tues-10q_20190331.htm

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2019

OR

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

FOR THE TRANSITION PERIOD FROM          TO         

Commission File Number 0-19658

 

TUESDAY MORNING CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

75-2398532

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

6250 LBJ Freeway

Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

(972) 387-3562

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

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 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, par value $0.01 per share

 

TUES

 

The NASDAQ Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at May 3, 2019

Common Stock, par value $0.01 per share

 

46,710,278

 

 

 

 


Table of Contents

 

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2019 and June 30, 2018

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the Nine Months Ended March 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

ITEM 2.

 

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

 

13

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

20

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

20

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

21

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

21

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

21

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

 

 

 

 

 

ITEM 6.

 

Exhibits

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Tuesday Morning Corporation

Consolidated Balance Sheets

March 31, 2019 (unaudited) and June 30, 2018

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

13,768

 

 

$

9,510

 

Inventories

 

 

238,280

 

 

 

234,365

 

Prepaid expenses

 

 

4,756

 

 

 

6,301

 

Other current assets

 

 

2,052

 

 

 

1,206

 

Total Current Assets

 

 

258,856

 

 

 

251,382

 

Property and equipment, net

 

 

111,518

 

 

 

121,117

 

Deferred financing costs

 

 

1,050

 

 

 

671

 

Other assets

 

 

3,185

 

 

 

3,086

 

Total Assets

 

$

374,609

 

 

$

376,256

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

82,954

 

 

$

88,912

 

Accrued liabilities

 

 

46,114

 

 

 

41,765

 

Income taxes payable

 

 

141

 

 

 

66

 

Total Current Liabilities

 

 

129,209

 

 

 

130,743

 

 

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

35,200

 

 

 

38,480

 

Deferred rent

 

 

23,864

 

 

 

22,883

 

Asset retirement obligation  — non-current

 

 

3,002

 

 

 

3,100

 

Other liabilities — non-current

 

 

809

 

 

 

796

 

Total Liabilities

 

 

192,084

 

 

 

196,002

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, authorized 10,000,000 shares;

    none issued or outstanding

 

 

 

 

 

 

Common stock, par value $0.01 per share, authorized 100,000,000 shares;

48,523,910 shares issued and 46,740,249 shares outstanding at March 31, 2019 and 47,648,958 shares issued and 45,865,297 shares outstanding at June 30, 2018

 

 

465

 

 

 

469

 

Additional paid-in capital

 

 

240,623

 

 

 

237,957

 

Retained deficit

 

 

(51,751

)

 

 

(51,360

)

Less: 1,783,661 common shares in treasury, at cost, at March 31, 2019

   and 1,783,661 common shares in treasury, at cost, at June 30, 2018

 

 

(6,812

)

 

 

(6,812

)

Total Stockholders’ Equity

 

 

182,525

 

 

 

180,254

 

Total Liabilities and Stockholders’ Equity

 

$

374,609

 

 

$

376,256

 

 

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

 

 

3


Tuesday Morning Corporation

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

Nine Months Ended

 

 

 

 

March 31,

March 31,

 

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Net sales

 

$

210,984

 

 

$

223,296

 

 

$

776,716

 

 

$

775,860

 

 

Cost of sales

 

 

134,486

 

 

 

142,993

 

 

 

501,054

 

 

 

511,922

 

 

Gross profit

 

 

76,498

 

 

 

80,303

 

 

 

275,662

 

 

 

263,938

 

 

Selling, general and administrative expenses

 

 

84,309

 

 

 

88,092

 

 

 

274,751

 

 

 

275,445

 

 

Operating income/(loss)

 

 

(7,811

)

 

 

(7,789

)

 

 

911

 

 

 

(11,507

)

 

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(513

)

 

 

(493

)

 

 

(1,868

)

 

 

(1,473

)

 

Other income, net

 

 

165

 

 

 

179

 

 

 

597

 

 

 

907

 

 

Other income/(expense) total

 

 

(348

)

 

 

(314

)

 

 

(1,271

)

 

 

(566

)

 

Loss before income taxes

 

 

(8,159

)

 

 

(8,103

)

 

 

(360

)

 

 

(12,073

)

 

Income tax provision/(benefit)

 

 

130

 

 

 

(23

)

 

 

31

 

 

 

(431

)

 

Net loss

 

$

(8,289

)

 

$

(8,080

)

 

$

(391

)

 

$

(11,642

)

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.18

)

 

$

(0.18

)

 

$

(0.01

)

 

$

(0.26

)

 

Diluted

 

$

(0.18

)

 

$

(0.18

)

 

$

(0.01

)

 

$

(0.26

)

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

44,811

 

 

 

44,365

 

 

 

44,677

 

 

 

44,236

 

 

Diluted

 

 

44,811

 

 

 

44,365

 

 

 

44,677

 

 

 

44,236

 

 

Dividends per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

 

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

 

4


Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Three Months Ended March 31, 2019

(In thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury

 

 

Total

Shareholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Stock

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

46,801

 

 

$

469

 

 

$

239,723

 

 

$

(43,462

)

 

$

(6,812

)

 

$

189,918

 

Net loss

 

 

 

 

 

 

 

 

 

 

(8,289

)

 

 

 

 

 

(8,289

)

Share-based compensation expense

 

 

 

 

 

 

 

896

 

 

 

 

 

 

 

 

 

896

 

Shares issued or canceled in connection with

  employee stock incentive plans and related tax effect

 

(61

)

 

 

(4

)

 

 

4

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

46,740

 

 

$

465

 

 

$

240,623

 

 

$

(51,751

)

 

$

(6,812

)

 

$

182,525

 

 

Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Three Months Ended March 31, 2018

(In thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury

 

 

Total

Shareholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Stock

 

 

Equity

 

Balance at December 31, 2017

 

45,919

 

 

$

469

 

 

$

236,436

 

 

$

(32,984

)

 

$

(6,812

)

 

$

197,109

 

Net loss

 

 

 

 

 

 

 

 

 

 

(8,080

)

 

 

 

 

 

(8,080

)

Share-based compensation expense

 

 

 

 

 

 

 

860

 

 

 

 

 

 

 

 

 

860

 

Shares issued in connection with exercises of

   employee stock options

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Shares issued or canceled in connection with

  employee stock incentive plans and related tax effect

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

45,924

 

 

$

469

 

 

$

237,299

 

 

$

(41,064

)

 

$

(6,812

)

 

$

189,892

 

 

 

 


5


Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Nine Months Ended March 31, 2019

(In thousands)

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury

 

 

Total

Shareholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Stock

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

45,865

 

 

$

469

 

 

$

237,957

 

 

$

(51,360

)

 

$

(6,812

)

 

$

180,254

 

Net loss

 

 

 

 

 

 

 

 

 

 

(391

)

 

 

 

 

 

(391

)

Share-based compensation expense

 

 

 

 

 

 

 

2,655

 

 

 

 

 

 

 

 

 

2,655

 

Shares issued in connection with exercises of

   employee stock options

 

3

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Shares issued or canceled in connection with

  employee stock incentive plans and related tax effect

 

872

 

 

 

(4

)

 

 

4

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

46,740

 

 

$

465

 

 

$

240,623

 

 

$

(51,751

)

 

$

(6,812

)

 

$

182,525

 

 

 

 

Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Nine Months Ended March 31, 2018

(In thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

Earnings

 

 

Treasury

 

 

Total

Shareholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Deficit)

 

 

Stock

 

 

Equity

 

Balance at June 30, 2017

 

45,121

 

 

$

469

 

 

$

234,604

 

 

$

(29,422

)

 

$

(6,812

)

 

$

198,839

 

Net loss

 

 

 

 

 

 

 

 

 

 

(11,642

)

 

 

 

 

 

(11,642

)

Share-based compensation expense

 

 

 

 

 

 

 

2,691

 

 

 

 

 

 

 

 

 

2,691

 

Shares issued in connection with exercises of

   employee stock options

 

3

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Shares issued or canceled in connection with

  employee stock incentive plans and related tax effect

 

800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

45,924

 

 

$

469

 

 

$

237,299

 

 

$

(41,064

)

 

$

(6,812

)

 

$

189,892

 

 

 

6


Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(391

)

 

$

(11,642

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

19,727

 

 

 

19,087

 

Amortization of financing fees

 

 

220

 

 

 

236

 

Gain on disposal of assets

 

 

(10

)

 

 

(69

)

Gain on sale-leaseback

 

 

 

 

 

(371

)

Share-based compensation

 

 

2,671

 

 

 

2,729

 

Deferred income taxes

 

 

 

 

 

(571

)

Construction allowances from landlords

 

 

1,121

 

 

 

6,688

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

(3,931

)

 

 

(23,122

)

Prepaid and other current assets

 

 

885

 

 

 

883

 

Accounts payable

 

 

(15,349

)

 

 

19,396

 

Accrued liabilities

 

 

5,063

 

 

 

2,199

 

Deferred rent

 

 

(141

)

 

 

1,921

 

Income taxes payable

 

 

82

 

 

 

71

 

Other liabilities — non-current

 

 

34

 

 

 

367

 

Net cash provided by operating activities

 

 

9,981

 

 

 

17,802

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(10,924

)

 

 

(25,552

)

Purchase of intellectual property

 

 

(292

)

 

 

(30

)

Proceeds from sale of assets

 

 

25

 

 

 

69

 

Net cash used in investing activities

 

 

(11,191

)

 

 

(25,513

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds under revolving credit facility

 

 

156,200

 

 

 

153,900

 

Repayments under revolving credit facility

 

 

(159,480

)

 

 

(140,000

)

Change in cash overdraft

 

 

9,391

 

 

 

(60

)

Payments on capital leases

 

 

(121

)

 

 

(119

)

Proceeds from exercise of common stock options and stock purchase plan purchases

 

 

7

 

 

 

4

 

Payment of financing fees

 

 

(529

)

 

 

 

Net cash provided by financing activities

 

 

5,468

 

 

 

13,725

 

Net increase in cash and cash equivalents

 

 

4,258

 

 

 

6,014

 

Cash and cash equivalents, beginning of period

 

 

9,510

 

 

 

6,263

 

Cash and cash equivalents, end of period

 

$

13,768

 

 

$

12,277

 

 

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

 

 

7


Tuesday Morning Corporation

Notes to Condensed Consolidated Financial Statements (unaudited)

The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.  Other than as disclosed in this document, please refer to our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 for our critical accounting policies.

 

 

1.      Basis of presentation — The unaudited interim consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. The consolidated balance sheet at June 30, 2018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. The results of operations for the three and nine month periods ended March 31, 2019 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2019, which we refer to as fiscal 2019.

We do not present a consolidated statement of comprehensive income as there are no other comprehensive income items in either the current or prior fiscal periods.

The preparation of unaudited interim consolidated financial statements, in conformity with GAAP, requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates relate to: inventory valuation under the retail method and estimation of reserves and valuation allowances specifically related to insurance, income taxes and litigation. Actual results could differ materially from these estimates. Our fiscal year ends on June 30 and we operate our business as a single operating segment.

 

2.       Revenue Recognition — Our revenue is earned from sales of merchandise within our stores and is recorded at the point of sale and conveyance of merchandise to customers. Revenue is measured based on the amount of consideration that we expect to receive, reduced by point of sale discounts and estimates for sales returns, and excludes sales tax.  Payment for our sales is due at the time of sale.  We maintain a reserve for estimated returns, and we use historical customer return behavior to estimate our reserve requirements.  Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), adopted in the first quarter of fiscal 2019 as discussed in Note 14 below, required a change in presentation of the sales return reserve on the balance sheet, which we previously presented net of the estimated value of returned merchandise, but is now being presented on a gross basis.  In the first quarter of fiscal 2019, we recorded an immaterial adjustment to present the reserve on a gross basis, increasing “Accrued Liabilities” and recording the corresponding returns asset, as evaluated for impairment, in “Other Assets,” in the Consolidated Balance Sheet. No impairment of the returns asset was indicated or recorded as of March 31, 2019.  Gift cards are sold to customers in our stores and we issue gift cards for merchandise returns in our stores. Revenue from sales of gift cards and issuances of merchandise credits is recognized when the gift card is redeemed by the customer, or if the likelihood of the gift card being redeemed by the customer is remote (gift card breakage). The gift card breakage rate is determined based upon historical redemption patterns. An estimate of the rate of gift card breakage is applied over the period of estimated performance and the breakage amounts are included in net sales in the Consolidated Statement of Operations.  Breakage income recognized was less than $0.01 million in the third quarter of fiscal 2019 and was $0.2 million in the third quarter of fiscal 2018.  Breakage income recognized was $0.3 million for the nine months ended March 31, 2019 and was $0.6 million for the nine months ended March 31, 2018.  The gift card liability is included in “Accrued Liabilities” in the Consolidated Balance Sheet at March 31, 2019.

 

3.      Share-based incentive plans — Stock Option Awards. We have established the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”) and the Tuesday Morning Corporation 2014 Long-Term Incentive Plan, as amended (the “2014 Plan”), which allow for the granting of stock options to directors, officers and key employees of the Company, and certain other key individuals who perform services for us and our subsidiaries. Equity awards may no longer be granted under the 2008 Plan, but equity awards granted under the 2008 Plan are still outstanding.  

On November 16, 2016, our stockholders approved amendments to the 2014 Plan to increase the number of shares of the Company’s common stock available for issuance under the 2014 Plan by 2,500,000 shares and to make additional amendments to the 2014 Plan, including (i) reducing the percentage of shares exempt from the minimum vesting requirements under the 2014 Plan, (ii) adding a clawback policy, (iii) generally eliminating the discretion of the Board of Directors to accelerate the vesting of outstanding and unvested awards upon a change of control and (iv) providing that certain shares surrendered in payment of the exercise price of awards or withheld for tax withholding would count against the shares available under the 2014 Plan.       

8


 

Stock options were awarded with a strike price at a fair market value equal to the closing price of our common stock on the date of the grant under the 2008 Plan and the 2014 Plan.

 

Options granted under the 2008 Plan and the 2014 Plan typically vest over periods of one to four years and expire ten years from the date of grant. Options granted under the 2008 Plan and the 2014 Plan may have certain performance requirements in addition to service terms. If the performance conditions are not satisfied, the options are forfeited. The exercise prices of stock options outstanding on March 31, 2019, range between $1.80 per share and $20.91 per share.  The 2008 Plan terminated as to new awards as of September 16, 2014. There were 1.9 million shares available for grant under the 2014 Plan at March 31, 2019.

Restricted Stock Awards—The 2008 Plan and the 2014 Plan authorize the grant of restricted stock awards to directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries.  Equity awards may no longer be granted under the 2008 Plan, but restricted stock awards granted under the 2008 Plan are still outstanding.  Restricted stock awards are not transferable, but bear certain rights of common stock ownership including voting and dividend rights.  The 2014 Plan also authorizes the issuance of restricted stock units which, upon vesting, provide for the issuance of an equivalent number of shares of common stock.  Restricted units are not transferable and do not provide voting or dividend rights.  Shares and units are valued at the fair market value of our common stock at the date of award.  Shares and units may be subject to certain performance requirements. If the performance requirements are not met, the restricted shares or units are forfeited.  Under the 2008 Plan and the 2014 Plan, as of March 31, 2019, there were 1,910,659 shares of restricted stock and 230,770 restricted stock units outstanding with award vesting periods, both performance-based and service-based, of one to four years and a weighted average grant date fair value of $2.07 and $3.49 per share, respectively.

Performance-Based Restricted Stock Awards and Performance-Based Stock Option Awards.  As of March 31, 2019 there were 1,481,507 unvested performance-based restricted stock awards and performance-based stock options outstanding under the 2014 Plan.  

Share-based Compensation Costs.   Share-based compensation costs were recognized as follows (in thousands):

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Amortization of share-based compensation during the

   period

$

896

 

 

$

860

 

 

$

2,655

 

 

$

2,691

 

 

Amounts capitalized in ending inventory

 

(275

)

 

 

(318

)

 

 

(892

)

 

 

(1,041

)

 

Amounts recognized and charged to cost of sales

 

218

 

 

 

242

 

 

 

908

 

 

 

1,079

 

 

Amounts charged against income for the period before tax

$

839

 

 

$

784

 

 

$

2,671

 

 

$

2,729

 

 

 

 

 

4.      Commitments and contingencies — we are involved in legal and governmental proceedings as part of the normal course of our business. Reserves have been established when a loss is considered probable and are based on management’s best estimates of our potential liability in these matters. These estimates have been developed in consultation with internal and external counsel and are based on a combination of litigation and settlement strategies. Management believes that such litigation and claims will be resolved without material effect on our financial position or results of operations.

 

 

5.      Earnings per common share — The following table sets forth the computation of basic and diluted income/(loss) per common share (in thousands, except per share amounts):

 

 

Three Months Ended

March  31,

 

 

Nine Months Ended

March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

Net loss

$

(8,289

)

 

$

(8,080

)

 

$

(391

)

 

$

(11,642

)

 

Less: Income to participating securities

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common shares

$

(8,289

)

 

$

(8,080

)

 

$

(391

)

 

$

(11,642

)

 

Weighted average number of common shares

   outstanding basic

 

44,811

 

 

 

44,365

 

 

 

44,677

 

 

 

44,236

 

 

Effect of dilutive stock equivalents

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding diluted

 

44,811

 

 

 

44,365

 

 

 

44,677

 

 

 

44,236

 

 

Net loss per common share basic

$

(0.18

)

 

$

(0.18

)

 

$

(0.01

)

 

$

(0.26

)

 

Net loss per common share diluted

$

(0.18

)

 

$

(0.18

)

 

$

(0.01

)

 

$

(0.26

)

 

9


 

For the quarters and year to date periods ended March 31, 2019 and March 31, 2018, all options representing the rights to purchase shares, respectively, were not included in the dilutive income per share calculation, because the assumed exercise of such options would have been anti-dilutive.

 

6.      Revolving credit facility — We are party to a credit agreement providing for an asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million (the “Revolving Credit Facility”) which originally was scheduled to mature on August 18, 2020.  On January 29, 2019, the Revolving Credit Facility was amended to extend the maturity date to January 29, 2024.  The availability of funds under the Revolving Credit Facility is limited to the lesser of a calculated borrowing base and the lenders’ aggregate commitments under the Revolving Credit Facility. Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets. The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements. The Revolving Credit Facility requires that we satisfy a fixed charge coverage ratio at any time that our availability is less than the greater of 10% of our calculated borrowing base or $12.5 million. Our Revolving Credit Facility, in some instances, limits our ability to pay cash dividends and repurchase our common stock. In order for the borrower under the Revolving Credit Facility, our subsidiary, to make a restricted payment to us for the payment of a dividend or a repurchase of shares, we are required to, among other things, maintain availability of 20% of the lesser of our calculated borrowing base or our lenders’ aggregate commitments under the Revolving Credit Facility on a pro forma basis for a specified period prior to and immediately following the restricted payment. As of March 31, 2019, we were in compliance with all of the Revolving Credit Facility covenants.  

At March 31, 2019, we had $35.2 million outstanding under the Revolving Credit Facility, $11.0 million of outstanding letters of credit and availability of $71.1 million. Letters of credit under the Revolving Credit Facility are generally for self-insurance purposes. We incur commitment fees of up to 0.25% on the unused portion of the Revolving Credit Facility, payable quarterly. Any borrowing under the Revolving Credit Facility incurs interest at the prime rate, or LIBOR, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin), subject to a floor of one month LIBOR plus an applicable margin in the case of loans based on the prime rate.  Interest expense for the third quarter of the current fiscal year from the Revolving Credit Facility of $0.5 million was comprised of interest of $0.3 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the third quarter of the prior fiscal year from the Revolving Credit Facility of $0.5 million was comprised of interest of $0.3 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the nine months ended March 31, 2019 of $1.9 million was comprised of interest of $1.3 million, commitment fees of $0.3 million, and the amortization of financing fees of $0.3 million. Interest expense for the nine months ended March 31, 2018 of $1.5 million was comprised of interest of $0.8 million, commitment fees of $0.4 million, and the amortization of financing fees of $0.3 million.

The fair value of the Company’s debt approximated its carrying amount as of March 31, 2019.

 

7.      Depreciation — Accumulated depreciation of owned property and equipment at March 31, 2019 and June 30, 2018 was $173.5 million and $157.0 million, respectively.

 

 

8.      Income taxes — The Company or one of its subsidiaries files income tax returns in the U.S. federal, state and local taxing jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to state and local income tax examinations for years through fiscal 2013.  The Internal Revenue Service has concluded an examination of the Company for years ending on or before June 30, 2010.

 

The effective tax rates for the quarters ended March 31, 2019 and March 31, 2018 were (1.6%) and 0.3%, respectively. The effective tax rates for the nine months ended March 31, 2019 and March 31, 2018 were (8.6%) and 3.6%, respectively. The income tax benefit in the prior year included a favorable tax impact of approximately $0.6 million resulting from the release of a valuation allowance on deferred taxes due to enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”), as discussed further below.  A full valuation allowance is currently recorded against substantially all of the Company’s other deferred tax assets. A deviation from the customary relationship between income tax expense/(benefit) and pretax income/(loss) results from the effects of the valuation allowance.

 

We have completed our accounting for the impact of the enactment of the TCJA, within the one year measurement period ending December 22, 2018, as required under the rules issued by the SEC.  Through the third quarter of fiscal 2018, we applied the provisions of the newly enacted TCJA, resulting in an approximate $0.6 million income tax benefit connected with future refunds of alternative minimum tax credits no longer requiring a valuation allowance.  The impact of the new tax law, including the remeasurement of our deferred taxes at the new corporate tax rate, did not have a material impact on our deferred taxes as substantially all of our other deferred tax assets have corresponding valuation allowances.  The Company currently expects the effect of the TCJA to have a nominal impact on its annual effective tax rate, given its cumulative loss position and the related valuation allowance.

 

 

10


9.      Cash and cash equivalents — Cash and cash equivalents include credit card receivables and all highly liquid instruments with original maturities of three months or less. Cash equivalents are carried at cost, which approximates fair value.  At March 31, 2019 and June 30, 2018, credit card receivables from third party consumer credit card providers were $11.3 million and $7.9 million, respectively.  Such receivables are generally collected within one week of the balance sheet date.

 

 

10.      Intellectual property — Our intellectual property primarily consists of indefinite lived trademarks. We evaluate annually whether the trademarks continue to have an indefinite life. Trademarks and other intellectual property are reviewed for impairment annually in the fourth fiscal quarter, and may be reviewed more frequently if indicators of impairment are present. As of March 31, 2019, the carrying value of the intellectual property, which included indefinite-lived trademarks, was $1.3 million, and no impairment was identified or recorded.

 

11.     Cease use liability — Amounts in “Accrued liabilities” in the Consolidated Balance Sheet at March 31, 2019 include the current portions of accruals for the net present value of future minimum lease payments, net of estimated sublease income, attributable to closed stores with remaining lease obligations.  There was no cease use liability at March 31, 2019.  The cease use liability at June 30, 2018 was $77 thousand, and was all classified as short-term. Expenses related to store closings are included in “Selling, general and administrative expenses” in the Consolidated Statements of Operations.

 

12.    Sale-leaseback —During the fourth quarter of fiscal 2016, we entered into a sale-leaseback transaction to sell two buildings and land utilized in our Dallas distribution center operations, which we did not consider part of our long-term distribution network, and leased back these facilities through December 2017. We subsequently exercised our option to extend the related lease through March 2018, which was accounted for as an operating lease and has now expired. We had no continuing involvement with the properties sold other than a normal leaseback.

 

The consideration received for the sale, as reduced by closing and transaction costs, was $8.8 million, and the net book value of properties sold was $5.2 million, resulting in a $3.6 million gain. The gain recognized in fiscal 2016 was $2.5 million, which included the portion of the gain in excess of the present value of the minimum lease payments for the leaseback, and was included in “Other income” in our Consolidated Statement of Operations.  During fiscal 2017, we recognized $0.7 million of the gain. During the first three months of fiscal 2018, we recognized $0.2 million of the gain.  The final $0.2 million gain deferred on the Consolidated Balance Sheet at September 30, 2017 was classified as short-term and was recognized in the second quarter of fiscal 2018.

        

13.  Capital lease — During fiscal 2017, we entered into a 5-year capital lease maturing on January 31, 2022 for equipment and software. At March 31, 2019, the capital lease asset balance was $0.5 million, the current lease liability was $0.2 million and the long-term lease liability was $0.3 million. The capital lease asset is amortized on a straight-line basis. Capital lease amortization was less than $0.1 million in the third quarter of both fiscal 2019 and 2018.

 

14.  Recent accounting pronouncements — In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118),” which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. As discussed in Note 8, the Company has completed its analysis of the effects of the TCJA within the measurement period in accordance with SAB 118.

 

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which provides guidance on eight specific cash flow issues in regard to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, and required adoption on a retrospective basis.  The Company adopted ASU 2016-15 in the first quarter of fiscal 2019. The adoption of this standard did not materially impact our consolidated financial statements and disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which is intended to improve financial reporting in connection with leasing transactions. ASU 2016-02 will require entities (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or finance, while the income statement will reflect lease expense for operating leases and amortization/interest expense for finance leases. Accounting by entities that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP. In addition, ASU 2016-02 requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. A modified retrospective approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the financial statements. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which provided an additional transition option that allows companies to continue applying the guidance under the current lease standard in the comparative periods presented in the consolidated financial statements. Companies that elect this option would record a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. The Company currently plans to elect this transition option.  The Company will

11


adopt this standard in the first quarter of fiscal 2020. While the Company is currently evaluating the provisions of ASU 2016-02, including which practical expedients to apply and assessing the impact on the Company’s consolidated financial statements and disclosures, the primary effect of adopting the new standard will be to record assets and obligations for current operating leases.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), an updated standard on revenue recognition, and has since modified the standard with additional ASUs. The new guidance provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration, or payment, to which the company expects to be entitled in exchange for those goods or services. The Company adopted this standard in the first quarter of fiscal 2019 using the modified retrospective method, and the adoption did not have a material impact on its consolidated financial statements and disclosures.  See Note 2 for further information.

12


Item 2.

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

The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

Business Overview

 

We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods.  We are a closeout retailer, selling high-quality products at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers.  Our customers come to us for an ever-changing, exceptional assortment of brand names at great prices.  Our strong value proposition has established a loyal customer base, who we engage regularly with social media, email, direct mail, digital media and newspaper circulars.

 

During the third quarter of fiscal 2019, we continued to implement our strategy of improving store locations and the in-store experience for our customers, which includes (i) closing less productive stores with limited foot traffic and relocating some of these stores to, or opening new stores in, better locations with footprints that are on average four to six thousand square feet larger, (ii) expanding some existing stores to a larger footprint, and (iii) improving the finishes in these relocated, new and expanded stores.

 

We operated 712 stores in 40 states as of March 31, 2019.  As part of the implementation of our real estate strategy, our store base decreased from 724 stores in 40 states as of March 31, 2018.

 

Net sales for the third quarter of fiscal 2019 were $211 million, a decrease of 5.5% compared to $223.3 million for the same period last year, primarily due to a decrease in sales from comparable stores (stores open at least five quarters, including stores relocated in the same market and renovated stores) of 5.3%. The decrease in comparable store sales was due to a 2.6% decrease in customer transactions along with a 2.8% decrease in average ticket. Sales at stores relocated during the past 12 months increased approximately 42% on average for the third quarter of fiscal 2019 as compared to the same period last year and contributed approximately 120 basis points of comparable store sales growth. Net sales for the first nine months of fiscal 2019 were $776.7 million, an increase of $0.9 million, from $775.8 million for the same period last year.  Comparable store sales for the nine months ended March 31, 2019 increased by 0.3%, compared to the same period last year, which was due to a 0.3% increase in customer transactions as well as a 0.1% increase in average ticket.  Sales at stores relocated during the past 12 months increased approximately 49% on average for the first nine months of fiscal 2019 as compared to the same period last year and contributed approximately 190 basis points of comparable store sales growth.  Sales per square foot for the rolling 12 month period ended March 31, 2019 were $115, consistent with the rolling 12 month period ended March 31, 2018.  

 

Cost of sales, as a percentage of net sales, for the third quarter of fiscal 2019 was 63.7%, compared to 64.0% for the same period last year.  Cost of sales, as a percentage of net sales, for the first nine months of fiscal 2019 was 64.5%, compared to 66.0% for the same period last year.

 

For the third quarter of fiscal 2019, selling, general and administrative expenses decreased $3.8 million to $84.3 million, from $88.1 million for the same quarter last year. For the first nine months of fiscal 2019, selling, general and administrative expenses decreased $0.7 million to $274.7 million, from $275.4 million for the same period last year. 

 

Our operating loss for the third quarter of fiscal 2019 was $7.8 million, consistent with our operating loss of $7.8 million for the same period last year. Our operating income for the nine months ended March 31, 2019 was $0.9 million compared to an operating loss of $11.5 million for the same period last year.

 

Our net loss for the third quarter of fiscal 2019 was $8.3 million, or $0.18 per share, compared to a net loss of $8.1 million, or $0.18 per share, for the same period last year. Our net loss for the nine months ended March 31, 2019 was $0.4 million, or $0.01 per share, compared to a net loss of $11.6 million, or $0.26 per share, for the same period last year.

 

As shown under the heading “Non-GAAP Financial Measures” below, EBITDA for the third quarter of fiscal 2019 was negative $1.2 million compared to negative $1.3 million for the same period last year.  Adjusted EBITDA for the third quarter of fiscal 2019 was negative $0.4 million compared to negative $0.9 million for the same period last year. EBITDA for the first nine months of fiscal 2019 was $21.2 million compared to $8.5 million for the prior year period.  Adjusted EBITDA for the first nine months of fiscal 2019 was $24.0 million compared to $11.6 million for the same period last year, as shown below.

 

Inventory levels at March 31, 2019 increased $3.9 million to $238.3 million from $234.4 million at June 30, 2018. Compared to the same date last year, inventories decreased $6.7 million from $245.0 million at March 31, 2018. The decrease in inventory as compared to March 31, 2018 was driven primarily by lower inventory in our distribution centers and lower in-transit inventory.   Inventory turnover for the trailing five quarters as of March 31, 2019 was 2.6 turns, a decrease from the trailing five quarter turnover as of March 31, 2018 of 2.7 turns.

13


 

Cash and cash equivalents at March 31, 2019 increased $4.3 million to $13.8 million from $9.5 million at June 30, 2018. Compared to the same date last year, cash and cash equivalents increased $1.5 million from $12.3 million at March 31, 2018.

Results of Operations

Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31.

There can be no assurance that the trends in sales or operating results will continue in the future.

 

Non-GAAP Financial Measures

We define EBITDA as net income or net loss before interest, income taxes, depreciation, and amortization. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash items and other items that we believe are not representative of our core operating performance. These measures are not presentations made in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered as alternatives to net income or loss as a measure of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as, and should not be considered as alternatives to cash flows as a measure of liquidity. EBITDA and Adjusted EBITDA should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by such adjustments. We believe it is useful for investors to see these EBITDA and Adjusted EBITDA measures that management uses to evaluate our operating performance. These non-GAAP financial measures are included to supplement our financial information presented in accordance with GAAP and because we use these measures to monitor and evaluate the performance of our business as a supplement to GAAP measures and we believe the presentation of these non-GAAP measures enhances investors’ ability to analyze trends in our business and evaluate our performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. The non-GAAP measures presented may not be comparable to similarly titled measures used by other companies.

 

The following table reconciles net income/(loss), the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA, each of which is a non-GAAP financial measure (in thousands):

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March  31,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss (GAAP)

$

(8,289

)

 

$

(8,080

)

 

$

(391

)

 

$

(11,642

)

Depreciation and amortization

 

6,444

 

 

 

6,363

 

 

 

19,727

 

 

 

19,087

 

Interest expense, net

 

510

 

 

 

485

 

 

 

1,846

 

 

 

1,450

 

Income tax provision/(benefit)

 

130

 

 

 

(23

)

 

 

31

 

 

 

(431

)

EBITDA (non-GAAP)

$

(1,205

)

 

$

(1,255

)

 

$

21,213

 

 

$

8,464

 

Share based compensation expense  (1)

 

839

 

 

 

784

 

 

 

2,671

 

 

 

2,729

 

Cease-use rent expense  (2)

 

(3

)

 

 

(396

)

 

 

68

 

 

 

398

 

Stockholder nominations related expenses  (3)

 

 

 

 

 

 

 

 

 

 

408

 

Gain on sale of assets  (4)

 

 

 

 

 

 

 

 

 

 

(371

)

Adjusted EBITDA (non-GAAP)

$

(369

)

 

$

(867

)

 

$

23,952

 

 

$

11,628