The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual audited financial statements. In our opinion, all adjustments (consisting primarily of normal and recurring adjustments) considered necessary for a fair presentation have been included. Due to the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended February 2, 2019, filed with the Securities and Exchange Commission (“SEC”) on March 28, 2019.
As used herein, the terms “we,” “our,” “us” and “Stein Mart” refer to Stein Mart, Inc. and its wholly-owned subsidiaries.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases, to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. We adopted this ASU and the related amendments as of February 3, 2019.
At transition, we elected the package of practical expedients, which allowed us to carry forward the historical lease classification, to not reassess prior conclusions related to initial direct costs, and to not reassess whether any expired or existing contracts are or contain leases. We did not elect the use of hindsight to determine the term of our leases at transition. We also elected the practical expedient to not separate non-lease components from the lease components to which they relate and instead to combine them and account for them as a single lease component. We made an accounting policy election not to capitalize leases with an initial term of twelve months or less.
Adoption of the new standard had a significant effect on our Consolidated Balance Sheets due to the addition of operating lease assets of $382.5 million and operating lease liabilities of $422.7 million, as of February 3, 2019. We also recognized a cumulative effect adjustment that increased retained deficit by $2.1 million for transition impairments related to previously impaired leased locations. The standard did not have a significant effect on our results of operations or cash flows. Consistent with the optional effective date transition method, the financial information in the Consolidated Balance Sheets prior to the adoption of this new lease accounting guidance has not been adjusted and is therefore not comparable to the current period presented.
See Note 8 “Leases” for additional information.
Recent Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update provides additional guidance to ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which was issued in April 2015. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning on or after December 15, 2019, and interim periods within those annual periods with early adoption permitted in any interim period for which financial statements have not yet been issued. We are in the process of evaluating the effect that this ASU will have on our financial condition, results of operations and cash flows.
8
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
2. Revision of Previously Issued Financial Statements
During the quarter ended May 4, 2019, we identified a financial statement misstatement related to previous impairment calculations, which resulted in an overstatement of property and equipment, net, and an understatement of retained deficit of $4.1 million and $3.7 million as of February 2, 2019 and August 4, 2018, respectively. The error also resulted in an understatement of selling, general and administrative expenses of $0.2 million and $0.2 million for the year ended February 2, 2019 and 26 weeks ended August 4, 2018, respectively. Based on an analysis of quantitative and qualitative factors, we determined that the error was not material to our prior interim and annual financial statements. To correct this error, we revised the accompanying Consolidated Balance Sheets as of February 2, 2019 and August 4, 2018 and the Statement of Operations for the 26 weeks ended August 4, 2018.
3. Revenue Recognition
Revenue from sales of our merchandise is recognized at the time of sale net of any returns, discounts and percentage-off coupons. Our Ecommerce operation records revenue as orders are fulfilled and provided to a carrier for delivery. Shipping and handling fees charged to customers are also included in total net sales with corresponding costs recorded as cost of goods sold as they are considered a fulfillment cost. Future merchandise returns are estimated based on historical experience. Sales tax collected from customers is not recognized as revenue and is included in accrued expenses and other current liabilities on the Consolidated Balance Sheets until paid. Our shoe department and vintage luxury handbag department inventories are each owned by separate single suppliers under supply agreements. Our commissions from the sales in these areas are included in net sales on the Consolidated Statements of Operations.
We offer gift and merchandise return cards to our customers. At the time gift cards are sold, the issuance is recorded as a liability to customers, and no revenue is recognized. At the time merchandise return cards are issued for returned merchandise, the sale is reversed and a liability to customers is recorded. These card liabilities are reduced and sales revenue is recognized when they are redeemed for merchandise. Card liabilities are included in accrued expenses and other current liabilities in the Consolidated Balance Sheets.
Our gift and merchandise return cards may not ultimately be redeemed either in full or partially. We account for this “breakage” of unused amounts as revenue in proportion to the pattern of rights exercised by the customer. Breakage revenue is recorded within other revenue in the Consolidated Statements of Operations. During the 13 weeks ended August 3, 2019 and August 4, 2018, we recognized $0.2 million and $0.3 million, respectively, of breakage revenue on unused gift and merchandise return cards. During the 26 weeks ended August 3, 2019 and August 4, 2018, we recognized $0.8 million and $0.9 million, respectively, of breakage revenue on unused gift and merchandise return cards.
Stein Mart Credit Cards
We offer co-branded and private label credit cards under the Stein Mart brand. These cards are issued by Synchrony Bank (“Synchrony”) in accordance with our Amended and Restated Co-Brand and Private Label Credit Card Consumer Program Agreement (the “Agreement”). Synchrony extends credit directly to card holders, provides all servicing for the credit card accounts and bears all risk of credit and fraud losses.
We receive royalty revenue from Synchrony based on card usage in our stores and at other retailers for the Stein Mart Mastercard. We also receive revenues for new accounts and gain share based on the profitability of the overall program. Credit card revenue is recorded within other revenue in the Consolidated Statements of Operations. These revenues are recorded as they are earned based on the occurrence of the various program activities and represent the majority of other revenue. Subsequent to quarter-end on August 21, 2019, we entered into an amendment to our Agreement with Synchrony whereby Synchrony waived its rights to require us to post cash reserves to cure our failure to satisfy one or more of the quarterly financial covenants specified in the Agreement for periods through October 31, 2020 (the “Exemption Period”). As consideration for Synchrony’s entry into this amendment, we agreed to reduce the amount of fees paid to us by Synchrony under the Agreement from September 1, 2019 through the end of the Exemption Period.
Card holders are eligible to participate in the credit card rewards program, which provides for reward certificates. We defer a portion of our revenue for loyalty points earned by customers and recognize the revenue as the certificates earned are used to purchase merchandise by our customers. This revenue is recorded within other revenue in the Consolidated Statements of Operations.
9
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
Certificates may not ultimately be redeemed either in full or partially. We account for this “breakage” of unused amounts as revenue in proportion to the pattern of rights exercised by the customer. Breakage revenue is recorded within other revenue in the Consolidated Statements of Operations. During the 13 weeks ended August 3, 2019 and August 4, 2018, we recognized $1.9 million and $0.9 million, respectively, of breakage revenue on unused credit card reward certificates and points. During the 26 weeks ended August 3, 2019 and August 4, 2018, we recognized $3.8 million and $2.4 million, respectively, of breakage revenue on unused credit card reward certificates and points.
Revenue
The following table sets forth our revenue by type of contract (in thousands):
|
|
13 Weeks Ended
August 3, 2019
|
|
|
13 Weeks Ended
August 4, 2018
|
|
|
26 Weeks Ended
August 3, 2019
|
|
|
26 Weeks Ended
August 4, 2018
|
|
Store sales (1)
|
|
|
$
|
273,025
|
|
|
$
|
292,014
|
|
|
|
$
|
566,314
|
|
|
$
|
598,845
|
|
Ecommerce sales (1)
|
|
|
|
13,462
|
|
|
|
13,017
|
|
|
|
|
27,206
|
|
|
|
25,831
|
|
Licensee commissions (2)
|
|
|
|
5,882
|
|
|
|
5,828
|
|
|
|
|
13,006
|
|
|
|
12,788
|
|
Net sales
|
|
|
$
|
292,369
|
|
|
$
|
310,859
|
|
|
|
$
|
606,526
|
|
|
$
|
637,464
|
|
Credit card revenue (3)
|
|
|
|
1,791
|
|
|
|
2,221
|
|
|
|
|
4,355
|
|
|
|
4,489
|
|
Breakage revenue (4)
|
|
|
|
2,077
|
|
|
|
1,221
|
|
|
|
|
4,615
|
|
|
|
3,216
|
|
Other
|
|
|
|
95
|
|
|
|
127
|
|
|
|
|
218
|
|
|
|
246
|
|
Other revenue
|
|
|
|
3,963
|
|
|
|
3,569
|
|
|
|
|
9,188
|
|
|
|
7,951
|
|
Total revenue
|
|
|
$
|
296,332
|
|
|
$
|
314,428
|
|
|
|
$
|
615,714
|
|
|
$
|
645,415
|
|
(1)
|
Store and Ecommerce sales are net of any returns, discounts and percentage-off coupons.
|
(2)
|
Licensed department commissions are net of any returns.
|
(3)
|
Credit card revenue earned from Synchrony programs.
|
(4)
|
Breakage revenue earned on unused gift and merchandise return cards and unused certificates and loyalty reward points.
|
The following table sets forth the gross-up of the sales return reserve (in thousands):
|
|
August 3, 2019
|
|
|
February 2, 2019
|
|
|
August 4, 2018
|
|
Reserve for sales returns
|
|
|
$
|
(3,603
|
)
|
|
$
|
(3,469
|
)
|
|
$
|
(3,756
|
)
|
Cost of inventory returns
|
|
|
|
1,994
|
|
|
|
1,984
|
|
|
|
1,976
|
|
The following table sets forth the contract liabilities and their relationship to revenue (in thousands):
|
|
August 3, 2019
|
|
|
February 2, 2019
|
|
|
August 4, 2018
|
|
Deferred revenue contracts
|
|
|
$
|
(10,217
|
)
|
|
$
|
(11,017
|
)
|
|
$
|
(11,817
|
)
|
Gift card liability
|
|
|
|
(9,287
|
)
|
|
|
(12,246
|
)
|
|
|
(9,328
|
)
|
Credit card reward liability
|
|
|
|
(5,615
|
)
|
|
|
(5,583
|
)
|
|
|
(5,034
|
)
|
Liability for deferred revenue
|
|
|
$
|
(25,119
|
)
|
|
$
|
(28,846
|
)
|
|
$
|
(26,179
|
)
|
The following table sets forth a rollforward of the amounts included in contract liabilities for the periods presented (in thousands):
|
|
26 Weeks Ended
August 3, 2019
|
|
|
26 Weeks Ended
August 4, 2018
|
|
Beginning balance
|
|
|
$
|
28,846
|
|
|
$
|
29,381
|
|
Current period gift cards sold and loyalty reward points earned
|
|
|
|
16,970
|
|
|
|
16,311
|
|
Net sales from redemptions (1)
|
|
|
|
(15,282
|
)
|
|
|
(15,503
|
)
|
Breakage and amortization (2)
|
|
|
|
(5,415
|
)
|
|
|
(4,010
|
)
|
Ending balance
|
|
|
$
|
25,119
|
|
|
$
|
26,179
|
|
(1)
|
$6.2 and $6.4 million in net sales from redemptions were included in the beginning balance of contract liabilities for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively.
|
(2)
|
$3.0 million and $2.7 million in breakage and amortization were included in the beginning balance of contract liabilities for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively.
|
10
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
4. Accrued Expenses and Other Current Liabilities
The following table sets forth the major components of accrued expenses and other current liabilities (in thousands):
|
|
August 3, 2019
|
|
|
February 2, 2019
|
|
|
August 4, 2018
|
|
Property taxes
|
|
|
$
|
16,534
|
|
|
$
|
18,852
|
|
|
$
|
14,950
|
|
Unredeemed gift and merchandise return cards
|
|
|
|
9,287
|
|
|
|
12,246
|
|
|
|
9,328
|
|
Compensation and employee benefits
|
|
|
|
7,240
|
|
|
|
9,271
|
|
|
|
8,613
|
|
Accrued vacation
|
|
|
|
4,266
|
|
|
|
4,365
|
|
|
|
7,632
|
|
Other
|
|
|
|
38,534
|
|
|
|
32,916
|
|
|
|
33,218
|
|
Accrued expenses and other current liabilities
|
|
|
$
|
75,861
|
|
|
$
|
77,650
|
|
|
$
|
73,741
|
|
5. Shareholders’ Equity
Dividends
During the 26 weeks ended August 3, 2019 and August 4, 2018, there were no cash dividends declared.
Stock Repurchase Plan
During the 13 weeks ended August 3, 2019 and August 4, 2018, we repurchased 11,886 shares and 3,306 shares, respectively, of our common stock in the open market at a total cost of less than $0.1 million, respectively. During the 26 weeks ended August 3, 2019 and August 4, 2018, we repurchased 114,429 shares and 48,409 shares, respectively, of our common stock in the open market at a total cost of $0.1 million and less than $0.1 million, respectively. Stock repurchases on the open market, under a Board of Directors authorized plan, were for taxes due on the vesting of employee stock awards. As of August 3, 2019, there are 366,889 shares which can be repurchased pursuant to the Board of Directors’ current authorization.
6. Earnings (Loss) per Share
Basic earnings (loss) per share ("EPS”) is computed by dividing net income (loss) by the basic weighted-average number of common shares outstanding for the period. Diluted EPS is calculated by also considering the impact of potential common stock equivalents on both net income (loss) and weighted-average number of common shares outstanding. We no longer compute EPS under the two-class method since we do not have any remaining participating securities containing non-forfeitable rights to dividends.
The following table sets forth a reconciliation of basic weighted-average number of common shares to diluted weighted-average number of common shares (in thousands):
|
|
13 Weeks Ended
August 3, 2019
|
|
|
13 Weeks Ended
August 4, 2018
|
|
|
26 Weeks Ended
August 3, 2019
|
|
|
26 Weeks Ended
August 4, 2018
|
|
Basic weighted-average shares outstanding
|
|
|
47,406
|
|
|
|
46,669
|
|
|
|
47,258
|
|
|
|
46,639
|
|
Incremental shares from share-based compensation plans
|
|
|
-
|
|
|
|
-
|
|
|
|
323
|
|
|
|
500
|
|
Diluted weighted-average shares outstanding
|
|
|
47,406
|
|
|
|
46,669
|
|
|
|
47,581
|
|
|
|
47,139
|
|
Diluted weighted-average shares outstanding exclude approximately 2.4 million shares and 2.3 million shares during the 13 weeks ended August 3, 2019 and August 4, 2018, respectively, which are anti-dilutive for the periods presented. Diluted weighted-average shares outstanding exclude approximately 2.6 million shares and 3.0 million shares during the 26 weeks ended August 3, 2019 and August 4, 2018, respectively, which are anti-dilutive for the periods presented. These shares are comprised of a mix of stock options, performance awards and restricted stock units. Stock options excluded were those that had exercise prices greater than the average market price of the common shares such that inclusion would have been anti-dilutive. Restricted stock units and performance shares excluded were shares that were anti-dilutive as calculated using the treasury stock method.
11
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
7. Debt
The following table sets forth our debt (in thousands):
|
|
August 3, 2019
|
|
|
February 2, 2019
|
|
|
August 4, 2018
|
|
Revolving credit facility
|
|
|
$
|
103,517
|
|
|
$
|
119,100
|
|
|
$
|
112,253
|
|
Term loan
|
|
|
|
35,000
|
|
|
|
35,000
|
|
|
|
50,000
|
|
Promissory note
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,000
|
|
Total debt
|
|
|
|
138,517
|
|
|
|
154,100
|
|
|
|
175,253
|
|
Current portion
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(125,253
|
)
|
Debt issuance costs
|
|
|
|
(755
|
)
|
|
|
(847
|
)
|
|
|
(714
|
)
|
Long-term debt
|
|
|
$
|
137,762
|
|
|
$
|
153,253
|
|
|
$
|
49,286
|
|
Revolving Credit Facility and Equipment Term Loan
On February 3, 2015, we entered into a $250.0 million senior secured revolving credit facility pursuant to a second amended and restated credit agreement (the “Credit Agreement”) with Wells Fargo Bank (“Wells Fargo”), with an original maturity of February 2020 (the “Revolving Credit Facility”) and a secured $25.0 million master loan agreement with Wells Fargo Equipment Finance, Inc. (the “Equipment Term Loan”) with an original maturity of February 2018. Borrowings under the Revolving Credit Facility were initially used for a special dividend but are subsequently being used for working capital, capital expenditures and other general corporate purposes. During 2015, debt issuance costs of $0.4 million were associated with the Revolving Credit Facility and the Equipment Term Loan. Debt issuance costs associated with the Credit Agreement were being amortized over its term. We repaid the Equipment Term Loan in full on January 22, 2018, at which time the associated debt issuance costs were fully amortized.
On February 19, 2018, we entered into Amendment No. 1 (the “Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Credit Agreement Amendment provided for, among other things, an Accommodation Period (as defined in the Credit Agreement Amendment) during which we were not required to meet the Fixed Charge Coverage Ratio (as defined in the Credit Agreement). This change permitted us to borrow the full amount of the then applicable borrowing base until we delivered our financial statements for the Measurement Period (as defined in the Credit Agreement) ended February 28, 2018. Pursuant to the Credit Agreement Amendment, a Cash Dominion Event (as defined in the Credit Agreement Amendment) occurred as of the effective date of the Credit Agreement Amendment and at all times thereafter. Because of the Cash Dominion Event, all of our cash receipts were swept daily to repay outstanding borrowings under the Credit Agreement and the amount outstanding under the Credit Agreement was classified as a short-term obligation. As noted below, the Third Credit Agreement Amendment removed the Cash Dominion Event effective September 18, 2018.
On March 14, 2018, we entered into Amendment No. 2 (the “Second Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Second Credit Agreement Amendment provided for, among other things, the following: (1) the $25.0 million Tranche A-1 Revolving Loans (as defined in the Second Credit Agreement Amendment) were repaid in full with the proceeds of the Term Loan (as defined below); (2) the entry into the Intercreditor Agreement (as defined below); and (3) certain other modifications and updates to coordinate the Revolving Credit Facility with the Term Loan.
On September 18, 2018, we entered into Amendment No. 3 (the “Third Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Third Credit Agreement Amendment provided for, among other things, the following: (1) the increase of Aggregate Tranche A Revolving Loan Commitments (as defined in the Second Credit Agreement Amendment) from $225.0 million to $240.0 million; (2) an extension of the maturity date of the Revolving Credit Facility to the earlier of (a) the maturity date of the Term Loan Agreement (as defined below) or (b) September 18, 2023; and (3) the elimination of Cash Dominion Event status and a change in Cash Dominion to be triggered only in the event of (a) the occurrence and continuance of any Event of Default or (b) Excess Availability of less than (A) 10.0% of the loan cap at any time or (B) 12.5% of the loan cap for three consecutive business days. During 2018, debt issuance costs of less than $0.1 million were associated with the Third Credit Agreement Amendment and are being amortized over its term. Debt issuance costs of $0.1 million remaining under the initial Credit Agreement are being amortized over the new term of the Third Credit Agreement Amendment. The elimination of cash dominion status changed the debt classification from a short-term to long-term obligation.
12
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
On February 26, 2019, we entered into Amendment No. 4 (the “Fourth Credit Agreement Amendment”) to the Credit Agreement with Wells Fargo. The Fourth Credit Agreement Amendment provided for, among other things, a modification to the definition of “Capital Expenditures” and “Permitted Indebtedness” as defined in the Fourth Credit Agreement Amendment.
The total amount available for borrowings under the Credit Agreement is the lesser of $240.0 million or 100 percent of eligible credit card receivables and the net recovery percentage of eligible inventories less reserves. On August 3, 2019, in addition to outstanding borrowings under the Credit Agreement, we had $8.0 million of outstanding letters of credit and our Excess Availability (as defined in the Credit Agreement) was $61.9 million.
The Credit Agreement contains customary representations and warranties, affirmative and negative covenants (including the requirement of a 1.0 to 1.0 consolidated Fixed Charge Coverage Ratio upon the occurrence and during the continuance of any Covenant Compliance Event, as defined in the Credit Agreement), and events of default for facilities of this type and is cross-collateralized and cross-defaulted. Collateral for the Revolving Credit Facility consists of substantially all of our personal property. Wells Fargo has a first lien on all collateral other than equipment.
Borrowings under the Credit Agreement are either base rate loans or London Interbank Offered Rate (“LIBOR”) loans. LIBOR loans bear interest equal to the adjusted LIBOR plus the applicable margin (125 to 175 basis points) depending on the quarterly average excess availability. Base Rate Loans bear interest equal to the highest of (a) the Federal Funds Rate plus 0.50 percent, (b) the adjusted LIBOR plus 1.00 percent, or (c) the Wells Fargo “prime rate,” plus the Applicable Margin (25 to 75 basis points).
The weighted average interest rate for the amount outstanding under the Credit Agreement was 3.87 percent as of August 3, 2019.
Term Loan
On March 14, 2018, we entered into a Term Loan Credit Agreement with Gordon Brothers Finance Company, as administrative agent (in such capacity, the “Term Loan Agent”), and Gordon Brothers Finance Company, LLC, as lender (the “Term Loan Agreement”). The Term Loan Agreement provided for a term loan in the amount of $50.0 million (the “Term Loan”). Debt issuance costs associated with the Term Loan were capitalized in the amount of $0.9 million and are being amortized over the term of the Term Loan. The net proceeds of $49.1 million from the Term Loan were used to permanently pay off the $25.0 million Tranche A-1 Revolving Loan (as defined in the Credit Agreement) and to pay down the Revolving Credit Facility. After utilizing proceeds from the Term Loan for repayment of amounts outstanding under the existing Tranche A-1 Revolving Loans, the Term Loan resulted in an increase in our Excess Availability of approximately $25.0 million under the Credit Agreement.
The Term Loan originally matured on the earlier of (1) the termination date specified in our Credit Agreement, as such date may be extended with the consent of the Term Loan Agent or in accordance with the Intercreditor Agreement (defined below), and (2) March 14, 2020.
On September 18, 2018, we entered into Amendment No. 2 (the “Second Term Loan Amendment”) to the Term Loan with Gordon Brothers Finance Company. The Second Term Loan Amendment provided for, among other things, the following: (1) the reduction of the maximum amount of the Term Loan to $35.0 million; (2) an extension of the maturity date of the Term Loan Agreement to the earlier of (a) the termination date specified in the Revolving Credit Facility (as defined in the Third Credit Agreement Amendment), and (b) September 18, 2023; (3) the reduction of the non-default interest rate applicable to the Term Loan under the Term Loan Agreement to a fluctuating rate of interest equal to three-month LIBOR (with a floor of 1.5%) plus 8.25% per annum; and (4) the elimination of Cash Dominion Event status and a change in Cash Dominion to be triggered only in the event of (a) the occurrence and continuance of any Event of Default or (b) Excess Availability of less than (A) 10.0% of the Revolving Loan Cap at any time or (B) 12.5% of the Revolving Loan Cap for three consecutive Business Days. During 2018, debt issuance costs of approximately $0.3 million were associated with the Term Loan and are being amortized over its term. The elimination of cash dominion status changed the debt classification from a short-term to long-term obligation.
On February 26, 2019, we entered into Amendment No. 3 (the “Third Term Loan Amendment”) to the Term Loan Agreement. The Third Term Loan Amendment provided for, among other things, a modification to the definition of “Capital Expenditures” and “Permitted Indebtedness” as defined in the Third Term Loan Amendment.
13
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
The Term Loan Agreement contains customary representations and warranties, events of default, and affirmative and negative covenants, which include the retention of the existing minimum 1.0 to 1.0 consolidated fixed charge coverage ratio under the Credit Agreement during periods where Revolving Excess Availability (as defined in the Term Loan Agreement) is less than the greater of $20.0 million or 10.0 percent of Combined Loan Cap (as defined in the Term Loan Agreement) for four consecutive business days or during the occurrence of an Event of Default (as defined in the Term Loan Agreement.
The Term Loan is secured by a second lien security interest (subordinate only to the liens securing the Credit Agreement) on all assets securing the Credit Agreement (which consist of substantially all of our personal property), except furniture, fixtures and equipment and intellectual property, upon which the Term Loan lenders have a first lien security interest. If at any time prior to the first anniversary date of the Term Loan, the Revolving Excess Availability is less than $20.0 million, if requested by the Term Loan Agent, the Term Loan will also be secured by a first lien on leasehold interests in real property with an aggregate value of not less than $10.0 million, and the Credit Agreement will be secured by a second lien on such leasehold interests.
The Term Loan is subject to certain mandatory prepayments if an Event of Default (as defined in the Term Loan Agreement) exists. If no such Event of Default exists, proceeds of the Term Loan priority collateral are to be applied to amounts outstanding under the Credit Agreement.
The Term Loan Agent and Wells Fargo have entered into an Intercreditor Agreement dated as of March 14, 2018 (the “Intercreditor Agreement”), acknowledged by us under the Term Loan and the Credit Agreement. The Intercreditor Agreement was also amended on September 18, 2018 to incorporate the amendment to the Revolving Credit Facility and the Term Loan Agreement.
The weighted average interest rate for the amount outstanding under the Term Loan was 10.57 percent as of August 3, 2019.
Promissory Note
We believe we can borrow, on a short-term basis and subject to the formal agreement of the lender, amounts up to the cash surrender value of the life insurance policies related to our executive deferred compensation plans to provide additional liquidity if needed. At August 3, 2019, the cash surrender value of our life insurance policies was $15.5 million.
On February 2, 2018, we executed a promissory note under which we borrowed approximately $13.7 million (the “Promissory Note”) from SunTrust Bank (the “Trustee”) in its capacity as the trustee under a trust agreement (the “Trust Agreement”) dated September 1, 1999. The trust established by the Trust Agreement (the “Trust”) holds certain life insurance policies related to our executive deferred compensation plans. The Trustee obtained loans from the insurance policies held in the Trust in an amount not less than the amount of the Promissory Note. The Promissory Note was a short-term obligation and the proceeds were used to pay down borrowings under the existing Credit Agreement which provided additional availability under that agreement.
The Promissory Note had a fixed interest rate of 3.58 percent per annum and an original maturity date of April 1, 2018. On March 7, 2018, we executed an amendment to the Promissory Note under which the Trustee extended the maturity date of the note from April 1, 2018, to July 1, 2018 (the “Maturity Date”). The amendment did not alter the short-term nature of the Promissory Note. The Promissory Note could be prepaid in whole or in part at any time. All unpaid principal and accrued interest on the Promissory Note would have become due and payable on the Maturity Date. The Trustee could offset payments due under the Promissory Note against amounts we would otherwise be entitled to withdraw from the Trust under the terms of the Trust Agreement. On June 29, 2018, we repaid the outstanding balance of the second promissory note.
On July 31, 2018, we executed a second promissory note from SunTrust Bank for $13.0 million, which carried a fixed interest rate of 3.58 percent per annum and an original maturity date of September 10, 2018. This note included the same terms as the Promissory Note executed on February 2, 2018. On September 10, 2018, we repaid the outstanding balance of the Promissory Note.
14
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
The following table sets forth the aggregate maturities of our long-term debt at August 3, 2019, for the following fiscal years (in thousands):
2020
|
|
$
|
|
-
|
|
2021
|
|
|
|
-
|
|
2022
|
|
|
|
-
|
|
2023
|
|
|
|
138,517
|
|
2024
|
|
|
|
-
|
|
Thereafter
|
|
|
|
-
|
|
Total
|
|
$
|
|
138,517
|
|
8. Leases
We lease all our retail store locations, support facilities and certain equipment under operating leases. Our store leases have varying terms and are generally for 10 years with options to extend the lease term for two or more 5-year periods. Annual store rent is generally comprised of a fixed minimum amount plus an insignificant contingent amount based on a percentage of sales in excess of specified levels. Most store leases also require additional payments covering real estate taxes, common area costs and insurance. Certain lease agreements contain rent holidays, and/or rent escalation clauses. Except for contingent rent, we recognize rent expense on a straight-line basis over the lease term. Contingent rent, determined based on a percentage of sales in excess of specified levels, is recognized as rent expense when achievement of the specified sales that triggers the contingent rent is probable. Construction allowances and other such lease incentives are recorded on the Consolidated Balance Sheets and are amortized on a straight-line basis as a reduction of rent expense. The lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement or modification date in determining the present value of lease payments.
In addition to the operating lease assets presented on the Consolidated Balance Sheets, assets under finance leases of $3.0 million are included in property and equipment, net on the Consolidated Balance Sheets as of August 3, 2019. The remaining finance lease obligation is split between accrued expenses and other current liabilities for the short-term portion and other liabilities for the long-term portion on the Consolidated Balance Sheets.
The following table summarizes our classification of lease cost (in thousands):
|
|
|
|
13 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
Statement of Operations Location
|
|
August 3, 2019
|
|
|
August 3, 2019
|
|
Operating lease cost (1)
|
|
Selling, general and administrative expenses
|
|
$
|
24,149
|
|
|
$
|
47,676
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
Amortization of finance lease
assets
|
|
Selling, general and administrative expenses
|
|
|
160
|
|
|
|
312
|
|
Interest on lease liabilities
|
|
Interest expense, net
|
|
|
17
|
|
|
|
33
|
|
Variable lease cost
|
|
Selling, general and administrative expenses
|
|
|
9,330
|
|
|
|
19,260
|
|
Net lease cost
|
|
|
|
$
|
33,656
|
|
|
$
|
67,281
|
|
(1)
|
Includes lease costs for short-term leases, which are immaterial.
|
15
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
As of August 3, 2019, the following table summarizes the maturity of the company’s lease liabilities (in thousands):
|
|
Operating
|
|
|
Finance
|
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
Remainder of 2019
|
|
$
|
50,047
|
|
|
$
|
487
|
|
|
$
|
50,534
|
|
2020
|
|
|
96,054
|
|
|
|
855
|
|
|
|
96,909
|
|
2021
|
|
|
85,561
|
|
|
|
282
|
|
|
|
85,843
|
|
2022
|
|
|
70,371
|
|
|
|
281
|
|
|
|
70,652
|
|
2023
|
|
|
55,309
|
|
|
|
151
|
|
|
|
55,460
|
|
After 2023
|
|
|
107,324
|
|
|
|
1
|
|
|
|
107,325
|
|
Total lease payments
|
|
|
464,666
|
|
|
|
2,057
|
|
|
|
466,723
|
|
Less: Interest
|
|
|
(65,216
|
)
|
|
|
(182
|
)
|
|
|
(65,398
|
)
|
Present value of lease liabilities
|
|
$
|
399,450
|
|
|
$
|
1,875
|
|
|
$
|
401,325
|
|
The following table summarizes our lease term and discount rate:
|
|
|
|
|
|
|
|
|
|
|
August 3, 2019
|
|
Weighted-average remaining lease term (years):
|
|
|
|
|
|
|
Operating leases
|
|
|
|
5.7 years
|
|
Finance leases
|
|
|
|
2.7 years
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
Operating leases
|
|
|
|
|
5.4
|
%
|
Finance leases
|
|
|
|
|
6.4
|
%
|
The following table summarizes the other information related to our lease liabilities (in thousands):
|
|
13 Weeks Ended
|
|
|
26 Weeks Ended
|
|
|
|
August 3, 2019
|
|
|
August 3, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
25,480
|
|
|
$
|
50,697
|
|
Operating cash flows from finance leases
|
|
|
17
|
|
|
|
33
|
|
Financing cash flows from finance leases
|
|
|
199
|
|
|
|
367
|
|
As of February 2, 2019, in accordance with ASC 840, Leases, the aggregate minimum non-cancelable lease payments under operating leases were as follows (in thousands):
|
|
Operating
|
|
|
Finance
|
|
|
|
Leases
|
|
|
Leases
|
|
2019
|
|
$
|
101,139
|
|
|
$
|
738
|
|
2020
|
|
|
93,190
|
|
|
|
574
|
|
2021
|
|
|
82,324
|
|
|
|
1
|
|
2022
|
|
|
66,820
|
|
|
|
-
|
|
2023
|
|
|
50,697
|
|
|
|
-
|
|
Thereafter
|
|
|
102,550
|
|
|
|
-
|
|
Total minimum lease payments
|
|
$
|
496,720
|
|
|
|
1,313
|
|
Amount representing interest
|
|
|
|
|
|
|
(67
|
)
|
Present value of minimum lease payments
|
|
|
|
|
|
|
1,246
|
|
Less: current portion
|
|
|
|
|
|
|
(685
|
)
|
Long-term capital lease obligations
|
|
|
|
|
|
$
|
561
|
|
16
Stein Mart, Inc.
Notes to Consolidated Financial Statements - Continued
9. Commitments and Contingencies
We are involved in various routine legal proceedings incidental to the conduct of our business. While some of these matters could be material to our results of operations or cash flows for any period if an unfavorable outcome results, we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our overall financial condition. During both the 13 and 26 weeks ended August 3, 2019 and August 4, 2018, we did not accrue for any actual or anticipated loss contingencies.
10. Income Taxes
The provision for income taxes is based on a current estimate of the annual effective tax rate adjusted to reflect the impact of discrete items. Our effective income tax rate may fluctuate from quarter to quarter as a result of a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in tax law, outcomes of administrative audits, the impact of discrete items, and the mix of earnings. Our income tax expense for both the 13 and 26 weeks ended August 3, 2019, reflects our estimated taxable income for the year. The effective tax rate will be close to zero percent for all of 2019.
17