Item 2 - Management’s Discussion
and Analysis of Financial Condition and
Results of Operations
August 3, 2019 and August 4, 2018
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 unaudited 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 as of and for the fiscal year ended February 2, 2019.
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 3, 2019, the fye segment operated 206 stores totaling approximately 1.1 million square feet in the United States,
the District of Columbia and the U.S. Virgin Islands. The etailz segment is a 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 industry 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. 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 and
working capital (current assets less current liabilities) as relevant indicators of its financial position. See Liquidity and Cash
Flows section for further discussion of these items.
RESULTS OF OPERATIONS
Thirteen and Twenty-six Weeks Ended August
3, 2019
Compared to the Thirteen and Twenty-six
Weeks Ended August 4, 2018
Segment Highlights (amounts in thousands):
|
|
Thirteen Weeks Ended
|
|
|
Twenty-six Weeks Ended
|
|
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
Total Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
41,744
|
|
|
$
|
50,545
|
|
|
$
|
86,762
|
|
|
$
|
104,608
|
|
etailz
|
|
|
34,260
|
|
|
|
51,629
|
|
|
|
69,392
|
|
|
|
94,169
|
|
Total Company
|
|
$
|
76,004
|
|
|
$
|
102,174
|
|
|
$
|
156,154
|
|
|
$
|
198,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
17,013
|
|
|
$
|
20,634
|
|
|
$
|
34,515
|
|
|
$
|
42,905
|
|
etailz
|
|
|
8,103
|
|
|
|
11,539
|
|
|
|
15,991
|
|
|
|
20,956
|
|
Total Company
|
|
$
|
25,116
|
|
|
$
|
32,173
|
|
|
$
|
50,506
|
|
|
$
|
63,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye
|
|
$
|
(6,655
|
)
|
|
$
|
(6,629
|
)
|
|
$
|
(12,755
|
)
|
|
$
|
(12,001
|
)
|
etailz
|
|
|
(746
|
)
|
|
|
(2,760
|
)
|
|
|
(2,287
|
)
|
|
|
(5,547
|
)
|
Total Company
|
|
$
|
(7,401
|
)
|
|
$
|
(9,389
|
)
|
|
$
|
(15,042
|
)
|
|
$
|
(17,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of etailz Loss from Operations to etailz Adjusted Loss from Operations
|
|
|
|
|
|
|
|
|
etailz loss from operations
|
|
$
|
(746
|
)
|
|
$
|
(2,760
|
)
|
|
$
|
(2,287
|
)
|
|
$
|
(5,547
|
)
|
Acquisition related amortization and compensation expenses (1)
|
|
|
286
|
|
|
|
2,090
|
|
|
|
638
|
|
|
|
4,184
|
|
etailz adjusted loss from operations (2)
|
|
$
|
(460
|
)
|
|
$
|
(670
|
)
|
|
$
|
(1,649
|
)
|
|
$
|
(1,363
|
)
|
(1) For the 13 weeks ended August 3, 2019, acquisition
related expenses consisted of amortization expense of intangible assets of $286 thousand. For the 26 weeks ended August 3, 2019,
acquisition related expenses consisted of amortization expense of intangible assets of $572 thousand and compensation expense of
$66 thousand. For the 13 weeks ended August 4, 2018, acquisition related expenses consisted of amortization expense of intangible
assets of $972 thousand and compensation expense of $1,118 thousand. For the 26 weeks ended August 4, 2018, acquisition related
expenses consisted of amortization expense of intangible assets of $1,944 thousand and compensation expense of $2,240 thousand.
(2) 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 loss 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
|
|
|
|
|
(amounts in thousands)
|
|
August 3,
2019
|
|
August 4,
2018
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
August 3,
2019
|
|
August 4,
2018
|
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye revenue
|
|
$
|
41,744
|
|
|
50,545
|
|
$
|
(8,801
|
)
|
|
|
-17.4
|
%
|
|
|
-1.2
|
%
|
|
$
|
86,762
|
|
|
104,608
|
|
|
$
|
(17,846
|
)
|
|
|
-17.1
|
%
|
|
|
-0.6
|
%
|
etailz revenue
|
|
|
34,260
|
|
|
51,629
|
|
|
(17,369
|
)
|
|
|
-33.6
|
%
|
|
|
|
|
|
|
69,392
|
|
|
94,169
|
|
|
|
(24,777
|
)
|
|
|
-26.3
|
%
|
|
|
|
|
Total revenue
|
|
$
|
76,004
|
|
$
|
102,174
|
|
$
|
(26,170
|
)
|
|
|
-25.6
|
%
|
|
|
|
|
|
$
|
156,154
|
|
$
|
198,777
|
|
|
$
|
(42,623
|
)
|
|
|
-21.4
|
%
|
|
|
|
|
Total revenue decreased 25.6% and 21.4% for the thirteen and
twenty-six weeks ended August 3, 2019 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
|
|
|
|
|
(amounts in thousands,
except store count)
|
August
3,
2019
|
|
|
August
4,
2018
|
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
August
3,
2019
|
|
|
August
4,
2018
|
|
|
$
|
|
|
%
|
|
|
Comp
Store Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye net sales
|
|
$
|
40,892
|
|
|
|
49,410
|
|
|
$
|
(8,518
|
)
|
|
|
-17.2
|
%
|
|
|
-1.2
|
%
|
|
$
|
85,116
|
|
|
|
102,102
|
|
|
$
|
(16,986
|
)
|
|
|
-16.6
|
%
|
|
|
-0.6
|
%
|
Other revenue
|
|
|
852
|
|
|
|
1,135
|
|
|
|
(283
|
)
|
|
|
-24.9
|
%
|
|
|
|
|
|
|
1,646
|
|
|
|
2,506
|
|
|
|
(860
|
)
|
|
|
-34.3
|
%
|
|
|
|
|
Total revenue
|
|
$
|
41,744
|
|
|
$
|
50,545
|
|
|
$
|
(8,801
|
)
|
|
|
-17.4
|
%
|
|
|
|
|
|
$
|
86,762
|
|
|
$
|
104,608
|
|
|
$
|
(17,846
|
)
|
|
|
-17.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of fye net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trend / Lifestyle
|
|
|
46.8
|
%
|
|
|
40.9
|
%
|
|
|
|
|
|
|
|
|
|
|
9.6
|
%
|
|
|
44.7
|
%
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
9.5
|
%
|
Video
|
|
|
24.3
|
%
|
|
|
29.0
|
%
|
|
|
|
|
|
|
|
|
|
|
-16.1
|
%
|
|
|
26.4
|
%
|
|
|
30.5
|
%
|
|
|
|
|
|
|
|
|
|
|
-11.6
|
%
|
Music
|
|
|
17.5
|
%
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
-7.8
|
%
|
|
|
17.7
|
%
|
|
|
18.5
|
%
|
|
|
|
|
|
|
|
|
|
|
-3.9
|
%
|
Electronics
|
|
|
11.4
|
%
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
-0.1
|
%
|
|
|
11.2
|
%
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
-2.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store Count:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
241
|
|
|
|
(35
|
)
|
|
|
-14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Square footage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145
|
|
|
|
1,339
|
|
|
|
(194
|
)
|
|
|
-14.5
|
%
|
|
|
|
|
fye net sales. Net sales decreased 17.2% and 16.6% during
the thirteen weeks and twenty-six weeks ended August 3, 2019 as compared to the same period last year. The decline in net sales
resulted from a 14.5% decline in total stores in operation and a 1.2% and 0.6% decline in comparable store net sales for the thirteen
and twenty-six weeks ended August 3, 2019, respectively.
Trend/Lifestyle:
Comparable store net sales in the trend/lifestyle category increased
9.6% and 9.5% during the thirteen and twenty-six weeks ended August 3, 2019, respectively. Trend/lifestyle products represented
46.8% and 44.7% of total net sales for the thirteen and twenty-six weeks ended August 3, 2019, respectively, compared to 40.9%
and 39.3% 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 16.1%
and 11.6% during the thirteen and twenty-six week periods ended August 3, 2019, respectively. The video category represented 24.3%
and 26.4% of total net sales for the thirteen and twenty-six weeks ended August 3, 2019, respectively, compared to 29.0% and 30.5%
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 3, 2019,
music sales in comparable stores decreased 7.8% and 3.9%, respectively, versus the thirteen and twenty-six weeks ended August 4,
2018. The music category represented 17.5% and 17.7% of total net sales for the thirteen and twenty-six weeks ended August 3, 2019,
respectively, compared to 18.4% and 18.5% for the thirteen and twenty-six weeks ended August 4, 2018 due to continued industry-wide
decline in physical media sales.
Electronics:
Comparable store net sales in the electronics category decreased
0.1% and 2.3% during the thirteen and twenty-six weeks ended August 3, 2019, respectively. Electronics net sales represented 11.4%
and 11.2% of total net sales for the thirteen and twenty-six weeks ended August 4, 2019, respectively, compared to 11.7% of total
net sales for both the thirteen and twenty-six weeks in the comparable periods last year.
Other Revenue. Other revenue, which was primarily related
to commissions and fees earned from third parties for the fye segment, was approximately $0.9 million and $1.6 million for the
thirteen and twenty-six weeks ended August 3, 2019, respectively, compared to $1.1 million and $2.5 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 $34.3 million
and $69.4 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively compared to $51.6 million and $94.2
million sales for the thirteen and twenty-six weeks ended August 4, 2018. 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 3, 2019, etailz
sold approximately 25,000 SKUs from approximately 1,500 suppliers, compared to approximately 31,000 SKUs from approximately 2,200
suppliers during the twenty-six weeks ended August 4, 2018. The decline in sales was attributable to the vendor remediation performance
improvement plan which was implemented during the fourth quarter of 2018 for the etailz segment, as discussed in Note 1 to the
interim condensed consolidated financial statements.
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
|
|
(amounts in thousands)
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
$
|
|
|
%
|
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit
|
|
$
|
17,013
|
|
|
$
|
20,634
|
|
|
$
|
(3,621
|
)
|
|
|
-17.5
|
%
|
|
$
|
34,515
|
|
|
$
|
42,905
|
|
|
$
|
(8,390
|
)
|
|
|
-19.6
|
%
|
etailz gross profit
|
|
|
8,103
|
|
|
|
11,539
|
|
|
|
(3,436
|
)
|
|
|
-29.8
|
%
|
|
|
15,991
|
|
|
|
20,956
|
|
|
|
(4,965
|
)
|
|
|
-23.7
|
%
|
Total gross profit
|
|
$
|
25,116
|
|
|
$
|
32,173
|
|
|
$
|
(7,057
|
)
|
|
|
-21.9
|
%
|
|
$
|
50,506
|
|
|
$
|
63,861
|
|
|
$
|
(13,355
|
)
|
|
|
-20.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye gross profit as a % of fye revenue
|
|
|
40.8
|
%
|
|
|
40.8
|
%
|
|
|
|
|
|
|
|
|
|
|
39.8
|
%
|
|
|
41.0
|
%
|
|
|
|
|
|
|
|
|
etailz gross profit as a % of etailz revenue
|
|
|
23.7
|
%
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
|
23.0
|
%
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
Total gross profit as a % of total revenue
|
|
|
33.0
|
%
|
|
|
31.5
|
%
|
|
|
|
|
|
|
|
|
|
|
32.3
|
%
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
Gross profit decreased 21.9% to $25.1 million for the thirteen
weeks ended August 3, 2019 compared to $32.2 million for the thirteen weeks ended August 4, 2018. For the twenty-six weeks ended
August 3, 2019, gross profit decreased 20.9% to $50.5 million compared to $63.9 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 3, 2019 was 40.8% and 39.8%, respectively, compared to 40.8% and 41.0%
for the comparable periods last year.
etailz Segment
etailz gross profit as a percentage of
total revenue for the thirteen and twenty-six weeks ended August 3, 2019 was 23.7% and 23.0%, respectively, compared to 22.3% for
both the thirteen and twenty-six weeks for the comparable periods last year. The increase in the gross profit rate was a result
of the performance improvement plan implemented during the fourth quarter of 2018. See Note 1 for the description of the etailz
segment performance improvement plan.
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
|
|
(amounts in thousands)
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
$
|
|
|
%
|
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fye SG&A, excluding depreciation and amortization
|
|
$
|
23,052
|
|
|
$
|
26,103
|
|
|
($
|
3,051
|
)
|
|
|
-11.7
|
%
|
|
$
|
46,082
|
|
|
$
|
52,592
|
|
|
($
|
6,510
|
)
|
|
|
-12.4
|
%
|
As a % of total fye revenue
|
|
|
55.2
|
%
|
|
|
51.6
|
%
|
|
|
|
|
|
|
|
|
|
|
53.1
|
%
|
|
|
50.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
etailz SG&A, excluding depreciation and amortization
|
|
|
8,413
|
|
|
|
13,185
|
|
|
|
(4,772
|
)
|
|
|
-36.2
|
%
|
|
|
17,434
|
|
|
|
24,310
|
|
|
|
(6,876
|
)
|
|
|
-28.3
|
%
|
As a % of total etailz revenue
|
|
|
24.6
|
%
|
|
|
25.5
|
%
|
|
|
|
|
|
|
|
|
|
|
25.1
|
%
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,052
|
|
|
|
2,274
|
|
|
|
(1,222
|
)
|
|
|
-53.7
|
%
|
|
|
2,032
|
|
|
|
4,507
|
|
|
|
(2,475
|
)
|
|
|
-54.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SG&A
|
|
$
|
32,517
|
|
|
$
|
41,562
|
|
|
($
|
9,045
|
)
|
|
|
-21.8
|
%
|
|
$
|
65,548
|
|
|
$
|
81,409
|
|
|
($
|
15,861
|
)
|
|
|
-19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a % of total revenue
|
|
|
42.8
|
%
|
|
|
40.7
|
%
|
|
|
|
|
|
|
|
|
|
|
42.0
|
%
|
|
|
41.0
|
%
|
|
|
|
|
|
|
|
|
SG&A expenses decreased $9.0 million
and $15.9 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively.
fye Segment
fye SG&A, excluding depreciation and amortization expenses,
decreased $3.1 million, or 11.7%, and $6.5 million, or 12.4%, for the thirteen and twenty-six weeks ended August 3, 2019, respectively.
As a percentage of fye revenue, SG&A expenses in the fye segment for the thirteen and twenty-six weeks ended August 3, 2019
were 55.2% and 53.1%, respectively, compared to 51.6% and 50.3% for the same periods last year. The decline in SG&A expenses
was due to lower sales primarily as a result of fewer stores in operation. The increase in SG&A expenses as a percentage of
revenue was due to an increase in outside consulting and professional fees.
etailz Segment
etailz SG&A, excluding depreciation and amortization expenses,
decreased $4.8 million and $6.9 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively. As a percentage
of etailz revenue, SG&A expenses in the etailz segment for the thirteen and twenty-six weeks ended August 3, 2019 were 24.6%
and 25.1%, respectively, compared to 25.5% and 25.8% for the same periods last year. The decrease was primarily due to expense
reduction initiatives implemented in the fourth quarter of 2018.
Depreciation and amortization. Consolidated depreciation
and amortization expense decreased $1.2 million and $2.5 million for the thirteen and twenty-six weeks ended August 3, 2019, respectively,
primarily due to the $29.1 million net decrease in carrying value of fixed assets and intangible assets, resulting from impairment
charges recorded for the fye segment, during the fourth quarter of fiscal 2018. 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 2, 2019.
Interest Expense. Interest expense was $194 thousand
and $326 thousand during the thirteen and twenty-six weeks ended August 3, 2019, respectively. Interest expense consisted primarily
of interest payments resulted from borrowings under the Company’s credit facility and unused commitment fees. Interest expense
during the thirteen and twenty-six weeks ended August 4, 2018 was $103 thousand and $166 thousand, respectively. The increase in
interest expense was due to borrowings under the credit facility as discussed in Note 8 to the interim condensed consolidated financial
statements.
Other Loss (Income).
As of August 3, 2019, other loss (income) consisted of the following:
|
|
Thirteen Weeks Ended
|
|
|
Twenty-six Weeks Ended
|
|
(amounts in thousands)
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
Write-off of investment
|
|
$
|
500
|
|
|
$
|
—
|
|
|
$
|
500
|
|
|
$
|
—
|
|
Interest income
|
|
|
(38
|
)
|
|
|
(49
|
)
|
|
|
(81
|
)
|
|
|
(128
|
)
|
Other loss (income)
|
|
$
|
462
|
|
|
$
|
(49
|
)
|
|
$
|
419
|
|
|
$
|
(128
|
)
|
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 3, 2019 and comparative periods last year.
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
|
|
(amounts in thousands)
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
$
Change
|
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
$
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(8,057
|
)
|
|
$
|
(9,443
|
)
|
|
$
|
1,386
|
|
|
$
|
(15,787
|
)
|
|
$
|
(17,586
|
)
|
|
$
|
1,799
|
|
Income tax expense
|
|
|
71
|
|
|
|
67
|
|
|
|
4
|
|
|
|
143
|
|
|
|
71
|
|
|
|
72
|
|
Net loss
|
|
$
|
(8,128
|
)
|
|
$
|
(9,510
|
)
|
|
$
|
1,382
|
|
|
$
|
(15,930
|
)
|
|
$
|
(17,657
|
)
|
|
$
|
1,727
|
|
LIQUIDITY
Liquidity and Cash Flows:
The Company’s primary sources of liquidity are its borrowing
capacity under its revolving credit facility, available cash and cash equivalents, and to a lesser extent, cash generated from
operations. Our cash requirements relate primarily to working capital needed to operate our business, including funding operating
expenses, the purchase of inventory and capital expenditures. Our ability to achieve profitability and meet future liquidity needs
and capital requirements will depend upon numerous factors, including the timing and amount of our revenue; the timing and amount
of our operating expenses; the timing and costs of working capital needs; and changes in our strategy or our planned activities.
The Company incurred net losses of $15.9 million and $17.7 million
for the twenty-six weeks ended August 3, 2019 and August 4, 2018, respectively, and has an accumulated deficit of $66.2 million
at August 3, 2019. In addition, net cash used in operating activities for the twenty-six weeks ended August 3, 2019 was $15.0 million.
Net cash used in operating activities for the twenty-six weeks ended August 4, 2018 was $32.9 million.
As disclosed in the Company's Annual Report on Form 10-K filed
May 14, 2019, the Company experienced negative cash flows from operations during fiscal 2018 and 2017, and we expect to continue
to incur net losses in the foreseeable future. We implemented strategic initiatives on December 11, 2018, aimed at improving organizational
efficiency and conserving working capital needed to support the growth of our etailz segment (the “performance improvement
plan”). As a result of the initiative, and disciplined inventory management in the fye segment, the Company was able to reduce
cash used in operations by $18.0 million for the twenty-six weeks ended August 3, 2019 as compared to the twenty-six weeks ended
August 3, 2018. We anticipate continued improvement in cash flows used in operations for the remainder of the fiscal 2019. At August
3, 2019, we had cash and cash equivalents of $3.6 million, net working capital of $42.3 million, and short-term borrowings in the
amount of $12.1 million on our revolving credit facility, as further discussed in footnote 8 in the interim condensed consolidated
financial statements. This compares to $4.5 million in cash and cash equivalents, net working capital of $82.1 million, and short-term
borrowings in the amount of $6.3 million on the Company’s revolving credit facility at August 4, 2018.
Management anticipates any cash requirements due to a shortfall
in cash from operations will be funded by the Company’s revolving credit facility. See note 8 in the interim condensed consolidated
financial statements for additional information.
In addition to the aforementioned current sources of existing
working capital, the Company may explore certain other strategic alternatives that may become available to the Company, as well
as continuing the efforts to generate additional sales and increase margins. However, at this time the Company has no commitments
to obtain any additional funds, and there can be no assurance such funds will be available on acceptable terms or at all, should
we require such additional funds. If the Company is unable to improve its operations, it may be required to obtain additional funding,
and the Company’s financial condition and results of operations may be materially adversely affected.
Furthermore, broad market and industry factors may seriously
harm the market price of our common stock, regardless of our operating performance, and may adversely impact our ability to raise
additional funds, should we require such additional funds.
The unaudited condensed consolidated financial statements for
the thirteen and twenty-six weeks ended August 3, 2019 were prepared on the basis of a going concern which contemplates that the
Company will be able to realize assets and discharge liabilities in the normal course of business. The ability of the Company to
meet its liabilities and to continue as a going concern is dependent on improved profitability, the performance improvement plan
implemented for the etailz segment and the availability of future funding. The unaudited condensed consolidated financial statements
do not include any adjustments that might result from the outcome of these uncertainties.
The following table sets forth a summary of key components of
cash flow and working capital:
|
|
|
As of or for the
|
|
|
Change
|
|
|
|
|
Twenty-six Weeks Ended
|
|
|
|
|
(amounts in thousands)
|
|
August 3,
2019
|
|
|
August 4,
2018
|
|
|
$
|
|
|
Operating Cash Flows
|
|
|
(14,962
|
)
|
|
|
(32,944
|
)
|
|
|
17,982
|
|
|
Investing Cash Flows
|
|
|
(1,420
|
)
|
|
|
(663
|
)
|
|
|
(757
|
)
|
|
Financing Cash Flows
|
|
|
12,086
|
|
|
|
4,841
|
|
|
|
7,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
(1)
|
|
(1,541
|
)
|
|
|
(1,800
|
)
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, Cash Equivalents, and Restricted Cash
|
(2)
|
|
9,930
|
|
|
|
14,740
|
|
|
|
(4,810
|
)
|
|
Merchandise Inventory
|
|
|
89,785
|
|
|
|
114,920
|
|
|
|
(25,135
|
)
|
|
Working Capital
|
|
|
42,306
|
|
|
|
82,100
|
|
|
|
(39,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in Investing Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Cash and cash equivalents per condensed consolidated balance sheets
|
|
$
|
3,635
|
|
|
$
|
4,477
|
|
|
|
|
|
|
Add: restricted cash
|
|
|
6,295
|
|
|
|
10,263
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash
|
|
$
|
9,930
|
|
|
$
|
14,740
|
|
|
|
|
|
Cash used in operations was $15.0 million
for the twenty-six weeks ended August 3, 2019, primarily due to a net loss of $15.9 million, adding back depreciation and amortization
of $2.0 million, a $5.1 million seasonal decrease in inventory, a $1.3 million decrease in prepaid expenses and other current assets,
and a $4.0 million decrease in other long-term assets, less a reduction in accounts payable, accrued expenses and other current
liabilities, deferred revenue, and other long-term liabilities of $5.3 million $1.0 million, $1.0 million, and $4.2 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 $1.4
million for the twenty-six weeks ended August 3, 2019, which consisted primarily of capital expenditures.
Cash provided by financing activities for the twenty-six weeks
ended August 3, 2019, was comprised of $12.1 million proceeds from short-term borrowings.
Capital Expenditures. During the thirteen
and twenty-six weeks ended August 3, 2019, respectively, the Company made capital expenditures of $0.7 million and $1.5 million,
respectively. The Company currently plans to spend approximately $3.9 million for capital expenditures during fiscal 2019.
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 as of and for the year ended February 2, 2019 includes a summary
of the critical accounting policies and methods used by the Company in the preparation of its interim condensed consolidated financial
statements. As goodwill was fully impaired during fiscal 2018, the Company no longer considers goodwill to be a critical accounting
policy. With the exception of goodwill, there have been no material changes or modifications to the critical accounting policies
since February 2, 2019.
Recent Accounting Pronouncements:
The information set forth under Note 3, Recently Adopted Accounting
Pronouncements section 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: adjusted operating loss for the etailz segment 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 loss from operations to evaluate its own operating performance and as an integral part of its planning process. The Company
presents etailz adjusted 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
expenses, 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 expenses, 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