STAGE STORES, INC. Cautionary Statement Concerning Forward-Looking Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 ("Act") provides a safe
harbor for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the statements. We wish to take advantage of
the "safe harbor" provisions of the Act.
Certain statements in this report are forward-looking statements within the
meaning of the Act, and such statements are intended to qualify for the
protection of the safe harbor provided by the Act. The words "anticipate,"
"estimate," "expect," "objective," "goal," "project," "intend," "plan,"
"believe," "will," "should," "may," "target," "forecast," "guidance," "outlook,"
and similar expressions generally identify forward-looking statements.
Similarly, descriptions of our objectives, strategies, plans, goals or targets
are also forward-looking statements. Forward-looking statements relate to the
expectations of management as to future occurrences and trends, including
statements expressing optimism or pessimism about future operating results or
events and projected sales, earnings, capital expenditures and business
strategy.
Forward-looking statements are based upon a number of assumptions and factors
concerning future conditions that may ultimately prove to be inaccurate and
could cause actual results to differ materially from those in the
forward-looking statements. Forward-looking statements that are made herein and
in other reports and releases are not guarantees of future performance and
actual results may differ materially from those discussed in such
forward-looking statements as a result of various factors. These factors
include, but are not limited to, our ability to maintain customary trade terms
with vendors, our ability to comply with the various covenant requirements
contained in the credit facility agreement, the demand for apparel, and other
factors. The demand for apparel and sales volume can be affected by significant
changes in economic conditions, including an economic downturn, employment
levels in our markets, consumer confidence, energy and gasoline prices, the
value of the Mexican peso, and other factors influencing discretionary consumer
spending. Other factors affecting the demand for apparel and sales volume
include unusual weather patterns, an increase in the level of competition in our
market areas, competitors' marketing strategies, changes in fashion trends,
changes in the average cost of merchandise purchased for resale, availability of
product on normal payment terms and the failure to achieve the expected results
of our merchandising and marketing plans as well as our store opening or
relocation plans. Additional assumptions, factors and risks concerning future
conditions are discussed in the Risk Factors section of the Form 10-K, and may
be discussed from time to time in our other filings with the SEC , including
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Most of these
factors are difficult to predict accurately and are generally beyond our
control.
Forward-looking statements are and will be based upon management's then-current
views and assumptions regarding future events and operating performance, and
apply only as of the dates of such statements. Although management believes the
expectations expressed in forward-looking statements are based on reasonable
assumptions within the bounds of our knowledge, forward-looking statements, by
their nature, involve risks, uncertainties and other factors, any one or a
combination of which could materially affect our business, financial condition,
results of operations or liquidity.
Readers should carefully review the Form 10-K in its entirety including, but not
limited to, our financial statements and the notes thereto and the risks and
uncertainties described in Part I, Item 1A (Risk Factors) of the Form 10-K. This
report should be read in conjunction with the Form 10-K, and you should consider
all of these risks, uncertainties and other factors carefully in evaluating
forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date they are made. We undertake no obligation to
publicly update forward-looking statements whether as a result of new
information, future events or otherwise. Readers are advised, however, to
consult any further disclosures we make on related subjects in our public
announcements and SEC filings.
27--------------------------------------------------------------------------------
Table of Contents
For purposes of the following discussion, all references to the "third quarter 2019" and the "third quarter 2018" are for the 13-week fiscal periods endedNovember 2, 2019 andNovember 3, 2018 , respectively, and all references to the "year-to-date 2019" and the "year-to-date 2018" are for the 39-week fiscal periods endedNovember 2, 2019 andNovember 3, 2018 , respectively The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in this Form 10-Q as well as the financial and other information included in the Form 10-K.
Our Business
We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As ofNovember 2, 2019 , we operated in 42 states through 617 BEALLS, GOODY'S, PALAIS ROYAL, PEEBLES and STAGE department stores and 158 GORDMANS off-price stores, as well as an e-commerce website (www.stage.com). Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in smaller and mid-sized markets in the Midwest. InSeptember 2019 , we announced our plan to convert substantially all of our department stores to off-price beginning inFebruary 2020 . By the end of the third quarter of fiscal year 2020, we expect to be operating approximately 700 predominantly small-market, Gordmans stores, offering off-price values and broad assortments of name-brand merchandise in a fun, scarcity driven, treasure hunt experience.
Third Quarter 2019 Financial Overview
Select financial results for the third quarter 2019 were as follows (comparisons are to the third quarter 2018):
• Net sales increased
• Comparable sales increased 17.4%. Comparable sales consist of store sales
after a store has been in operation for 14 full months, including
pre-conversion department store sales, post-conversion off-price sales and
e-commerce sales.
• Net loss was
• Loss per common share was
• Adjusted net loss was
reconciliation of non-GAAP financial measures on page 30).
• Adjusted loss per common share was
common share of $1.08 (see the reconciliation of non-GAAP financial
measures on page 30).
• Adjusted EBITDA was
million (see the reconciliation of non-GAAP financial measures on
page 30).
• Recognized impairment charges of
• Converted 17 department stores to off-price, bringing the year-to-date
conversion total to 89.
Strategy and Outlook
Our 2019 strategy is to grow our off-price stores, emphasize trending merchandise such as home goods, drive sales through pre-conversion promotions associated with our transition to off-price, and exit underperforming department stores. These initiatives, along with the strong performances of our home and women's categories, contributed to the 17.4% increase in comparable sales for the third quarter 2019. Based on the sales trend for the year-to-date 2019, we expect to generate positive comparable sales for the fourth quarter. InOctober 2019 , we launched AmazonHub Counter ("Counter") pick-up points in our off-price and department stores. With Counter, Amazon shoppers have the option to pick up their Amazon packages at our stores. Counter is currently available over 700 of our stores. While it is still too early to determine the impact of the program on our sales, we expect Counter to bring in additional traffic to our stores. 28
--------------------------------------------------------------------------------
Table of Contents
Our 2019 and long-term strategic objectives are to:
• Transition to an off-price business model by converting substantially all
stores to off-price by the third quarter of 2020. The recent growth in the
off-price retail industry, the success of our 2018 and 2019 off-price
conversions, and our presence in small markets without major off-price
competitors, have driven our strategy which we believe provides a
sustained growth opportunity. Following the 2020 conversions, we will have
more than 700 off-price stores, representing over 90% of our total sales
volume in 2020. During the year-to-date 2019, we completed 89 store
conversions and opened one new off-price store.
• Build a national brand through our growing population of Gordmansoff-price stores and promote brand recognition of our Gordmans nameplate
through our private label credit card and loyalty program. In
we reissued our existing credit cards as a combined off-price and
department store branded credit card to more than 2 million cardholders.
We expect off-price credit sales as a percentage of total off-price sales
to continue to grow in 2019 and beyond, and reach 25% in the future.
• Expand the home department in our department stores to drive sales in this
trending category and prepare for off-price conversion. During the first
quarter 2019, we relocated the home department to the store front andadded new high capacity home fixtures in the majority of our department
stores. This, along with expanding the merchandise assortments, increased
home department sales by approximately 150% in our department stores for
the year-to-date 2019. We expect home department sales as a percent oftotal sales to increase in penetration and provide the greatest benefit to
sales during the fourth quarter holiday gift period.
• Optimize our supply chain to support the full-chain rollout of off-price
conversions in 2020.
• Shift our e-commerce operations to a drop-ship model to allow our stores,
merchants and distribution centers to focus on our pivot to our off-price
model. We plan to discontinue order fulfillment from our distribution
centers and stores after the 2019 holiday shopping season.
• Close 60 underperforming department stores in 2019. During the
year-to-date 2019, we permanently closed 22 department stores. The
majority of the remaining closures are planned for January 2020 .
Store counts at the end of the third quarter 2019 and third quarter 2018 were as follows:
November 2, 2019 November 3, 2018
Department stores 617 754
Off-price stores 158 68
Total stores 775 822
29--------------------------------------------------------------------------------
Table of Contents
Non-GAAP Financial Measures
The following table presents adjusted earnings (loss) before interest, taxes,
depreciation and amortization (adjusted EBITDA), adjusted net loss and adjusted
diluted loss per share, non-GAAP financial measures. We believe the presentation
of these supplemental non-GAAP financial measures helps facilitate comparisons
of our operating performance across periods. In addition, management uses these
non-GAAP financial measures to assess the results of our operations. Non-GAAP
financial information should not be considered in isolation or viewed as a
substitute for net income, cash flow from operations, diluted earnings per
common share or other measures of performance as defined by GAAP. Moreover, the
inclusion of non-GAAP financial information as used herein is not necessarily
comparable to other similarly titled measures of other companies due to the
potential inconsistencies in the method of presentation and items considered.
The following table sets forth the supplemental financial information and the
reconciliation of the non-GAAP financial measures to the most directly
comparable GAAP measure (in thousands):
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
Net loss (GAAP) $ (15,914 ) $ (31,353 ) $ (87,338 ) $ (79,953 )
Interest expense 4,070 3,350 12,187 8,253
Income tax expense 150 (12 ) 450 288
Depreciation and amortization 15,272 13,988 45,144 44,135
Impairment of long-lived assets 9,680 - 11,295 1,070
Severance 425 819 2,928 938
Pre-opening expenses (a) 560 - 3,457 -
Store closing services 1,038 - 2,216 -
Adjusted EBITDA (non-GAAP) $ 15,281 $ (13,208 ) $ (9,661 ) $ (25,269 )
Net loss (GAAP) $ (15,914 ) $ (31,353 ) $ (87,338 ) $ (79,953 )
Impairment of long-lived assets 9,680 - 11,295 1,070
Severance 425 819 2,928 938
Pre-opening expenses (a) 560 - 3,457 -
Store closing services 1,038 - 2,216 -
Adjusted net loss (non-GAAP) $ (4,211 ) $ (30,534 ) $ (67,442 ) $ (77,945 ) Diluted loss per share (GAAP) $ (0.55 ) $ (1.11 ) $ (3.04 ) $ (2.85 ) Impairment of long-lived assets
0.34 - 0.39 0.04
Severance 0.01 0.03 0.10 0.03
Pre-opening expenses (a) 0.02 - 0.12 -
Store closing services 0.04 - 0.08 -
Adjusted diluted loss per share
(non-GAAP) (b) $ (0.15 ) $ (1.08 ) $ (2.35 ) $ (2.78 )
(a) Pre-opening expenses include store payroll, marketing expenses, meals and travel expenses, and supplies.
(b) Per share amounts may not foot
due to rounding.
30--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Third Quarter 2019 compared to Third Quarter 2018 and Year-to-Date 2019 compared to Year-to-Date 2018 (amounts in thousands, except percentages):
Net Sales Three Months Ended Nine Months Ended November 2, November 3, November 2, 2019 November 3, 2018 Change 2019 2018 Change Net sales $ 399,302 $ 347,100$ 52,202 $ 1,094,888 $ 1,060,623 $ 34,265
Sales percent change:
Total net sales 15.0 % 3.2 %
Comparable sales 17.4 % 5.3 %
Net sales for the third quarter 2019 increased compared to the third quarter
2018 primarily due to an increase in comparable sales, partially offset by store
closures. The increase in comparable sales was driven by off-price conversions
completed during 2019, strong performances of our home and women's categories,
and favorable response to pre-conversion promotions in our department stores as
we execute our transition to off-price. The increase in comparable sales
reflects increases in transaction count and average transaction value, with an
increase in units per transaction partially offset by lower average unit retail.
Net sales for the year-to-date 2019 increased compared to the year-to-date 2018
primarily due to an increase in comparable sales, partially offset by store
closures. The increase in comparable sales was driven by off-price conversions
completed during 2019, strong performance of our home category, and favorable
response to third quarter pre-conversion promotions in our department stores.
The increase in comparable sales reflects increases in transaction count and
average transaction value, with an increase in units per transaction partially
offset by lower average unit retail.
Credit Income
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018
Change
$ 15,678 $ 13,324 $
2,354
3.9 % 3.8 % 0.1 % 3.9 % 4.1 % (0.2 )%
The increase in credit income for the third quarter 2019 compared to the third
quarter 2018 was primarily driven by higher credit sales and timing of income
earned.
31--------------------------------------------------------------------------------
Table of Contents
Cost of Sales and Gross Margin
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 Change November 2, 2019 November 3, 2018 Change
Net sales $ 399,302 $ 347,100 $ 52,202 $ 1,094,888 $ 1,060,623 $ 34,265
Cost of sales and
related buying,
occupancy and
distribution
expenses 315,494 278,665 36,829 888,297 847,213 41,084
Gross profit $ 83,808 $ 68,435 $ 15,373 $ 206,591 $ 213,410 $ (6,819 )
As a percent of net
sales 21.0 % 19.7 % 1.3 % 18.9 % 20.1 % (1.2 )%
The increase in gross profit rate for the third quarter 2019 compared to the
third quarter 2018 was driven by lower markdowns and sales leverage on fixed
costs, partially offset by increased supply chain costs and impairment of
long-lived assets.
The decrease in gross profit rate for the year-to-date 2019 compared to the year-to-date 2018 was primarily due to increased supply chain costs and impairment of long-lived assets.
Selling, General and Administrative Expenses ("SG&A Expenses")
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 Change
$ 111,180 $ 109,774 $
1,406
27.8 % 31.6 % (3.8 )% 29.6 % 30.9 % (1.3 )%
The decrease in SG&A expenses rate for the third quarter 2019 compared to the
third quarter 2018 was driven by lower store expenses due to the closure of
underperforming stores, lower marketing costs associated with operating our
off-price stores, planned reductions in department store marketing and sales
leverage on fixed costs, partially offset by impairment of long-lived assets and
higher incentive compensation costs due to better results.
The decrease in SG&A expenses rate for the year-to-date 2019 compared to the
year-to-date 2018 was driven by lower store expenses due to the closure of
underperforming stores, lower marketing costs associated with operating our
off-price stores, planned reductions in department store marketing and sales
leverage on fixed costs, partially offset by higher impairment of long-lived
assets, pre-opening expenses associated with conversion stores in the
year-to-date 2019 and higher incentive compensation costs due to better results.
Interest Expense
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 Change November 2, 2019 November 3, 2018 Change
Interest expense $ 4,070 $ 3,350 $ 720 $ 12,187 $ 8,253 $ 3,934
As a percent of net
sales 1.0 % 1.0 % - % 1.1 % 0.8 % 0.3 %
Interest expense is comprised of interest on borrowings under the Credit
Facility, related letters of credit and commitment fees, amortization of debt
issuance costs and interest on finance obligations. The increase in interest
expense was primarily due to an increase in average borrowings and higher
interest rates under the Credit Facility for the year-to-date 2019 compared to
the year-to-date 2018. For the year-to-date 2019, the weighted average interest
rate on outstanding borrowings and the average daily borrowings under the credit
facility, including the term loan, were 4.6% and $320.9 million , respectively,
as compared to 3.53% and $274.3 million for the year-to-date 2018.
32--------------------------------------------------------------------------------
Table of Contents
Income Taxes
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 Change
November 2, 2019 November 3, 2018 Change
Income tax expense
(benefit) $ 150 $ (12 ) $ 162 $ 450 $ 288 $ 162
Effective tax rate (1.0 )% - % (1.0 )% (0.5 )% (0.4 )% (0.1 )%
The effective income tax rate for the third quarter and year-to-date 2019 and
the third quarter and year-to-date 2018, was approximately 0%. A valuation
allowance has been recognized for substantially all tax benefits generated by
tax losses in each period due to the uncertainly of realization, which is
dependent upon generation of future taxable income. We expect our effective
income tax rate to be approximately 0% percent for 2019.
Loss Before Income Tax and Net Loss
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 Change November 2, 2019 November 3, 2018 Change
Loss before income tax $ (15,764 ) $ (31,365 ) $ 15,601 $ (86,888 ) $ (79,665 ) $ (7,223 )
Net loss (15,914 ) (31,353 ) 15,439 (87,338 ) (79,953 ) (7,385 )
Seasonality and Inflation
Our business, like many other retailers, is subject to seasonal influences, with
a significant portion of sales and income typically realized during the last
quarter of our fiscal year. Working capital requirements fluctuate during the
year and generally reach their highest levels during the third and fourth
quarters. Because of the seasonality of our business, results from any quarter
are not necessarily indicative of the results that may be achieved for a full
fiscal year.
We do not believe that inflation has had a material effect on our results of
operations. However, there can be no assurance that our business will not be
affected by inflation in the future.
33--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows, (iii) trade credit terms from our vendors and their factors and (iv) the Credit Facility. The loss of key vendors, or material changes in support by our vendors or their factors, can have a material impact on our business and liquidity. To date, we have successfully managed our vendor relationships to maintain inventory purchases at planned levels on acceptable payment terms. However, if we fail to meet our performance objectives, we may experience a tightening of credit or payment terms from our vendors or their factors. Our primary cash requirements are for operational needs, including rent and salaries, inventory purchases, and capital investments in our stores, supply chain and information technology. Our working capital fluctuates with seasonal variations which affect our borrowings and availability under the Credit Facility. Our availability under the Credit Facility is generally highest after the holiday selling season and is lowest just before this season as we build inventory levels. Based on our current expectations regarding our operating results, we believe that our sources of liquidity will be sufficient to cover working capital needs, planned capital expenditures and debt service requirements for at least the next 12 months.
Key components of our cash flow are summarized below (in thousands):
Nine Months Ended
November 2, 2019 November 3, 2018 Change
Net cash (used in) provided by: Operating activities$ (76,910 ) $ (136,917 ) $ 60,007 Investing activities (22,258 ) (19,444 ) (2,814 ) Financing activities 109,606 160,936 (51,330 ) Operating Activities During the year-to-date 2019, we used$76.9 million in cash from operating activities. Net loss, adjusted for non-cash expenses, provided cash of approximately$25.9 million , including non-cash operating lease expense of$52.6 million . Changes in operating assets and liabilities used net cash of approximately$107.7 million , which included a$156.9 million increase in merchandise inventories, primarily due to the seasonal build of inventories, and a$56.2 million decrease in operating lease liabilities, partially offset by a$15.1 million decrease in other assets and a$90.4 million increase in accounts payable and other liabilities. Additionally, cash flows from operating activities included construction allowances from landlords of$4.8 million , which funded a portion of the capital expenditures in investing activities. During the year-to-date 2018, we used$136.9 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately$30.1 million . Changes in operating assets and liabilities used net cash of approximately$107.6 million , which included a$163.9 million increase in merchandise inventories, primarily due to the seasonal build of inventories, partially offset by a$4.9 million decrease in other assets and a$51.4 million increase in accounts payable and other liabilities. Additionally, cash flows from operating activities included construction allowances from landlords of$0.8 million , which funded a portion of the capital expenditures in investing activities. The$60.0 million year-over-year improvement was driven by (i) a$39.0 million favorable change in cash flows from accounts payable and other liabilities resulting from continued trade support, (ii) a$7.0 million favorable change in cash flows from inventories attributable to faster inventory turnover, lower inventory investments in off-price stores compared to department stores, and the closure of underperforming stores, (iii) a$10.2 million favorable change in cash flows from other assets, and (iv) a$3.8 million improvement in net loss excluding non-cash depreciation, amortization and impairment. 34
--------------------------------------------------------------------------------
Table of Contents
Investing Activities
Net cash used in investing activities increased
Capital expenditures were$25.1 million for the year-to-date 2019, compared to$21.8 million for the year-to-date 2018. The increase in capital expenditures reflect our investments in converting stores to off-price and adding high capacity home fixtures in our department stores. We received construction allowances from landlords of$4.8 million in the year-to-date 2019, which are included in cash flows from operating activities, and were used to fund a portion of the capital expenditures. These funds are recorded as a reduction from our operating lease assets on the balance sheet and are recognized as an offset to rent expense over the lease term commencing with the date the allowances are earned. We estimate that capital expenditures in 2019, net of construction allowances to be received from landlords, will be approximately$30.0 million . The expenditures will principally be for investments in our stores, supply chain and technology. Financing Activities Net cash provided by financing activities decreased$51.3 million to$109.6 million for the year-to-date 2019, compared to$160.9 million for the year-to-date 2018, primarily due to lower net borrowings during the current year under the Credit Facility due to improved cash usage in the year-to-date 2019 compared to the year-to-date 2018. We use the Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Credit Facility agreement. The Credit Facility is secured by our inventory, cash, cash equivalents, and substantially all of our other assets. The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the credit facility agreement. For the nine months endedNovember 2, 2019 , the weighted average interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were 4.6% and$320.9 million , respectively, compared to 3.5% and$274.3 million for the year-to-date 2018. Letters of credit issued under the credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. AtNovember 2, 2019 , outstanding letters of credit totaled approximately$6.5 million . These letters of credit expire within 12 months of issuance and may be renewed. The Credit Facility agreement contains a covenant requiring us to maintain excess availability at or above$35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The Credit Facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to$30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. AtNovember 2, 2019 , we were in compliance with the debt covenants of the credit facility agreement and we expect to remain in compliance for the next 12 months. Excess availability under the credit facility atNovember 2, 2019 was$100.7 million . 35
--------------------------------------------------------------------------------
Table of Contents
Recent Accounting Standards
Disclosure concerning recent accounting standards is incorporated by reference to Note 1 of our Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.
© Edgar Online, source
