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EXCEL - IDEA: XBRL DOCUMENT - TUESDAY MORNING CORP/DEFinancial_Report.xls
EX-32.1 - EX-32.1 - TUESDAY MORNING CORP/DEtues-ex321_201503317.htm
EX-31.2 - EX-31.2 - TUESDAY MORNING CORP/DEtues-ex312_201503318.htm
EX-31.1 - EX-31.1 - TUESDAY MORNING CORP/DEtues-ex311_201503319.htm
EX-32.2 - EX-32.2 - TUESDAY MORNING CORP/DEtues-ex322_201503316.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

OR

o

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

FOR THE TRANSITION PERIOD FROM          TO         

Commission File Number 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  T    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  T    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 ¨

 

Accelerated filer

 T

 

 

 

 

 

Non-accelerated filer

 ¨

(Do not check if a smaller reporting company)

Smaller reporting company

 ¨

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

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 April 28, 2015

Common Stock, par value $0.01 per share

 

44,056,542

 

 

 

 


 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

ITEM 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2015 and June 30, 2014

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31,
2015 and 2014

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2015 and 2014

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

 

 

 

 

 

ITEM 2.

 

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

 

9

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

16

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

17

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

18

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

18

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

18

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

18

 

 

 

 

 

ITEM 6.

 

Exhibits

 

19

 

2


PART I — FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Tuesday Morning Corporation

Consolidated Balance Sheets

March 31, 2015 (unaudited) and June 30, 2014

(In thousands, except per share data)

 

 

 

March 31,

 

 

June 30,

 

 

 

2015

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,886

 

 

$

49,686

 

Inventories

 

 

223,421

 

 

 

207,663

 

Prepaid expenses

 

 

6,757

 

 

 

5,822

 

Deferred income taxes

 

 

42

 

 

 

42

 

Other current assets

 

 

424

 

 

 

1,094

 

Total Current Assets

 

 

273,530

 

 

 

264,307

 

Property and equipment, net

 

 

63,663

 

 

 

65,939

 

Deferred financing costs

 

 

996

 

 

 

1,416

 

Other assets

 

 

802

 

 

 

724

 

Total Assets

 

$

338,991

 

 

$

332,386

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

76,348

 

 

$

86,284

 

Accrued liabilities

 

 

36,762

 

 

 

39,618

 

Income taxes payable

 

 

414

 

 

 

1

 

Total Current Liabilities

 

 

113,524

 

 

 

125,903

 

Deferred rent

 

 

2,050

 

 

 

2,721

 

Income tax payable — non current

 

 

355

 

 

 

410

 

Deferred income taxes

 

 

42

 

 

 

42

 

Total Liabilities

 

 

115,971

 

 

 

129,076

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

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;

   45,817,694 shares issued and 44,056,542 shares outstanding at March

   31, 2015 and 45,417,397 shares issued and 43,663,091 shares outstanding

   at June 30, 2014

 

 

458

 

 

 

454

 

Additional paid-in capital

 

 

225,576

 

 

 

220,352

 

Retained earnings/(deficit)

 

 

3,647

 

 

 

(10,978

)

Less: 1,761,152 common shares in treasury, at cost, at March 31, 2015

   and 1,754,306 common shares in treasury, at cost, at June 30, 2014

 

 

(6,661

)

 

 

(6,518

)

Total Stockholders’ Equity

 

 

223,020

 

 

 

203,310

 

Total Liabilities and Stockholders’ Equity

 

$

338,991

 

 

$

332,386

 

 

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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net sales

 

$

189,726

 

 

$

182,765

 

 

$

693,335

 

 

$

652,214

 

Cost of sales

 

 

117,326

 

 

 

114,664

 

 

 

439,955

 

 

 

421,348

 

Gross profit

 

 

72,400

 

 

 

68,101

 

 

 

253,380

 

 

 

230,866

 

Selling, general and administrative expenses

 

 

74,515

 

 

 

75,730

 

 

 

237,028

 

 

 

232,678

 

Operating income/(loss)

 

 

(2,115

)

 

 

(7,629

)

 

 

16,352

 

 

 

(1,812

)

Other income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(348

)

 

 

(355

)

 

 

(1,070

)

 

 

(1,109

)

Other income/(expense), net

 

 

(405

)

 

 

(4

)

 

 

(387

)

 

 

79

 

Other expense, net

 

 

(753

)

 

 

(359

)

 

 

(1,457

)

 

 

(1,030

)

Income/(loss) before income taxes

 

 

(2,868

)

 

 

(7,988

)

 

 

14,895

 

 

 

(2,842

)

Income tax provision/(benefit)

 

 

(64

)

 

 

440

 

 

 

270

 

 

 

(79

)

Net income/(loss)

 

$

(2,804

)

 

$

(8,428

)

 

$

14,625

 

 

$

(2,763

)

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income/(loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

 

$

(0.20

)

 

$

0.33

 

 

$

(0.06

)

Diluted

 

$

(0.06

)

 

$

(0.20

)

 

$

0.33

 

 

$

(0.06

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43,554

 

 

 

43,072

 

 

 

43,431

 

 

 

42,863

 

Diluted

 

 

43,554

 

 

 

43,072

 

 

 

43,750

 

 

 

42,863

 

Dividends per common share

 

$

 

 

$

 

 

$

 

 

$

 

 

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

 

 

4


Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

 

 

Nine Months Ended

 

 

 

March 31,

 

 

 

2015

 

 

2014

 

Net cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income/(loss)

 

$

14,625

 

 

$

(2,763

)

Adjustments to reconcile net income/(loss) to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

9,114

 

 

 

9,090

 

Amortization of financing fees

 

 

447

 

 

 

446

 

Deferred income taxes

 

 

 

 

 

3,265

 

Loss on disposal of assets

 

 

904

 

 

 

361

 

Share-based compensation

 

 

3,906

 

 

 

1,829

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventories

 

 

(15,469

)

 

 

6,237

 

Prepaid and other current assets

 

 

(343

)

 

 

1,262

 

Accounts payable

 

 

(9,936

)

 

 

383

 

Accrued liabilities

 

 

(2,856

)

 

 

4,570

 

Other payable - non-current

 

 

 

 

 

(2,289

)

Deferred rent

 

 

(671

)

 

 

(174

)

Income taxes payable

 

 

358

 

 

 

(450

)

Net cash provided by operating activities

 

 

79

 

 

 

21,767

 

Net cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of assets

 

 

47

 

 

 

34

 

Capital expenditures

 

 

(7,789

)

 

 

(10,713

)

Net cash used in investing activities

 

 

(7,742

)

 

 

(10,679

)

Net cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments under revolving credit facility

 

 

(6,000

)

 

 

(25,100

)

Proceeds under revolving credit facility

 

 

6,000

 

 

 

25,100

 

Payments of debt financing costs

 

 

(27

)

 

 

 

Purchase of treasury stock

 

 

(143

)

 

 

(320

)

Proceeds from the exercise of employee stock options

 

 

1,033

 

 

 

1,951

 

Net cash provided by financing activities

 

 

863

 

 

 

1,631

 

Net increase/(decrease) in cash and cash equivalents

 

 

(6,800

)

 

 

12,719

 

Cash and cash equivalents, beginning of period

 

 

49,686

 

 

 

28,896

 

Cash and cash equivalents, end of period

 

$

42,886

 

 

$

41,615

 

 

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

 

 

5


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.

 

 

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, 2014.  The balance sheet at June 30, 2014 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, 2014.  The results of operations for the three and nine month periods ended March 31, 2015 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2015.

The Company no longer presents 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 from these estimates.  Our fiscal year ends on June 30 and we operate our business as a single operating segment.

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.

 

 

2.      Share-based incentive plans — Stock Option Awards.   We have established the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan, as amended (the “1997 Plan”), the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004 Plan”), and the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 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 1997 Plan, the 2004 Plan, or the 2008 Plan, but equity awards granted under the 1997 Plan, the 2004 Plan and the 2008 Plan are still outstanding.

On September 16, 2014, our Board of Directors adopted the Tuesday Morning Corporation 2014 Long-Term Incentive Plan (the “2014 Plan”), and the 2014 Plan was approved by our stockholders at the 2014 annual meeting of stockholders on November 12, 2014. The 2014 Plan became effective on September 16, 2014, and the maximum number of shares reserved for issuance under the 2014 Plan is 3,600,000 shares plus any awards under the 2008 Plan (i) that were outstanding on September 16, 2014 and, on or after September 16, 2014, are forfeited, expire, or are canceled, and (ii) any shares subject to such awards that, on or after September 16, 2014, are used to satisfy the exercise price or tax withholding obligations with respect to such awards. Our Board of Directors also approved the termination of the 2008 Plan, effective upon the date of stockholder approval of the 2014 Plan, and no new awards will be made under the 2008 Plan. The 2014 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards which may be granted singly, in combination, or in tandem, and which may be paid in cash, shares of common stock, or a combination of cash and shares of common stock.

Stock options were awarded with a strike price at a fair market value equal to the average of the high and low trading prices of our common stock on the date of grant under the 1997 Plan and the 2004 Plan.  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.

6


Options granted under the 1997 Plan and the 2004 Plan typically vest over periods of one to five years and expire ten years from the date of grant, while 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 2004 Plan and the 2008 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, 2015, range between $1.24 per share and $35.23 per share.  The 1997 Plan, the 2004 Plan, and the 2008 Plan terminated pursuant to their terms as of December 29, 2007, May 17, 2014, and September 16, 2014, respectively.  There were five million shares available for grant under the 2014 Plan at March 31, 2015.

Restricted Stock Awards.   The 1997 Plan, the 2004 Plan, 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 1997 Plan, the 2004 Plan, and the 2008 Plan, but restricted stock awards granted under the 2004 Plan and 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.  Shares are valued at the fair market value of our common stock at the date of award.  Shares may be subject to certain performance requirements.  If the performance requirements are not met, the restricted shares are forfeited.  At December 31, 2007, all shares under the 1997 Plan had been granted and the 1997 Plan terminated pursuant to its terms as of December 29, 2007.  Under the 2004 Plan, the 2008 Plan and the 2014 Plan, as of March 31, 2015, there were 435,283 shares of restricted stock outstanding, both performance-based and other, with award vesting periods of one to four years and a weighted average fair value of $16.99 per share.

Performance-Based Restricted Stock Awards and Performance-Based Stock Option Awards.    As of March 31, 2015 there were 247,480 performance-based restricted stock awards and performance-based stock option awards outstanding under the 2008 Plan and 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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Amortization of share-based compensation during the period

 

$

1,508

 

 

$

873

 

 

$

4,195

 

 

$

1,866

 

Amounts capitalized in ending inventory

 

 

(566

)

 

 

(222

)

 

 

(1,313

)

 

 

(531

)

Amounts recognized and charged to cost of sales

 

 

364

 

 

 

142

 

 

 

1,024

 

 

 

494

 

Amounts charged against income for the period, before tax

 

$

1,306

 

 

$

793

 

 

$

3,906

 

 

$

1,829

 

 

 

3.      Commitments and contingencies — From time to time, the Company is involved in litigation which is incidental to its business.  In the Company’s opinion, no litigation to which the Company is currently a party is likely to have a material adverse effect on the Company’s consolidated financial condition, results of operations, or cash flows.

 

 

 

4.      Income/(loss) 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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income/(loss)

 

$

(2,804

)

 

$

(8,428

)

 

$

14,625

 

 

$

(2,763

)

Less: Income to participating securities

 

 

 

 

 

 

 

 

(125

)

 

 

 

Net income/(loss) attributable to common shares

 

$

(2,804

)

 

$

(8,428

)

 

$

14,500

 

 

$

(2,763

)

Weighted average number of common shares outstanding basic

 

 

43,554

 

 

 

43,072

 

 

 

43,431

 

 

 

42,863

 

Effect of dilutive stock equivalents

 

 

 

 

 

 

 

 

319

 

 

 

 

Weighted average number of common shares outstanding dilutive

 

 

43,554

 

 

 

43,072

 

 

 

43,750

 

 

 

42,863

 

Net income/(loss) per common share basic

 

$

(0.06

)

 

$

(0.20

)

 

$

0.33

 

 

$

(0.06

)

Net income/(loss) per common share diluted

 

$

(0.06

)

 

$

(0.20

)

 

$

0.33

 

 

$

(0.06

)

 

For the quarters ended March 31, 2015 and March 31, 2014, and for the nine months ended March 31, 2014, all options representing rights to purchase shares were excluded from the diluted loss per share calculation as the Company had a net loss for those periods and the assumed exercise of such options would have been anti-dilutive.  For the nine months ended March 31, 2015,

7


options representing rights to purchase 275,783 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.

 

 

5.      Revolving credit facility — We have 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 November 17, 2016 (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 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.  Our financial covenant requires that we maintain availability of 10% of our calculated borrowing base, but never less than $15 million.  Our Revolving Credit Facility may, in some instances, limit payment of cash dividends and repurchases of the Company’s common stock.  In order to make a restricted payment, including payment of a dividend or a repurchase of shares, we must maintain availability of 17.5% of our lenders’ aggregate commitments under the Revolving Credit Facility for three months prior to, and on a pro forma basis for the six months immediately following, and after giving effect to, the restricted payment and we must satisfy a fixed charge coverage ratio requirement.  As of March 31, 2015, we were in compliance with all required covenants.

At March 31, 2015, we had no amounts outstanding under the Revolving Credit Facility, $6.4 million of outstanding letters of credit and availability of $109.6 million under the Revolving Credit Facility.  Letters of credit under the Revolving Credit Facility are primarily for self-insurance purposes.  We incur commitment fees of up to 0.375% on the unused portion of the Revolving Credit Facility.  Any borrowing under the Revolving Credit Facility incurs interest at LIBOR or the prime rate, 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).  These rates are increased or reduced as our average daily availability changes.  Interest expense for the third quarter of both the current fiscal year and prior fiscal year of $0.4 million was due to commitment fees of $0.2 million and the amortization of financing fees of $0.2 million.  Interest expense for the nine months ended March 31, 2015 and March 31, 2014 was $1.1 million, due to $0.6 million of commitment fees and $0.5 million of amortized financing fees.

 

 

6.      Depreciation — Accumulated depreciation of owned equipment and property at March 31, 2015 and June 30, 2014 was $119.9 million and $114.7 million, respectively.

 

 

7.      Income taxes — Tuesday Morning Corporation or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  With a few exceptions, Tuesday Morning Corporation is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2009.  The U.S. federal income tax statute of limitations has expired for all taxable years ended on or before June 30, 2011.

 

The effective tax rates for the quarters ended March 31, 2015 and March 31, 2014 were 2.2% and (5.5%), respectively.  The effective tax rates for the nine months ended March 31, 2015 and March 31, 2014 were 1.8% and 2.8%, respectively.  A full valuation allowance is currently recorded against the Company’s deferred tax assets as the Company was in a three year cumulative loss position as of June 30, 2013 and June 30, 2014.  A deviation from the customary relationship between income tax expense/(benefit) and pretax income/(loss) results from the utilization of the valuation allowance.

 

The Internal Revenue Service issued final regulations T.D. 9636 - Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property in September 2013 which are applicable to tax years beginning on or after January 1, 2014.  The Company is currently reviewing the regulations which provide guidance on the application of sections 162(a) and 263(a) of the Internal Revenue Code to amounts paid to acquire, produce, or improve tangible property and anticipates an immaterial impact to our tax return and financial statements.

 

 

8.      Cash and cash equivalents — Cash and cash equivalents are comprised of cash, 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, 2015 and June 30, 2014, credit card receivables from third party consumer credit card providers were $4.3 million and $3.8 million, respectively.  Such receivables are generally collected within one week of the balance sheet date.

 

 

9.       Recent accounting pronouncements — There were no accounting pronouncements issued during the third quarter of fiscal 2015 that affected the Company.

 

 

8


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, 2014.

Business Overview

·

We are a leading retailer of off-price, upscale decorative home accessories, housewares, seasonal goods and famous-maker gifts that we generally sell below retail prices charged by department stores and specialty and on-line retailers in the United States.  We operated 774 stores in 41 states as of March 31, 2015.  Our strong everyday value proposition is also supported with periodic circulars that create a sense of urgency and excitement for our customer base.

·

We recently completed execution of a business turnaround strategy to improve our store operations, merchandise offerings, sales productivity and overall profitability.  The business turnaround phase was the initial part of our overall business transformation strategy.  A number of specific costs related to our business turnaround have been incurred as we executed this strategy.  To provide enhanced information regarding our business performance, we have shown the effects of these specific costs on the prior year in the Results of Operations section.

·

Net sales for the third quarter of fiscal 2015 were $189.7 million, an increase of $6.9 million, or 3.8%, from $182.8 million for the same period last year.  Comparable store sales for the quarter ended March 31, 2015 increased by 6.5%, compared to the same period last year, which was due to a 6.8% increase in customer transactions, slightly offset by a 0.3% decrease in average ticket.  Net sales for the first nine months of fiscal 2015 were $693.3 million, an increase of $41.1 million, or 6.3%, from $652.2 million for the same period last year.  Comparable store sales for the nine months ended March 31, 2015 increased by 8.4%, compared to the same period last year, which was due to an 8.3% increase in customer transactions along with a 0.1% increase in average ticket.

·

Cost of sales, as a percentage of net sales, for the third quarter of fiscal 2015 was 61.8%, compared to 62.7% for the same period last year.  Cost of sales, as a percentage of net sales, for the first nine months of fiscal 2015 was 63.5%, compared to 64.6% for the same period last year.

·

For the third quarter of fiscal 2015, selling, general and administrative expenses decreased $1.2 million to $74.5 million, from $75.7 million for the same quarter last year.  For the first nine months of fiscal 2015, selling, general and administrative expenses increased $4.3 million to $237.0 million, from $232.7 million for the same period last year.

·

We had a net loss of $2.8 million and a net loss per share of $0.06 for the quarter ended March 31, 2015, compared to a net loss of $8.4 million and a net loss per share of $0.20 for the same period last year.  We generated net income of $14.6 million and net income per share of $0.33 for the nine months ended March 31, 2015, compared to a net loss of $2.8 million and a net loss per share of $0.06 for the same period last year.

·

Inventory levels at March 31, 2015 increased $15.7 million to $223.4 million from $207.7 million at June 30, 2014.  Compared to the same date last year, inventories increased $17.6 million from $205.8 million at March 31, 2014.  Additional inventory is in place to support current sales trends.  Inventory turnover for the trailing five quarters is 2.6 turns, and compares favorably to our prior year trailing five quarter turnover of 2.5 turns.  In the prior year, as part of our business turnaround, we were in the process of reducing excess inventory and exiting certain categories.

·

Cash and cash equivalents at March 31, 2015 decreased $6.8 million to $42.9 million from $49.7 million at June 30, 2014.  Compared to the same date last year, cash and cash equivalents increased $1.3 million from $41.6 million at March 31, 2014.

Results of Operations

The following tables set forth certain financial information from our consolidated statements of operations for the third quarter and nine months ended March 31, 2015 and the corresponding periods in 2014.  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.  In addition to our reported results, we have also provided below a summary of the reconciliation to the adjusted (non-GAAP) financial information for the third quarter and nine months ended March 31, 2015 and the corresponding periods in fiscal 2014.

9


Summary and Reconciliation of GAAP to Non-GAAP Financial Measures

(in thousands, except for per share data, percentages and ratios)

 

 

 

Three Months Ended March 31, 2015

 

 

Three Months Ended March 31, 2014

 

 

 

GAAP

 

 

Non-GAAP

Adjustments

 

 

Adjusted

(Non-GAAP)

 

 

GAAP

 

 

Non-GAAP

Adjustments

 

 

Adjusted

(Non-GAAP)

 

Net sales

 

$

189,726

 

 

 

 

 

$

189,726

 

 

$

182,765

 

 

 

 

 

$

182,765

 

Percent increase from prior year

 

 

3.8

%

 

 

 

 

 

3.8

%

 

 

2.6

%

 

 

 

 

 

2.6

%

Comparable store sales increase (1)

 

 

6.5

%

 

 

 

 

 

6.5

%

 

 

6.4

%

 

 

 

 

 

6.4

%

Gross profit

 

$

72,400

 

 

 

 

 

$

72,400

 

 

$

68,101

 

 

 

 

 

$

68,101

 

Selling, general and administrative expenses (2)

 

$

74,515

 

 

 

 

 

$

74,515

 

 

$

75,730

 

 

$

(2,202

)

 

$

73,528

 

Operating income/(loss) (3)

 

$

(2,115

)

 

 

 

 

$

(2,115

)

 

$

(7,629

)

 

$

2,202

 

 

$

(5,427

)

Interest expense, net

 

$

(348

)

 

 

 

 

$

(348

)

 

$

(355

)

 

 

 

 

$

(355

)

Other income, net

 

$

(405

)

 

 

 

 

$

(405

)

 

$

(4

)

 

$

 

 

$

(4

)

Income tax provision

 

$

(64

)

 

 

 

 

$

(64

)

 

$

440

 

 

$

(567

)

 

$

(127

)

Net income/(loss) (3)

 

$

(2,804

)

 

 

 

 

$

(2,804

)

 

$

(8,428

)

 

$

2,769

 

 

$

(5,659

)

Diluted income/(loss) per share (3)

 

$

(0.06

)

 

 

 

 

$

(0.06

)

 

$

(0.20

)

 

$

0.06

 

 

$

(0.13

)

Ratios as a percent of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

38.2

%

 

 

 

 

 

38.2

%

 

 

37.3

%

 

 

 

 

 

37.3

%

Selling, general and administrative expenses

 

 

39.3

%

 

 

 

 

 

39.3

%

 

 

41.4

%

 

 

(1.2

)%

 

 

40.2

%

Operating income/(loss)

 

 

(1.1)

%

 

 

 

 

 

(1.1

)%

 

 

(4.2

)%

 

 

1.2

%

 

 

(3.0

)%

 

 

 

Nine Months Ended March 31, 2015

 

 

Nine Months Ended March 31, 2014

 

 

 

GAAP

 

 

Non-GAAP

Adjustments

 

 

Adjusted

(Non-GAAP)

 

 

GAAP

 

 

Non-GAAP

Adjustments

 

 

Adjusted

(Non-GAAP)

 

Net sales

 

$

693,335

 

 

 

 

 

$

693,335

 

 

$

652,214

 

 

 

 

 

$

652,214

 

Percent increase from prior year

 

 

6.3

%

 

 

 

 

 

6.3

%

 

 

2.5

%

 

 

 

 

 

2.5

%

Comparable store sales increase (1)

 

 

8.4

%

 

 

 

 

 

8.4

%

 

 

5.7

%

 

 

 

 

 

5.7

%

Gross profit

 

$

253,380

 

 

 

 

 

$

253,380

 

 

$

230,866

 

 

$

1,810

 

 

$

232,676

 

Selling, general and administrative expenses (2)

 

$

237,028

 

 

 

 

 

$

237,028

 

 

$

232,678

 

 

$

(4,839

)

 

$

227,839

 

Operating income/(loss) (3)

 

$

16,352

 

 

 

 

 

$

16,352

 

 

$

(1,812

)

 

$

6,649

 

 

$

4,837

 

Interest expense, net

 

$

(1,070

)

 

 

 

 

$

(1,070

)

 

$

(1,109

)

 

 

 

 

$

(1,109

)

Other income/(loss), net

 

$

(387

)

 

 

 

 

$

(387

)

 

$

79

 

 

$

 

 

$

79

 

Income tax provision/(benefit)

 

$

270

 

 

 

 

 

$

270

 

 

$

(79

)

 

$

166

 

 

$

87

 

Net income/(loss) (3)

 

$

14,625

 

 

 

 

 

$

14,625

 

 

$

(2,763

)

 

$

6,483

 

 

$

3,720

 

Diluted income/(loss) per share (3)

 

$

0.33

 

 

 

 

 

$

0.33

 

 

$

(0.06

)

 

$

0.15

 

 

$

0.09

 

Ratios as a percent of net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

36.5

%

 

 

 

 

 

36.5

%

 

 

35.4

%

 

 

0.3

%

 

 

35.7

%

Selling, general and administrative expenses

 

 

34.2

%

 

 

 

 

 

34.2

%

 

 

35.7

%

 

 

(0.7

)%

 

 

34.9

%

Operating income/(loss)

 

 

2.4

%

 

 

 

 

 

2.4

%

 

 

(0.3

)%

 

 

1.0

%

 

 

0.7

%

  

(1)

Stores are included in the comparable store sales calculation at the beginning of the quarter following the anniversary date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is generally considered the same store for purposes of this computation.

(2)

See “Non-GAAP Financial Measures” below for details on these adjustments.  The adjustment to gross profit and the components of the adjustments to selling, general and administrative expenses are set forth in the first table under “Non-GAAP Financial Measures” below.

(3)

See “Non-GAAP Financial Measures” below for a discussion of these non-GAAP measures and reconciliation to their most directly comparable GAAP financial measures and further information on their uses and limitations.

Non-GAAP Financial Measures

We report our financial information in accordance with United States generally accepted accounting principles (GAAP).  However, we present certain financial measures identified as non-GAAP under the rules of the SEC to assess our results.  We believe that the non-GAAP financial measures provide useful information to the Company’s management, investors, and other interested parties because they allow them to understand and compare our core operating results during the third quarter and nine months ended March 31, 2015 to the corresponding prior year periods in a more consistent manner.  We believe this also facilitates the comparison of our

10


results to the results of our peer companies.  The non-GAAP financial measures presented in the tables below should not be viewed as an alternative or substitute for our reported GAAP results, but in addition to our GAAP results.

The following non-GAAP financial measures are adjusted to exclude the impact of the following business turnaround related charges and adjustments in the prior-year periods: our inventory write-down, management and board transition charges (including compensation and severance, consulting, legal, search and recruiting costs related to the transition), and changes in our deferred tax asset valuation allowance.  The amount of the turnaround related inventory write-down excluded from cost of sales (and the calculation of gross profit on a non-GAAP basis) and the adjustments to selling, general and administrative expenses are included in the first table below.

Adjusted Operating Income/(Loss):  The following table reconciles operating income/(loss), the most directly comparable GAAP financial measure, to adjusted operating income/(loss), a non-GAAP financial measure:

(in thousands, except for percentages and ratios)

 

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Operating income/(loss) (GAAP)

 

$

(2,115

)

 

$

(7,629

)

 

$

16,352

 

 

$

(1,812

)

As a percent of net sales

 

 

-1.1

%

 

 

-4.2

%

 

 

2.4

%

 

 

-0.3

%

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustment reducing cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory write-down and merchandise category exit

 

$

 

 

$

 

 

$

 

 

$

1,810

 

Adjustments reducing selling, general and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

 

 

 

606

 

 

 

 

 

 

2,160

 

Legal, consulting, and recruiting

 

 

 

 

 

1,596

 

 

 

 

 

 

2,679

 

Adjusted operating income/(loss) (non-GAAP)

 

$

(2,115

)

 

$

(5,427

)

 

$

16,352

 

 

$

4,837

 

As a percent of net sales

 

 

-1.1

%

 

 

-3.0

%

 

 

2.4

%

 

 

0.7

%

 

Adjusted Net Income/(Loss) from Continuing Operations:  The following table reconciles net income/(loss) from continuing operations, the most directly comparable GAAP financial measure, to adjusted net income/(loss) from continuing operations, a non-GAAP financial measure:

(in thousands)

 

 

 

Three Months Ended

March 31,

 

 

Nine Months Ended

March 31,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income/(loss) from continuing operations (GAAP)

 

$

(2,804

)

 

$

(8,428

)

 

$

14,625

 

 

$

(2,763

)

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory write-down and merchandise category exit, net of tax of $—, $—, $—, and $787(2)

 

 

 

 

 

 

 

 

 

 

 

1,023

 

Compensation, net of tax of $—, $72, $—, and $940(1)(2)

 

 

 

 

 

534

 

 

 

 

 

 

1,220

 

Legal, consulting, and recruiting, net of tax of $—, $189, $—, and $1,166 (1)(2)

 

 

 

 

 

1,407

 

 

 

 

 

 

1,513

 

Deferred tax asset valuation allowance

 

 

 

 

 

828

 

 

 

 

 

 

2,727

 

Adjusted net income/(loss) from continuing operations (non-GAAP)

 

$

(2,804

)

 

$

(5,659

)

 

$

14,625

 

 

$

3,720

 

 

(1)

The effective tax rate utilized in this non-GAAP adjusted net income/(loss) from continuing operations reconciliation is 11.9% for the three months ended March 31, 2014.  This rate is inclusive of a deferred tax asset valuation allowance of $18.9 million as of March 31, 2014.

(2)

The effective tax rate utilized in this non-GAAP adjusted net income/(loss) from continuing operations reconciliation is 43.5% for the nine months ended March 31, 2014.  This rate is inclusive of a deferred tax asset valuation allowance of $18.9 million as of March 31, 2014.

11


Adjusted Diluted Income/(Loss) per share from Continuing Operations:  The following table reconciles diluted income/(loss) per share from continuing operations, the most directly comparable GAAP financial measure, to adjusted diluted income/(loss) per share from continuing operations, a non-GAAP financial measure:

 

 

 

Three Months Ended

March 31,