tues-10q_20191231.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 December 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)

 

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 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  

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 February 3, 2020

Common Stock, par value $0.01 per share

 

48,024,022

 

 

 

 


Table of Contents

 

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2019 and June 30, 2019

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended December 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

 

19

 

 

 

 

 

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

December 31, 2019 (unaudited) and June 30, 2019

(In thousands, except share and per share data)

 

 

 

December 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,903

 

 

$

11,395

 

Inventories

 

 

204,008

 

 

 

237,895

 

Prepaid expenses

 

 

5,262

 

 

 

5,388

 

Assets held for sale

 

 

4,601

 

 

 

 

Other current assets

 

 

2,861

 

 

 

1,822

 

Total Current Assets

 

 

221,635

 

 

 

256,500

 

Property and equipment, net

 

 

101,252

 

 

 

110,146

 

Operating lease right-of-use assets

 

 

355,187

 

 

 

 

Deferred financing costs

 

 

885

 

 

 

994

 

Other assets

 

 

2,561

 

 

 

2,881

 

Total Assets

 

$

681,520

 

 

$

370,521

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

72,945

 

 

$

91,251

 

Accrued liabilities

 

 

44,963

 

 

 

45,923

 

Operating lease liabilities

 

 

71,590

 

 

 

 

Total Current Liabilities

 

 

189,498

 

 

 

137,174

 

 

 

 

 

 

 

 

 

 

Operating lease liabilities — non-current

 

 

310,814

 

 

 

 

Borrowings under revolving credit facility

 

 

3,600

 

 

 

34,650

 

Deferred rent

 

 

 

 

 

23,551

 

Asset retirement obligation  — non-current

 

 

3,002

 

 

 

3,002

 

Other liabilities — non-current

 

 

1,149

 

 

 

835

 

Total Liabilities

 

 

508,063

 

 

 

199,212

 

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;

   49,820,109 shares issued and 48,036,448 shares outstanding at

   December 31, 2019 and 48,466,930 shares issued and 46,683,269 shares

   outstanding at June 30, 2019

 

 

462

 

 

 

465

 

Additional paid-in capital

 

 

242,899

 

 

 

241,456

 

Retained deficit

 

 

(63,092

)

 

 

(63,800

)

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

   and 1,783,661 common shares in treasury, at cost, at June 30, 2019

 

 

(6,812

)

 

 

(6,812

)

Total Stockholders’ Equity

 

 

173,457

 

 

 

171,309

 

Total Liabilities and Stockholders’ Equity

 

$

681,520

 

 

$

370,521

 

 

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

 

 

3


Tuesday Morning Corporation

Consolidated Statements of Operations (unaudited)

Three and Six Months Ended December 31, 2019 and 2018

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net sales

 

$

324,414

 

 

$

338,418

 

 

$

548,853

 

 

$

565,731

 

Cost of sales

 

 

218,638

 

 

 

221,673

 

 

 

361,945

 

 

 

366,568

 

Gross profit

 

 

105,776

 

 

 

116,745

 

 

 

186,908

 

 

 

199,163

 

Selling, general and administrative expenses

 

 

94,677

 

 

 

100,437

 

 

 

184,460

 

 

 

190,442

 

Operating income

 

 

11,099

 

 

 

16,308

 

 

 

2,448

 

 

 

8,721

 

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(726

)

 

 

(767

)

 

 

(1,391

)

 

 

(1,355

)

Other income, net

 

 

166

 

 

 

242

 

 

 

234

 

 

 

432

 

Other income/(expense) total

 

 

(560

)

 

 

(525

)

 

 

(1,157

)

 

 

(923

)

Income before income taxes

 

 

10,539

 

 

 

15,783

 

 

 

1,291

 

 

 

7,798

 

Income tax benefit

 

 

(398

)

 

 

(223

)

 

 

(18

)

 

 

(99

)

Net income

 

$

10,937

 

 

$

16,006

 

 

$

1,309

 

 

$

7,897

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.24

 

 

$

0.35

 

 

$

0.03

 

 

$

0.17

 

Diluted

 

$

0.24

 

 

$

0.35

 

 

$

0.03

 

 

$

0.17

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

45,218

 

 

 

44,733

 

 

 

45,086

 

 

 

44,612

 

Diluted

 

 

45,218

 

 

 

44,736

 

 

 

45,086

 

 

 

44,618

 

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 December 31, 2019 and 2018

(In thousands)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at September 30, 2019

 

47,738

 

 

$

462

 

 

$

242,179

 

 

$

(74,030

)

 

$

(6,812

)

 

 

161,799

 

Net income

 

 

 

 

 

 

 

 

 

 

10,937

 

 

 

 

 

 

10,937

 

Share-based compensation

 

 

 

 

 

 

 

720

 

 

 

 

 

 

 

 

 

720

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

48,036

 

 

$

462

 

 

$

242,899

 

 

$

(63,092

)

 

$

(6,812

)

 

$

173,457

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at September 30, 2018

 

46,987

 

 

$

469

 

 

$

238,728

 

 

$

(59,469

)

 

$

(6,812

)

 

$

172,916

 

Net income

 

 

 

 

 

 

 

 

 

 

16,006

 

 

 

 

 

 

16,006

 

Share-based compensation

 

 

 

 

 

 

 

988

 

 

 

 

 

 

 

 

 

988

 

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

 

(189

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

46,801

 

 

$

469

 

 

$

239,723

 

 

$

(43,463

)

 

$

(6,812

)

 

$

189,917

 

 

5


Tuesday Morning Corporation

Consolidated Statements of Stockholders' Equity (unaudited)

Six Months Ended December 31, 2019 and 2018

(In thousands)

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at June 30, 2019

 

46,683

 

 

$

465

 

 

$

241,456

 

 

$

(63,800

)

 

$

(6,812

)

 

$

171,309

 

Net income

 

 

 

 

 

 

 

 

 

 

1,309

 

 

 

 

 

 

1,309

 

Share-based compensation

 

 

 

 

 

 

 

1,441

 

 

 

 

 

 

 

 

 

1,441

 

Shares issued or canceled in connection with

   employee stock incentive plans and related tax effect

 

1,353

 

 

 

(3

)

 

 

3

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

(601

)

 

 

 

 

 

(601

)

Balance at December 31, 2019

 

48,036

 

 

$

462

 

 

$

242,899

 

 

$

(63,092

)

 

$

(6,812

)

 

$

173,457

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Treasury

 

 

Total

Stockholders'

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Stock

 

 

Equity

 

Balance at June 30, 2018

 

45,865

 

 

$

469

 

 

$

237,957

 

 

$

(51,360

)

 

$

(6,812

)

 

$

180,254

 

Net income

 

 

 

 

 

 

 

 

 

 

7,897

 

 

 

 

 

 

7,897

 

Share-based compensation

 

 

 

 

 

 

 

1,759

 

 

 

 

 

 

 

 

 

1,759

 

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

 

933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

46,801

 

 

$

469

 

 

$

239,723

 

 

$

(43,463

)

 

$

(6,812

)

 

$

189,917

 

 

6


Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

Six Months Ended December 31, 2019 and 2018

(In thousands)

 

 

 

Six Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,309

 

 

$

7,897

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12,807

 

 

 

13,283

 

Amortization of financing fees

 

 

108

 

 

 

158

 

(Gain)/loss on disposal of assets

 

 

137

 

 

 

(18

)

Share-based compensation

 

 

1,559

 

 

 

1,832

 

Construction allowances from landlords

 

 

483

 

 

 

598

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

33,769

 

 

 

7,389

 

Prepaid and other current assets

 

 

(578

)

 

 

(42

)

Accounts payable

 

 

(23,263

)

 

 

(15,244

)

Accrued liabilities

 

 

1,424

 

 

 

15,869

 

Operating lease assets and liabilities

 

 

219

 

 

 

 

Deferred rent

 

 

 

 

 

(38

)

Income taxes payable

 

 

46

 

 

 

73

 

Other liabilities — non-current

 

 

101

 

 

 

957

 

Net cash provided by operating activities

 

 

28,121

 

 

 

32,714

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(8,365

)

 

 

(8,067

)

Purchases of intellectual property

 

 

(20

)

 

 

(273

)

Proceeds from sales of assets

 

 

22

 

 

 

21

 

Net cash used in investing activities

 

 

(8,363

)

 

 

(8,319

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit facility

 

 

142,300

 

 

 

86,600

 

Repayments of borrowings under revolving credit facility

 

 

(173,350

)

 

 

(120,080

)

Change in cash overdraft

 

 

4,957

 

 

 

5,770

 

Payments on finance leases

 

 

(157

)

 

 

(81

)

Proceeds from exercise of stock options and stock purchase plan purchases

 

 

 

 

 

7

 

Net cash used in financing activities

 

 

(26,250

)

 

 

(27,784

)

Net decrease in cash and cash equivalents

 

 

(6,492

)

 

 

(3,389

)

Cash and cash equivalents, beginning of period

 

 

11,395

 

 

 

9,510

 

Cash and cash equivalents, end of period

 

$

4,903

 

 

$

6,121

 

 

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, 2019 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, 2019. The consolidated balance sheet at June 30, 2019 has been derived from the audited consolidated financial statements at that date. These interim financial statements do 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, 2019. The results of operations for the three and six months ended December 31, 2019 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2020, which we refer to as fiscal 2020, due in part to the seasonality of our business. Certain reclassifications were made to prior period amounts to conform to the current period presentation. None of the reclassifications affected our net income in any period.  

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.

Accounting Pronouncement Recently Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASC 842”).  ASC 842 requires entities (“lessees”) that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.   Under ASC 842, a right-of-use asset and lease liability is 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. In addition, ASC 842 requires disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.

 

We adopted ASC 842 effective July 1, 2019 on a modified retrospective basis.  We elected the transition option that allows entities to only apply the standard at the adoption date and not apply the provisions to comparative periods; therefore, prior periods were not restated.  This transition option allows the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented.  Our adoption of the standard resulted in a cumulative effect adjustment to retained earnings of $0.6 million, as of July 1, 2019. The adoption of the standard resulted in the recognition of operating lease assets of approximately $350 million and liabilities of approximately $375 million as of July 1, 2019.

 

We elected certain practical expedients permitted under the transition guidance, including the package of practical expedients, which allows us to not reassess whether existing contracts contain leases, the lease classification of existing leases, or initial direct costs for existing leases.  We elected not to separate lease and non-lease components for new and modified leases and not to recognize a right-of-use asset and a lease liability for leases with an initial term of 12 months or less.  We did not elect the hindsight practical expedient.  The adoption of the standard did not materially impact our consolidated net income or liquidity, and did not have an impact on debt-covenant compliance under our current revolving credit agreement.

 

See Note 5 for additional information.

 

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, as well as a corresponding returns asset, and we use historical customer return

8


behavior to estimate our reserve requirements.  No impairment of the returns asset was identified or recorded as of December 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 $0.1 million in the second quarter of fiscal 2020 and was $0.2 million in the second quarter of fiscal 2019. Breakage income recognized was $0.2 million in the first six months of fiscal 2020 and was $0.3 million in the first six months of fiscal 2019.  The gift card liability is included in “Accrued liabilities” in the Consolidated Balance Sheet.

 

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.

 

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

 

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 December 31, 2019 range between $1.64 per share and $20.91 per share.  The 2008 Plan terminated as to new awards as of September 16, 2014.  There were 2.1 million shares available for grant under the 2014 Plan at December 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 or a cash payment based on the value of our common stock at vesting.  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 on the date of the grant.  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 December 31, 2019, there were 2,737,884 shares of restricted stock and 1,558,138 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 $2.33 and $1.76 per share, respectively.

Performance-Based Restricted Stock Awards and Performance-Based Stock Option Awards.  As of December 31, 2019 there were 1,679,047 unvested performance-based restricted stock awards and performance-based restricted stock units payable in cash outstanding under the 2014 Plan.

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

 

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Amortization of share-based compensation during the period

$

721

 

 

$

988

 

 

$

1,441

 

 

$

1,759

 

Amounts capitalized in ending inventory

 

(190

)

 

 

(332

)

 

 

(391

)

 

 

(617

)

Amounts recognized and charged to cost of sales

 

323

 

 

 

452

 

 

 

509

 

 

 

690

 

Amounts charged against income for the period before tax

$

854

 

 

$

1,108

 

 

$

1,559

 

 

$

1,832

 

 

 

 

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.       Leases — We conduct substantially all operations from leased facilities, with the exception of the corporate headquarters in Dallas and the Dallas warehouse, distribution and retail complex, which are owned facilities.  The other warehouse facilities across the country and all other retail store locations are under operating leases that will expire over the next 1 to 11 years.  Many of our leases include options to renew at our discretion.  We include the lease renewal option periods in the calculation of our operating lease assets

9


and liabilities when it is reasonably certain that we will renew the lease.  We also lease certain equipment under finance leases that expire generally within 60 months.

As discussed in Note 1, we adopted ASC 842 effective July 1, 2019 using the modified retrospective adoption method, which resulted in an adjustment to opening retained earnings of $0.6 million as of July 1, 2019 to recognize impairment of the opening right-of-use asset balance for two stores for which assets had been previously impaired under ASC 360, “Property, Plant, and Equipment.”

We utilized the simplified transition option available in ASC 842, which allowed the continued application of the legacy guidance in ASC 840, including disclosure requirements, in the comparative periods presented in the year of adoption.

 

We determine whether an agreement contains a lease at inception based on our right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset. Lease liabilities represent the present value of future lease payments and the right-of-use (ROU) assets represent our right to use the underlying assets for the respective lease terms.

The operating lease liability is measured as the present value of the unpaid lease payments and the ROU asset is derived from the calculation of the operating lease liability.  As our leases do not generally provide an implicit rate, we use our incremental borrowing rate as the discount rate to calculate the present value of lease payments.  The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow over a similar term, on a collateralized basis in a similar economic environment.

Rent escalations occurring during the term of the leases are included in the calculation of the future minimum lease payments and the rent expense related to these leases is recognized on a straight-line basis over the lease term.  In addition to minimum lease payments, certain leases require payment of a proportionate share of real estate taxes and certain building operating expenses allocated on a percentage of sales in excess of a specified base.  These variable lease costs are not included in the measurement of the ROU asset or lease liability due to unpredictability of the payment amount and are recorded as lease expense in the period incurred.  The ROU asset is adjusted to account for previously recorded lease-related expenses such as deferred rent and other lease liabilities.

Our lease agreements do not contain residual value guarantees or significant restrictions or covenants other than those customary in such arrangements.

The components of lease cost are as follows (in thousands):

 

 

 

Three Months Ended

December 31,

2019

 

 

Six Months Ended

December 31,

2019

 

Operating lease cost

 

$

23,424

 

 

$

47,550

 

Variable lease cost

 

 

6,328

 

 

 

12,823

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

 

71

 

 

 

142

 

Interest on lease liabilities

 

 

8

 

 

 

16

 

Total lease cost

 

$

29,831

 

 

$

60,531

 

 

The table below presents additional information related to the Company’s leases as of December 31, 2019:

 

 

 

As of December 31, 2019

 

Weighted average remaining lease term (in years)

 

 

 

 

Operating leases

 

 

6.2

 

Finance leases

 

 

3.1

 

Weighted average discount rate

 

 

 

 

Operating leases

 

 

5.8

%

Finance leases

 

 

3.8

%

 

10


Other information related to leases, including supplemental disclosures of cash flow information, is as follows (in thousands):

 

 

 

Three Months Ended

December 31, 2019

 

 

Six  Months Ended

December 31,

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

22,787

 

 

$

44,037

 

Operating cash flows from finance leases

 

 

8

 

 

 

16

 

Financing cash flows from finance leases

 

 

71

 

 

 

142

 

Right-of-use assets obtained in exchange

   for operating lease liabilities

 

 

(1,929

)

 

 

10,573

 

 

Maturities of lease liabilities were as follows as of December 31, 2019 (in thousands):

 

 

Operating

Leases

 

 

Finance

Leases

 

 

Total

 

Fiscal year:

 

 

 

 

 

 

 

 

 

 

 

2020 (remaining)

$

46,580

 

 

$

154

 

 

$

46,734

 

2021

 

85,509

 

 

 

315

 

 

 

85,824

 

2022

 

73,375

 

 

 

236

 

 

 

73,611

 

2023

 

63,488

 

 

 

97

 

 

 

63,585

 

2024

 

54,627

 

 

 

10

 

 

 

54,637

 

2025

 

47,274

 

 

 

 

 

 

47,274

 

Thereafter

 

86,542

 

 

 

 

 

 

86,542

 

Total lease payments

$

457,395

 

 

$

812

 

 

$

458,207

 

Less:  Interest

 

74,991

 

 

 

43

 

 

 

75,034

 

Total lease liabilities

$

382,404

 

 

$

769

 

 

$

383,173

 

Less:  Current lease liabilities

 

71,590

 

 

 

293

 

 

 

71,883

 

Non-current lease liabilities

$

310,814

 

 

$

476

 

 

$

311,290

 

 

Current and non-current finance lease liabilities are recorded in “Accrued liabilities” and “Other liabilities – non-current,” respectively, on our consolidated balance sheet.  As of December 31, 2019, there were no operating lease payments for legally binding minimum lease payments for leases signed but not yet commenced.

 

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

 

 

Three Months Ended

December 31,

 

 

Six Months Ended

December 31,

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

$

10,937

 

 

$

16,006

 

 

$

1,309

 

 

$

7,897

 

Less: Income to participating securities

 

(267

)

 

 

(159

)

 

 

(15

)

 

 

(96

)

Net income attributable to common shares

$

10,670

 

 

$

15,847

 

 

$

1,294

 

 

$

7,801

 

Weighted average number of common shares

   outstanding — basic

 

45,218

 

 

 

44,733

 

 

 

45,086

 

 

 

44,612

 

Effect of dilutive stock equivalents

 

 

 

 

3

 

 

 

 

 

 

6

 

Weighted average number of common shares

   outstanding — diluted

 

45,218

 

 

 

44,736

 

 

 

45,086

 

 

 

44,618

 

Net income per common share — basic

$

0.24

 

 

$

0.35

 

 

$

0.03

 

 

$

0.17

 

Net income per common share — diluted

$

0.24

 

 

$

0.35

 

 

$

0.03

 

 

$

0.17

 

 

For the quarters ended December 31, 2019 and December 31, 2018, options representing the rights to purchase approximately 2.8 million weighted average shares and 4.0 million weighted average shares were not included in the diluted income per share calculation, because the assumed exercise of such options would have been anti-dilutive.  For the six months ended December 31, 2019 and December 31, 2018, options and awards representing rights to purchase approximately 3.0 million weighted average shares and 3.9 million weighted average shares were excluded from the diluted income per share calculation, because the assumed exercise of such options and awards would have been anti-dilutive.

 

7.      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 which matures on January 29, 2024 (the “Revolving Credit Facility”). The availability of funds under the Revolving Credit Facility is limited to the lesser of a calculated borrowing base and the lenders’

11


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 December 31, 2019, we were in compliance with all of the Revolving Credit Facility covenants.  

At December 31, 2019, we had $3.6 million outstanding under the Revolving Credit Facility, $8.8 million of outstanding letters of credit and availability of $91.4 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 second quarter of the current fiscal year from the Revolving Credit Facility of $0.7 million was comprised of interest of $0.6 million, commitment fees of less than $0.1 million and the amortization of financing fees of less than $0.1 million. Interest expense for the second quarter of the prior fiscal year from the Revolving Credit Facility of $0.8 million was comprised of interest of $0.6 million, commitment fees of $0.1 million and the amortization of financing fees of $0.1 million. Interest expense for the first six months of the current fiscal year from the Revolving Credit Facility of $1.4 million was comprised of interest of $1.1 million, commitment fees of $0.2 million and the amortization of financing fees of $0.1 million. Interest expense for the second quarter of the prior fiscal year from the Revolving Credit Facility of $1.4 million was comprised of interest of $1.0 million, commitment fees of $0.2 million and the amortization of financing fees of $0.2 million.

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

 

8.      Depreciation — Accumulated depreciation of owned property and equipment as of December 31, 2019 and June 30, 2019 was $175.5 million and $179.7 million, respectively.  Upon determining that a long-lived asset meets the criteria to be classified as held for sale, the Company ceases depreciation and records the assets at the lower of fair value, net of selling costs, or the carrying amount of the asset. As of December 31, 2019, we committed to a plan to sell certain non-core property associated with our Dallas distribution center facility and concluded that the criteria were met for recording these assets as held for sale.  The estimated fair value of these assets was higher than the carrying amount, therefore the assets were reclassified on our balance sheet from Property and equipment, net to Assets held for sale at their carrying amount, with no impact to the statement of operations.

 

 

9.      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 2014.  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 December 31, 2019 and 2018 were (3.8%) and (1.4%), respectively. The effective tax rates for the six months ended December 31, 2019 and 2018 were (1.4%) and (1.3%), respectively.   A full valuation allowance is currently recorded against substantially all of the Company’s 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.

 

 

10.      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.  As of December 31, 2019 and June 30, 2019, credit card receivables from third party consumer credit card providers were $2.0 million and $9.7 million, respectively.  Such receivables are generally collected within one week of the balance sheet date.

 

11.      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 December 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.

 

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, 2019.

Business Overview

 

We are one of the original off-price retailers and a leading destination for unique home and lifestyle goods.  We are an off-price 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 second quarter of fiscal 2020, while at a more moderate pace, we continued to implement our strategy of improving store locations and the in-store experience for our customers.  Additionally, we are focused on successfully renegotiating our store lease terms.  

 

We operated 705 stores in 39 states as of December 31, 2019. Our store base decreased from 720 stores in 40 states as of December 31, 2018.

 

Net sales for the second quarter of fiscal 2020 were $324.4 million, a decrease of 4.1%, compared to $338.4 million for the same period last year, primarily due to a decrease in sales from comparable stores (which we define as stores open at least five quarters, including stores relocated in the same market and renovated stores) of 3.0%. The decrease in comparable store sales was due to a 3.7% decrease in average ticket, partially offset by a 0.7% increase in customer transactions. Sales per square foot for the rolling 12 month period ended December 31, 2019 were $114, a decrease of 2.6% from the rolling 12 month period ended December 31, 2018.  Net sales for the first six months of fiscal 2020 were $548.9 million, a decrease of 3.0%, compared to $565.7 million for the same period last year, primarily due to a decrease in sales from comparable stores of 2.1%. The decrease in comparable store sales was due to a 3.4% decrease in average ticket, partially offset by a 1.4% increase in customer transactions.

 

Gross margin for the second quarter of fiscal 2020 was 32.6%, compared to 34.5% for the same period last year.  Gross margin for the first six months of fiscal 2020 was 34.1%, compared to 35.2% for the same period last year.

 

For the second quarter of fiscal 2020, selling, general and administrative expenses decreased $5.7 million to $94.7 million, from $100.4 million for the same quarter last year. For the first six months of fiscal 2020, selling, general and administrative expenses decreased $5.9 million to $184.5 million, from $190.4 million for the same period last year.

 

Our operating income for the second quarter of fiscal 2020 was $11.1 million, compared to $16.3 million for the same period last year. Our operating income for the first six months of fiscal 2020 was $2.4 mil