dxlg-10q_20171028.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File Number: 01-34219

 

DESTINATION XL GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

04-2623104

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

555 Turnpike Street

Canton, MA

02021

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (781) 828-9300

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of November 10, 2017, the registrant had 48,686,513 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

DESTINATION XL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

October 28, 2017

 

 

January 28, 2017

 

 

 

(Fiscal 2017)

 

 

(Fiscal 2016)

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,791

 

 

$

5,572

 

Accounts receivable

 

 

4,232

 

 

 

7,114

 

Inventories

 

 

119,878

 

 

 

117,446

 

Prepaid expenses and other current assets

 

 

11,747

 

 

 

8,817

 

Total current assets

 

 

141,648

 

 

 

138,949

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation and amortization

 

 

116,126

 

 

 

124,347

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

Intangible assets

 

 

1,923

 

 

 

2,228

 

Other assets

 

 

3,955

 

 

 

3,804

 

Total assets

 

$

263,652

 

 

$

269,328

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

2,296

 

 

$

6,941

 

Current portion of deferred gain on sale-leaseback

 

 

1,465

 

 

 

1,465

 

Accounts payable

 

 

32,750

 

 

 

31,258

 

Accrued expenses and other current liabilities

 

 

24,616

 

 

 

31,938

 

Borrowings under credit facility

 

 

68,198

 

 

 

44,097

 

Total current liabilities

 

 

129,325

 

 

 

115,699

 

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

 

10,892

 

 

 

12,061

 

Deferred rent and lease incentives

 

 

36,075

 

 

 

35,421

 

Deferred gain on sale-leaseback, net of current portion

 

 

10,624

 

 

 

11,723

 

Deferred tax liability

 

 

222

 

 

 

222

 

Other long-term liabilities

 

 

4,735

 

 

 

5,682

 

Total long-term liabilities

 

 

62,548

 

 

 

65,109

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 1,000,000 shares  authorized, none issued

 

 

 

 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized,  61,426,351 and  61,637,164 shares issued at October 28, 2017 and January 28, 2017, respectively

 

 

614

 

 

 

616

 

Additional paid-in capital

 

 

307,115

 

 

 

304,466

 

Treasury stock at cost, 12,755,873 and 10,877,439 shares at October 28, 2017 and January 28, 2017, respectively

 

 

(92,658

)

 

 

(87,977

)

Accumulated deficit

 

 

(138,069

)

 

 

(122,567

)

Accumulated other comprehensive loss

 

 

(5,223

)

 

 

(6,018

)

Total stockholders' equity

 

 

71,779

 

 

 

88,520

 

Total liabilities and stockholders' equity

 

$

263,652

 

 

$

269,328

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2


 

DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

 

October 28, 2017

 

 

October 29, 2016

 

 

 

(Fiscal 2017)

 

 

(Fiscal 2016)

 

 

(Fiscal 2017)

 

 

(Fiscal 2016)

 

 

 

 

 

Sales

 

$

103,700

 

 

$

101,871

 

 

$

332,454

 

 

$

327,637

 

Cost of goods sold including occupancy costs

 

 

58,887

 

 

 

56,633

 

 

 

183,136

 

 

 

177,790

 

Gross profit

 

 

44,813

 

 

 

45,238

 

 

 

149,318

 

 

 

149,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

41,968

 

 

 

41,383

 

 

 

137,204

 

 

 

129,051

 

Depreciation and amortization

 

 

7,680

 

 

 

7,494

 

 

 

25,055

 

 

 

22,363

 

Total expenses

 

 

49,648

 

 

 

48,877

 

 

 

162,259

 

 

 

151,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(4,835

)

 

 

(3,639

)

 

 

(12,941

)

 

 

(1,567

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(871

)

 

 

(779

)

 

 

(2,497

)

 

 

(2,346

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(5,706

)

 

 

(4,418

)

 

 

(15,438

)

 

 

(3,913

)

Provision for income taxes

 

 

-

 

 

 

34

 

 

 

64

 

 

 

126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(5,706

)

 

$

(4,452

)

 

$

(15,502

)

 

$

(4,039

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.12

)

 

$

(0.09

)

 

$

(0.32

)

 

$

(0.08

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

48,607

 

 

 

49,552

 

 

 

48,966

 

 

 

49,532

 

Diluted

 

 

48,607

 

 

 

49,552

 

 

 

48,966

 

 

 

49,532

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

3


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

 

October 28, 2017

 

 

October 29, 2016

 

 

October 28, 2017

 

 

October 29, 2016

 

 

 

 

(Fiscal 2017)

 

 

(Fiscal 2016)

 

 

(Fiscal 2017)

 

 

(Fiscal 2016)

 

 

Net loss

 

$

(5,706

)

 

$

(4,452

)

 

$

(15,502

)

 

$

(4,039

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(52

)

 

 

(176

)

 

 

164

 

 

 

(319

)

 

Pension plans

 

 

210

 

 

 

237

 

 

 

631

 

 

 

711

 

 

Other comprehensive income before taxes

 

 

158

 

 

 

61

 

 

 

795

 

 

 

392

 

 

Tax provision related to items of other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

 

158

 

 

 

61

 

 

 

795

 

 

 

392

 

 

Comprehensive loss

 

$

(5,548

)

 

$

(4,391

)

 

$

(14,707

)

 

$

(3,647

)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

4


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury Stock

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Deficit

 

 

Income (Loss)

 

 

Total

 

Balance at January 28, 2017

 

 

61,637

 

 

$

616

 

 

$

304,466

 

 

 

(10,877

)

 

$

(87,977

)

 

$

(122,567

)

 

$

(6,018

)

 

$

88,520

 

Board of Directors compensation

 

 

96

 

 

 

1

 

 

 

420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

421

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

1,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,306

 

Restricted Stock issued, reclass from liability to equity (Note 3)

 

 

425

 

 

 

4

 

 

 

916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

920

 

Cancellations of restricted stock, net of issuances

 

 

(777

)

 

 

(8

)

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred stock vested

 

 

45

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,878

)

 

 

(4,681

)

 

 

 

 

 

 

 

 

 

 

(4,681

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

631

 

 

 

631

 

Foreign currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

164

 

 

 

164

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,502

)

 

 

 

 

 

 

(15,502

)

Balance at October 28, 2017

 

 

61,426

 

 

$

614

 

 

$

307,115

 

 

 

(12,755

)

 

$

(92,658

)

 

$

(138,069

)

 

$

(5,223

)

 

$

71,779

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

5


DESTINATION XL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

For the Nine Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

 

 

(Fiscal 2017)

 

 

(Fiscal 2016)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(15,502

)

 

$

(4,039

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of deferred gain on sale-leaseback

 

 

(1,099

)

 

 

(1,099

)

Amortization of deferred debt issuance costs

 

 

206

 

 

 

208

 

Depreciation and amortization

 

 

25,055

 

 

 

22,363

 

Deferred taxes, net of valuation allowance

 

 

 

 

 

26

 

Stock compensation expense

 

 

1,306

 

 

 

1,076

 

Board of Directors stock compensation

 

 

421

 

 

 

362

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,882

 

 

 

(3,642

)

Inventories

 

 

(2,432

)

 

 

(3,167

)

Prepaid expenses and other current assets

 

 

(2,930

)

 

 

(705

)

Other assets

 

 

(151

)

 

 

(376

)

Accounts payable

 

 

1,492

 

 

 

(972

)

Deferred rent and lease incentives

 

 

654

 

 

 

3,976

 

Accrued expenses and other liabilities

 

 

(4,654

)

 

 

(5,959

)

Net cash provided by operating activities

 

 

5,248

 

 

 

8,052

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property and equipment, net

 

 

(18,429

)

 

 

(21,799

)

Net cash used for investing activities

 

 

(18,429

)

 

 

(21,799

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(4,681

)

 

 

 

Principal payments on long-term debt

 

 

(5,930

)

 

 

(5,363

)

Net borrowings under credit facility

 

 

24,011

 

 

 

20,284

 

Net cash provided by financing activities

 

 

13,400

 

 

 

14,921

 

Net increase in cash and cash equivalents

 

 

219

 

 

 

1,174

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

5,572

 

 

 

5,170

 

End of period

 

$

5,791

 

 

$

6,344

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

6


DESTINATION XL GROUP, INC.

Notes to Consolidated Financial Statements

 

 

1. Basis of Presentation

In the opinion of management of Destination XL Group, Inc., a Delaware corporation (formerly known as Casual Male Retail Group, Inc. and, collectively with its subsidiaries, referred to as the “Company”), the accompanying unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the interim financial statements. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes to the Company’s audited consolidated financial statements for the fiscal year ended January 28, 2017 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 20, 2017.

The information set forth in these statements may be subject to normal year-end adjustments. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s business historically has been seasonal in nature, and the results of the interim periods presented are not necessarily indicative of the results to be expected for the full year.

The Company’s fiscal year is a 52- or 53- week period ending on the Saturday closest to January 31. Fiscal 2017 is a 53-week period ending on February 3, 2018 and fiscal 2016 was a 52-week period ending on January 28, 2017.

Segment Information

The Company reports its operations as one reportable segment, Big & Tall Men’s Apparel, which consists of two principal operating segments: its retail business and its direct business. The Company considers its operating segments to be similar in terms of economic characteristics, production processes and operations, and has therefore aggregated them into a single reporting segment, consistent with its omni-channel business approach. The direct operating segment includes the operating results and assets for LivingXL® and ShoesXL®.

 

Intangibles

At October 28, 2017, the “Casual Male” trademark had a carrying value of $0.4 million and is considered a definite-lived asset. The Company is amortizing the remaining carrying value on an accelerated basis, consistent with projected cash flows through fiscal 2018, its estimated remaining useful life.

The Company’s “Rochester” trademark is considered an indefinite-lived intangible asset and has a carrying value of $1.5 million. During the nine months ended October 28, 2017, no event or circumstance occurred which would cause a reduction in the fair value of the Company’s reporting units, requiring interim testing of the Company’s “Rochester” trademark.

 

Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements.

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets or liabilities.

The Company utilizes observable market inputs (quoted market prices) when measuring fair value whenever possible.

7


The fair value of long-term debt is classified within Level 2 of the valuation hierarchy. At October 28, 2017, the fair value approximated the carrying amount based upon terms available to the Company for borrowings with similar arrangements and remaining maturities.

The fair value of indefinite-lived assets, which consists of the Company’s “Rochester” trademark, is measured on a non-recurring basis in connection with the Company’s annual impairment test. The fair value of the trademark is determined using a projected discounted cash flow analysis based on unobservable inputs and is classified within Level 3 of the valuation hierarchy. See Intangibles above.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximate fair value because of the short maturity of these instruments.

 

Accumulated Other Comprehensive Income (Loss) - (“AOCI”)

Other comprehensive income (loss) includes amounts related to foreign currency and pension plans and is reported in the Consolidated Statements of Comprehensive Income (Loss). Other comprehensive income and reclassifications from AOCI for the three and nine months ended October 28, 2017 and October 29, 2016, respectively, were as follows:

 

 

 

 

October 28, 2017

 

 

October 29, 2016

 

For the three months ended:

 

(in thousands)

 

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

Balance at beginning of the quarter

 

$

(4,816

)

 

$

(565

)

 

$

(5,381

)

 

$

(5,639

)

 

$

(682

)

 

$

(6,321

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications, net of taxes

 

 

43

 

 

 

(52

)

 

 

(9

)

 

 

61

 

 

 

(176

)

 

 

(115

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income, net of taxes  (1)

 

 

167

 

 

 

 

 

 

167

 

 

 

176

 

 

 

 

 

 

176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) for the period

 

 

210

 

 

 

(52

)

 

 

158

 

 

 

237

 

 

 

(176

)

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of quarter

 

$

(4,606

)

 

$

(617

)

 

$

(5,223

)

 

$

(5,402

)

 

$

(858

)

 

$

(6,260

)

 

 

 

October 28, 2017

 

 

October 29, 2016

 

For the nine months ended:

 

(in thousands)

 

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

 

Pension

Plans

 

 

Foreign

Currency

 

 

Total

 

Balance at beginning of fiscal year

 

$

(5,237

)

 

$

(781

)

 

$

(6,018

)

 

$

(6,113

)

 

$

(539

)

 

$

(6,652

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before

   reclassifications, net of taxes

 

 

128

 

 

 

164

 

 

 

292

 

 

 

183

 

 

 

(319

)

 

 

(136

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassified from accumulated other

   comprehensive income, net of taxes  (1)

 

 

503

 

 

 

 

 

 

503

 

 

 

528

 

 

 

 

 

 

528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) for the period

 

 

631

 

 

 

164

 

 

 

795

 

 

 

711

 

 

 

(319

)

 

 

392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of quarter

 

$

(4,606

)

 

$

(617

)

 

$

(5,223

)

 

$

(5,402

)

 

$

(858

)

 

$

(6,260

)

 

(1)

Includes the amortization of the unrecognized loss on pension plans which was charged to “Selling, General and Administrative” Expense on the Consolidated Statements of Operations for all periods presented. The amortization of the unrecognized loss, before tax, was $167,000 and $503,000 for the three and nine months ended October 28, 2017, respectively, and $176,000 and $528,000 for the three and nine months ended October 29, 2016, respectively.  There was no tax benefit for any period.

 


8


Revenue Recognition

Revenue from the Company’s retail business is recorded upon purchase of merchandise by customers, net of an allowance for sales returns. Revenue from the Company’s direct business is recognized at the time a customer order is delivered, net of an allowance for sales returns. Store sales are defined as sales that originate and are fulfilled directly at the store level.  E-commerce sales are defined as sales that originate online, including those initiated online at the store level.  

 

Stock-based Compensation

All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the Consolidated Statements of Operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results and future changes in estimates may differ from the Company’s current estimates.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for events or changes in circumstances that might indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets by determining whether the carrying value of such assets over their respective remaining lives can be recovered through projected undiscounted future cash flows. The amount of impairment, if any, is measured based on projected discounted future cash flows using a discount rate reflecting the Company’s average cost of funds.

In the second quarter of fiscal 2017, the Company recorded an impairment charge of $1.7 million for the write-down of property and equipment.  The impairment charge related to a store where the carrying value exceeded fair value.  The fair value of these assets, based on Level 3 inputs, was determined using estimated discounted cash flows.  The impairment charge was included in Depreciation and Amortization on the Consolidated Statement of Operations for the nine months ended October 28, 2017.  There was no material impairment of assets in the third quarter of fiscal 2017 or in the first nine months of fiscal 2016.

Recently Adopted Accounting Pronouncements

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted.  The Company adopted this pronouncement as of January 29, 2017.  The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this standard during the first quarter of fiscal 2017. The adoption of this standard did not have a material impact on the Company’s provision for income taxes or diluted earnings per share.  The Company has elected to adopt the guidance related to the presentation of excess tax benefits in its Consolidated Statements of Cash Flows on a prospective transition method.  Since there were no excess tax benefits for the nine months ended October 28, 2017 or October 29, 2016, this election did not result in a change in presentation on the Consolidated Statement of Cash Flows.  In addition, the Company has elected to continue to estimate forfeitures at each grant.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition,” as well as various other sections of the ASC, such as, but not limited to, ASC 340-20, “Other Assets and Deferred Costs - Capitalized Advertising Costs”. The core principle of ASU 2014-09 is that an entity should recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied either retrospectively to each prior reporting period presented or with the cumulative effect recognized at the date of initial adoption as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet). Early adoption is

9


permitted after December 15, 2016. The Company expects to adopt ASU 2014-09 in the first quarter of fiscal 2018, using the modified retrospective approach as a transition method.   The Company is continuing to evaluate the impact that ASU 2014-09 will have on its Consolidated Financial Statements and its disclosures, particularly as it relates to the Company’s revenue recognition policies and internal controls for gift card breakage, loyalty award program and estimates for sales returns.  Based on these efforts, the Company currently anticipates that the performance obligations underlying its core revenue stream and the timing of recognition therefore, will remain substantially unchanged.  The Company expects that ASU 2014-09 will require additional disclosure, but does not expect the adoption to have a material impact on its Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which will require an entity to recognize lease assets and lease liabilities on its balance sheet and will increase disclosure requirements on its leasing arrangements.  The ASU is effective for annual periods beginning after December 15, 2018, and interim periods therein.  Early adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at the beginning of the earliest comparative period presented with an adjustment to equity. While the Company is still evaluating the impact this pronouncement will have on its Consolidated Financial Statements, the Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets.  The extent of such gross-up is under evaluation.  

In March 2016, the FASB issued ASU 2016-04, “Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products,” which amends exempting gift cards and other prepaid stored-value products from the guidance on extinguishing financial liabilities. Rather, they will be subject to breakage accounting consistent with the new revenue guidance in Topic 606. However, the exemption only applies to breakage liabilities that are not subject to unclaimed property laws or that are attached to segregated bank accounts (e.g., consumer debit cards).  The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which reduces the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230.  The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory,” which reduces the existing diversity in practice in how income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized. The amendments in ASU 2016-16 require an entity to recognize such income tax consequences when the intra-entity transfer occurs rather than waiting until such time as the asset has been sold to an outside party.  The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718)”which provides clarity in order to reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted. The Company does not expect the adoption of this pronouncement to have a material impact on its Consolidated Financial Statements.

No other new accounting pronouncements, issued or effective during the first nine months of fiscal 2017, have had or are expected to have a significant impact on the Company’s Consolidated Financial Statements.

 

 

 


10


2. Debt

Credit Agreement with Bank of America, N.A.

On October 30, 2014, the Company amended its credit facility with Bank of America, N.A, effective October 29, 2014, by executing the Second Amendment to the Sixth Amended and Restated Loan and Security Agreement (as amended, the “Credit Facility”).

The Credit Facility provides for maximum committed borrowings of $125 million. The Credit Facility includes, pursuant to an accordion feature, the ability to increase the Credit Facility by an additional $50 million upon the request of the Company and the agreement of the lender(s) participating in the increase. The Credit Facility includes a sublimit of $20 million for commercial and standby letters of credit and a sublimit of up to $15 million for swingline loans. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets. The maturity date of the Credit Facility is October 29, 2019. The Company’s obligations under the Credit Facility are secured by a lien on substantially all of its assets, excluding (i) a first priority lien held by the lenders of the Term Loan Facility on certain equipment of the Company described below and (ii) intellectual property.

At October 28, 2017, the Company had outstanding borrowings under the Credit Facility of $68.4 million, before unamortized debt issuance costs of $0.2 million. Outstanding standby letters of credit were $3.3 million and outstanding documentary letters of credit were $0.1 million. Unused excess availability at October 28, 2017 was $38.2 million. Average monthly borrowings outstanding under the Credit Facility during the first nine months of fiscal 2017 were $60.4 million, resulting in an average unused excess availability of approximately $43.3 million. The Company’s ability to borrow under the Credit Facility is determined using an availability formula based on eligible assets, with increased advance rates based on seasonality.  Pursuant to the terms of the Credit Facility, if the Company’s excess availability under the Credit Facility fails to be equal to or greater than the greater of (i) 10% of the Loan Cap (defined in the Credit Facility as the lesser of the revolving credit commitments at such time or the borrowing base at the relevant measurement time) and (ii) $7.5 million, the Company will be required to maintain a minimum consolidated fixed charge coverage ratio of 1.0:1.0 in order to pursue certain transactions, including but not limited to, stock repurchases, payment of dividends and business acquisitions.

Borrowings made pursuant to the Credit Facility will bear interest at a rate equal to the base rate (determined as the highest of (a) Bank of America N.A.’s prime rate, (b) the Federal Funds rate plus 0.50% or (c) the annual ICE-LIBOR rate (“LIBOR”) for the respective interest period) plus a varying percentage, based on the Company’s borrowing base, of 0.50%-0.75% for prime-based borrowings and 1.50%-1.75% for LIBOR-based borrowings. The Company is also subject to an unused line fee of 0.25%. At October 28, 2017, the Company’s prime-based interest rate was 4.75%. At October 28, 2017, the Company had approximately $64.0 million of its outstanding borrowings in LIBOR-based contracts with an interest rate of 2.70%. The LIBOR-based contracts expired on October 31, 2017. When a LIBOR-based borrowing expires, the borrowings revert back to prime-based borrowings unless the Company enters into a new LIBOR-based borrowing arrangement.

The fair value of the amount outstanding under the Credit Facility at October 28, 2017 approximated the carrying value.

Long-Term Debt

Components of long-term debt are as follows:

 

(in thousands)

 

October 28, 2017

 

 

January 28, 2017

 

Equipment financing notes

 

$

1,409

 

 

$

6,589

 

Term loan, due 2019

 

 

12,000

 

 

 

12,750

 

Less: unamortized debt issuance costs

 

 

(221