UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
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There were
AT HOME GROUP INC.
TABLE OF CONTENTS
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1 | ||
3 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 18 | |
34 | ||
34 | ||
36 | ||
36 | ||
Unregistered Sales of Equity Securities and Use of Proceeds. | 36 | |
36 | ||
36 | ||
36 | ||
37 | ||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “potential”, “predict”, “seek”, “should” or “vision”, or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, our expected new store openings, our real estate strategy, growth targets and potential growth opportunities and future capital expenditures, estimates of expenses we may incur in connection with equity incentive awards to management, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this report are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, including the important factors described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 26, 2019 as filed with the Securities and Exchange Commission (“SEC”) on March 27, 2019, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:
● | general economic factors that may materially adversely affect our business, revenue and profitability; |
● | volatility or disruption in the financial markets; |
● | consumer spending on home décor products which could decrease or be displaced by spending on other activities; |
● | our ability to successfully implement our growth strategy on a timely basis or at all; |
● | our failure to manage inventory effectively and our inability to satisfy changing consumer demands and preferences; |
● | losses of, or disruptions in, or our inability to efficiently operate our distribution network; |
● | risks related to our imported merchandise, including the additional imposition of tariffs or other trade restrictions; |
● | adverse events, including weather impacts, in the geographical regions in which we operate; |
● | risks associated with leasing substantial amounts of space; |
● | risks associated with our sale-leaseback strategy; |
● | the highly competitive retail environment in which we operate; |
● | risks related to our substantial indebtedness and the significant operating and financial restrictions imposed on us and our subsidiaries by our secured credit facilities; |
● | our dependence upon the services of our management team and our buyers; |
● | the failure to attract and retain quality employees; |
● | difficulties with our vendors; |
● | the seasonality of our business; |
● | fluctuations in our quarterly operating results; |
● | the failure or inability to protect our intellectual property rights; |
● | risks associated with third-party claims that we infringe upon their intellectual property rights; |
● | increases in commodity prices and supply chain costs; |
● | the need to make significant investments in advertising, marketing or promotions; |
● | the success of any investment in online services or e-commerce activities that we may launch; |
● | the success of our loyalty program or private label or co-branded consumer credit offerings and any investments related thereto; |
● | disruptions to our information systems or our failure to adequately support, maintain and upgrade those systems; |
● | unauthorized disclosure of sensitive or confidential customer information; |
1
● | regulatory or litigation developments; |
● | risks associated with product recalls and/or product liability, as well as changes in product safety and other consumer protection laws; |
● | inadequacy of our insurance coverage; |
● | our substantial dependence upon our reputation and positive perceptions of At Home; |
● | the potential negative impact of changes to our accounting policies, rules and regulations; |
● | changes to the U.S. tax laws and changes in our effective tax rate; |
● | the significant amount of our common stock held by certain existing stockholders; and |
● | other risks and uncertainties, including those listed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 26, 2019 as filed with the SEC on March 27, 2019, and in other filings we may make from time to time with the SEC. |
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this report are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this report, they may not be predictive of results or developments in future periods.
Any forward-looking statement that we make in this Quarterly Report on Form 10-Q speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report.
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PART I — FINANCIAL INFORMATION
ITEM 1. — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT HOME GROUP INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
July 27, 2019 | January 26, 2019 | July 28, 2018 | ||||||||
Assets |
| |||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | | $ | | $ | | ||||
Inventories, net | | | | |||||||
Prepaid expenses | | | | |||||||
Other current assets | | | | |||||||
Total current assets | | | | |||||||
Operating lease right-of-use assets | | - | - | |||||||
Property and equipment, net | | | | |||||||
Goodwill | | | | |||||||
Trade name | | | | |||||||
Debt issuance costs, net | | | | |||||||
Restricted cash | | | | |||||||
Noncurrent deferred tax asset | | | | |||||||
Other assets | | | | |||||||
Total assets | $ | | $ | | $ | | ||||
Liabilities and Shareholders' Equity | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | | $ | | $ | | ||||
Accrued and other current liabilities | | | | |||||||
Revolving line of credit | | | | |||||||
Current portion of operating lease liabilities | | - | - | |||||||
Current portion of deferred rent | - | | | |||||||
Current portion of long-term debt | | | | |||||||
Total current liabilities | | | | |||||||
Operating lease liabilities | | - | - | |||||||
Long-term debt | | | | |||||||
Financing obligations | | | | |||||||
Deferred rent | - | | | |||||||
Other long-term liabilities | | | | |||||||
Total liabilities | | | | |||||||
Shareholders' Equity | ||||||||||
Common stock; $ | | | | |||||||
Additional paid-in capital | | | | |||||||
Retained earnings | | | | |||||||
Total shareholders' equity | | | | |||||||
Total liabilities and shareholders' equity | $ | | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
3
AT HOME GROUP INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
| Thirteen Weeks Ended | Twenty-six Weeks Ended | |||||||||||
July 27, 2019 | July 28, 2018 | July 27, 2019 | July 28, 2018 | ||||||||||
|
| ||||||||||||
Net sales | $ | | $ | | $ | | $ | | |||||
Cost of sales | | | | | |||||||||
Gross profit | | | | | |||||||||
Operating expenses | |||||||||||||
Selling, general and administrative expenses | | | | | |||||||||
Depreciation and amortization | | | | | |||||||||
Total operating expenses | | | | | |||||||||
Gain on sale-leaseback | - | - | | - | |||||||||
Operating income (loss) | ( | ||||||||||||
Interest expense, net | | | | | |||||||||
Income (loss) before income taxes | | ( | | ( | |||||||||
Income tax provision (benefit) | | ( | | ( | |||||||||
Net income (loss) | $ | | $ | ( | $ | | $ | | |||||
Earnings per share: | |||||||||||||
Net income (loss) per common share: | |||||||||||||
Basic | $ | | $ | ( | $ | | $ | | |||||
Diluted | $ | | $ | ( | $ | | $ | | |||||
Weighted average shares outstanding: | |||||||||||||
Basic | | | | | |||||||||
Diluted | | | | |
See Notes to Condensed Consolidated Financial Statements.
4
AT HOME GROUP INC.
Condensed Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
(Unaudited)
Additional | |||||||||||||||
Common Stock | Paid-in | Retained | |||||||||||||
Shares | Par Value | Capital | Earnings | Total | |||||||||||
Balance, January 27, 2018 | | $ | | $ | | $ | | $ | | ||||||
Stock-based compensation | - | - | | - | | ||||||||||
Exercise of stock options | | | | - | | ||||||||||
Net income | - | - | - | | | ||||||||||
Balance, April 28, 2018 | | | | | | ||||||||||
Stock-based compensation | - | - | | - | | ||||||||||
Exercise of stock options | | | | - | | ||||||||||
Net loss | - | - | - | ( | ( | ||||||||||
Balance, July 28, 2018 | | | | | | ||||||||||
Balance, January 26, 2019 | | | | | | ||||||||||
Adoption of ASU No. 2016-02, Leases (ASC 842) | - | - | - | | | ||||||||||
Balance, January 26, 2019, as adjusted | | | | | | ||||||||||
Stock-based compensation | - | - | | - | | ||||||||||
Exercise of stock options and other awards | | | | - | | ||||||||||
Net income | - | - | - | | | ||||||||||
Balance, April 27, 2019 | | | | | | ||||||||||
Stock-based compensation | - | - | | - | | ||||||||||
Exercise of stock options and other awards | | - | | - | | ||||||||||
Net income | - | - | - | | | ||||||||||
Balance, July 27, 2019 | | $ | | $ | | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
5
AT HOME GROUP INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Twenty-six Weeks Ended | ||||||
July 27, 2019 | July 28, 2018 | ||||||
Operating Activities | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | | | |||||
Non-cash interest expense | | | |||||
Gain on sale-leaseback | ( | - | |||||
Amortization of deferred gain on sale-leaseback | - | ( | |||||
Deferred income taxes | ( | ( | |||||
Stock-based compensation | | | |||||
Other non-cash losses, net | | | |||||
Changes in operating assets and liabilities: | |||||||
Inventories | ( | ( | |||||
Prepaid expenses and other current assets | ( | ( | |||||
Other assets | ( | ( | |||||
Accounts payable | | | |||||
Accrued liabilities | | | |||||
Operating lease assets and liabilities | | - | |||||
Deferred rent | - | | |||||
Net cash provided by operating activities | | | |||||
Investing Activities | |||||||
Purchase of property and equipment | ( | ( | |||||
Net proceeds from sale of property and equipment | | | |||||
Net cash used in investing activities | ( | ( | |||||
Financing Activities | |||||||
Payments under lines of credit | ( | ( | |||||
Proceeds from lines of credit | | | |||||
Payment of debt issuance costs | ( | - | |||||
Payments on financing obligations | ( | ( | |||||
Proceeds from financing obligations | | - | |||||
Payments on long-term debt | ( | ( | |||||
Proceeds from exercise of stock options | | | |||||
Net cash provided by financing activities | | | |||||
Increase in cash, cash equivalents and restricted cash | | | |||||
Cash, cash equivalents and restricted cash, beginning of period | | | |||||
Cash, cash equivalents and restricted cash, end of period | $ | | $ | | |||
Supplemental Cash Flow Information | |||||||
Cash paid for interest | $ | | $ | | |||
Cash paid for income taxes | $ | | $ | | |||
Supplemental Information for Non-cash Investing and Financing Activities | |||||||
Increase in current liabilities of property and equipment | $ | | $ | | |||
Property and equipment reduction due to sale-leaseback | $ | - | $ | ( | |||
Property and equipment additions due to build-to-suit lease transactions | $ | - | $ | |
See Notes to Condensed Consolidated Financial Statements.
6
1. Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements include At Home Group Inc. and its wholly-owned subsidiaries (collectively referred to as “we”, “us”, “our” and the “Company”).
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information in accordance with Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been included.
The condensed consolidated balance sheets as of July 27, 2019 and July 28, 2018, the condensed consolidated statements of operations for the thirteen and twenty-six weeks ended July 27, 2019 and July 28, 2018, the condensed consolidated statements of shareholders’ equity ending July 27, 2019 and July 28, 2018 and the condensed consolidated statements of cash flows for the twenty-six weeks ended July 27, 2019 and July 28, 2018 have been prepared by the Company and are unaudited. The consolidated balance sheet as of January 26, 2019 has been derived from the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 26, 2019 as filed with the Securities and Exchange Commission (“SEC”) on March 27, 2019 (the “Annual Report”), but does not include all of the information and notes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the fiscal years ended January 26, 2019 and January 27, 2018 and the related notes thereto included in the Annual Report.
The Company does not have any components of other comprehensive income recorded within its condensed consolidated financial statements, and, therefore, does not separately present a statement of comprehensive income in its condensed consolidated financial statements.
Fiscal Year
We report on the basis of a 52- or 53-week fiscal year, which ends on the last Saturday in January. References to a fiscal year mean the year in which that fiscal year ends. References herein to “second fiscal quarter 2020” relate to the thirteen weeks ended July 27, 2019 and references to “second fiscal quarter 2019” relate to the thirteen weeks ended July 28, 2018. References herein to “the six months ended July 27, 2019” relate to the twenty-six weeks ended July 27, 2019 and references to “the six months ended July 28, 2018” relate to the twenty-six weeks ended July 28, 2018.
Consolidation
The accompanying condensed consolidated financial statements include the accounts of At Home Group Inc. and its consolidated wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP 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 sales and expenses during the reporting period. Actual results could differ from those estimates.
7
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Reclassification
Certain prior period amounts have been reclassified to conform with the current period presentation within the condensed consolidated statement of cash flows. These reclassifications had no effect on previously reported results of operations or retained earnings.
Seasonality
Our business is moderately seasonal in nature and, therefore, the results of operations for the thirteen and twenty-six weeks ended July 27, 2019 are not necessarily indicative of the operating results that may be expected for a full fiscal year. Historically, our business has realized a slightly higher portion of net sales and operating income in the second and fourth fiscal quarters attributable primarily to the impact of summer and the year-end holiday decorating seasons, respectively.
Restricted Cash
Restricted cash consists of cash and cash equivalents reserved for a specific purpose that is not readily available for immediate or general business use. Our restricted cash balance as of July 27, 2019 consists primarily of cash equivalents held for use in the purchase of property and equipment.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
| July 27, 2019 |
| January 26, 2019 |
| July 28, 2018 |
| January 27, 2018 |
| |||||
|
| ||||||||||||
Cash and cash equivalents | $ | | $ | | $ | | $ | | |||||
Restricted cash | | | | — | |||||||||
Cash, cash equivalents and restricted cash | $ | | $ | | $ | | $ | |
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. Under ASU 2017-04, goodwill impairment is to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value with the loss recognized not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The standard is to be applied on a prospective basis. We do not anticipate a material impact to the consolidated financial statements once implemented.
Recently Adopted Accounting Standards
On January 27, 2019, we adopted ASU No. 2018-15, “Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU 2018-15”) using the prospective method. ASU 2018-15 aligns 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). As of July 27, 2019, we
8
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
have not incurred material implementation costs related to a hosting arrangement that is a service contract that would meet our capitalization policy.
On January 27, 2019, we adopted ASU No. 2016-02 “Leases”, which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases” (“ASU 2016-02” or “ASC 842”), using the modified retrospective approach. For more information, see Note 10 – Commitments and Contingencies.
2. Fair Value Measurements
We follow the provisions of Accounting Standards Codification (“ASC”) 820 (Topic 820, “Fair Value Measurements and Disclosures”). ASC 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations.
● | Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that we have the ability to access. |
● | Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. |
● | Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our own assumptions about the assumptions that market participants would use. |
ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument is categorized based upon the lowest level of input that is significant to the fair value calculation.
The fair value of all current financial instruments approximates carrying value because of the short-term nature of these instruments. We have variable and fixed rates on our long-term debt. The fair value of long-term debt with variable rates approximates carrying value as the interest rates of these amounts approximate market rates. We determine fair value on our fixed rate debt by using quoted market prices and current interest rates.
At July 27, 2019, the fair value of our fixed rate mortgage due August 22, 2022 was $
3. Sale-Leaseback Transactions
In March 2019, we sold
In July 2018, we sold
9
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
sale, we entered into a lease pursuant to which we leased back the properties for cumulative initial annual rent of $
In February 2018, we sold
4. Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following (in thousands):
July 27, 2019 | January 26, 2019 | July 28, 2018 | ||||||||
|
|
|
| |||||||
Inventory in-transit | $ | | $ | | $ | | ||||
Accrued payroll and other employee-related liabilities | | | | |||||||
Accrued taxes, other than income | | | | |||||||
Accrued interest | | | | |||||||
Insurance liabilities | | | | |||||||
Gift card liability | | | | |||||||
Construction costs | | | | |||||||
Accrued inbound freight | | | | |||||||
Sales returns reserve | | | | |||||||
Other | | | | |||||||
Total accrued liabilities | $ | | $ | | $ | |
5. Revolving Line of Credit
Interest on borrowings under our $
In June 2019, in connection with the agreement governing the ABL Facility (the “ABL Credit Agreement”), we entered into a letter agreement with certain of the Lenders party to the ABL Credit Agreement (the “Commitment Increase Letter Agreement”) pursuant to which such Lenders agreed to increase their respective commitments by $
10
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
We have amended the ABL Credit Agreement from time to time. After giving effect to such amendments and the ABL Commitment Increase, as of July 27, 2019, the amount of aggregate commitments available under the ABL Credit Agreement is $
As of July 27, 2019, approximately $
6. Long-Term Debt
Long-term debt consists of the following (in thousands):
July 27, 2019 | January 26, 2019 | July 28, 2018 |
| |||||||
Term Loan | $ | | $ | | $ | | ||||
Note payable, bank(a) | | | | |||||||
Obligations under finance leases | | | | |||||||
Total debt | | | | |||||||
Less: current maturities | | | | |||||||
Less: unamortized deferred debt issuance costs | | | | |||||||
Long-term debt | $ | | $ | | $ | |
(a) | Matures August 22, 2022; $ |
On June 5, 2015, our indirect wholly owned subsidiary, At Home Holding III Inc. (the “Borrower”), entered into the First Lien Agreement, by and among the Borrower, At Home Holding II Inc. (“At Home II”), a direct wholly owned subsidiary of At Home Group Inc., as guarantor, certain indirect subsidiaries of At Home II, various lenders and Bank of America, N.A., as administrative agent and collateral agent. We have subsequently amended our First Lien Agreement from time to time. After giving effect to such amendments, the First Lien Agreement provides for a term loan in an aggregate principal amount of $
On July 27, 2017, the Borrower entered into a First Amendment to the First Lien Agreement to permit the incurrence of additional indebtedness pursuant to the ABL Amendment and to make certain technical changes to conform to the terms of the ABL Amendment.
On November 27, 2018, At Home II and the Borrower entered into the Second Amendment (the “Term Loan Amendment”) with the lenders party thereto and Bank of America, N.A., as administrative agent and as collateral agent, which amended the First Lien Agreement, as amended by the First Amendment dated July 27, 2017. Pursuant to the
11
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Term Loan Amendment, among other things, the Borrower borrowed an additional $
7. Related Party Transactions
Merry Mabbett Inc. (“MMI”) is owned by Merry Mabbett Dean, who is the mother of Lewis L. Bird III, our Chief Executive Officer. During the thirteen and twenty-six weeks ended July 27, 2019 and July 28, 2018, through MMI, we purchased certain fixtures, furniture and equipment that is now owned and used by us in our home office, new store offices or in the product vignettes in the stores. In addition, Ms. Dean, through MMI, provided certain design services to us, including design for our home office, as well as design in our stores. During the thirteen weeks ended July 27, 2019 and July 28, 2018, we paid MMI a nominal amount and approximately $
8. Revenue Recognition
We sell a broad assortment of home décor, including home furnishings and accent décor, and recognize revenue when the customer takes possession or control of goods at the time the sale is completed at the store register. Accordingly, we implicitly enter into a contract with customers at the point of sale. In addition to retail store sales, we also generate revenue through the sale of gift cards and through incentive arrangements associated with our credit card program.
As noted in the segment information in the notes to the consolidated financial statements included in our Annual Report, our business consists of
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||
July 27, 2019 |
| July 28, 2018 | July 27, 2019 |
| July 28, 2018 | ||||||||
|
|
|
| ||||||||||
Home furnishings | | % | | % | | % | | % | |||||
Accent décor | | | | | |||||||||
Other | | | | | |||||||||
Total | | % | | % | | % | | % |
Contract liabilities are recognized primarily for gift card sales. Cash received from the sale of gift cards is recorded as a contract liability in accrued and other current liabilities, and we recognize revenue upon the customer’s redemption of the gift card. Gift card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying an estimated breakage rate that takes into account historical patterns of redemptions and deactivations of gift cards.
12
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
We recognized approximately $
In fiscal year 2018, we launched a credit card program by which credit is extended to eligible customers through private label and co-branded credit cards with Synchrony Bank (“Synchrony”). Through the launch of the credit card program, we received reimbursement of costs associated with the launch of the credit card program as well as a one-time payment which has been deferred over the initial
Customers may return purchased items for an exchange or refund. We utilize the expected value methodology in which different scenarios, including current sales return data and historical quarterly sales return rates, are used to develop an estimated sales return rate. We present the sales returns reserve within other current liabilities and the estimated value of the inventory that will be returned within other current assets in the condensed consolidated balance sheets.
July 27, 2019 | January 26, 2019 | July 28, 2018 | ||||||||
|
|
|
| |||||||
Accrued and other current liabilities | $ | | $ | | $ | | ||||
Other current assets | | | | |||||||
Sales returns reserve, net | $ | | $ | | $ | |
9. Income Taxes
Our effective tax rate for the thirteen weeks ended July 27, 2019 was
13
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
10. Commitments and Contingencies
Leases
In February 2016, the FASB issued ASU 2016-02 which supersedes ASC 840 and creates a new topic, ASC 842. ASC 842 requires lessees to recognize a right-of-use asset and an operating lease liability on the balance sheet for all operating leases (with the exception of short-term leases, as defined in ASC 842) at the lease commencement date and recognize expenses on the income statement in a similar manner to the legacy guidance in ASC 840. The operating lease liability is measured as the present value of the unpaid lease payments and the right-of-use asset will be derived from the calculation of the operating lease liability.
We adopted the provisions of ASC 842 effective January 27, 2019, using the modified retrospective adoption method, which resulted in an adjustment to opening retained earnings of $
Package of practical expedients | ● We have elected to not reassess whether any expired or existing contracts are or contain leases. ● We did not reassess initial direct costs for any existing leases. ● All existing operating and capital leases under ASC 840 were recorded as operating and financing leases, respectively, under ASC 842. | ||
Separation of lease and non-lease components | ● We have elected to account for lease and non-lease components as a single component for our entire population of real estate portfolio assets. | ||
Short-term leases | ● We have elected the short-term lease recognition exemption for all applicable classes of underlying assets. ● Short-term leases include only those leased assets with a term greater than one month but less than 12 months in duration and expense is recognized on a straight-line basis over the lease term. ● Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet. |
In addition, ASC 842 eliminated the previous sale-leaseback and build-to-suit lease accounting guidance, which resulted in the derecognition of (i) deferred gains on sale-leasebacks, (ii) build-to-suit assets and related financing obligation liabilities that remained on the balance sheet after the end of the construction period and (iii) the related deferred taxes. For leases with terms of 12 months and greater, an asset and liability are initially recorded at an amount equal to the present value of the unpaid lease payments over the lease term. In determining the lease term for each lease, we include options to extend the lease when it is reasonably certain that we will exercise that option. We use the interest rate implicit in the lease, when known, or its estimated incremental borrowing rate, which is derived from information available at the lease commencement date including prevailing financial market conditions, in determining the present value of the unpaid lease payments.
We assess whether a contract contains a lease on its execution date. If the contract contains a lease, lease classification is assessed upon its commencement date under ASC 842. For leases that are determined to qualify for treatment as operating leases, rent expense is recognized on a straight-line basis over the lease term. Leases that are determined to qualify for treatment as finance leases recognize interest expense as determined using the effective interest method with corresponding amortization of the right-of-use assets.
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AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
We enter into leases primarily for real estate assets to support our operations in the normal course of business. As of July 27, 2019, our material operating leases consist of our corporate headquarters, distribution centers and the majority of our store properties. We also have
The components of lease cost were as follows (in thousands):
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||
July 27, 2019 | July 27, 2019 | ||||||
Operating lease cost(a) | $ | | $ | | |||
Variable lease cost | | | |||||
Finance lease cost | |||||||
Amortization of right-of-use assets | | | |||||
Interest on lease liabilities | | | |||||
Total lease cost(b) | $ | | $ | |
(a) | Net of an immaterial amount of sublease income. |
(b) | Short-term lease cost for the thirteen and twenty-six weeks ended July 27, 2019 was immaterial. |
The table below presents additional information related to our leases as of July 27, 2019.
Weighted average remaining lease term | ||||
Operating leases | years | |||
Finance leases | years | |||
Weighted average discount rate | ||||
Operating leases | % | |||
Finance leases | % |
Supplemental disclosures of cash flow information related to leases were as follows (in thousands):
Twenty-six Weeks Ended | |||||||
July 27, 2019 | |||||||
Cash paid for operating lease liabilities | $ | | |||||
Right-of-use assets obtained in exchange for operating lease liabilities | $ | | |||||
Cash paid for finance lease liabilities | $ | |
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AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Maturities of lease liabilities were as follows as of July 27, 2019 (in thousands):
Financing | |||||||||||||
Operating Leases | Finance Leases | Obligations | Total | ||||||||||
Remainder of 2020 | $ | | $ | | $ | | $ | | |||||
2021 | | | | | |||||||||
2022 | | | | | |||||||||
2023 | | | | | |||||||||
2024 | | | | | |||||||||
Thereafter | | | | | |||||||||
Total lease payments | | | | | |||||||||
Amount representing interest | ( | ( | ( | ( | |||||||||
Remaining non-cash obligation | - | - | | | |||||||||
Present value of lease liabilities | | | | | |||||||||
Less current obligations | ( | ( | - | ( | |||||||||
Long-term lease obligations | $ | | $ | | $ | | $ | |
As of July 27, 2019, operating lease payments excluded approximately $
We have one sale-leaseback transaction which does not qualify for sale-leaseback accounting due to an option to repurchase a portion of the asset. This transaction is accounted for under the financing method. Under the financing method, the assets remain on the condensed consolidated balance sheet and the proceeds from the transactions are recorded as financing obligations. A portion of lease payments are applied as payments of deemed principal and imputed interest.
Litigation
We are subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
11. Earnings Per Share
In accordance with ASC 260, (Topic 260, “Earnings Per Share”), basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period and include the dilutive impact of potential shares from the exercise of stock options and restricted stock units. Potentially dilutive securities are excluded from the computation of diluted net income (loss) per share if their effect is anti-dilutive.
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AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table sets forth the calculation of basic and diluted earnings per share for the thirteen and twenty-six weeks ended July 27, 2019 and July 28, 2018 as follows (dollars in thousands, except share and per share data):
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||
| July 27, 2019 |
| July 28, 2018 |
| July 27, 2019 |
| July 28, 2018 |
| |||||
Numerator: | |||||||||||||
Net income (loss) | $ | | $ | ( | $ | | $ | | |||||
Denominator: | |||||||||||||
Weighted average common shares outstanding-basic | | | | | |||||||||
Effect of dilutive securities: | |||||||||||||
Stock options and restricted stock units | | — | | | |||||||||
Weighted average common shares outstanding-diluted | | | | | |||||||||
Net income (loss) per common share: | |||||||||||||
Basic | $ | | $ | ( | $ | | $ | | |||||
Diluted | $ | | $ | ( | $ | | $ | |
For the thirteen weeks ended July 27, 2019 and July 28, 2018, approximately
12. Stock-Based Compensation
On March 28, 2019, we made a grant of
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ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of the financial condition and results of our operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of At Home Group Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year ended January 26, 2019 as filed with the Securities and Exchange Commission (“SEC”) on March 27, 2019 (the “Annual Report”). You should review the disclosures under the heading “Item 1A. Risk Factors” in the Annual Report, as well as any cautionary language in this report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All expressions of the “Company”, “us”, “we”, “our”, and all similar expressions are references to At Home Group Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the last Saturday in January. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to a fiscal year mean the year in which that fiscal year ends. References herein to “fiscal year 2020” relate to the 52 weeks ending January 25, 2020 and references herein to “fiscal year 2019” relate to the 52 weeks ending January 26, 2019. References herein to “second fiscal quarter 2020” and “second fiscal quarter 2019” relate to the thirteen weeks ended July 27, 2019 and July 28, 2018, respectively. References herein to “the six months ended July 27, 2019” and “the six months ended July 28, 2018” relate to the twenty-six weeks ended July 27, 2019 and July 28, 2018, respectively. References herein to “third fiscal quarter 2020” relate to the thirteen weeks ended October 26, 2019.
Overview
At Home is the leading home décor superstore based on the number of our locations and our large format stores that we believe dedicate more space per store to home décor than any other player in the industry. We are focused on providing the broadest assortment of products for any room, in any style, for any budget. We utilize our space advantage to out-assort our competition, offering over 50,000 SKUs throughout our stores. Our differentiated merchandising strategy allows us to identify on-trend products and then value engineer those products to provide desirable aesthetics at attractive price points for our customers. Over 70% of our products are unbranded, private label or specifically designed for us. We believe that our broad and comprehensive offering and compelling value proposition combine to create a leading destination for home décor with the opportunity to continue taking market share in a highly fragmented and growing industry.
As of July 27, 2019, our store base was comprised of 204 large format stores across 39 states, averaging approximately 105,000 square feet per store. Over the past five completed fiscal years we have opened 122 new stores and we believe there is significant whitespace opportunity to increase our store count in both existing and new markets.
Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
Overall economic trends. The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our stores, while economic weakness results in a reduction of customer spending. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs.
Consumer preferences and demand. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences and design trends. If we misjudge the market for our products, we may be faced with excess inventories for
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some products and may be required to become more promotional in our selling activities, which would impact our net sales and gross profit.
New store openings. We expect new stores will be the key driver of the growth in our sales and operating profit in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. The performance of new stores may vary depending on various factors such as the store opening date, the time of year of a particular opening, the amount of store opening costs, the amount of store occupancy costs and the location of the new store, including whether it is located in a new or existing market. For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. In addition, in response to the interest and excitement generated when we open a new store, the new stores generally experience higher net sales during the initial period of one to three months after which the new store’s net sales will begin to normalize as it reaches maturity within six months of opening, as further discussed below.
Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our inventory management and distribution systems, financial and management controls and information systems. We will also be required to hire, train and retain store management and store personnel, which, together with increased marketing costs, can affect our operating margins.
A new store typically reaches maturity, meaning the store’s annualized targeted sales volume has been reached within six months of opening. New stores are included in the comparable store base during the sixteenth full fiscal month following the store’s opening, which we believe represents the most appropriate comparison. We also periodically explore opportunities to relocate a limited number of existing stores to improve location, lease terms, store layout or customer experience. Relocated stores typically achieve a level of operating profitability comparable to our company-wide average for existing stores more quickly than new stores.
Infrastructure investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. In the past six fiscal years, we have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that our strong management team, brand identity, upgraded and automated distribution centers and enhanced information systems, including our warehouse management and POS systems, enable us to replicate our profitable store format and differentiated shopping experience. In addition, we implemented a merchandise planning system and upgraded our inventory allocation system to better manage inventory for each store and corresponding customer base. We continue to make investments relating to our second distribution center in Pennsylvania that we opened in the beginning of fiscal year 2020 and expect to incur incremental net operating costs in connection therewith through the remainder of fiscal year 2020 that will impact our operating margins. We expect these infrastructure investments to support our successful operating model over a significantly expanded store base.
Pricing strategy. We are committed to providing our products at everyday low prices. We value engineer products in collaboration with our suppliers to recreate the “look” that we believe our customer wants while eliminating the costly construction elements that our customer does not value. We believe our customer views shopping At Home as an in-person experience through which our customer can see and feel the quality of our products and physically assemble a desired aesthetic. This design approach allows us to deliver an attractive value to our customer, as our products are typically less expensive than other branded products with a similar look. We employ a simple everyday low pricing strategy that consistently delivers savings to our customer without the need for extensive promotions, as evidenced by over 80% of our net sales occurring at full price.
Our ability to source and distribute products effectively. Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net sales could be adversely affected in the event of constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales. Recently enacted tariffs could also impact our or our vendors’ ability to source product efficiently or create other supply chain disruptions. We believe the direct effect of the tariffs enacted in fiscal year 2019 did not have a material impact on our
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business due to a combination of supplier negotiations, direct sourcing and strategic price increases. However, we expect that the additional recent tariffs proposed or enacted, including the additional tariffs that took effect in May 2019 and further tariffs announced for September and December 2019, may have an impact on our profit margins in the short-term while we employ similar actions to mitigate the costs associated with new tariffs.
Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including our product offerings, promotional events, store openings and shifts in the timing of holidays, among other things. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year.
Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, including with respect to freight costs, which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. We have faced inflationary pressure on freight costs, which were being heightened by tariff-related shipment surges and port congestion. In response to increasing commodity prices, freight costs or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary. Additionally, we believe our second distribution center in Pennsylvania will reduce future freight costs as the facility continues to ramp-up over the remainder of fiscal year 2020.
How We Assess the Performance of Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures include net sales, gross profit and gross margin, and selling, general and administrative expenses. In addition, we also review other important metrics such as Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income.
Net Sales
Net sales are derived from direct retail sales to customers in our stores, net of merchandise returns and discounts. Growth in net sales is impacted by opening new stores and increases in comparable store sales.
New store openings
The number of new store openings reflects the new stores opened during a particular reporting period, including any relocations of existing stores during such period. Before we open new stores, we incur pre-opening costs, as described below. The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results as described above in “—Trends and Other Factors Affecting Our Business”.
Comparable store sales
A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. When a store is being relocated or remodeled, we exclude sales from that store in the calculation of comparable store sales until the first day of the sixteenth full fiscal month after it reopens. In addition, when applicable, we adjust for the effect of the 53rd week. There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this report regarding our comparable store sales may not be comparable to similar data made available by other retailers.
Comparable store sales allow us to evaluate how our store base is performing by measuring the change in period-over-period net sales in stores that have been open for the applicable period. Various factors affect comparable store sales, including:
● | consumer preferences, buying trends and overall economic trends; |
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● | our ability to identify and respond effectively to customer preferences and trends; |
● | our ability to provide an assortment of high quality and trend-right product offerings that generate new and repeat visits to our stores; |
● | the customer experience we provide in our stores; |
● | our ability to source and receive products accurately and timely; |
● | changes in product pricing, including promotional activities; |
● | the number of items purchased per store visit; |
● | weather; and |
● | timing and length of holiday shopping periods. |
Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we anticipate that an increasing percentage of our net sales will come from stores not included in our comparable store sales calculation. Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.
Gross Profit and Gross Margin
Gross profit is determined by subtracting cost of sales from our net sales. Gross margin measures gross profit as a percentage of net sales.
Cost of sales consists of various expenses related to the cost of selling our merchandise. Cost of sales consists of the following: (1) cost of merchandise, net of inventory shrinkage, damages and vendor allowances; (2) inbound freight and internal transportation costs such as distribution center-to-store freight costs; (3) costs of operating our distribution centers, including labor, occupancy costs, supplies, and depreciation; and (4) store occupancy costs including rent, insurance, taxes, common area maintenance, utilities, repairs and maintenance and depreciation. The components of our cost of sales expenses may not be comparable to other retailers.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) consist of various expenses related to supporting and facilitating the sale of merchandise in our stores. These costs include payroll, benefits and other personnel expenses for corporate and store employees, including stock-based compensation expense, consulting, legal and other professional services expenses, marketing and advertising expenses, occupancy costs for our corporate headquarters and various other expenses.
SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. In addition, the components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth. In particular, we have expanded our marketing and advertising spend as a percentage of net sales in each of the fiscal years since our initial public offering and expect that we will continue to make investments in marketing and advertising spend in future fiscal years.
In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A. In particular, the one-time bonus grant of stock options to certain members of our senior management in connection with our initial public offering resulted in incremental non-cash stock-based compensation expense of approximately $20.0 million, which was expensed over the derived service period beginning with the third quarter of fiscal year 2017 and continued into the second quarter of fiscal year 2019. Additionally, the one-time grant of stock options to our Chairman and Chief Executive Officer made in the second fiscal
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quarter 2019 resulted in incremental non-cash stock-based compensation expense of approximately $41.5 million, which vested immediately and was fully recognized in the second fiscal quarter 2019.
Adjusted EBITDA
Adjusted EBITDA is a key metric used by management and our board of directors to assess our financial performance. Adjusted EBITDA is also the basis for performance evaluation under our current executive compensation programs. In addition, Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use Adjusted EBITDA to supplement generally accepted accounting principles in the United States of America (“GAAP”) measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.
Adjusted EBITDA is defined as net income (loss) before net interest expense, loss from early extinguishment of debt, income tax provision and depreciation and amortization, adjusted for the impact of certain other items as defined in our debt agreements, including certain legal settlements and consulting and other professional fees, relocation and employee recruiting incentives, management fees and expenses, stock-based compensation expense, impairment of our trade name, gain on sale-leaseback and non-cash rent. Periods prior to the adoption of ASC 842 have been adjusted to show the illustrative impact of the accounting standard, which is non-cash in nature. For a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, see “—Results of Operations”.
Store-level Adjusted EBITDA
We use Store-level Adjusted EBITDA as a supplemental measure of our performance, which represents our Adjusted EBITDA excluding the impact of costs associated with new store openings and certain corporate overhead expenses that we do not consider in our evaluation of the ongoing operating performance of our stores from period to period. Our calculation of Store-level Adjusted EBITDA is a supplemental measure of operating performance of our stores and may not be comparable to similar measures reported by other companies. We believe that Store-level Adjusted EBITDA is an important measure to evaluate the performance and profitability of each of our stores, individually and in the aggregate, especially given the level of investments we have made in our home office and infrastructure over the past six years to support future growth. We also believe that Store-level Adjusted EBITDA is a useful measure in evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store level, and the costs of opening new stores, which are non-recurring at the store level, and thereby enables the comparability of the operating performance of our stores during the period. We use Store-level Adjusted EBITDA information to benchmark our performance versus competitors. Store-level Adjusted EBITDA should not be used as a substitute for consolidated measures of profitability of performance because it does not reflect corporate overhead expenses that are necessary to allow us to effectively operate our stores and generate Store-level Adjusted EBITDA. For a reconciliation of Store-level Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, see “—Results of Operations”.
Adjusted Net Income
Adjusted Net Income represents our net income (loss), adjusted for gain on sale-leaseback, initial public offering related non-cash stock-based compensation expense and related payroll tax expenses and the income tax impact associated with the special one-time initial public offering bonus stock option exercises, non-cash stock-based compensation expense related to the special one-time grant of stock options to our Chairman and Chief Executive Officer, costs associated with the restructuring of our merchandising department and other adjustments, which include costs related to the registration and sale of shares of our common stock on behalf of certain existing stockholders, and other transaction costs. Periods prior to the adoption of ASC 842 have been adjusted to show the illustrative impact of the accounting standard, which is non-cash in nature. We present Adjusted Net Income because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. For a reconciliation of Adjusted Net Income to net income (loss), the most directly comparable GAAP measure, see “—Results of Operations”.
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Results of Operations
The following tables summarize key components of our results of operations for the periods indicated in dollars (in thousands), as a percentage of our net sales and other operational data:
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||
July 27, 2019 | July 28, 2018 | July 27, 2019 | July 28, 2018 | ||||||||||
Statement of Operations Data: | |||||||||||||
Net sales | $ | 342,321 | $ | 288,493 | $ | 648,585 | $ | 544,654 | |||||
Cost of sales | 241,923 | 191,115 | 460,136 | 362,032 | |||||||||
Gross profit | 100,398 | 97,378 | 188,449 | 182,622 | |||||||||
Operating expenses | |||||||||||||
Selling, general and administrative expenses | 76,716 | 107,591 | 153,645 | 167,056 | |||||||||
Depreciation and amortization | 1,869 | 1,615 | 3,630 | 3,194 | |||||||||
Total operating expenses | 78,585 | 109,206 | 157,275 | 170,250 | |||||||||
Gain on sale-leaseback | — | — | 16,528 | — | |||||||||
Operating income (loss) | 21,813 | (11,828) | 47,702 | 12,372 | |||||||||
Interest expense, net | 8,235 | 6,680 | 16,004 | 12,458 | |||||||||
Income (loss) before income taxes | 13,578 | (18,508) | 31,698 | (86) | |||||||||
Income tax provision (benefit) | 3,196 | (8,440) | 7,433 | (8,379) | |||||||||
Net income (loss) | $ | 10,382 | $ | (10,068) | $ | 24,265 | $ | 8,293 | |||||
Percentage of Net Sales: | |||||||||||||
Net sales | 100.0 % | 100.0 % | 100.0 % | 100.0 % | |||||||||
Cost of sales | 70.7 % | 66.2 % | 70.9 % | 66.5 % | |||||||||
Gross profit | 29.3 % | 33.8 % | 29.1 % | 33.5 % | |||||||||
Operating expenses | |||||||||||||
Selling, general and administrative expenses | 22.4 % | 37.3 % | 23.7 % | 30.7 % | |||||||||
Depreciation and amortization | 0.5 % | 0.6 % | 0.6 % | 0.6 % | |||||||||
Total operating expenses | 23.0 % | 37.9 % | 24.2 % | 31.3 % | |||||||||
Gain on sale-leaseback | — % | — % | 2.5 % | — % | |||||||||
Operating income (loss) | 6.4 % | (4.1)% | 7.4 % | 2.3 % | |||||||||
Interest expense, net | 2.4 % | 2.3 % | 2.5 % | 2.3 % | |||||||||
Income (loss) before income taxes | 4.0 % | (6.4)% | 4.9 % | (0.0)% | |||||||||
Income tax provision (benefit) | 0.9 % | (2.9)% | 1.1 % | (1.5)% | |||||||||
Net income (loss) | 3.0 % | (3.5)% | 3.7 % | 1.5 % | |||||||||
Operational Data: | |||||||||||||
Total stores at end of period | 204 | 165 | 204 | 165 | |||||||||
New stores opened | 13 | 9 | 24 | 18 | |||||||||
Comparable store sales | (0.4)% | 2.8% | (0.6)% | 1.9% | |||||||||
Non-GAAP Measures(1): | |||||||||||||
Store-level Adjusted EBITDA(2) | $ | 78,772 | $ | 76,839 | $ | 143,479 | $ | 144,589 | |||||
Store-level Adjusted EBITDA margin(2) | 23.0% | 26.6% | 22.1% | 26.5% | |||||||||
Adjusted EBITDA(2) | $ | 47,147 | $ | 49,316 | $ | 80,897 | $ | 90,603 | |||||
Adjusted EBITDA margin(2) | 13.8% | 17.1% | 12.5% | 16.6% | |||||||||
Adjusted Net Income(3) | $ | 11,421 | $ | 20,588 | $ | 13,317 | $ | 38,827 |
(1) | We present Adjusted EBITDA, Adjusted EBITDA margin, Store-level Adjusted EBITDA, Store-level Adjusted EBITDA margin and Adjusted Net Income, which are not recognized financial measures under GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as interest, depreciation, amortization, loss on extinguishment of debt, impairment charges and taxes. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income. In particular, Store-level Adjusted EBITDA does not reflect costs associated with new store openings, which are incurred on a limited basis |
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with respect to any particular store when opened and are not indicative of ongoing core operating performance, and corporate overhead expenses that are necessary to allow us to effectively operate our stores and generate Store-level Adjusted EBITDA. Our presentation of Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income in the future, and any such modification may be material. In addition, Adjusted EBITDA, Adjusted EBITDA margin, Store-level Adjusted EBITDA, Store-level Adjusted EBITDA margin and Adjusted Net Income may not be comparable to similarly titled measures used by other companies in our industry or across different industries. |
Management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted EBITDA in connection with performance evaluations for our executives; to supplement GAAP measures of performance in the evaluation of the effectiveness of our business strategies; to make budgeting decisions; and to compare our performance against that of other peer companies using similar measures. In addition, we utilize Adjusted EBITDA in certain calculations under our $425.0 million senior secured asset-based revolving credit facility (the “ABL Facility”) (defined therein as “Consolidated EBITDA”) and our $350.0 million term loan (the “Term Loan”) (defined therein as “Consolidated Cash EBITDA”). Management believes Store-level Adjusted EBITDA is helpful in highlighting trends because it facilitates comparisons of store operating performance from period to period by excluding the impact of costs associated with new store openings and certain corporate overhead expenses, such as certain costs associated with management, finance, accounting, legal and other centralized corporate functions. In addition, periods prior to the adoption of ASC 842 have been adjusted to show the illustrative impact of the accounting standard, which is non-cash in nature. Management believes that Adjusted Net Income assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items we do not believe are indicative of our core operating performance.
(2) | The following table reconciles our net income (loss) to EBITDA, Adjusted EBITDA and Store-level Adjusted EBITDA for the periods presented (in thousands): |
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||
| July 27, 2019 |
| July 28, 2018 |
| July 27, 2019 |
| July 28, 2018 |
| |||||
|
| ||||||||||||
Net income (loss), as reported | $ | 10,382 | $ | (10,068) | $ | 24,265 | $ | 8,293 | |||||
Interest expense, net | 8,235 | 6,680 | 16,004 | 12,458 | |||||||||
Income tax provision (benefit) | 3,196 | (8,440) | 7,433 | (8,379) | |||||||||
Depreciation and amortization(a) | 17,301 | 14,474 | 33,831 | 25,930 | |||||||||
EBITDA, as reported | 39,114 | 2,646 | 81,533 | 38,302 | |||||||||
Gain on sale-leaseback(b) | — | — | (16,528) | — | |||||||||
Consulting and other professional services(c) | 719 | 1,564 | 2,300 | 3,912 | |||||||||
Stock-based compensation expense(d) | 1,637 | 1,884 | 3,485 | 2,716 | |||||||||
Stock-based compensation related to special one-time IPO bonus grant(e) | — | 1,225 | — | 2,521 | |||||||||
Stock-based compensation related to one-time CEO grant(f) | — | 41,475 | — | 41,475 | |||||||||
Non-cash rent(b) | 4,257 | 1,337 | 8,633 | 2,994 | |||||||||
Other(g) | 1,420 | 327 | 1,474 | 741 | |||||||||
Adjusted EBITDA, as reported | 47,147 | 50,458 | 80,897 | 92,661 | |||||||||
Illustrative impact of ASC 842(h) | — | (1,142) | — | (2,058) | |||||||||
Adjusted EBITDA, as recast | 47,147 | 49,316 | 80,897 | 90,603 | |||||||||
Costs associated with new store openings(i) | 7,539 | 4,880 | 14,599 | 8,618 | |||||||||
Corporate overhead expenses(j) | 24,086 | 22,108 | 47,983 | 44,316 | |||||||||
Less illustrative impact of ASC 842(h) | — | 1,142 | — | 2,058 | |||||||||
Store-level Adjusted EBITDA, as reported | 78,772 | 77,446 | 143,479 | 145,595 | |||||||||
Illustrative impact of ASC 842(h) | — | (607) | — | (1,006) | |||||||||
Store-level Adjusted EBITDA, as recast | $ | 78,772 | $ | 76,839 | $ | 143,479 | $ | 144,589 |
(a) | Includes the portion of depreciation and amortization expenses that are classified as cost of sales in our condensed consolidated statements of operations. |
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(b) | Consists of the non-cash portion of rent, which reflects the extent to which our GAAP straight-line rent expense recognized exceeds or is less than our cash rent payments, partially offset, for the thirteen and twenty-six weeks ended July 28, 2018, by the amortization of deferred gains on sale-leaseback transactions that are recognized to rent expense on a straight-line basis through the applicable lease term. The offsetting amount relating to the amortization of deferred gains on sale-leaseback transactions was $(2.2) million and $(4.1) million during the thirteen and twenty-six weeks ended July 28, 2018, respectively. As of January 27, 2019, we fully recognized the gains on sale-leaseback transactions on the condensed consolidated statements of operations in accordance with ASC 842. The GAAP straight-line rent expense adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant growth. For newer leases, our rent expense recognized typically exceeds our cash rent payments while for more mature leases, rent expense recognized is typically less than our cash rent payments. |
(c) | Primarily consists of (i) consulting and other professional fees with respect to projects to enhance our merchandising and human resource capabilities and other company initiatives; and (ii) charges incurred in connection with the sale of shares of our common stock on behalf of certain existing stockholders and other transaction costs. |
(d) | Non-cash stock-based compensation expense related to the ongoing equity incentive program that we have in place to incentivize, retain and motivate our employees, officers and non-employee directors. |
(e) | Non-cash stock-based compensation expense associated with a special one-time initial public offering bonus grant to certain members of senior management (the “IPO grant”), which we do not consider in our evaluation of our ongoing performance. The IPO grant was made in addition to the ongoing equity incentive program that we have in place to incentivize, retain and motivate our employees, officers and non-employee directors and was made to reward certain senior executives for historical performance and allow them to benefit from future successful outcomes for certain existing stockholders. |
(f) | Non-cash stock-based compensation expense associated with a special one-time grant of stock options to our Chairman and Chief Executive Officer that vested and was fully recognized in the second fiscal quarter 2019 (the “CEO grant”), which we do not consider in our evaluation of our ongoing performance. |
(g) | Other adjustments include amounts our management believes are not representative of our ongoing operations, including: |
● | for each of the thirteen and twenty-six weeks ended July 27, 2019, costs incurred of $1.4 million related to the restructuring of our merchandising department; and |
● | for the thirteen and twenty-six weeks ended July 28, 2018, a payroll tax expense related to the exercise of stock options of $0.3 million and $0.6 million, respectively. |
(h) | Represents the necessary adjustments to reflect management’s estimates of the impact of the adoption of ASC 842 on fiscal year 2019 results, which requires, among other things, a change to the accounting treatment of sale-leaseback transactions and the reclassification of certain of our financing obligations. |
(i) | Reflects non-capital expenditures associated with opening new stores, including marketing and advertising, labor and cash occupancy expenses. Costs related to new store openings represent cash costs, and you should be aware that in the future we may incur expenses that are similar to these costs. We anticipate that we will continue to incur cash costs as we open new stores in the future. We opened 13 and nine new stores during the thirteen weeks ended July 27, 2019 and July 28, 2018, respectively, and 24 and 18 new stores during the twenty-six weeks ended July 27, 2019 and July 28, 2018, respectively. |
(j) | Reflects corporate overhead expenses, which are not directly related to the profitability of our stores, to facilitate comparisons of store operating performance as we do not consider these corporate overhead expenses when evaluating the ongoing performance of our stores from period to period. Corporate overhead expenses, which are a component of selling, general and administrative expenses, are comprised of various home office general and administrative expenses such as payroll expenses, occupancy costs, marketing and advertising, and consulting and professional fees. See our discussion of the changes in selling, general and administrative expenses presented in “—Results of Operations”. Store-level Adjusted EBITDA should not be used as a substitute for consolidated measures of profitability or performance because it does not reflect corporate overhead expenses that are necessary to allow us to effectively operate our stores and generate Store-level Adjusted EBITDA. We anticipate that we will continue to incur corporate overhead expenses in future periods. |
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(3) | The following table reconciles our net income (loss) to Adjusted Net Income for the periods presented (in thousands): |
Thirteen Weeks Ended | Twenty-six Weeks Ended | ||||||||||||
| July 27, 2019 |
| July 28, 2018 |
| July 27, 2019 |
| July 28, 2018 |
| |||||
|
| ||||||||||||
Net income (loss), as reported | $ | 10,382 | $ | (10,068) | $ | 24,265 | $ | 8,293 | |||||
Adjustments: | |||||||||||||
Gain on sale-leaseback(a) | — | — | (16,528) | — | |||||||||
Stock-based compensation related to special one-time IPO bonus grant(b) | — | 1,225 | — | 2,521 | |||||||||
Payroll tax expense related to special one-time IPO bonus stock option exercises(c) | 10 | 35 | 46 | 46 | |||||||||
Stock-based compensation related to one-time CEO grant(d) | — | 41,475 | — | 41,475 | |||||||||
Merchandising department restructuring(e) | 870 | — | 870 | — | |||||||||
Other(f) | 474 | 657 | 1,373 | 1,178 | |||||||||
Tax impact of adjustments to net income (loss)(g) | (308) | (10,355) | 3,304 | (10,366) | |||||||||
Tax benefit related to special one-time IPO bonus stock option exercises(h) | (7) | (343) | (13) | (397) | |||||||||
Adjusted Net Income, as reported | 11,421 | 22,626 | 13,317 | 42,750 | |||||||||
Illustrative impact of ASC 842(i) | — | (2,038) | — | (3,923) | |||||||||
Adjusted Net Income, as recast | $ | 11,421 | $ | 20,588 | $ | 13,317 | $ | 38,827 |
(a) | As of January 27, 2019, we fully recognized the gains on sale-leaseback transactions on the condensed consolidated statements of operations in accordance with ASC 842. |
(b) | Non-cash stock-based compensation expense associated with the IPO grant, which we do not consider in our evaluation of our ongoing performance. The IPO grant was made in addition to the ongoing equity incentive program that we have in place to incentivize, retain and motivate our employees, officers and non-employee directors and was made to reward certain senior executives for historical performance and allow them to benefit from future successful outcomes for certain existing stockholders. |
(c) | Payroll tax expense related to stock option exercises associated with the IPO grant, which we do not consider in our evaluation of our ongoing performance. |
(d) | Non-cash stock-based compensation expense associated with the CEO grant, which we do not consider in our evaluation of our ongoing performance. The CEO grant vested and was fully recognized in the second fiscal quarter 2019. |
(e) | Includes certain employee related costs incurred as part of restructuring our merchandising department. |
(f) | Other adjustments include amounts our management believes are not representative of our ongoing operations, including charges incurred in connection with the sale of shares of our common stock on behalf of certain existing stockholders and other transaction costs. |
(g) | Represents the income tax impact of the adjusted expenses using the annual effective tax rate excluding discrete items. After giving effect to the adjustments to net income (loss), the adjusted effective tax rate for the thirteen and twenty-six weeks ended July 27, 2019 was 23.5% and 23.7%, respectively. The adjusted effective tax rate for the thirteen and twenty-six weeks ended July 28, 2018 was 9.1% and 5.3%, respectively. |
(h) | Represents the income tax benefit related to stock option exercises associated with the IPO grant. |
(i) | Represents the necessary adjustments to reflect management’s estimates of the impact of ASC 842 on fiscal year 2019 results, which requires, among other things, a change to the accounting treatment of sale-leaseback transactions and the reclassification of certain of our financing obligations. |
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Thirteen Weeks Ended July 27, 2019 Compared to Thirteen Weeks Ended July 28, 2018
Net Sales
Net sales increased $53.8 million, or 18.7%, to $342.3 million for the thirteen weeks ended July 27, 2019 from $288.5 million for the thirteen weeks ended July 28, 2018. The increase was primarily driven by approximately $54.8 million of incremental revenue from the net addition of 39 new stores opened since July 28, 2018 as well as the addition of a number of stores that were opened prior to July 28, 2018 but had not yet been open for 15 months and, as a result, were not included in the comparable store base. The increase in net sales was partially offset by comparable store sales, which decreased $1.0 million or 0.4% during the thirteen weeks ended July 27, 2019, driven primarily by adverse weather conditions in the beginning of the second fiscal quarter 2020.
Cost of Sales
Cost of sales increased $50.8 million, or 26.6%, to $241.9 million for the thirteen weeks ended July 27, 2019 from $191.1 million for the thirteen weeks ended July 28, 2018. This increase was primarily driven by the 18.7% increase in net sales for the thirteen weeks ended July 27, 2019 compared to the thirteen weeks ended July 28, 2018, which resulted in a $29.7 million increase in merchandise costs. In addition, during the thirteen weeks ended July 27, 2019, we recognized a $2.6 million increase in depreciation and amortization as a result of new store openings since July 28, 2018 and a $13.5 million increase in store occupancy costs, in each case as a result of new store openings and sale-leaseback transactions since July 28, 2018 and the adoption of ASC 842.
Gross Profit and Gross Margin
Gross profit was $100.4 million for the thirteen weeks ended July 27, 2019, an increase of $3.0 million from $97.4 million for the thirteen weeks ended July 28, 2018. The increase in gross profit was primarily driven by increased sales volume from the net addition of 39 new stores opened since July 28, 2018, partially offset by the 0.4% decrease in comparable store sales and the impact of the adoption of ASC 842. Gross margin decreased 450 basis points to 29.3% of net sales for the thirteen weeks ended July 27, 2019 from 33.8% of net sales for the thirteen weeks ended July 28, 2018. The decrease was primarily driven by a decrease in product profit related to increased markdowns during the thirteen weeks ended July 27, 2019, the adoption of ASC 842, costs associated with opening our second distribution center and increased occupancy costs resulting from our fiscal year 2020 and 2019 sale-leaseback transactions. We expect elevated markdown activity to continue through the third fiscal quarter 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $76.7 million for the thirteen weeks ended July 27, 2019 compared to $107.6 million for the thirteen weeks ended July 28, 2018, a decrease of $30.9 million or 28.7%. As a percentage of sales, SG&A decreased 1,490 basis points for the thirteen weeks ended July 27, 2019 to 22.4% from 37.3% for the thirteen weeks ended July 28, 2018, primarily due to the nonrecurrence of the prior fiscal year stock-based compensation expense of $41.5 million associated with the one-time CEO grant. This decrease was partially offset by an increase in pre-opening expenses due to new store openings, including initial indirect costs that are no longer capitalized due to the adoption of ASC 842. Selling, general and administrative expenses include corporate overhead expenses, which decreased by $41.3 million, primarily as a result of the nonrecurrence of the $41.5 million one-time CEO grant. This decrease was partially offset by increased payroll expenses to support our growth strategies during the current fiscal year period. Selling, general and administrative expenses also include expenses related to store operations, which partially offset the decrease in overall selling, general and administrative expense by $8.5 million, primarily driven by additional headcount for our new stores and an increase in pre-opening expenses due to the timing of new store openings, including initial indirect costs that are no longer capitalized due to the adoption of ASC 842.
The remaining change in selling, general and administrative expenses was related to marketing and advertising expenses. Total marketing and advertising expenses were $10.6 million for the thirteen weeks ended July 27, 2019 compared to $8.7 million for the thirteen weeks ended July 28, 2018, an increase of $1.9 million or 21.5%. The increase was driven by our efforts to increase traffic and build brand awareness.
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Interest Expense, Net
Interest expense, net increased to $8.2 million for the thirteen weeks ended July 27, 2019 from $6.7 million for the thirteen weeks ended July 28, 2018, an increase of $1.5 million. The increase in interest expense is primarily due to increased borrowings under our ABL Facility and Term Loan to support our growth strategies in addition to increases in the average interest rates applicable to our variable rate debt during the period. The effective interest rate for the ABL Facility was approximately 4.40% and 3.80% during the thirteen weeks ended July 27, 2019 and July 28, 2018, respectively.
Income Tax Provision
Income tax expense was $3.2 million for the thirteen weeks ended July 27, 2019 compared to income tax benefit of $8.4 million for the thirteen weeks ended July 28, 2018. The effective tax rate for the thirteen weeks ended July 27, 2019 was 23.5% compared to 45.6% for the thirteen weeks ended July 28, 2018. The effective tax rate for the thirteen weeks ended July 27, 2019 differs from the federal statutory rate primarily due to the impact of state and local income taxes. The effective tax rate for the thirteen weeks ended July 28, 2018 differs from the federal statutory rate primarily due to the recognition of $4.1 million of excess tax benefit related to stock option exercises and the impact of state and local income taxes.
Twenty-six Weeks Ended July 27, 2019 Compared to Twenty-six Weeks Ended July 28, 2018
Net Sales
Net sales increased $103.9 million, or 19.1%, to $648.6 million for the twenty-six weeks ended July 27, 2019 from $544.7 million for the twenty-six weeks ended July 28, 2018. The increase was primarily driven by approximately $106.8 million of incremental revenue from the net addition of 39 new stores opened since July 28, 2018 as well as the addition of a number of stores that were opened prior to July 28, 2018 but had not yet been open for 15 months and, as a result, were not included in the comparable store base. The increase in net sales was partially offset by comparable store sales, which decreased $2.9 million or 0.6% during the twenty-six weeks ended July 27, 2019, driven primarily by adverse weather conditions.
Cost of Sales
Cost of sales increased $98.1 million, or 27.1%, to $460.1 million for the twenty-six weeks ended July 27, 2019 from $362.0 million for the twenty-six weeks ended July 28, 2018. This increase was primarily driven by the 19.1% increase in net sales for the twenty-six weeks ended July 27, 2019 compared to the twenty-six weeks ended July 28, 2018, which resulted in a $52.8 million increase in merchandise costs. In addition, during the twenty-six weeks ended July 27, 2019, we recognized a $7.5 million increase in depreciation and amortization and a $25.1 million increase in store occupancy costs, in each case as a result of new store openings and sale-leaseback transactions since July 28, 2018 and the adoption of ASC 842.
Gross Profit and Gross Margin
Gross profit was $188.4 million for the twenty-six weeks ended July 27, 2019, an increase of $5.8 million from $182.6 million for the twenty-six weeks ended July 28, 2018. The increase in gross profit was primarily driven by increased sales volume from the net addition of 39 new stores opened since July 28, 2018, partially offset by the 0.6% decrease in comparable store sales and the impact of the adoption of ASC 842. Gross margin decreased 440 basis points to 29.1% of net sales for the twenty-six weeks ended July 27, 2019 from 33.5% of net sales for the twenty-six weeks ended July 28, 2018. The decrease was primarily driven by a decrease in product profit related to increased markdowns during the twenty-six weeks ended July 27, 2019, the adoption of ASC 842, costs associated with opening our second distribution center and increased occupancy costs resulting from our fiscal year 2020 and 2019 sale-leaseback transactions. We expect elevated markdown activity to continue through the third fiscal quarter 2020.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were $153.6 million for the twenty-six weeks ended July 27, 2019 compared to $167.1 million for the twenty-six weeks ended July 28, 2018, a decrease of $13.5 million or 8.0%. As a percentage of sales, SG&A decreased 700 basis points for the twenty-six weeks ended July 27, 2019 to 23.7% from 30.7% for the twenty-six weeks ended July 28, 2018, primarily due to the nonrecurrence of (i) the prior fiscal year stock-based compensation expense of $41.5 million associated with the one-time CEO grant and (ii) stock-based compensation expenses associated with the IPO grant. This decrease was partially offset by an increase in pre-opening expenses due to new store openings, including initial indirect costs that are no longer capitalized due to the adoption of ASC 842. Selling, general and administrative expenses include corporate overhead expenses, which decreased by $40.2 million, primarily as a result of the nonrecurrence of (i) the $41.5 million one-time CEO grant and (ii) stock-based compensation expenses associated with the IPO grant. This decrease was partially offset by increased payroll expenses to support our growth strategies. Selling, general and administrative expenses also include expenses related to store operations, which partially offset the overall decrease in selling, general and administrative expense by $21.8 million, primarily driven by additional headcount for our new stores, incremental store labor hours and an increase in pre-opening expenses due to the timing of new store openings, including initial indirect costs that are no longer capitalized due to the adoption of ASC 842.
The remaining change in selling, general and administrative expenses was related to marketing and advertising expenses. Total marketing and advertising expenses were $23.0 million for the twenty-six weeks ended July 27, 2019 compared to $18.1 million for the twenty-six weeks ended July 28, 2018, an increase of $4.9 million or 27.3%. The increase was driven by our efforts to increase traffic and build brand awareness.
Interest Expense, Net
Interest expense, net increased to $16.0 million for the twenty-six weeks ended July 27, 2019 from $12.5 million for the twenty-six weeks ended July 28, 2018, an increase of $3.5 million. The increase in interest expense is primarily due to increased borrowings under our ABL Facility and Term Loan to support our growth strategies in addition to increases in the average interest rates applicable to our variable rate debt during the period. The effective interest rate for the ABL Facility was approximately 4.30% and 3.60% during the twenty-six weeks ended July 27, 2019 and July 28, 2018, respectively.
Income Tax Provision
Income tax expense was $7.4 million for the twenty-six weeks ended July 27, 2019 compared to income tax benefit of $8.4 million for the twenty-six weeks ended July 28, 2018. The effective tax rate for the twenty-six weeks ended July 27, 2019 was 23.4% compared to 9,687.5% for the twenty-six weeks ended July 28, 2018. The effective tax rate for the twenty-six weeks ended July 27, 2019 differs from the federal statutory rate primarily due to the impact of state and local income taxes. The effective tax rate for the twenty-six weeks ended July 28, 2018 differs from the previous federal statutory rate primarily due to our recognition for the period of a loss before income taxes of $0.1 million as well as the impact of $8.3 million of excess tax benefit realized in connection with stock option exercises and, to a lesser extent, the impact of state and local income taxes.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash generated by operating activities, proceeds from sale-leaseback transactions and borrowings under our ABL Facility and Term Loan Facilities (as described in “—Term Loan Facilities”). Historically, we have financed our operations primarily from cash generated from operations and periodic borrowings under our ABL Facility. Our primary cash needs are for day-to-day operations, to provide for infrastructure investments in our stores, to finance new store openings, to pay interest and principal on our indebtedness and to fund working capital requirements for seasonal inventory builds and new store inventory purchases.
As of July 27, 2019, we had $13.1 million of cash and cash equivalents and $133.1 million in borrowing availability under our ABL Facility. At that date, there were $0.4 million in face amount of letters of credit that had been
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issued under the ABL Facility. The agreement governing the ABL Facility (the “ABL Credit Agreement”), as amended, currently provides for aggregate revolving commitments of $425.0 million, with a sublimit for the issuance of letters of credit of $50.0 million and a sublimit for the issuance of swingline loans of $20.0 million. The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them.
In June 2015, we entered into the Term Loan Facilities. The interest rate on the Term Loan Facilities is variable; based on the London Interbank Offered Rate (“LIBOR”) in effect at July 27, 2019, our obligations under the Term Loan Facilities bore interest at a rate of 6.1%. The Term Loan is repayable in equal quarterly installments of approximately $0.9 million.
Our capital expenditures can vary depending on the timing of new store openings and infrastructure-related investments. Capital expenditures for the fiscal year ended January 26, 2019 were approximately $209.1 million, inclusive of $13.0 million invested in the second distribution center and net of proceeds from the sale of property and equipment, which includes sale-leaseback proceeds, of approximately $148.4 million. We estimate that our capital expenditures for the fiscal year ending January 25, 2020 will be in the range of $135.0 million to $155.0 million, net of proceeds from sale-leaseback transactions of $125.0 million. We also plan to invest in the infrastructure necessary to support the further development of our business and continued growth. During fiscal year 2019, we opened 31 new stores, net of two relocated stores and one store closure. Net capital expenditures incurred to date have been substantially financed with cash from operating activities, sale-leaseback transactions and borrowings under our ABL Facility. We expect fiscal year 2020 net capital expenditures to be primarily financed in the same manner.
Based on our growth plans, we believe that our cash position, net cash provided by operating activities, borrowings under our ABL Facility and sale-leaseback transactions will be adequate to finance our planned capital expenditures, working capital requirements and debt service obligations over the next twelve months and the foreseeable future thereafter. If cash flows from operations and borrowings under our ABL Facility are not sufficient or available to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.
Our indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations. Management reacts strategically to changes in economic conditions and monitors compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and flexibility.
Sale-Leaseback Transactions
As part of our flexible real estate strategy, we utilize sale-leaseback transactions to finance investments previously made for the purchase of second generation properties and the construction of new store locations. This enhances our ability to access a range of locations and facilities efficiently. We factor sale-leaseback transactions into our capital allocation decisions. In order to support the execution of sale-leaseback transactions, we have relationships with certain publicly traded REITs and other lenders that have demonstrated interest in our portfolio of assets.
In February 2018, we sold four of our properties in Blaine, Minnesota; Fort Worth, Texas; Jackson, Mississippi; and Memphis, Tennessee for a total of $50.3 million. Contemporaneously with the closing of the sale, we entered into a lease pursuant to which we leased back the properties for cumulative initial annual rent of $3.4 million, subject to annual escalations.
In July 2018, we sold three of our properties in Clarksville, Tennessee; Shreveport, Louisiana; and Wixom, Michigan for a total of $43.6 million. Contemporaneously with the closing of the sale, we entered into a lease pursuant to which we leased back the properties for cumulative initial annual rent of $3.0 million, subject to annual escalations.
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In March 2019, we sold five of our properties in Frederick, Maryland; Live Oak, Texas; Mansfield, Texas; Plano, Texas; and Whitehall, Pennsylvania for a total of $74.7 million. Contemporaneously with the closing of the sale, we entered into a lease pursuant to which we leased back the properties for cumulative initial annual rent of $5.0 million, subject to annual escalations.
We have one sale-leaseback transaction which does not qualify for sale-leaseback accounting due to an option to repurchase a portion of the asset. This transaction is accounted for under the financing method. Under the financing method, the assets remain on the condensed consolidated balance sheet and the proceeds from the transactions are recorded as financing obligations. A portion of lease payments are applied as payments of deemed principal and imputed interest. The current portion of financing obligations is included in our current portion of long-term debt on the condensed consolidated balance sheets.
Term Loan Facilities
On June 5, 2015, our indirect wholly owned subsidiary At Home Holding III Inc. (the “Borrower”) entered into a first lien credit agreement (the “First Lien Agreement”), by and among the Borrower, At Home Holding II Inc. (“At Home II”), a direct wholly owned subsidiary of ours, as guarantor, certain indirect subsidiaries of At Home II, various lenders and Bank of America, N.A., as administrative agent and collateral agent. We have subsequently amended our First Lien Agreement from time to time. After giving effect to such amendments, the First Lien Agreement provides for the Term Loan in an aggregate principal amount of $350.0 million. The Term Loan will mature on June 3, 2022, and is repayable in equal quarterly installments of approximately $0.9 million for an annual aggregate amount equal to 1% of the principal amount. The Borrower has the option of paying interest on a 1-month, 2-month or quarterly basis on the Term Loan at an annual rate of LIBOR (subject to a 1% floor) plus 4.00%, subject to a 0.50% reduction if the Borrower achieves a specified secured net leverage ratio level, which was met during the fiscal year ended January 28, 2017 and for which the Borrower has continued to qualify during the thirteen and twenty-six weeks ended July 27, 2019. The Term Loan is prepayable, in whole or in part, without premium at our option.
The Term Loan permits us to add one or more incremental term loans in amounts subject to our compliance with a first lien net leverage ratio test. The first lien net leverage ratio test is calculated using Adjusted EBITDA, which is defined as “Consolidated EBITDA” under our credit agreement.
On November 27, 2018, At Home II and the Borrower entered into the Second Amendment (the “Term Loan Amendment”) with the lenders party thereto and Bank of America, N.A., as administrative agent and as collateral agent, which amended the First Lien Agreement, as amended by the First Amendment dated July 27, 2017. Pursuant to the Term Loan Amendment, among other things, the Borrower borrowed an additional $50.0 million in incremental term loans, increasing the principal amount outstanding under the First Lien Agreement on such date to $339.5 million. Net proceeds from the incremental term loans were used to repay approximately $49.6 million of borrowings under our ABL Facility.
As of July 27, 2019, approximately $337.7 million was outstanding under the Term Loan. The Term Loan has various non-financial covenants, customary representations and warranties, events of defaults and remedies substantially similar to those described in respect of the ABL Facility below. There are no financial maintenance covenants in the Term Loan. As of July 27, 2019 and July 28, 2018, we were in compliance with all covenants prescribed under the Term Loan.
Asset-Based Lending Credit Facility
In October 2011, we entered into the ABL Facility, which originally provided for cash borrowings or issuances of letters of credit of up to $80.0 million based on defined percentages of eligible inventory and credit card receivable balances. We have subsequently amended the ABL Credit Agreement from time to time. In June 2019, in connection with the ABL Credit Agreement, we entered into a letter agreement with certain of the Lenders party to the ABL Credit Agreement (the “Commitment Increase Letter Agreement”) pursuant to which such Lenders agreed to increase their respective commitments by $75.0 million in the aggregate, with effect from June 14, 2019 (the “ABL Commitment Increase”). Following the ABL Commitment Increase, the amount of aggregate commitments available under the ABL
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Credit Agreement is $425.0 million. The other terms of the ABL Facility were not changed by the Commitment Increase Letter Agreement. After giving effect to such amendments and the ABL Commitment Increase, as of July 27, 2019, the amount of aggregate commitments available under the ABL Credit Agreement is $425.0 million, with a sublimit for the issuance of letters of credit of $50.0 million and a sublimit for the issuance of swingline loans of $20.0 million. In July 2017, in connection with the Seventh Amendment to the ABL Credit Agreement, the maturity of the ABL Facility was extended to the earlier of July 27, 2022 and the date that is 91 days prior to the maturity date of the First Lien Agreement (as such date may be extended).
Borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option: (x) the higher of (i) the Federal Funds Rate plus 1/2 of 1.00%, (ii) the agent bank's prime rate and (iii) LIBOR plus 1.00%, plus in each case, an applicable margin of 0.25% to 0.75% based on our availability or (y) the agent bank's LIBOR plus an applicable margin of 1.25% to 1.75% based on our availability. The effective interest rate was approximately 4.40% and 3.80% during the thirteen weeks ended July 27, 2019 and July 28, 2018, respectively, and approximately 4.30% and 3.60% during the twenty-six weeks ended July 27, 2019 and July 28, 2018, respectively.
As of July 27, 2019, approximately $276.4 million was outstanding under the ABL Facility, approximately $0.4 million in face amount of letters of credit had been issued and we had availability of approximately $133.1 million.
The ABL Facility contains a number of covenants that, among other things, restrict our ability to, subject to specified exceptions, incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; engage in businesses that are not in a related line of business; make loans, advances or guarantees; pay dividends; engage in transactions with affiliates; and make investments. In addition, the ABL Facility contains certain cross-default provisions. There are no financial maintenance covenants in the ABL Facility. However, during the existence of an event of default or when we fail to maintain availability of the greater of $15.0 million and 10% of the loan cap, the consolidated fixed charge coverage ratio on a rolling 12 month basis as of the end of any fiscal month must be 1.00 to 1.00 or higher. As of July 27, 2019 and July 28, 2018, we were in compliance with all covenants under the ABL Facility.
Collateral under the ABL Facility and the Term Loan
The ABL Facility is secured by (a) a first priority lien on our (i) cash, cash equivalents, deposit accounts, accounts receivable, other receivables, tax refunds and inventory, (ii) to the extent relating to, arising from, evidencing or governing any of the items referred to in the preceding clause (i), chattel paper, documents, instruments, general intangibles, and securities accounts related thereto, (iii) books and records relating to the foregoing and (iv) supporting obligations and all products and proceeds of the foregoing and all collateral security and guarantees given by any person with respect to any of the foregoing, in each case subject to certain exceptions (collectively, “ABL Priority Collateral”) and (b) a second priority lien on our remaining assets not constituting ABL Priority Collateral, subject to certain exceptions (collectively, “Term Priority Collateral”); provided, however that since our amendment of the ABL Facility in July 2017, real property that may secure the Term Loan from time to time no longer forms part of the collateral under the ABL Facility.
The Term Loan is secured by (a) a first priority lien on the Term Priority Collateral and (b) a second priority lien on the ABL Priority Collateral.
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Summary of Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table (in thousands):
Twenty-six Weeks Ended | |||||||
| July 27, 2019 |
| July 28, 2018 |
| |||
Net Cash Provided by Operating Activities | $ | 11,367 | $ | 22,326 | |||
Net Cash Used in Investing Activities | (77,707) | (67,763) | |||||
Net Cash Provided by Financing Activities | 68,495 | 49,812 | |||||
Increase in Cash, Cash Equivalents and Restricted Cash | 2,155 | 4,375 |
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $11.4 million for the twenty-six weeks ended July 27, 2019 compared to net cash provided by operating activities of $22.3 million for the twenty-six weeks ended July 28, 2018. The $10.9 million decrease in cash provided by operating activities was primarily due to an increase of approximately $7.7 million in cash paid for income taxes and a $3.9 million increase in cash paid for interest.
Net Cash Used in Investing Activities
Net cash used in investing activities was $77.7 million for the twenty-six weeks ended July 27, 2019 compared to $67.8 million for the twenty-six weeks ended July 28, 2018. The $9.9 million increase in cash used in investing activities was driven by an increase in net capital expenditures. Capital expenditures of $141.5 million for the twenty-six weeks ended July 27, 2019 consisted of $126.3 million invested in new store growth and approximately $3.6 million invested in the second distribution center with the remaining $11.4 million primarily related to investments in information technology initiatives and existing stores. Capital expenditures of $160.4 million for the twenty-six weeks ended July 28, 2018 consisted of $144.5 million invested in new store growth with the remaining $15.9 million primarily related to investments in information technology initiatives, existing stores and the second distribution center.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $68.5 million for the twenty-six weeks ended July 27, 2019 compared to $49.8 million for the twenty-six weeks ended July 28, 2018, an increase of $18.7 million primarily due to a $21.9 million increase in net borrowings under our ABL Facility and a $9.6 million increase in proceeds from financing obligations, which was partially offset by a $12.1 million decrease in proceeds from the exercise of stock options.
Off-Balance Sheet Arrangements
We have not historically entered into off-balance sheet arrangements other than letters of credit and purchase obligations in the normal course of our operations.
Seasonality
Our business is moderately seasonal in nature. Historically, our business has realized a slightly higher portion of net sales and operating income in the second and fourth fiscal quarters, attributable primarily to the impact of the summer and year-end holiday decorating seasons, respectively. However, our broad and comprehensive product offering makes us less susceptible to holiday shopping seasonal patterns than many other retailers. Our quarterly results have been and will continue to be affected by the timing of new store openings and their associated pre-opening costs. As a result of these factors, our financial and operating results for any single quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved for a full fiscal year.
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Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. A summary of our significant accounting policies is included in Note 1 to the annual consolidated financial statements included in the Annual Report. See also “Note 1 – Summary of Significant Accounting Policies”, “Note 8 – Revenue Recognition” and “Note 10 – Commitments and Contingencies” to our Condensed Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
We have market risk exposure arising from changes in interest rates on our ABL Facility and Term Loan Facilities, which bear interest at rates that are benchmarked against LIBOR. Based on our overall interest rate exposure to variable rate debt outstanding as of July 27, 2019, a 1% increase or decrease in interest rates would increase or decrease income before income taxes by approximately $6.1 million. A 1% increase or decrease in interest rates would impact the fair value of our long-term fixed rate debt by an immaterial amount. A change in interest rates would not materially affect the fair value of our variable rate debt as the debt reprices periodically.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.
Foreign Currency Risk
We purchase approximately 65% of our merchandise from suppliers in foreign countries, however, those purchases are made exclusively in U.S. dollars. Therefore, we do not believe that foreign currency fluctuation has had a material impact on our financial performance for the periods presented in this report.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the thirteen weeks ended July 27, 2019 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various litigations, claims and other proceedings that arise from time to time in the ordinary course of business. We believe these actions are routine and incidental to the business. While the outcome of these actions cannot be predicted with certainty, we do not believe that any will have a material adverse impact on our business.
ITEM 1A. RISK FACTORS
There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 26, 2019 as filed with the SEC on March 27, 2019 which is accessible on the SEC’s website at www.sec.gov.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) Exhibits
The following exhibits are filed or furnished as a part of this report:
Exhibit Number | Description of Exhibit | |
---|---|---|
†10.1 | ||
10.2 | ||
*31.1 | ||
*31.2 | ||
*32.1 | ||
*101.INS | Inline XBRL Instance Document. | |
*101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
*101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
*101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
*101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
*101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
*104 | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline Instance XBRL document. |
* | Filed herewith. |
† | Indicates management contracts or compensatory plans or arrangements in which our executive officers or directors participate. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AT HOME GROUP INC. | ||
September 5, 2019 | /s/ LEWIS L. BIRD III | |
By: | Lewis L. Bird III | |
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | ||
September 5, 2019 | /s/ JEFFREY R. KNUDSON | |
By: | Jeffrey R. Knudson | |
Chief Financial Officer (Principal Financial Officer) | ||
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