10-Q 1 ssi-0504201910q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 2019

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

For the transition period from ______ to ______

Commission File Number 1-14035

Stage Stores, Inc.
(Exact name of registrant as specified in its charter)
NEVADA
 (State or other jurisdiction of incorporation or organization)
91-1826900
 (I.R.S. Employer Identification No.)
 
 
2425 West Loop South, Houston, Texas
 (Address of principal executive offices)
77027
 (Zip Code)

(800) 579-2302
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock ($0.01 par value)
SSI
New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
 
Accelerated filer
þ
 
 
 
 
 
Non-accelerated filer
o
 
Smaller reporting company
þ
 
 
 
 
 
 
 
 
Emerging growth company
o



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

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

As of June 5, 2019, there were 28,663,276 shares of the registrant’s common stock outstanding.


TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Page No.
Item 1.
 
 
 
 
 
May 4, 2019, February 2, 2019 and May 5, 2018
 
 
 
 
Three Months Ended May 4, 2019 and May 5, 2018
 
 
 
 
Three Months Ended May 4, 2019 and May 5, 2018
 
 
 
 
Three Months Ended May 4, 2019 and May 5, 2018
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 




PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
Stage Stores, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
(Unaudited)
 
 
 
 
 
 
 
May 4, 2019
 
February 2, 2019
 
May 5, 2018
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
22,793

 
$
15,830

 
$
29,091

Merchandise inventories, net
472,000

 
424,555

 
477,562

Prepaid expenses and other current assets
43,817

 
52,518

 
48,762

Total current assets
538,610

 
492,903

 
555,415

 
 
 
 
 
 
Property, equipment and leasehold improvements, net of accumulated depreciation of $742,162, $733,366 and $713,867, respectively
211,849

 
224,803

 
244,214

Operating lease assets
332,233

 
—

 
—

Intangible assets
2,225

 
2,225

 
17,135

Other non-current assets, net
22,690

 
24,230

 
23,715

Total assets
$
1,107,607

 
$
744,161

 
$
840,479

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
Accounts payable
$
121,347

 
$
106,825

 
$
128,883

Current portion of debt obligations
5,170

 
4,812

 
2,896

Current portion of operating lease liabilities
75,211

 
—

 
—

Accrued expenses and other current liabilities
73,822

 
65,715

 
64,617

Total current liabilities
275,550


177,352

 
196,396

 
 
 
 
 
 
Long-term debt obligations
306,699

 
250,294

 
265,469

Long-term operating lease liabilities
289,154

 
—

 
—

Other long-term liabilities
33,305

 
61,990

 
66,029

Total liabilities
904,708


489,636

 
527,894

 
 
 
 
 
 
Commitments and contingencies


 


 



 

 
 

 
 
Common stock, par value $0.01, 100,000 shares authorized, 33,805, 33,469 and 33,111 shares issued, respectively
338

 
335

 
331

Additional paid-in capital
424,407

 
423,535

 
420,091

Treasury stock, at cost, 5,175 shares, respectively
(43,552
)
 
(43,579
)
 
(43,339
)
Accumulated other comprehensive loss
(5,687
)
 
(5,857
)
 
(4,978
)
Accumulated deficit
(172,607
)
 
(119,909
)
 
(59,520
)
Total stockholders' equity
202,899

 
254,525

 
312,585

Total liabilities and stockholders' equity
$
1,107,607


$
744,161

 
$
840,479

 
 
 
 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Stage Stores, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
 
 
 
 
May 4, 2019
 
May 5, 2018
Net sales
$
327,721

 
$
344,229

Credit income
13,108

 
15,514

Total revenues
340,829

 
359,743

Cost of sales and related buying, occupancy and distribution expenses
277,599

 
281,741

Selling, general and administrative expenses
106,576

 
107,277

Interest expense
3,994

 
2,253

Loss before income tax
(47,340
)

(31,528
)
Income tax expense
150

 
150

Net loss
$
(47,490
)

$
(31,678
)
 
 
 
 
Other comprehensive income:
 
 
 
Amortization of employee benefit related costs, net of tax of $0, respectively
$
170

 
$
199

Total other comprehensive income
170


199

Comprehensive loss
$
(47,320
)

$
(31,479
)
 
 
 
 
Net loss per share:
 
 
 
Basic
$
(1.67
)
 
$
(1.14
)
Diluted
$
(1.67
)
 
$
(1.14
)
 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
28,441

 
27,765

Diluted
28,441

 
27,765

 
 
 
 



The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Stage Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Three Months Ended
 
 
 
 
 
May 4, 2019
 
May 5, 2018
Cash flows from operating activities:
 
 
 
Net loss
$
(47,490
)
 
$
(31,678
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization of long-lived assets
15,344

 
15,151

Impairment of long-lived assets
519

 
—

Gain on retirements of property, equipment and leasehold improvements
(678
)
 
(30
)
Non-cash operating lease expense
17,588

 
—

Stock-based compensation expense
949

 
1,558

Amortization of debt issuance costs
170

 
74

Deferred compensation obligation
(27
)
 
41

Amortization of employee benefit related costs
170

 
199

Construction allowances from landlords
1,867

 
—

Other changes in operating assets and liabilities:
 

 
 

Increase in merchandise inventories
(47,445
)
 
(39,185
)
Decrease in other assets
14,252

 
4,303

Decrease in operating lease liabilities
(18,972
)
 
—

Increase (decrease) in accounts payable and other liabilities
26,551

 
(19,088
)
Net cash used in operating activities
(37,202
)

(68,655
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property, equipment and leasehold improvements
(13,774
)
 
(6,930
)
Proceeds from insurance and disposal of assets
678

 
45

Net cash used in investing activities
(13,096
)

(6,885
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from revolving credit facility borrowings
149,411

 
164,071

Payments of revolving credit facility borrowings
(91,756
)
 
(78,310
)
Payments of long-term debt obligations
(338
)
 
(731
)
Payments of debt issuance costs
(36
)
 
—

Payments for stock related compensation
(20
)
 
(204
)
Cash dividends paid
—

 
(1,445
)
Net cash provided by financing activities
57,261


83,381

Net increase in cash and cash equivalents
6,963


7,841

 
 
 
 
Cash and cash equivalents:
 

 
 

Beginning of period
15,830

 
21,250

End of period
$
22,793


$
29,091

 
 
 
 
Supplemental disclosures including non-cash investing and financing activities:
 

 
 

Interest paid
$
3,745

 
$
2,116

Income taxes paid (refunded)
$
473

 
$
(180
)
Unpaid liabilities for capital expenditures
$
3,863

 
$
2,597

 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Stage Stores, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except per share amounts)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Total
Balance at February 2, 2019
33,469

 
$
335

 
$
423,535

 
(5,175
)
 
$
(43,579
)
 
$
(5,857
)
 
$
(119,909
)
 
$
254,525

Cumulative-effect adjustment (a)
—

 
—

 
—

 
—

 
—

 
—

 
(5,208
)
 
(5,208
)
Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(47,490
)
 
(47,490
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
170

 
—

 
170

Deferred compensation
—

 
—

 
(27
)
 
—

 
27

 
—

 
—

 
—

Issuance of equity awards, net
336

 
3

 
(3
)
 
—

 
—

 
—

 
—

 
—

Tax withholdings paid for net settlement of stock awards
—

 
—

 
(47
)
 
—

 
—

 
—

 
—

 
(47
)
Stock-based compensation expense
—

 
—

 
949

 
—

 
—

 
—

 
—

 
949

Balance at May 4, 2019
33,805

 
$
338

 
$
424,407

 
(5,175
)
 
$
(43,552
)

$
(5,687
)
 
$
(172,607
)
 
$
202,899

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Related to the adoption of the new lease accounting standard. See Note 1 for further disclosures regarding the adoption impact.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Total
Balance at February 3, 2018
32,806

 
$
328

 
$
418,658

 
(5,175
)
 
$
(43,298
)
 
$
(5,177
)
 
$
(26,397
)
 
$
344,114

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(31,678
)
 
(31,678
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
199

 
—

 
199

Dividends on common stock, $0.05 per share
—

 
—

 
—

 
—

 
—

 
—

 
(1,445
)
 
(1,445
)
Deferred compensation
—

 
—

 
41

 
—

 
(41
)
 
—

 
—

 
—

Issuance of equity awards, net
305

 
3

 
(3
)
 
—

 
—

 
—

 
—

 
—

Tax withholdings paid for net settlement of stock awards
—

 
—

 
(163
)
 
—

 
—

 
—

 
—

 
(163
)
Stock-based compensation expense
—

 
—

 
1,558

 
—

 
—

 
—

 
—

 
1,558

Balance at May 5, 2018
33,111

 
$
331

 
$
420,091

 
(5,175
)
 
$
(43,339
)
 
$
(4,978
)
 
$
(59,520
)
 
$
312,585




The accompanying notes are an integral part of these condensed consolidated financial statements.
7

Stage Stores, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1 - BASIS OF PRESENTATION
    
The accompanying condensed consolidated financial statements of Stage Stores, Inc. and its subsidiary (“we,” “us” or “our”) have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Those adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods have been made. Results of operations for such interim periods are not necessarily indicative of the results of operations for a full year due to seasonality and other factors. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto filed with our Annual Report on Form 10-K for the year ended February 2, 2019 (“Form 10-K”).    

We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of May 4, 2019, we operated in 42 states through 685 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 105 GORDMANS off-price stores, as well as an e-commerce website (www.stage.com). Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized markets in the Midwest.

References to a particular year are to our fiscal year, which is the 52- or 53-week period ending on the Saturday closest to January 31st of the following calendar year.  For example, a reference to “2019” is a reference to the fiscal year ending February 1, 2020, and “2018” is a reference to the fiscal year ended February 2, 2019. Fiscal years 2019 and 2018 are comprised of 52 weeks. References to the “three months ended May 4, 2019” and “three months ended May 5, 2018” are for the respective 13-week fiscal quarters. References to quarters relate to our fiscal quarters.

Recently Adopted Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Updates (“ASU”) 2016-02, Leases (Topic 842), and subsequently issued related ASUs, which were incorporated into Topic 842. Under the new standard, lessees are required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the later of the lease commencement date and the date of adoption. The guidance also requires qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. We adopted the new standard on February 3, 2019, the first day of fiscal 2019.

Transition elections:

•
We elected to apply the effective date transition method as of the February 3, 2019 adoption date. Comparative periods prior to the adoption of the new standard have not been restated and are reported under the legacy guidance in Accounting Standards Codification (“ASC”) Topic 840, Leases.
•
We elected the package of practical expedients in the transition guidance, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
•
We elected not to use the practical expedient of using hindsight to determine the lease term and in assessing impairment of the right-of-use assets.
Accounting policy elections:

•
We elected the short-term lease exemption for non-real estate leases that have a lease term of twelve months or less. For non-real estate leases that qualify for the short-term exemption, we will not recognize a right-of-use asset or liability and will recognize those lease expenses on a straight-line basis over the lease term.
•
We elected to not separate lease and non-lease components for all of our current lease classes.

    


8

The adoption of the standard resulted in the recognition of operating lease assets and liabilities of $344.2 million and $375.8 million, respectively, as of February 3, 2019. Included in the measurement of the operating lease assets and liabilities is the reclassification of balances historically recorded as deferred rent and deferred rent tenant allowances. We also recognized a cumulative effect charge of $5.2 million, net of tax, to the opening accumulated deficit balance. This adjustment reflects $5.8 million in depreciation of leasehold improvements associated with conforming the asset useful life to the remaining lease life as of the transition date. It also reflects $0.6 million associated with the derecognition of lease obligations that had been classified as finance obligations under the former failed sale-leaseback guidance applied to build-to-suit arrangements. Under the new standard, these leases are classified as operating leases. The adoption of the standard did not have a material impact on our results of operations or cash flows. In addition, our bank covenants under our Credit Facility were not affected by the adoption of the standard. See Note 5 for further disclosures regarding leases.

Recent Accounting Pronouncements Not Yet Adopted.    In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementations costs incurred to develop or obtain internal-use software. The guidance also requires disclosure of the nature of hosting arrangements that are service contracts. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and disclosures.

NOTE 2 - FAIR VALUE MEASUREMENTS

We recognize or disclose the fair value of our financial and non-financial assets and liabilities on a recurring and non-recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.

We applied the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 –
Quoted prices in active markets for identical assets or liabilities.
 
 
Level 2 –
Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3 –
Inputs that are both unobservable and significant to the overall fair value measurement reflect our estimates of assumptions that market participants would use in pricing the asset or liability.
         


9


Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
 
May 4, 2019
 
Balance
 
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Other assets:
 
 
 
 
 
 
 
Securities held in grantor trust for deferred
compensation plans (a)(b)
$
17,887

 
$
17,887

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 2, 2019
 
Balance
 
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Other assets:
 

 
 

 
 

 
 

Securities held in grantor trust for deferred
compensation plans (a)(b)
$
19,536

 
$
19,536

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
May 5, 2018
 
Balance
 
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Other assets:
 

 
 

 
 

 
 

Securities held in grantor trust for deferred
compensation plans (a)(b)
$
19,606

 
$
19,606

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
(a) The liability for the amount due to participants corresponding in value to the securities held in the grantor trust is recorded in other long-term liabilities.
(b) Using the market approach, the fair values of these securities represent quoted market prices multiplied by the quantities held. Net gains and losses related to the changes in fair value in the assets and liabilities under the various deferred compensation plans are recorded in selling, general and administrative expenses and were nil for the three months ended May 4, 2019 and May 5, 2018, and for the fiscal year ended February 2, 2019.
    


10


Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
 
May 4, 2019
 
Balance
 
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Assets held for sale (a)
$
3,270

 
$
—

 
$
—

 
$
3,270

Store property, equipment and leasehold improvements (b)
2

 
—

 
—

 
2

Total Assets
$
3,272

 
$
—

 
$
—

 
$
3,272

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
February 2, 2019
 
Balance
 
Quoted Prices in Active Markets for Identical Instruments
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Store property, equipment and leasehold improvements (a)
$
1,583

 
$
—

 
$
—

 
$
1,583

 
 
 
 
 
 
 
 

(a) Assets held for sale are reflected in prepaid expenses and other current assets.

(b) Using an undiscounted cash flow model, we evaluate the cash flow trends of our stores at least annually and when events or changes in circumstances, such as a store closure, indicate that property, equipment and leasehold improvements may not be fully recoverable. When a store’s projected undiscounted cash flows indicate its carrying value may not be recoverable, we use a discounted cash flow model to estimate the fair value of the underlying long-lived assets. An impairment write-down is recorded if the carrying value of a long-lived asset exceeds its fair value. Key assumptions in estimating future cash flows include, among other things, expected future operating performance, including expected closure date and lease term, and changes in economic conditions. We believe estimated future cash flows are sufficient to support the carrying value of our long-lived assets. Significant changes in the key assumptions used in our cash flow projections may result in additional asset impairments. For the three months ended May 4, 2019 and fiscal year 2018, we recognized impairment charges of $0.5 million and $2.8 million, respectively. There were no impairment charges recognized for the three months ended May 5, 2018. Impairment charges related to assets held for sale are recorded in selling, general and administrative expenses, while impairment charges related to store property, equipment and leasehold improvements are recorded in cost of sales and related buying, occupancy and distribution expenses.

Due to the short-term nature of cash and cash equivalents, payables and short-term debt obligations, the carrying value approximates the fair value of these instruments. In addition, we believe that the credit facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.



11

NOTE 3 - DEBT OBLIGATIONS

Debt obligations for each period presented consisted of the following (in thousands):

 
May 4, 2019
 
February 2, 2019
 
May 5, 2018
Revolving loan
$
261,699

 
$
204,044

 
$
265,049

Term loan
50,000

 
50,000

 
—

Finance obligations
—

 
554

 
1,310

Other financing
170

 
508

 
2,006

Total debt obligations
311,869


255,106

 
268,365

Less: Current portion of debt obligations
5,170

 
4,812

 
2,896

Long-term debt obligations
$
306,699


$
250,294

 
$
265,469


 
We have total availability of $450.0 million with a seasonal increase to $475.0 million under our senior secured revolving credit facility agreement including a revolving loan (“Revolving Loan”) and term loans (“Term Loan”), jointly referred to as the “Credit Facility”. Additionally, we have a $25.0 million letter of credit sublimit. The Term Loan is payable in quarterly installments of $1.3 million beginning on June 15, 2019, with the remaining balance due upon maturity. The Credit Facility matures on December 16, 2021.

We use the Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings under the Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Credit Facility agreement. The Credit Facility is secured by our inventory, cash, cash equivalents, and substantially all of our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the Credit Facility agreement. For the three months ended May 4, 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the Credit Facility, were 4.8% and $299.2 million, respectively.

Letters of credit issued under the Credit Facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At May 4, 2019, outstanding letters of credit totaled approximately $6.0 million. These letters of credit expire within 12 months of issuance and may be renewed.

The Credit Facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The Credit Facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At May 4, 2019, we were in compliance with the debt covenants of the Credit Facility agreement and we expect to remain in compliance. Excess availability under the Credit Facility at May 4, 2019 was $55.7 million.

We derecognized finance obligations of $0.6 million upon adoption of ASC Topic 842, Leases, on February 3, 2019. See Note 1 for further disclosures regarding the adoption impact.
    





12

NOTE 4 - REVENUE

Net Sales

The following table presents the composition of net sales by merchandise category (in thousands):
 
 
Three Months Ended
 
 
May 4, 2019
 
May 5, 2018
Merchandise Category
 
Department Stores
 
Off-price Stores
 
Total Company
 
Department Stores
 
Off-price Stores
 
Total Company
Women’s
 
$
83,615

 
$
20,861

 
$
104,476

 
$
103,487

 
$
19,967

 
$
123,454

Men’s
 
39,108

 
8,514

 
47,622

 
41,336

 
7,545

 
48,881

Children's
 
25,138

 
9,880

 
35,018

 
29,078

 
8,096

 
37,174

Apparel
 
147,861

 
39,255

 
187,116

 
173,901

 
35,608

 
209,509

 
 
 
 
 
 
 
 
 
 
 
 
 
Footwear
 
40,271

 
5,074

 
45,345

 
44,483

 
4,819

 
49,302

Accessories
 
16,714

 
4,344

 
21,058

 
18,872

 
4,366

 
23,238

Cosmetics/Fragrances
 
27,869

 
2,813

 
30,682

 
31,186

 
2,482

 
33,668

Home/Gifts/Other
 
25,154

 
20,705

 
45,859

 
12,809

 
18,507

 
31,316

Non-apparel
 
110,008

 
32,936

 
142,944

 
107,350

 
30,174

 
137,524

 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue adjustments not allocated (a)
 
(1,912
)
 
(427
)
 
(2,339
)
 
(2,888
)
 
84

 
(2,804
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
255,957

 
$
71,764

 
$
327,721

 
$
278,363

 
$
65,866

 
$
344,229

 
 
 
 
 
 
 
 
 
 
 
 
 
(a) Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories.

Contract Liabilities

Contract liabilities (recorded in accrued expenses and other current liabilities) for each period presented were as follows (in thousands):

 
 
May 4, 2019
 
February 2, 2019
 
May 5, 2018
Gift cards and merchandise credits, net
 
$
10,503

 
$
12,433

 
$
10,159

Loyalty program rewards, net
 
3,239

 
1,484

 
3,081

Merchandise fulfillment liability
 
698

 
488

 
788

Total contract liabilities
 
$
14,440

 
$
14,405

 
$
14,028

    




13

The following table summarizes contract liability activity for each period presented (in thousands):

 
 
Three Months Ended
 
 
May 4, 2019
 
May 5, 2018
Beginning balance
 
$
14,405

 
$
13,474

Net sales recognized during the period from amounts included in contract liability balances at the beginning of the period
 
(4,986
)
 
(4,669
)
Current period additions to contract liability balances included in contract liability balances at the end of the period
 
5,021

 
5,223

Ending balance
 
$
14,440

 
$
14,028


Credit Income

We earn credit income from our private label credit card (“PLCC”) through a profit-sharing arrangement with Comenity Bank, an affiliate of Alliance Data Systems Corporation. We receive a monthly net portfolio yield payment from Comenity Bank, and we can potentially earn an annual bonus based upon the performance of the PLCC portfolio.

We recorded deferred revenue for certain upfront payments received from Comenity Bank associated with the execution of the PLCC agreement, and we recognized $0.6 million and $0.4 million in credit income related to these upfront payments during the three months ended May 4, 2019 and May 5, 2018, respectively. As of May 4, 2019, deferred revenue of $7.3 million remained to be amortized.




14

NOTE 5 - LEASES
    
Our lease agreements include leases for our retail stores, distribution centers and corporate headquarters. As of May 4, 2019, all of our leases were classified as operating leases. Our store leases typically have an initial term of 10 years and often have two renewal options of five years each. The exercise of a lease renewal option is at our sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that we will exercise that option. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.

We recognize a lease liability for our obligation to make lease payments arising from the lease and a related asset for our right to use the underlying asset for the lease term. The lease liability is measured based on the present value of lease payments over the lease term, and the asset is measured based on the value of the lease liability, net of landlord allowances. As the implicit interest rate in our lease agreements is not readily identifiable, we use our estimated collateralized incremental borrowing rate in determining the present value of lease payments. For all current lease classes, we made an accounting policy election not to separate lease and non-lease components.
The majority of our leases include fixed rent payments. A number of store leases provide for escalating minimum rent payments at pre-determined dates. Certain store leases provide for contingent rent payments based on a percentage of retail sales over contractual levels. Some of our leases include variable payments for maintenance, taxes and insurance.
Operating lease payments are expensed on a straight-line basis over the lease term. Variable payments are not included in the measurement of the lease liability or asset and are expensed as incurred.
We sublease our former corporate office building to a third party and recognize sublease income on a straight-line basis over the lease term.

ASC 842 Disclosures

Lease cost includes both the fixed and variable expenses recorded for leases. The components of lease cost were as follows (in thousands):

 
Three Months Ended
 
May 4, 2019
Operating lease cost
$
26,294

Variable lease cost
9,657

Sublease income
(368
)
Total net lease cost (a)
$
35,583


(a) Of this amount, $34.1 million is recorded in cost of sales and related buying, occupancy and distribution expenses and $1.5 million is recorded in selling, general and administrative expenses.

    


    


15

Cash and non-cash activities associated with our leases were as follows (in thousands):
 
Three Months Ended
 
May 4, 2019
Cash paid for operating leases
$
27,678

Cash received from sublease
362

Lease assets obtained in exchange for lease liabilities (a)
7,333


(a) Excludes operating lease assets of $344.2 million recognized on February 3, 2019 as a result of the adoption of ASU 2016-02, Leases (Topic 842). See Note 1 for further disclosures regarding the adoption impact.

        
The weighted-average remaining lease term and weighted-average discount rate associated with our leases as of May 4, 2019 were as follows:
Weighted average remaining lease term
5.4 years

Weighted average discount rate
10.1
%
                                        
        
Maturities of operating leases as of May 4, 2019 were as follows (in thousands):
Fiscal Year
 
Operating Leases
 
Sublease
2019 (remainder of year)
 
$
81,980

 
$
(1,085
)
2020
 
101,056

 
(1,492
)
2021
 
86,201

 
(1,582
)
2022
 
69,971

 
(1,582
)
2023
 
49,154

 
(1,054
)
2024
 
31,275

 
—

Thereafter
 
55,898

 
—

Total lease payments
 
475,535

 
$
(6,795
)
Less: Effects of discounting
 
111,170

 
 
Present value of lease liabilities
 
364,365

 
 
Less: Current portion of lease liabilities
 
75,211

 
 
Long-term lease liabilities
 
$
289,154

 
 
 
 
 
 
 
    
As of May 4, 2019, there were no leases that had not yet commenced.


16

Comparative Period Disclosures Reported Under ASC 840

Future minimum rental commitments on long-term, non-cancelable operating leases at February 2, 2019, were as follows (in thousands):
Fiscal Year
 
Commitments
 
Sublease Income
 
Net Minimum Lease Commitments
2019
 
$
108,541

 
$
(1,447
)
 
$
107,094

2020
 
98,859

 
(1,492
)
 
97,367

2021
 
83,377

 
(1,582
)
 
81,795

2022
 
67,447

 
(1,582
)
 
65,865

2023
 
46,887

 
(1,054
)
 
45,833

Thereafter
 
77,910

 
—

 
77,910

Total
 
$
483,021

 
$
(7,157
)
 
$
475,864


    
While infrequent in occurrence, occasionally we are responsible for the construction of leased stores and for paying project costs. ASC 840-40-55, The Effect of Lessee Involvement in Asset Construction, requires us to be considered the owner (for accounting purposes) of such build-to-suit arrangements during the construction period. The leases are accounted for as finance obligations with the amounts received from the landlord being recorded in debt obligations. Interest expense is recognized at a rate that will amortize the finance obligation over the initial term of the lease. Where ASC 840-40-55 was applicable, we have recorded finance obligations with interest rates of 6.1% and 12.3% on our consolidated financial statements related to two store leases as of February 2, 2019.

Future minimum annual payments required under existing finance obligations as of February 2, 2019 were as follows (in thousands):

Fiscal Year
 
Minimum Payments
 
Less: Interest
 
Principal Payments
2019
 
$
580

 
$
26

 
$
554




17

NOTE 6 - STOCK-BASED COMPENSATION

Stock-based compensation expense by type of grant for each period presented was as follows (in thousands):
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Non-vested stock
$
781

 
$
1,187

Restricted stock units
178

 
492

Stock-settled performance share units
168

 
371

Cash-settled performance share units
79

 
54

Total stock-based compensation expense
1,206

 
2,104

Related tax benefit
—

 
—

Stock-based compensation expense, net of tax
$
1,206

 
$
2,104


As of May 4, 2019, we have estimated unrecognized compensation cost of $8.3 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.6 years.

Non-vested Stock

We grant shares of non-vested stock to our employees and non-employee directors. Shares of non-vested stock awarded to employees vest 25% annually over a four-year period from the grant date. Shares of non-vested stock awarded to non-employee directors cliff vest after one year. At the end of the vesting period, shares of non-vested stock convert one-for-one to common stock. Certain non-vested stock awards have shareholder rights, including the right to vote and to receive dividends. The fair value of non-vested stock awards with dividend rights is based on the closing share price of our common stock on the grant date. The fair value of non-vested stock awards that do not have dividend rights is discounted for the present value of expected dividends during the vesting period. Compensation expense is recognized ratably over the vesting period.

The following table summarizes non-vested stock activity for the three months ended May 4, 2019:
 
Non-vested Stock
 
Number of Shares
 
Weighted
Average Grant
 Date Fair Value
Outstanding at February 2, 2019
 
1,379,616

 
$
4.43

Granted
 
625,000

 
0.98

Vested
 
(383,465
)
 
7.09

Forfeited
 
(9,983
)
 
6.36

Outstanding at May 4, 2019
 
1,611,168

 
2.45


The weighted-average grant date fair value for non-vested stock granted during the three months ended May 4, 2019 and May 5, 2018 was $0.98 and $2.19, respectively. The aggregate intrinsic value of non-vested stock that vested during the three months ended May 4, 2019 and May 5, 2018, was $0.4 million and $0.8 million, respectively. The payment of the employees’ tax liability for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liability. As a result, the actual number of shares issued during the three months ended May 4, 2019 was 336,233.

 


18

Restricted Stock Units (“RSUs”)

We grant RSUs to our employees, which vest 25% annually over a four-year period from the grant date.  Each vested RSU is settled in cash in an amount equal to the fair market value of one share of our common stock on the vesting date, not to exceed five times the per share fair market value of our common stock on the grant date. Unvested RSUs have the right to receive a dividend equivalent payment equal to cash dividends paid on our common stock. RSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for RSUs is remeasured based on the closing share price of our common stock at each reporting period until the award vests. Compensation expense is recognized ratably over the vesting period and adjusted with changes in the fair value of the liability.
    
The following table summarizes RSU activity for the three months ended May 4, 2019:
 
Restricted Stock Units
 
Number of Units
 
Weighted
Average Grant
 Date Fair Value
Outstanding at February 2, 2019
 
1,740,314

 
$
2.16

Granted
 
1,615,000

 
0.98

Vested
 
(439,064
)
 
2.16

Outstanding at May 4, 2019
 
2,916,250

 
1.51



Stock-settled Performance Share Units (“Stock-settled PSUs”)

We grant stock-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a three-year performance cycle. These awards cliff vest following a three-year performance cycle, and if earned, are settled in shares of our common stock, unless otherwise determined by our Board of Directors (“Board”), or its Compensation Committee. The actual number of shares of our common stock that may be earned ranges from zero to a maximum of twice the number of target units awarded to the recipient. Grant recipients do not have any shareholder rights on unvested or unearned stock-settled PSUs. The fair value of these PSUs is estimated using a Monte Carlo simulation, based on the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period for stock-settled PSUs.

    
The following table summarizes stock-settled PSU activity for the three months ended May 4, 2019:

Period Granted
 
Target PSUs
Outstanding at February 2, 2019
 
Target PSUs Granted
 
Target PSUs
Outstanding at May 4, 2019
 
Weighted Average
Grant Date
Fair Value
per Target PSU
2017
 
470,000

 
—

 
470,000

 
$
1.80

2018
 
280,000

 
—

 
280,000

 
3.05

2019
 
—

 
375,000

 
375,000

 
1.39

Total
 
750,000

 
375,000

 
1,125,000

 
1.97


The weighted-average grant date fair value for stock-settled PSUs granted during the three months ended May 4, 2019 and May 5, 2018 was $1.39 and $3.05, respectively. No stock-settled PSUs vested during the three months ended May 4, 2019 and May 5, 2018.





19

Cash-settled Performance Share Units (“Cash-settled PSUs”)

We grant cash-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a three-year performance cycle. These awards cliff vest following a three-year performance cycle, and if earned, are settled in cash. The amount of settlement ranges from zero to a maximum of twice the number of target units awarded multiplied by the fair market value of one share of our common stock on the vesting date. Grant recipients do not have any shareholder rights on unvested or unearned cash-settled PSUs. Cash-settled PSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for cash-settled PSUs is remeasured based on their fair value at each reporting period until the award vests, which is estimated using a Monte Carlo simulation. Assumptions used in the valuation include the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period and adjusted with changes in the fair value of the liability.

The following table summarizes cash-settled PSU activity three months ended May 4, 2019:

Period Granted
 
Target PSUs
Outstanding at February 2, 2019
 
Target PSUs Granted
 
Target PSUs
Outstanding at May 4, 2019
 
Weighted Average
Grant Date
Fair Value
per Target PSU
2018
 
300,000

 
—

 
300,000

 
$
3.05

2019
 
—

 
530,000

 
530,000

 
$
1.39

Total
 
300,000

 
530,000

 
830,000

 
$
1.99


    
NOTE 7 - PENSION PLAN

We sponsor a frozen defined benefit pension plan. The components of net periodic pension cost, which were recognized in selling, general and administrative expenses, were as follows (in thousands):
 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Employer service cost
$
135

 
$
123

Interest cost on pension benefit obligation
327

 
358

Expected return on plan assets
(368
)
 
(414
)
Amortization of net loss
170

 
199

Net periodic pension cost
$
264


$
266

 
Our funding policy is to make contributions to maintain the minimum funding requirements for our pension obligations in accordance with the Employee Retirement Income Security Act. We may elect to contribute additional amounts to maintain a level of funding to minimize the Pension Benefit Guaranty Corporation premium costs or to cover the short-term liquidity needs of the plan in order to maintain current invested positions. We contributed $0.3 million during the three months ended May 4, 2019, and we expect to contribute an additional $1.0 million in 2019.


NOTE 8 - EARNINGS PER SHARE
 
For the three months ended May 4, 2019 and May 5, 2018, respectively, participating securities had no impact on loss per common share and there were no anti-dilutive securities.





20

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Concerning Forward-Looking Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.

Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words “anticipate,” “estimate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy.

Forward-looking statements are based upon a number of assumptions and factors concerning future conditions that may ultimately prove to be inaccurate and could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements that are made herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors. These factors include, but are not limited to, the ability for us to maintain normal trade terms with vendors, the ability for us to comply with the various covenant requirements contained in the credit facility agreement, the demand for apparel, and other factors. The demand for apparel and sales volume can be affected by significant changes in economic conditions, including an economic downturn, employment levels in our markets, consumer confidence, energy and gasoline prices, the value of the Mexican peso, and other factors influencing discretionary consumer spending. Other factors affecting the demand for apparel and sales volume include unusual weather patterns, an increase in the level of competition in our market areas, competitors’ marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of our merchandising and marketing plans as well as our store opening or relocation plans. Additional assumptions, factors and risks concerning future conditions are discussed in the Risk Factors section of the Form 10-K, and may be discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Most of these factors are difficult to predict accurately and are generally beyond our control.

Forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although management believes the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

Readers should carefully review the Form 10-K in its entirety including, but not limited to, our financial statements and the notes thereto and the risks and uncertainties described in Part I, Item 1A (Risk Factors) of the Form 10-K. This report should be read in conjunction with the Form 10-K, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.



21

For purposes of the following discussion, all references to the “first quarter 2019” and the “first quarter 2018” are for the 13-week fiscal periods ended May 4, 2019 and May 5, 2018, respectively.

The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in this Form 10-Q as well as the financial and other information included in the Form 10-K.

Our Business

We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of May 4, 2019, we operated in 42 states through 685 specialty department stores under the BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE nameplates and 105 GORDMANS off-price stores. We also operate an e-commerce website. Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized markets in the Midwest.

First Quarter 2019 Financial Overview

Select financial results for the first quarter 2019 were as follows (comparisons are to the first quarter 2018):

•
Net sales decreased $16.5 million, or 4.8%.
•
Comparable sales decreased 3.1%. Comparable sales consist of store sales after a store has been in operation for 14 full months, including stores converted to off-price stores, and e-commerce sales.
•
Net loss was $47.5 million compared to $31.7 million.
•
Loss per common share was $1.67, compared to a loss per common share of $1.14.
•
EBITDA adjusted for impairments was a loss of $27.5 million compared to a loss of $14.1 million (see the reconciliation of non-GAAP financial measures on page 23).

2019 Outlook and Strategy

Our strategy is centered on growing our off-price stores, emphasizing merchandise categories that are trending to drive sales in both our off-price and department stores, and exiting underperforming department stores. Sales early in the first quarter 2019 were negatively impacted by expected disruptions related to the rollout of our strategic initiatives, which included temporary store closures associated with the conversion of 37 department stores to off-price and the home department expansion in our department stores. Sales benefited later in the quarter as these initiatives began to take hold. We expect these initiatives to positively impact our sales going forward and to contribute to positive comparable sales for the year.

Store counts at the end of the first quarter 2019 and first quarter 2018 were as follows:        
 
May 4, 2019
 
May 5, 2018
Department stores
685

 
773

Off-price stores
105

 
59

Total stores
790

 
832



    


22

Our 2019 and long-term strategic objectives are to:

•
Accelerate our presence in the off-price sector with the conversion of approximately 85 department stores to off-price in 2019, and another 150 conversions in the first half of 2020. Following the conversions, our off-price store count will be approximately 300, and will represent approximately 50% of our total sales volume in 2020. During the first quarter 2019, we converted 37 department stores to off-price. Comparable sales in the small markets which constitute the majority of our off-price conversions increased more than 120% in the first quarter 2019.

•
Close between 40 to 60 underperforming department stores (excluding conversions to off-price). During the first quarter 2019, we permanently closed 6 department stores.
    
•
Expand the home department in our department stores to drive sales in this trending category. During the first quarter 2019, we rolled out new high capacity home fixtures to all of our department stores and moved the home department to the front of the store, which along with expanded merchandise assortments, drove home department sales up by more than 100% in our department stores. We expect home department sales as a percent of total sales to increase in penetration throughout the year with the greatest benefit to sales during the fourth quarter holiday gift period.
 
•
Promote brand recognition of our nameplates through our private label credit card and loyalty program, which guests can use across all our stores and online. In March 2019, we rebranded our Gordmans loyalty program and integrated it with our existing department stores multi-tender loyalty program called Style Circle Rewards®. In the second quarter 2019, we plan to reissue our existing credit cards as a combined off-price and department store branded credit card to more than 2 million cardholders.

•
Optimize our supply chain through capital investments and by engaging outside expertise to mitigate higher supply chain costs and prepare us for future off-price store growth.

    
Non-GAAP Financial Measures

The following table presents earnings (loss) before interest, taxes, depreciation and amortization (“EBITDA”) and EBITDA adjusted for impairments, non-GAAP financial measures. We believe the presentation of these supplemental non-GAAP financial measures helps facilitate comparisons of our operating performance across periods. In addition, management uses these non-GAAP financial measures to assess the results of our operations. Non-GAAP financial information should not be considered in isolation or viewed as a substitute for net income, cash flow from operations, diluted earnings per common share or other measures of performance as defined by GAAP.  Moreover, the inclusion of non-GAAP financial information as used herein is not necessarily comparable to other similarly titled measures of other companies due to the potential inconsistencies in the method of presentation and items considered. The following table sets forth the supplemental financial information and the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure (in thousands): 

 
Three Months Ended
 
May 4, 2019
 
May 5, 2018
Net loss (GAAP)
$
(47,490
)
 
$
(31,678
)
Interest expense
3,994

 
2,253

Income tax expense
150

 
150

Depreciation and amortization
15,344

 
15,151

EBITDA (non-GAAP)
(28,002
)
 
(14,124
)
Impairment of long-lived assets
519

 
—

EBITDA adjusted for impairments (non-GAAP)
$
(27,483
)
 
$
(14,124
)


23

Results of Operations

First Quarter 2019 Compared to First Quarter 2018 (amounts in thousands, except percentages):

Net Sales

 
Three Months Ended
 
 
 
May 4, 2019
 
May 5, 2018
 
Change
Net sales
$
327,721

 
$
344,229

 
$
(16,508
)
Sales percent change:
 
 
 
 
 
Total net sales
 
 
 
 
(4.8
)%
Comparable sales
 
 
 
 
(3.1
)%

Net sales for the first quarter 2019 decreased compared to the first quarter 2018 primarily due to a decrease in comparable sales, as traffic continued to be challenged, and store closures. In addition, sales in the beginning of the first quarter 2019 were negatively impacted by disruptions due to temporary store closures associated with the conversion of 37 department stores to off-price and the installation of new high capacity home fixtures in our department stores. Sales later in the quarter benefited from these initiatives. As a result, comparable sales were down double digits in February and were flat in the combined March and April period, which includes the Easter shift.
Non-apparel categories outperformed apparel categories for the first quarter 2019. In our department stores, home and men’s were our best performing merchandise categories, while women’s, children’s, footwear, accessories and cosmetics underperformed. In our off-price stores, children’s and cosmetics were our best performing merchandise categories, while footwear, accessories, women’s, men’s and home underperformed.

Credit Income

 
Three Months Ended
 
 
 
May 4, 2019
 
May 5, 2018
 
Change
Credit Income
$
13,108

 
$
15,514

 
$
(2,406
)
As a percent of net sales
4.0
%
 
4.5
%
 
(0.5
)%

The decrease in credit income for the first quarter 2019 compared to the first quarter 2018 is primarily due to the off-price store conversions, lower department store credit sales and bad debt write-offs. Off-price store credit sales are generally underpenetrated as compared to department stores. However, we expect off-price credit sales as a percentage of total off-price sales to continue to grow in 2019 as compared to 2018. For the first quarter 2019 compared to the first quarter 2018, the credit sales penetration rate in our off-price business increased by 170 basis points.


24

Cost of Sales and Gross Margin

 
Three Months Ended
 
 
 
May 4, 2019
 
May 5, 2018
 
Change
Net sales
$
327,721

 
$
344,229

 
$
(16,508
)
Cost of sales and related buying, occupancy and distribution expenses
277,599

 
281,741

 
(4,142
)
Gross profit
$
50,122

 
$
62,488

 
$
(12,366
)
As a percent of net sales
15.3
%
 
18.2
%
 
(2.9
)%

The decrease in gross profit rate for the first quarter 2019 compared to the first quarter 2018 is primarily due to increased supply chain costs associated with our off-price stores.

Selling, General and Administrative Expenses (“SG&A Expenses”)

 
Three Months Ended
 
 
 
May 4, 2019
 
May 5, 2018
 
Change
SG&A Expenses
$
106,576

 
$
107,277

 
$
(701
)
As a percent of net sales
32.5
%
 
31.2
%
 
1.3
%

The decrease in SG&A expenses for the first quarter 2019 compared to the first quarter 2018 is primarily due to reductions in store payroll and department store advertising expenses, partially offset by lower net gains from casualty insurance claims. SG&A as a percentage of sales increased due to grand opening costs related to store conversions and sales deleverage.

Interest Expense

 
Three Months Ended
 
 
 
May 4, 2019
 
May 5, 2018
 
Change
Interest Expense
$
3,994

 
$
2,253

 
$
1,741

As a percent of net sales
1.2
%
 
0.7
%
 
0.5
%

Interest expense is comprised of interest on borrowings under the Credit Facility, related letters of credit and commitment fees, amortization of debt issuance costs and interest on finance obligations. The increase in interest expense is primarily due to an increase in average borrowings and higher interest rates under the credit facility for the first quarter 2019 compared to the first quarter 2018. For the first quarter 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 4.8% and $299.2 million, respectively, as compared to 3.2% and $247.5 million for the first quarter 2018.


25

Income Taxes

 
Three Months Ended
 
 
 
May 4, 2019
 
May 5, 2018
 
Change
Income tax expense
$
150

 
$
150

 
$
—

Effective tax rate
(0.3
)%
 
(0.5
)%
 
0.2
%

The effective income tax rates in both the first quarter 2019 and the first quarter 2018 were nearly 0% due to a valuation allowance taken for substantially all tax benefits generated by tax losses in each period due to the uncertainly of realization, which is is dependent upon generation of future taxable income. We expect our effective income tax rate to be approximately 0% percent for 2019.

Loss Before Income Tax and Net Loss

 
Three Months Ended
 
 
 
May 4, 2019
 
May 5, 2018
 
Change
Loss before income tax
$
(47,340
)
 
$
(31,528
)
 
$
(15,812
)
Net loss
(47,490
)
 
(31,678
)
 
(15,812
)


Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year. Working capital requirements fluctuate during the year and generally reach their highest levels during the third and fourth quarters. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
 
We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.

 


26

Liquidity and Capital Resources

Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows, (iii) trade credit terms from our vendors and their factors and (iv) the Credit Facility. The loss of key vendors, or material changes in support by our vendors or their factors, can have a material impact on our business and liquidity. To date, we have successfully managed our vendor relationships to maintain inventory purchases at planned levels on acceptable payment terms. However, if we fail to meet our performance objectives, we may experience a tightening of credit or payment terms from our vendors or their factors. Our primary cash requirements are for operational needs, including rent and salaries, inventory purchases, and capital investments in our stores, omni-channel, supply chain and information technology.

Our working capital fluctuates with seasonal variations which affect our borrowings and availability under the Credit Facility. Our availability under the Credit Facility is generally highest after the back-to-school and holiday selling seasons and is lowest just before those seasons as we build inventory levels. Based on our current expectations regarding our operating results, we believe that our sources of liquidity will be sufficient to cover working capital needs, planned capital expenditures and debt service requirements for at least the next 12 months.

 Key components of our cash flow are summarized below (in thousands):
 
Three Months Ended
 
 
 
May 4, 2019

May 5, 2018
 
Change
Net cash (used in) provided by:



 
 
Operating activities
$
(37,202
)

$
(68,655
)
 
$
31,453

Investing activities
(13,096
)

(6,885
)
 
(6,211
)
Financing activities
57,261


83,381

 
(26,120
)

Operating Activities

During the first quarter 2019, we used $37.2 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $13.5 million, including operating lease asset amortization of $17.6 million. Changes in operating assets and liabilities used net cash of approximately $25.6 million, which included a $47.4 million increase in merchandise inventories, primarily due to the seasonal build of inventories, partially offset by a $14.3 million decrease in other assets, a $19.0 million decrease in operating lease liabilities and a $26.6 million increase in accounts payable and other liabilities. Additionally, cash flows from operating activities included construction allowances from landlords of $1.9 million, which funded a portion of the capital expenditures in investing activities.

During the first quarter 2018, we used $68.7 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $14.7 million.  Changes in operating assets and liabilities used net cash of approximately $54.0 million, which included a $39.2 million increase in merchandise inventories, primarily due to the seasonal build of inventories, partially offset by a $4.3 million decrease in other assets and a $19.1 million decrease in accounts payable and other liabilities.

The year-over-year change primarily reflects a $47.3 million increase in cash flow from working capital, offset by a higher net loss of $15.8 million. The increase in cash flow from working capital was largely due to favorable fluctuations of $45.6 million in cash flows from accounts payable and other liabilities driven by paying down our elevated payables balance at the end of 2017 in the first quarter 2018.









27

Investing Activities

Net cash used in investing activities increased $6.2 million to $13.1 million for the first quarter 2019, compared to $6.9 million for the first quarter 2018.

Capital expenditures were $13.8 million for the first quarter 2019, compared to $6.9 million for the first quarter 2018. The increase in capital expenditures reflect our investments in converting stores to off-price and rolling out high capacity home fixtures in our department stores. We received construction allowances from landlords of $1.9 million in the first quarter 2019, which are included in cash flows from operating activities, and were used to fund a portion of the capital expenditures. These funds are recorded as a reduction from our operating lease assets on the balance sheet and are recognized as an offset to rent expense over the lease term commencing with the date the allowances are earned.

We estimate that capital expenditures in 2019, net of construction allowances to be received from landlords, will be approximately $30.0 million to $35.0 million. The expenditures will principally be for investments in our stores, omni-channel, supply chain and technology.

Financing Activities

Net cash provided by financing activities decreased $26.1 million to $57.3 million for the first quarter 2019, compared to $83.4 million for the first quarter 2018, primarily due to lower net borrowings under the Credit Facility.

We use the Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Credit Facility agreement. The Credit Facility is secured by our inventory, cash, cash equivalents, and substantially all of our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the credit facility agreement. For the first quarter 2019, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were 4.8% and $299.2 million, respectively, compared to 3.2% and $247.5 million for the first quarter 2018.

Letters of credit issued under the credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At May 4, 2019, outstanding letters of credit totaled approximately $6.0 million. These letters of credit expire within 12 months of issuance and may be renewed.

The Credit Facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The Credit Facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At May 4, 2019, we were in compliance with the debt covenants of the credit facility agreement and we expect to remain in compliance. Excess availability under the credit facility at May 4, 2019 was $55.7 million.


28

Recent Accounting Standards

Disclosure concerning recent accounting standards is incorporated by reference to Note 1 of our Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No response is required under Item 305 of Regulation S-K.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting

As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term “internal control over financial reporting” means a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

(1)
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(2)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

(3)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material adverse effect on the financial statements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. During the three months ended May 4, 2019, we implemented software and related technology controls to comply with the new lease accounting guidance requirements under ASC Topic 842. In addition, we enhanced our control environment over financial reporting and accounting for lease arrangements. There were no other changes in our internal control over financial reporting during the three months ended May 4, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

No response is required under Item 103 of Regulation S-K.

ITEM 1A.    RISK FACTORS

There have not been any material changes from the risk factors as previously disclosed in the Form 10-K.




29

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 7, 2011, our Board approved a stock repurchase program (“2011 Stock Repurchase Program”), which authorized us to repurchase up to $200.0 million of our outstanding common stock. The 2011 Stock Repurchase Program will expire when we have exhausted the authorization, unless terminated earlier by our Board. Through May 4, 2019, we repurchased approximately $141.6 million of our outstanding common shares under the 2011 Stock Repurchase Program. Also in March 2011, our Board authorized us to repurchase shares of our outstanding common stock equal to the amount of the proceeds and related tax benefits from the exercise of stock options, stock appreciation rights and other equity grants. Purchases of shares of our common stock may be made from time to time, either on the open market or through privately negotiated transactions and are financed by our existing cash, cash flow and other liquidity sources, as appropriate.

The table below sets forth information regarding our repurchases of common stock during the three months ended May 4, 2019:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total Number of Shares Purchased (a)
 
Average Price Paid Per Share (a)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (b)
 
 
 
 
 
 
 
 
 
February 3, 2019 to March 2, 2019
 
9,480

 
$
1.14

 
—

 
$
58,351,202

 
 
 
 
 
 
 
 
 
March 3, 2019 to April 6, 2019
 
51,341

 
1.00

 
—

 
$
58,351,202

 
 
 
 
 
 
 
 
 
April 7, 2019 to May 4, 2019
 
12,147

 
1.07

 
—

 
$
58,351,202

 
 
 
 
 
 
 
 
 
Total
 
72,968

 
$
1.03

 
—

 
 

(a) Although we did not repurchase any of our common stock during the three months ended May 4, 2019 under the 2011 Stock Repurchase Program:
•
We reacquired 47,232 shares of common stock from certain employees to cover tax withholding obligations from the vesting of restricted stock at a weighted average acquisition price of $1.00 per common share; and
•
The trustee of the grantor trust established by us for the purpose of holding assets under our deferred compensation plan purchased an aggregate of 25,736 shares of our common stock in the open market at a weighted average price of $1.08 in connection with the option to invest in our stock under the deferred compensation plan and reinvestment of dividends paid on our common stock held in trust in the deferred compensation plan.
(b) Reflects the $200.0 million authorized under the 2011 Stock Purchase Program, less the $141.6 million repurchased as of May 4, 2019 using our existing cash, cash flow and other liquidity sources since March 2011.



30

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    MINE SAFETY DISCLOSURES

None.

ITEM 5.    OTHER INFORMATION

None.

ITEM 6.    EXHIBITS

The following documents are the exhibits to this Form 10-Q. For convenient reference, each exhibit is listed according to the Exhibit Table of Item 601 of Regulation S-K.
Exhibit
Number
 
Description
 
 
 
10.1*#
 
 
31.1*
 
 
31.2*
 
 
32*
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
_______________________________________
*
Filed electronically herewith.
#
Certain confidential portions with a [****] have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K



31

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.

 
STAGE STORES, INC.
 
 
Dated: June 13, 2019
/s/ Michael L. Glazer
 
Michael L. Glazer
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
Dated: June 13, 2019
/s/ Jason T. Curtis
 
Jason T. Curtis
 
Executive Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial Officer)
 
 


32