|
|
|
|
|
|
(1)
|
Due to the adoption of Accounting Standards Update No
2014-09,
Revenue from Contracts with Customers (ASC 606),
the opening balance of retained earnings has been reduced by $0.9 million for fiscal year 2018. There was no adjustment made to retained earnings for fiscal 2019. See footnote 2.
|
15
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss by component, net of tax (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation
Adjustments, Net
|
|
|
Unrealized
(Loss) Gain on
Investments
|
|
|
Unrealized
(Loss) Gain on
Forward Contract
|
|
|
Total
|
|
Balance, February 3, 2018
|
|
$
|
(6,488
|
)
|
|
$
|
(10
|
)
|
|
$
|
(649
|
)
|
|
$
|
(7,147
|
)
|
Other comprehensive loss (income) before reclassifications
|
|
|
(1,676
|
)
|
|
|
10
|
|
|
|
378
|
|
|
|
(1,288
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
163
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 5, 2018
|
|
$
|
(8,164
|
)
|
|
$
|
|
|
|
$
|
(108
|
)
|
|
$
|
(8,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation
Adjustments, Net
|
|
|
Unrealized
(Loss) Gain on
Investments
|
|
|
Unrealized
(Loss) Gain on
Forward Contract
|
|
|
Total
|
|
Balance, January 28, 2017
|
|
$
|
(9,902
|
)
|
|
$
|
(12
|
)
|
|
$
|
(181
|
)
|
|
$
|
(10,095
|
)
|
Other comprehensive loss (income) before reclassifications
|
|
|
279
|
|
|
|
6
|
|
|
|
(321
|
)
|
|
|
(36
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 29, 2017
|
|
$
|
(9,623
|
)
|
|
$
|
(6
|
)
|
|
$
|
(543
|
)
|
|
$
|
(10,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the impact on the condensed consolidated statement of income line items is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Statement of Operations Location
|
|
May 5,
2018
|
|
|
April 29,
2017
|
|
Forward contract loss (gain) reclassified from accumulated other comprehensive loss to
income
|
|
Cost of goods sold
|
|
$
|
163
|
|
|
$
|
(41
|
)
|
14. DERIVATIVE FINANCIAL INSTRUMENT Cash Flow Hedges
The Company has a risk management policy to manage foreign currency risk relating to inventory purchases by its subsidiaries that are
denominated in foreign currencies. As such, the Company may employ hedging and derivative strategies to limit the effects of changes in foreign currency on its operating income and cash flows. The financial impact of these hedging instruments is
primarily offset by corresponding changes in the underlying exposures being hedged. The Company achieves this by closely matching the notional amount, terms and conditions of the derivative instrument with the underlying risk being hedged. The
Company does not use derivative instruments for trading or speculative purposes.
For derivatives that will be accounted for as hedging
instruments, the Company formally designates and documents at inception the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, the
Company will formally assess at least quarterly whether the financial instruments used in hedging are highly effective at offsetting changes in cash flows of the related underlying exposures. For purposes of assessing hedge
effectiveness, the Company uses the forward method, and assesses effectiveness based on the changes in both spot and forward points of the hedging instrument. If and when a derivative is no longer expected to be highly effective, hedge
accounting is discontinued and hedge ineffectiveness, if any, is included in current period earnings. As of May 5, 2018, there was no hedge ineffectiveness.
16
The Companys United Kingdom subsidiary is exposed to foreign currency risk from inventory
purchases. In order to mitigate the financial risk of settlement of inventory at various prices based on movement of the U.S. dollar against the British pound, the Company entered into foreign currency forward exchange contracts (the Hedging
Instruments). These are formally designated and highly effective as cash flow hedges. The Company will hedge approximately 45% of its U.S. dollar denominated purchases. All changes in the Hedging Instruments fair value
associated with inventory purchases are recorded in equity as a component of accumulated other comprehensive income until the underlying hedged item is reclassified to earnings. The Company records the foreign currency forward exchange contracts at
fair value in its consolidated balance sheets. The cash flows from derivative instruments that are designated as cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge
accounting is discontinued, cash flows subsequent to the date of discontinuance are classified within investing activities. The Company considers the classification of the underlying hedged items cash flows in determining the
classification for the designated derivative instruments cash flows. The Company classifies derivative instrument cash flows from hedges of foreign currency risk on the settlement of inventory as operating activities.
The Companys Hedging Instruments were classified within Level 2 of the fair value hierarchy. The following table summarizes the
effects, fair value and balance sheet classification of the Companys Hedging Instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated As Hedging
Instruments
|
|
Balance sheet location
|
|
|
May 5,
2018
|
|
|
February 3,
2018
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign currency forward exchange contract (inventory purchases)
|
|
|
Accounts Payable
|
|
|
$
|
108
|
|
|
$
|
649
|
|
The following table summarizes the effect and classification of the Companys Hedging Instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Derivatives Designated As Hedging
Instruments
|
|
Statement of
Operations Location
|
|
|
May 5,
2018
|
|
|
April 29,
2017
|
|
|
|
|
|
|
(in thousands)
|
|
Foreign currency forward exchange contract (inventory purchases):
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (Gain) reclassified from accumulated other comprehensive loss to income
|
|
|
Cost of goods sold
|
|
|
$
|
163
|
|
|
$
|
(41
|
)
|
The notional amounts outstanding of foreign exchange forward contracts were $10.4 million and
$6.0 million at May 5, 2018 and February 3, 2018, respectively. Such contracts expire through January 2019.
Accumulated
other comprehensive loss included a net deferred loss for Hedging Instruments in the amount of $0.1 million and $0.6 million at May 5, 2018 and February 3, 2018, respectively. The net deferred loss will be reclassified from
accumulated other comprehensive loss to costs of goods sold during the next twelve months when the inventory is sold.
15. INCOME
TAXES
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and
various state and foreign jurisdictions. The Companys U.S. federal income tax returns for fiscal 2011 through fiscal 2018 are open tax years. The Companys state tax filings are subject to varying statutes of limitations. The
Companys unrecognized state tax benefits are related to open tax years from fiscal 2006 through fiscal 2018, depending on each states particular statute of limitation. As of May 5, 2018, the examination by the Internal Revenue
Service for the Companys, fiscal 2011 through fiscal 2015, U.S. federal tax years is still ongoing.
17
The Company has a $1.4 million liability recorded for unrecognized tax benefits as of
February 3, 2018, which includes interest and penalties of $0.3 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense. All of the unrecognized tax benefits, if recognized,
would affect the Companys effective tax rate. During the three months ended May 5, 2018, the total amount of unrecognized tax benefits increased by approximately $33,000. The change to the total amount of the unrecognized tax benefit for
the three months ended May 5, 2018 included an increase in interest and penalties of approximately $14,000.
In the next twelve
months, it is reasonably possible the Company could resolve the U.S. federal examination related to the fiscal 2011 through fiscal 2015 tax years.
At the end of fiscal 2018, the Company maintained a $2.4 million valuation allowance against its remaining general domestic deferred tax
assets and U.S. state net operating loss carryforwards. During the three months ended May 5, 2018, the related valuation allowance decreased by approximately $114,000. The establishment of valuation allowances and development of projected
annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of
recording a valuation allowance on deferred tax assets. The balance of this valuation allowance is associated with U.S. domestic operations for different state and local taxing jurisdictions where the Company anticipates that it will generate
continuing tax losses.
16. STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND RESTRICTED SHARES
During the three months ended May 5, 2018, the Company granted an aggregate of 45,093 shares of restricted stock to certain key employees,
which vest primarily over a three-year period, at an estimated value of $1.2 million. This value is being recorded as compensation expense on a straight-line basis over the vesting period of the restricted stock.
During the three months ended May 5, 2018, the Company granted performance based restricted stock to certain key employees. Such stock
generally vests 100% in April 2021, provided that each employee is still an employee of the Company on such date, and the Company has met certain performance criteria. A total of 116,328 shares of performance-based restricted stock were issued
at an estimated value of $3.1 million.
During the three months ended May 5, 2018, a total of 77,453 shares of restricted stock
vested, of which 9,708 shares were withheld to cover the employees statutory income tax requirements. The estimated value of the withheld shares was $0.3 million.
17. SEGMENT INFORMATION
The Company has
four reportable segments: Mens Sportswear and Swim, Womens Sportswear,
Direct-to-Consumer
comprised of product sales and Licensing comprised of sales-based
royalties. The Mens Sportswear and Swim and Womens Sportswear segments derive revenues from the design, import and distribution of apparel to department stores and other retail outlets, principally throughout the United
States. The Direct-to-Consumer
segment derives its revenues from the sale of the Companys branded and licensed products through the Companys retail
stores and
e-commerce
platforms. The Licensing segment derives its revenues from royalties associated from the use of the Companys brand names, principally Perry Ellis, Original Penguin, Laundry, Gotcha,
Pro Player, Farah, Ben Hogan and John Henry. The Company allocates certain corporate selling, general and administrative expenses based primarily on the revenues generated by the segments.
18
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
May 5,
2018
|
|
|
April 29,
2017
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Mens Sportswear and Swim
|
|
$
|
199,606
|
|
|
$
|
185,866
|
|
Womens Sportswear
|
|
|
25,890
|
|
|
|
29,739
|
|
Direct-to-Consumer
|
|
|
19,939
|
|
|
|
18,218
|
|
Licensing
|
|
|
9,799
|
|
|
|
8,267
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
255,234
|
|
|
$
|
242,090
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Mens Sportswear and Swim
|
|
$
|
1,839
|
|
|
$
|
1,851
|
|
Womens Sportswear
|
|
|
746
|
|
|
|
795
|
|
Direct-to-Consumer
|
|
|
585
|
|
|
|
766
|
|
Licensing
|
|
|
57
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
3,227
|
|
|
$
|
3,468
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Mens Sportswear and Swim
|
|
$
|
13,245
|
|
|
$
|
15,515
|
|
Womens Sportswear
|
|
|
(3,143
|
)
|
|
|
(969
|
)
|
Direct-to-Consumer
|
|
|
(1,397
|
)
|
|
|
(4,101
|
)
|
Licensing
|
|
|
6,386
|
|
|
|
5,976
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
15,091
|
|
|
$
|
16,421
|
|
Total interest expense
|
|
|
2,009
|
|
|
|
1,956
|
|
|
|
|
|
|
|
|
|
|
Total net income before income taxes
|
|
$
|
13,082
|
|
|
$
|
14,465
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers related to continuing operations in the United States and foreign countries are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
May 5,
2018
|
|
|
April 29,
2017
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
222,592
|
|
|
$
|
212,072
|
|
International
|
|
|
32,642
|
|
|
|
30,018
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
255,234
|
|
|
$
|
242,090
|
|
|
|
|
|
|
|
|
|
|
18. FAIR VALUE MEASUREMENTS
Accounts receivable, accounts payable, accrued interest payable and accrued expenses
. The carrying amounts reported in the consolidated
balance sheets approximate fair value due to the short-term nature of these instruments.
Investments.
(classified within
Level 2 of the valuation hierarchy)The carrying amounts of the
available-for-sale
investments are measured at fair value on a recurring basis in the
consolidated balance sheets.
Real estate mortgages.
(classified within Level 2 of the valuation hierarchy)The carrying
amounts of the real estate mortgages were approximately $33.4 million and $33.6 million at May 5, 2018 and February 3, 2018, respectively. The carrying values of the real estate mortgages at May 5, 2018 and February 3,
2018, approximate their fair values since the interest rates approximate market rates.
Senior credit facility.
The carrying amount
of the senior credit facility approximates fair value due to the frequent resets of its floating interest rate.
19
Senior subordinated notes payable
. (classified within Level 2 of the valuation
hierarchy)The carrying amounts of the 7
7
/
8
% senior subordinated notes payable were approximately $49.9 and $49.8 million at
May 5, 2018 and February 3, 2018, respectively. The fair value of the 7
7
/
8
% senior subordinated notes payable was approximately
$52.1 and $50.1 million as of May 5, 2018 and February 3, 2018, respectively, based on quoted market prices.
See footnote
14 in these notes to unaudited condensed consolidated financial statements for disclosure of the fair value and line item caption of derivative instruments recorded in the consolidated balance sheets.
These estimated fair value amounts have been determined using available market information and appropriate valuation methods.