10-Q 1 zumz-10q_20190803.htm 10-Q zumz-10q_20190803.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

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

FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 2019

OR

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

Commission file number 000-51300

 

 

ZUMIEZ INC.

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1040022

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

4001 204th Street SW, Lynnwood, WA 98036

(Address of principal executive offices)  (Zip Code)

Registrant’s telephone number, including area code: (425) 551-1500

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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     No  

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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

 

 

 

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

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

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

ZUMZ

Nasdaq Global Select

At September 9, 2019, there were 25,763,843 shares outstanding of common stock.

 

 


ZUMIEZ INC.

FORM 10-Q

TABLE OF CONTENTS

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at August 3, 2019 (unaudited) and February 2, 2019

3

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Income for the three and six months ended August 3, 2019 and August 4, 2018

4

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended August 3, 2019 and August 4, 2018

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended August 3, 2019 and August 4, 2018

6

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended August 3, 2019 and August 4, 2018

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

 

 

Item 1A.

Risk Factors

30

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

 

 

Item 5.

Other Information

30

 

 

 

 

 

Item 6.

Exhibits

31

 

 

 

 

Signature

32

 

 

2


ZUMIEZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

August 3, 2019

 

 

February 2, 2019

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,846

 

 

$

52,422

 

Marketable securities

 

 

124,803

 

 

 

112,912

 

Receivables

 

 

21,615

 

 

 

17,776

 

Inventories

 

 

151,079

 

 

 

129,268

 

Prepaid expenses and other current assets

 

 

11,789

 

 

 

14,797

 

Total current assets

 

 

373,132

 

 

 

327,175

 

Fixed assets, net

 

 

116,219

 

 

 

120,503

 

Operating lease right-of-use assets

 

 

306,056

 

 

 

 

Goodwill

 

 

57,306

 

 

 

58,813

 

Intangible assets, net

 

 

14,672

 

 

 

15,260

 

Deferred tax assets, net

 

 

6,502

 

 

 

5,259

 

Other long-term assets

 

 

8,374

 

 

 

7,180

 

Total long-term assets

 

 

509,129

 

 

 

207,015

 

Total assets

 

$

882,261

 

 

$

534,190

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Trade accounts payable

 

$

82,859

 

 

$

35,293

 

Accrued payroll and payroll taxes

 

 

15,582

 

 

 

21,015

 

Income taxes payable

 

 

2,895

 

 

 

5,817

 

Deferred rent and tenant allowances

 

 

 

 

 

7,489

 

Operating lease liabilities

 

 

58,646

 

 

 

 

Other liabilities

 

 

21,150

 

 

 

23,494

 

Total current liabilities

 

 

181,132

 

 

 

93,108

 

Long-term deferred rent and tenant allowances

 

 

 

 

37,076

 

Long-term operating lease liabilities

 

 

293,450

 

 

 

 

Other long-term liabilities

 

 

3,472

 

 

 

3,550

 

Total long-term liabilities

 

 

296,922

 

 

 

40,626

 

Total liabilities

 

 

478,054

 

 

 

133,734

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Preferred stock, no par value, 20,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Common stock, no par value, 50,000 shares authorized; 25,770 shares issued and outstanding at August 3, 2019 and 25,521 shares issued and outstanding at February 2, 2019

 

 

156,625

 

 

 

153,066

 

Accumulated other comprehensive loss

 

 

(12,574

)

 

 

(9,224

)

Retained earnings

 

 

260,156

 

 

 

256,614

 

Total shareholders’ equity

 

 

404,207

 

 

 

400,456

 

Total liabilities and shareholders’ equity

 

$

882,261

 

 

$

534,190

 

 

See accompanying notes to condensed consolidated financial statements

 

3


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

 

August 4, 2018

 

 

August 3, 2019

 

 

 

August 4, 2018

 

Net sales

 

$

 

228,425

 

 

$

 

218,971

 

 

$

 

441,353

 

 

 

 

425,257

 

Cost of goods sold

 

 

 

151,229

 

 

 

 

146,436

 

 

 

 

297,693

 

 

 

 

290,136

 

Gross profit

 

 

 

77,196

 

 

 

 

72,535

 

 

 

 

143,660

 

 

 

 

135,121

 

Selling, general and administrative expenses

 

 

 

65,523

 

 

 

 

65,837

 

 

 

 

131,019

 

 

 

 

130,133

 

Operating profit

 

 

 

11,673

 

 

 

 

6,698

 

 

 

 

12,641

 

 

 

 

4,988

 

Interest income, net

 

 

 

798

 

 

 

 

238

 

 

 

 

1,650

 

 

 

 

521

 

Other income (expense), net

 

 

 

559

 

 

 

 

248

 

 

 

 

711

 

 

 

 

(233

)

Earnings before income taxes

 

 

 

13,030

 

 

 

 

7,184

 

 

 

 

15,002

 

 

 

 

5,276

 

Provision for income taxes

 

 

 

4,005

 

 

 

 

2,807

 

 

 

 

5,184

 

 

 

 

3,506

 

Net income

 

$

 

9,025

 

 

$

 

4,377

 

 

$

 

9,818

 

 

 

 

1,770

 

Basic earnings per share

 

$

 

0.36

 

 

$

 

0.18

 

 

$

 

0.39

 

 

 

 

0.07

 

Diluted earnings per share

 

$

 

0.36

 

 

$

 

0.17

 

 

$

 

0.39

 

 

 

 

0.07

 

Weighted average shares used in computation of earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

25,199

 

 

 

 

24,955

 

 

 

 

25,144

 

 

 

 

24,894

 

Diluted

 

 

 

25,402

 

 

 

 

25,188

 

 

 

 

25,395

 

 

 

 

25,211

 

 

See accompanying notes to condensed consolidated financial statements

 

4


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

 

 

August 3, 2019

 

 

August 4, 2018

 

Net income

 

$

9,025

 

 

$

4,377

 

 

 

$

9,818

 

 

$

1,770

 

Other comprehensive loss, net of tax and reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(663

)

 

 

(3,293

)

 

 

 

(3,698

)

 

 

(8,168

)

Net change in unrealized loss on available-for-sale debt securities

 

 

364

 

 

 

100

 

 

 

 

348

 

 

 

32

 

Other comprehensive loss, net

 

 

(299

)

 

 

(3,193

)

 

 

 

(3,350

)

 

 

(8,136

)

Comprehensive income (loss)

 

$

8,726

 

 

$

1,184

 

 

 

$

6,468

 

 

$

(6,366

)

 

See accompanying notes to condensed consolidated financial statements

 

5


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at May 4, 2019

 

 

25,741

 

 

$

155,104

 

 

$

(12,275

)

 

$

251,131

 

 

$

393,960

 

Net income

 

 

 

 

 

 

 

 

 

 

 

9,025

 

 

 

9,025

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(299

)

 

 

 

 

 

(299

)

Issuance and exercise of stock-based awards

 

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

1,521

 

 

 

 

 

 

 

 

 

1,521

 

Balance at August 3, 2019

 

 

25,770

 

 

$

156,625

 

 

$

(12,574

)

 

$

260,156

 

 

$

404,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at May 5, 2018

 

 

25,470

 

 

$

148,591

 

 

$

(4,908

)

 

$

208,802

 

 

$

352,485

 

Net income

 

 

 

 

 

 

 

 

 

 

 

4,377

 

 

 

4,377

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(3,193

)

 

 

 

 

 

(3,193

)

Issuance and exercise of stock-based awards

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

1,370

 

 

 

 

 

 

 

 

 

1,370

 

Balance at August 4, 2018

 

 

25,520

 

 

$

149,961

 

 

$

(8,101

)

 

$

213,179

 

 

$

355,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at February 2, 2019

 

 

25,521

 

 

$

153,066

 

 

$

(9,224

)

 

$

256,614

 

 

$

400,456

 

Net income

 

 

 

 

 

 

 

 

 

 

 

9,818

 

 

 

9,818

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(3,350

)

 

 

 

 

 

(3,350

)

Issuance and exercise of stock-based awards

 

 

249

 

 

 

345

 

 

 

 

 

 

 

 

 

345

 

Stock-based compensation expense

 

 

 

 

 

3,214

 

 

 

 

 

 

 

 

 

3,214

 

Cumulative effect of accounting change under ASC 842 (Note 1)

 

 

 

 

 

 

 

 

 

 

 

(6,276

)

 

 

(6,276

)

Balance at August 3, 2019

 

 

25,770

 

 

$

156,625

 

 

$

(12,574

)

 

$

260,156

 

 

$

404,207

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Income (Loss)

 

 

Earnings

 

 

Total

 

Balance at February 3, 2018

 

 

25,249

 

 

$

146,523

 

 

$

35

 

 

$

209,357

 

 

$

355,915

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,770

 

 

 

1,770

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(8,136

)

 

 

 

 

 

(8,136

)

Issuance and exercise of stock-based awards

 

 

271

 

 

 

426

 

 

 

 

 

 

 

 

 

426

 

Stock-based compensation expense

 

 

 

 

 

3,012

 

 

 

 

 

 

 

 

 

3,012

 

Cumulative effect of accounting change under ASC 606

 

 

 

 

 

 

 

 

 

 

 

2,052

 

 

 

2,052

 

Balance at August 4, 2018

 

 

25,520

 

 

$

149,961

 

 

$

(8,101

)

 

$

213,179

 

 

$

355,039

 

 

See accompanying notes to condensed consolidated financial statements

 

6


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

9,818

 

 

$

1,770

 

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

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

12,514

 

 

 

13,920

 

Noncash lease expense

 

 

28,318

 

 

 

 

Deferred taxes

 

 

935

 

 

 

(990

)

Stock-based compensation expense

 

 

3,214

 

 

 

3,012

 

Other

 

 

(165

)

 

 

310

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(770

)

 

 

(4,099

)

Inventories

 

 

(22,727

)

 

 

(25,993

)

Prepaid expenses and other assets

 

 

(2,115

)

 

 

(1,814

)

Trade accounts payable

 

 

47,275

 

 

 

40,815

 

Accrued payroll and payroll taxes

 

 

(5,345

)

 

 

(4,785

)

Income taxes payable

 

 

(3,857

)

 

 

(2,973

)

Deferred rent and tenant allowances

 

 

 

 

 

(872

)

Operating lease liabilities

 

 

(29,842

)

 

 

 

Other liabilities

 

 

(2,090

)

 

 

(2,997

)

Net cash provided by operating activities

 

 

35,163

 

 

 

15,304

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to fixed assets

 

 

(8,292

)

 

 

(9,061

)

Purchases of marketable securities and other investments

 

 

(93,288

)

 

 

(35,046

)

Sales and maturities of marketable securities and other investments

 

 

82,123

 

 

 

41,200

 

Net cash used in investing activities

 

 

(19,457

)

 

 

(2,907

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facilities

 

 

 

 

 

29,227

 

Payments on revolving credit facilities

 

 

 

 

 

(24,233

)

Proceeds from issuance and exercise of stock-based awards

 

 

583

 

 

 

621

 

Payments for tax withholdings on equity awards

 

 

(238

)

 

 

(195

)

Net cash provided by financing activities

 

 

345

 

 

 

5,420

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

(504

)

 

 

(693

)

Net increase in cash, cash equivalents, and restricted cash

 

 

15,547

 

 

 

17,124

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

54,271

 

 

 

25,803

 

Cash, cash equivalents, and restricted cash, end of period

 

$

69,818

 

 

$

42,927

 

Supplemental disclosure on cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

8,056

 

 

$

7,362

 

Accrual for purchases of fixed assets

 

 

2,052

 

 

 

3,496

 

 

See accompanying notes to condensed consolidated financial statements

 

7


ZUMIEZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Nature of Business and Basis of Presentation

Nature of Business—Zumiez Inc., including its wholly owned subsidiaries, (the “Company,” “we,” “us,” “its” and “our”) is a leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear, and other unique lifestyles.  At August 3, 2019, we operated 710 stores; 607 in the United States (“U.S.”), 51 in Canada, 42 in Europe, and 10 in Australia.  We operate under the names Zumiez, Blue Tomato and Fast Times.  Additionally, we operate ecommerce websites at zumiez.com, zumiez.ca, blue-tomato.com and fasttimes.com.au.

Fiscal Year—We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31.  Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years.  The three months ended August 3, 2019 and August 4, 2018 were 13-week periods. The six months ended August 3, 2019 and August 4, 2018 were 26-week periods.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited condensed consolidated financial statements include the accounts of Zumiez Inc. and its wholly-owned subsidiaries.  All significant intercompany transactions and balances are eliminated in consolidation.

In our opinion, the unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated balance sheets, operating results and cash flows for the periods presented.

The financial data at February 2, 2019 is derived from audited consolidated financial statements, which are included in our Annual Report on Form 10-K for the year ended February 2, 2019, and should be read in conjunction with the audited consolidated financial statements and notes thereto.  Interim results are not necessarily indicative of results for the full fiscal year due to seasonality and other factors.

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period.  These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition.  Actual results could differ from these estimates and assumptions.

Reclassification—Certain prior period amounts have been reclassified to be consistent with current year presentation within our condensed consolidated statement of cash flows.

Restricted Cash— Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash in other long-term assets on our condensed consolidated balance sheets. 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 statement of cash flows (in thousands):

 

 

 

February 2, 2019

 

 

February 3, 2018

 

Cash and cash equivalents

 

$

 

52,422

 

 

$

24,041

 

Restricted cash included in other long-term assets

 

 

 

1,849

 

 

 

1,762

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

 

54,271

 

 

$

25,803

 

 

 

 

 

 

 

 

 

 

 

 

 

August 3, 2019

 

 

August 4, 2018

 

Cash and cash equivalents

 

$

 

63,846

 

 

$

41,409

 

Restricted cash included in other long-term assets

 

 

 

5,972

 

 

 

1,518

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

 

69,818

 

 

$

42,927

 

 

8


Restricted cash included in other long-term assets represents amounts held as insurance collateral and collateral for bank guarantees on certain store operating leases.

Significant Accounting Policies—Our significant accounting policies are detailed in Note 2, “Summary of Significant Accounting Policies” within Part IV Item 15 of the Annual Report on Form 10-K for the year ended February 2, 2019.  There have been no significant changes in accounting policies, with exception of the adoption of Accounting Standards Codification Topic 842, Leases (“ASC 842”).  Our significant accounting policies impacted by the adoption of ASC 842 are discussed below.

Leases – We determine at inception if a contract is or contains a lease. Upon modification of a contract, we reassess if a contract is or contains a lease.  For a contract that contains fixed payments for both lease and non-lease components, we allocate the consideration to components based on the relative standalone price.  At the commencement date of a lease, we recognize (1) a right-of-use asset representing our right to use the underlying asset during the lease term and (2) a lease liability for the present value of the lease payments not yet made.    

The majority of our store operating leases include ongoing co-tenancy requirements or early termination option that reduce lease payments, permit lease termination, or both, in the event that co-tenants cease to operate for specific periods or if stated sales levels are not met in specific periods. The lease term includes the options to extend the lease, only to the extent it is reasonably certain that we will exercise such extension options and not exercise such early termination options, respectively. The lease payments are discounted using the rate implicit in the lease, if available, or our incremental borrowing rate. Our incremental borrowing rate is based on information available at commencement date. The right-of-use asset is measured at the present value of lease payments not yet made with adjustments for initial direct costs, lease prepayments and lease incentives. We evaluate the carrying value of right-of-use assets for indicators of impairment and perform an analysis of the recoverability of the related asset group. If the carrying value of the asset group is determined to be in excess of the estimated fair value, we record an impairment loss in our consolidated statements of income.

Our store operating leases may include fixed minimum lease payments, as contractually stated in the lease agreement or variable lease payments, which are generally based on a percentage of the store’s net sales in excess of a specified threshold or are dependent on changes in an index. Operating lease expense relating to fixed lease payments is recognized on a straight-line basis over the lease term and lease expense relating to variable payments is expensed as incurred.

Recent Accounting Standards— In August 2018, the Financial Accounting Standards Board (“FASB”) issued a new standard over customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract.  The standard requires implementation costs incurred in a hosting arrangement that is a service contract be accounted for in accordance with ASC 350-40.  The new standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted.  We adopted this standard prospectively for the fiscal year beginning February 3, 2019 and the impact on our condensed consolidated financial statements was not material.

In January 2017, the FASB issued a new standard simplifying the test for goodwill impairment.  The standard eliminates Step 2 from the goodwill impairment test. The standard requires entities perform the goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount and recognize the impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total goodwill allocated to that reporting unit. The new standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.  We do expect this standard to have a material impact on our condensed consolidated financial statements.

In February 2016, the FASB issued a comprehensive standard related to lease accounting to increase transparency and comparability among organizations.  The standard requires the recognition of right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements.  In July 2018, the FASB issued an update that allows companies an optional transition method to recognize a cumulative effect adjustment to the opening balance of retained earnings recorded at the beginning of the period of adoption.  The new standard was effective for the fiscal year beginning after December 15, 2018.

 

We adopted this standard for the fiscal year beginning February 3, 2019, using the optional transition method.  We elected the package of practical expedients available upon adoption that allows us (1) to not reassess whether expired or existing contracts contain leases, (2) to not reassess lease classification for existing leases, and (3) to not reassess initial direct costs for existing leases.  

 

The adoption of this standard resulted in a material change to our condensed consolidated balance sheet, primarily related to the (1) recognition of $297.3 million of operating lease right-of-use assets and $342.7 million of operating lease liabilities, (2) de-recognition of $44.6 million of deferred rent and tenant allowances, and (3) a cumulative adjustment to retained earnings of $6.3 million related to impairment of operating lease right-of-use assets that were impaired upon adoption of this standard. This standard did not have a material impact on our condensed consolidated statement of income or cash flows. See Note 4, “Leases” for additional information regarding leases.

 

9


The following table summarizes the changes made to our consolidated balance sheet at February 3, 2019 (in thousands):

 

 

 

As Reported

February 2, 2019

 

 

Adjustment

for ASC 842

 

 

 

As Adjusted

February 3, 2019

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

 

14,797

 

 

$

 

(5,739

)

 

$

 

9,058

 

Operating lease right-of-use assets

 

 

 

 

 

 

 

297,326

 

 

 

 

297,326

 

Deferred tax assets, net

 

 

 

5,259

 

 

 

 

2,345

 

 

 

 

7,604

 

Other long-term assets

 

 

 

7,180

 

 

 

 

(2,094

)

 

 

 

5,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred rent and tenant allowances

 

 

 

7,489

 

 

 

 

(7,489

)

 

 

 

 

Operating lease liabilities

 

 

 

 

 

 

 

52,958

 

 

 

 

52,958

 

Long-term deferred rent and tenant allowances

 

 

 

37,076

 

 

 

 

(37,076

)

 

 

 

 

Long-term operating lease liabilities

 

 

 

 

 

 

 

289,721

 

 

 

 

289,721

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained Earnings

 

 

 

256,614

 

 

 

 

(6,276

)

 

 

 

250,338

 

 

 

2. Revenue

 

The following table disaggregates net sales by geographic region (in thousands):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

August 3, 2019

 

 

August 4, 2018

 

 

August 3, 2019

 

 

August 4, 2018

 

United States

 

$

 

193,837

 

 

$

188,648

 

 

$

 

370,755

 

 

$

359,188

 

Canada

 

 

 

13,128

 

 

 

12,465

 

 

 

 

24,160

 

 

 

23,171

 

Europe

 

 

 

19,216

 

 

 

16,071

 

 

 

 

42,162

 

 

 

39,245

 

Australia

 

 

 

2,244

 

 

 

1,787

 

 

 

 

4,276

 

 

 

3,653

 

Net sales

 

$

 

228,425

 

 

$

218,971

 

 

$

 

441,353

 

 

$

425,257

 

 

Net sales for the three months ended August 3, 2019 included a $1.2 million decrease due to the change in foreign exchange rates, which consisted of $0.2 million in Canada, $0.8 million in Europe and $0.2 million in Australia. Net sales for the six months ended August 3, 2019 included a $3.9 million decrease due to the change in foreign exchange rates, which consisted of $0.7 million in Canada, $2.9 million in Europe and $0.3 million in Australia.  

Our contract liabilities include deferred revenue related to our customer loyalty program and gift cards. The current liability for gift cards was $2.7 million at August 3, 2019 and $4.3 million at February 2, 2019, respectively. Deferred revenue related to our STASH loyalty program was $2.4 million at August 3, 2019 and $2.1 million at February 2, 2019, respectively.

 

10


3. Cash, Cash Equivalents and Marketable Securities

The following tables summarize the estimated fair value of our cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands)

 

 

 

August 3, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

50,939

 

 

$

 

 

$

 

 

$

50,939

 

Money market funds

 

 

10,412

 

 

 

 

 

 

 

 

 

10,412

 

Corporate debt securities

 

 

2,495

 

 

 

 

 

 

 

 

 

2,495

 

Total cash and cash equivalents

 

 

63,846