Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - CHRISTOPHER & BANKS CORPcbk-20171028exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - CHRISTOPHER & BANKS CORPcbk-20171028exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - CHRISTOPHER & BANKS CORPcbk-20171028exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - CHRISTOPHER & BANKS CORPcbk-20171028exhibit311.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 October 28, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____to____
Commission File No. 001-31390
CHRISTOPHER & BANKS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
06 - 1195422
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
2400 Xenium Lane North, Plymouth, Minnesota
 
55441
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code (763) 551-5000
 
 Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  YES  ☐  NO
Indicate by check mark whether the registrant has submitted electronically 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒  YES  ☐  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the 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 ☒ (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Emerging growth company ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  YES ☒  NO
As of November 24, 2017, there were 37,834,003 shares of the registrant's common stock outstanding.




CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
 
 
October 28, 2017
 
January 28, 2017
 
 
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
17,867

 
$
35,006

Accounts receivable
 
4,196

 
2,549

Merchandise inventories
 
51,431

 
36,834

Prepaid expenses and other current assets
 
4,638

 
3,485

Income taxes receivable
 
243

 
516

Total current assets
 
78,375

 
78,390

Property, equipment and improvements, net
 
50,374

 
55,332

Other non-current assets:
 
 
 
 
Deferred income taxes
 
296

 
321

Other assets
 
638

 
577

Total other non-current assets
 
934

 
898

Total assets
 
$
129,683

 
$
134,620

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
22,600

 
$
13,867

Accrued salaries, wages and related expenses
 
5,972

 
6,613

Accrued liabilities and other current liabilities
 
24,871

 
26,426

Total current liabilities
 
53,443

 
46,906

Non-current liabilities:
 
 
 
 
Deferred lease incentives
 
8,186

 
9,021

Deferred rent obligations
 
6,623

 
6,576

Other non-current liabilities
 
2,500

 
822

Total non-current liabilities
 
17,309

 
16,419

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock — $0.01 par value, 1,000 shares authorized, none outstanding
 

 

Common stock — $0.01 par value, 74,000 shares authorized, 47,629 and 47,425 shares issued, and 37,838 and 37,634 shares outstanding at October 28, 2017 and January 28, 2017, respectively
 
475

 
473

Additional paid-in capital
 
127,348

 
126,516

Retained earnings
 
43,819

 
57,017

Common stock held in treasury, 9,791 shares at cost at October 28, 2017 and January 28, 2017
 
(112,711
)
 
(112,711
)
Total stockholders’ equity
 
58,931

 
71,295

Total liabilities and stockholders’ equity
 
$
129,683

 
$
134,620



See Notes to Condensed Consolidated Financial Statements

2


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited) 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
October 28,
 
October 29,
 
October 28,
 
October 29,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net sales
 
$
98,468

 
$
106,668

 
$
273,642

 
$
296,625

Merchandise, buying and occupancy costs
 
65,229

 
67,447

 
185,237

 
189,543

Gross profit
 
33,239

 
39,221

 
88,405

 
107,082

Other operating expenses:
 
 

 
 
 
 
 
 
Selling, general and administrative
 
31,802

 
32,483

 
91,956

 
98,585

Depreciation and amortization
 
2,976

 
3,119

 
9,242

 
9,116

Impairment of long-lived assets
 

 

 
163

 
476

Total other operating expenses
 
34,778

 
35,602

 
101,361

 
108,177

Operating (loss) income
 
(1,539
)
 
3,619

 
(12,956
)
 
(1,095
)
Interest expense, net
 
(38
)
 
(44
)
 
(107
)
 
(126
)
Other income
 

 

 

 
911

(Loss) income before income taxes
 
(1,577
)
 
3,575

 
(13,063
)
 
(310
)
Income tax provision
 
45

 
82

 
136

 
249

Net (loss) income
 
$
(1,622
)
 
$
3,493

 
$
(13,199
)
 
$
(559
)
 
 
 
 
 
 
 
 
 
Basic (loss) income per share:
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(0.05
)
 
$
0.09

 
$
(0.36
)
 
$
(0.02
)
Basic shares outstanding
 
37,285

 
37,075

 
37,178

 
36,992

 
 
 
 
 
 
 
 
 
Diluted (loss) income per share:
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(0.05
)
 
$
0.09

 
$
(0.36
)
 
$
(0.02
)
Diluted shares outstanding
 
37,285

 
37,153

 
37,178

 
36,992

 

See Notes to Condensed Consolidated Financial Statements


3


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
 
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
October 28, 2017
 
October 29, 2016
 
October 28, 2017
 
October 29, 2016
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(1,622
)
 
$
3,493

 
$
(13,199
)
 
$
(559
)
Other comprehensive income, net of tax
 

 

 

 

Comprehensive (loss) income
 
$
(1,622
)
 
$
3,493

 
$
(13,199
)
 
$
(559
)
 

See Notes to Condensed Consolidated Financial Statements


4


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
Thirty-Nine Weeks Ended
 
 
October 28, 2017
 
October 29, 2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(13,199
)
 
$
(559
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
9,242

 
9,116

Impairment of long-lived assets
 
163

 
476

Deferred income taxes, net
 
25

 
18

Gain from company-owned life insurance
 

 
(911
)
Amortization of premium on investments
 

 
10

Amortization of financing costs
 
47

 
47

Deferred lease-related liabilities
 
(866
)
 
(817
)
Stock-based compensation expense
 
859

 
565

Loss on disposal of assets
 

 
1

Changes in operating assets and liabilities:
 
 

 
 
Accounts receivable
 
(1,648
)
 
326

Merchandise inventories
 
(14,597
)
 
(11,604
)
Prepaid expenses and other assets
 
(1,260
)
 
(543
)
Income taxes receivable
 
273

 
(88
)
Accounts payable
 
8,640

 
123

Accrued liabilities
 
(2,089
)
 
2,912

Other liabilities
 
1,743

 
164

Net cash used in operating activities
 
(12,667
)
 
(764
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, equipment and improvements
 
(4,447
)
 
(8,770
)
Proceeds from company-owned life insurance
 

 
911

Maturities of available-for-sale investments
 

 
3,005

Net cash used in investing activities
 
(4,447
)
 
(4,854
)
Cash flows from financing activities:
 
 
 
 
Exercise of stock options
 

 
17

Shares redeemed for payroll taxes
 
(25
)
 
(23
)
Net cash used in financing activities
 
(25
)
 
(6
)
Net decrease in cash and cash equivalents
 
(17,139
)
 
(5,624
)
Cash and cash equivalents at beginning of period
 
35,006

 
31,506

Cash and cash equivalents at end of period
 
$
17,867

 
$
25,882

Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
107

 
$
143

Income taxes (refunded) paid
 
$
(263
)
 
$
102

Accrued purchases of equipment and improvements
 
$
288

 
$
267

 

See Notes to Condensed Consolidated Financial Statements


5


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — Basis of Presentation
 
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States ("U.S.") Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been omitted, pursuant to such rules and regulations. These unaudited condensed consolidated financial statements, except the condensed consolidated balance sheet as of January 28, 2017 derived from the Company's audited financial statements, should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
 
The results of operations for the interim period shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, considered necessary to present fairly our financial position, results of operations, and cash flows as of October 28, 2017, and October 29, 2016 and for all periods presented.
 
Recently issued accounting pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance under Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition requirements and provides a new comprehensive revenue recognition model that requires entities to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year. As a result, ASU 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. We do not believe the adoption of this standard will have a material impact on our consolidated financial statements. The new revenue standard will require the Company to recognize gift card breakage proportional to actual gift card redemptions. We plan to adopt this ASU under the modified retrospective approach beginning in the first quarter of fiscal 2018 which includes a cumulative adjustment to retained earnings. As interpretations of the new guidance continue to evolve in the fourth quarter of fiscal 2017, we will monitor developments and will finalize conclusions on our revenue recognition policy, disclosure requirements and changes that may be necessary to our internal controls over financial reporting.
 
In February 2016, the FASB issued ASU 2016-02, Leases, which requires that any lease arrangements longer than twelve months result in an entity recognizing an asset and liability on its balance sheet. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The provisions of this new guidance are to be applied using a modified retrospective approach, with elective reliefs, which requires application of the new guidance for all periods presented. The Company is currently evaluating the guidance and its impact on our consolidated financial statements and the related internal controls over financial reporting. The Company expects the adoption of this standard will have a material impact on its consolidated balance sheet for recognition of lease-related assets and liabilities. We will adopt the ASU beginning in the first quarter of fiscal 2019.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 addresses simplification of several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements mostly due to the impact of the tax valuation allowance.

We reviewed all other significant newly-issued accounting pronouncements and concluded they are either not applicable to our operations, or that no material effect is expected on our consolidated financial statements as a result of future adoption.

6


NOTE 2 — Merchandise Inventories and Sources of Supply
 
Merchandise inventories consisted of the following (in thousands):
 
 
October 28, 2017
 
January 28, 2017
Merchandise - in store/eCommerce
 
$
44,367

 
$
28,584

Merchandise - in transit
 
7,064

 
8,250

Total merchandise inventories
 
$
51,431

 
$
36,834

 
There have been no material changes to our ratio of imports to total merchandise purchases or concentration of supplier purchases in the thirty-nine weeks ended October 28, 2017 compared to the fiscal 2016 year ended January 28, 2017.

NOTE 3 — Property, Equipment and Improvements, Net
 
Property, equipment and improvements, net consisted of the following (in thousands):
 
Description
 
October 28, 2017
 
January 28, 2017
Land
 
$
1,597

 
$
1,597

Corporate office, distribution center and related building improvements
 
12,753

 
12,700

Store leasehold improvements
 
49,281

 
49,450

Store furniture and fixtures
 
69,405

 
69,598

Corporate office and distribution center furniture, fixtures and equipment
 
4,900

 
4,880

Computer and point of sale hardware and software
 
33,868

 
32,313

Construction in progress
 
1,795

 
1,321

Total property, equipment and improvements, gross
 
173,599

 
171,859

Less accumulated depreciation and amortization
 
(123,225
)
 
(116,527
)
Total property, equipment and improvements, net
 
$
50,374

 
$
55,332

 
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In conjunction with an impairment analysis, the Company determined that improvements and equipment at certain under-performing stores and at stores identified for closure were impaired. As a result, the Company recorded no long-lived asset impairment during the thirteen week periods ended October 28, 2017 and October 29, 2016. The Company recorded approximately $0.2 million and $0.5 million for long-lived asset impairments during the thirty-nine week periods ended October 28, 2017 and October 29, 2016, respectively.
 
NOTE 4 — Accrued Liabilities
 
Accrued liabilities and other current liabilities consisted of the following (in thousands):
 
 
October 28, 2017
 
January 28, 2017
Gift card and store credit liabilities
 
$
4,535

 
$
7,414

Accrued Friendship Rewards Program loyalty liability
 
3,763

 
3,770

Accrued income, sales and other taxes payable
 
2,403

 
1,239

Accrued occupancy-related expenses
 
3,217

 
3,614

Sales return reserve
 
2,055

 
943

eCommerce obligations
 
5,156

 
3,190

Other accrued liabilities
 
3,742

 
6,256

Total accrued liabilities and other current liabilities
 
$
24,871

 
$
26,426


NOTE 5 — Credit Facility

The Company is party to an amended and restated credit agreement (the "Credit Facility") with Wells Fargo Bank, N.A. (“Wells Fargo”), as lender. The Credit Facility was most recently amended and extended on September 8, 2014. The current expiration date is September 8, 2019.

7


 
The Credit Facility provides the Company with revolving credit loans of up to $50.0 million in the aggregate, subject to a borrowing base formula based primarily on eligible credit card receivables, inventory and real estate, as such terms are defined in the Credit Facility, and up to $10.0 million of which may be drawn in the form of standby and documentary letters of credit.
 
Borrowings under the Credit Facility will generally accrue interest at a rate ranging from 1.50% to 1.75% over the London Interbank Offered Rate ("LIBOR") or 0.50% to 0.75% over the Wells Fargo Prime Rate based on the amount of Average Daily Availability for the Fiscal Quarter immediately preceding each Adjustment Date, as such terms are defined in the Credit Facility. The Company has the ability to select between the LIBOR or prime based rate at the time of the cash advance. The Credit Facility has an unused commitment fee of 0.25%.

The Credit Facility contains customary events of default and various affirmative and negative covenants. The sole financial covenant contained in the Credit Facility requires the Company to maintain Availability at least equal to the greater of (a) ten percent (10%) of the borrowing base or (b) $3.0 million. In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met. The Company was in compliance with all covenants and other financial provisions as of October 28, 2017.

The Company's obligations under the Credit Facility are secured by the assets of the Company and its subsidiaries. The Company has pledged substantially all of its assets as collateral security for the loans, including accounts owed to the Company, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all of the Company's subsidiaries.
 
The Company had no revolving credit loan borrowings under the Credit Facility during each of the thirty-nine week periods ended October 28, 2017, and October 29, 2016. The total Borrowing Base at October 28, 2017 was approximately $48.1 million. As of October 28, 2017, the Company had open on-demand letters of credit of approximately $2.3 million. Accordingly, after reducing the Borrowing Base for the open letters of credit and the required minimum availability of the greater of $3.0 million, or 10.0% of the Borrowing Base, the net availability of revolving credit loans under the Credit Facility was approximately $40.9 million at October 28, 2017.

NOTE 6 — Income Taxes
 
The Company's liability for unrecognized tax benefits associated with uncertain tax positions is recorded within other non-current liabilities. There has been no material change in the reserve for unrecognized tax benefits since the end of the previous year. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense.
 
The Company and its subsidiaries are subject to U.S. federal income taxes and the income tax obligations of various state and local jurisdictions. Periods after fiscal 2013 remain subject to examination by the Internal Revenue Service. With few exceptions, the Company is not subject to state income tax examination by tax authorities for taxable years prior to fiscal 2012. As of October 28, 2017, the end of the third quarter of fiscal 2017, the Company had no other ongoing audits in various jurisdictions and does not expect the liability for unrecognized tax benefits to significantly increase or decrease in the next twelve months.

As of October 28, 2017, the possibility of future cumulative losses still exists. Accordingly, the Company has continued to maintain a valuation allowance against its net deferred tax assets. A small deferred tax asset was allowed related to certain tax benefits. The Company has federal and state net operating loss ("NOL") carryforwards which will reduce future taxable income. Approximately $36.2 million in net federal tax benefits are available from these federal loss carryforwards. An additional $1.2 million is available in net tax credit carryforwards. The state loss carryforwards will result in net state tax benefits of approximately $2.5 million.

Sections 382 and 383 of the Internal Revenue Code limit the annual utilization of certain tax attributes, including net operating loss carryforwards, incurred prior to a change in ownership. If the Company were to experience an ownership change, as defined by Sections 382 and 383, its ability to utilize its tax attributes could be substantially limited. Depending on the severity of the annual NOL limitation, the Company could permanently lose its ability to use a significant number of its accumulated NOLs.


8


NOTE 7 — Earnings Per Share
 
The following table sets forth the calculation of basic and diluted earnings per share (“EPS”) shown on the face of the accompanying consolidated statement of operations:
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
 
October 28,
 
October 29,
 
October 28,
 
October 29,
 
 
2017
 
2016
 
2017
 
2016
Numerator (in thousands):
 
 
 
 
 
 
 
 
Net (loss) income attributable to Christopher & Banks Corporation
 
$
(1,622
)
 
$
3,493

 
$
(13,199
)
 
$
(559
)
Denominator (in thousands):
 
 

 
 

 
 
 
 
Weighted average common shares outstanding - basic
 
37,285

 
37,075

 
37,178

 
36,992

Dilutive shares
 

 
78

 

 

Weighted average common and common equivalent shares outstanding - diluted
 
37,285

 
37,153

 
37,178

 
36,992

Net (loss) income per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.05
)
 
$
0.09

 
$
(0.36
)
 
$
(0.02
)
Diluted
 
$
(0.05
)
 
$
0.09

 
$
(0.36
)
 
$
(0.02
)
 
Total stock options of approximately 2.6 million and 3.2 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen week periods ended October 28, 2017 and October 29, 2016, as they were anti-dilutive. Total stock options of approximately 2.6 million and 2.8 million were excluded from the shares used in the computation of diluted earnings per share for the thirty-nine week periods ended October 28, 2017 and October 29, 2016, respectively, as they were anti-dilutive.
 
NOTE 8 — Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable
Level 3 – Unobservable inputs that are significant to the fair value of the asset or liability.

Assets that are Measured at Fair Value on a Non-recurring Basis:
 
The following table summarizes certain information for non-financial assets for the thirty-nine weeks ended October 28, 2017 and the fiscal year ended January 28, 2017, that are measured at fair value on a non-recurring basis in periods subsequent to an initial recognition period. The Company places amounts into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. 
 
 
Thirty-Nine Weeks Ended
 
Fiscal Year Ended
Long-Lived Assets Held and Used (in thousands):
 
October 28, 2017
 
January 28, 2017
Carrying value
 
$
163

 
$
877

Fair value measured using Level 3 inputs
 
$

 
$
91

Impairment charge
 
$
163

 
$
786

 
All of the fair value measurements included in the table above were based on significant unobservable inputs (Level 3). The Company determines fair value for measuring assets on a non-recurring basis using a discounted cash flow approach as discussed in Note 1, Nature of Business and Significant Accounting Policies in our Form 10-K for the year ended January 28, 2017. In determining future cash flows, the Company uses its best estimate of future operating results, which requires the use of significant estimates and assumptions, including estimated sales, merchandise margin and expense levels, and the selection of an appropriate discount rate; therefore, differences in the estimates or assumptions could produce significantly different results.

9


General economic uncertainty impacting the retail industry and the continuation of recent trends in company performance makes it reasonably possible that additional long-lived asset impairments could be identified and recorded in future periods.

The fair value measurement of the long-lived assets encompasses the following significant unobservable inputs:
 
 
Range
Unobservable Inputs
 
Fiscal 2016
Weighted Average Cost of Capital (WACC)
 
16%
Annual sales growth
 
0% to 7%

n
NOTE 9 — Legal Proceedings
 
The Company is subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated.

The ultimate resolution of legal matters can be inherently uncertain and for some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of these uncertainties. The Company does not, however, currently believe that the resolution of any pending matter will have a material adverse effect on its financial position, results of operations or liquidity.
 
In connection with a preliminary settlement of pre-litigation employment claims reached in February 2017, we established a loss contingency of $1.475 million as of January 28, 2017. In connection therewith, on April 13, 2017, a complaint was filed in State Circuit Court in the Fifteenth Judicial Circuit in Palm Beach County, Florida (the “Florida Circuit Court”) by three named plaintiffs in a purported class action asserting claims on behalf of current and former store managers. The named plaintiffs principally alleged that they and other similarly situated store managers were improperly classified as exempt employees and thus not compensated for overtime work as required under applicable federal and state law. On May 4, 2017, the Company entered into a settlement agreement with the named plaintiffs and the proposed class. On May 8, 2017, the Florida Circuit Court issued an order approving the class settlement. As approved by the Florida Circuit Court, certain current and former store managers are eligible to receive payments in connection with time worked in prior years. The settlement of the lawsuit is not an admission by us of any wrongdoing.

As part of the settlement, the Company contributed $1.475 million into a settlement fund in the second fiscal quarter of 2017. Following approval of the settlement, opt-in notices were sent to the members of the class. After the opt-in period concluded, settlement checks were mailed to the class members who opted in, which represented approximately 58% of the class members. On November 16, 2017, the Company received approximately $339,000 from the settlement administrator representing the remainder of the settlement fund after payment of all submitted claims and related settlement fund costs and expenses.

NOTE 10 — Segment Reporting
 
In the table below, Retail Operations includes activity generated by the Company’s retail store locations (Missy Petite Women ("MPW"), Outlets, Christopher & Banks, and C.J. Banks stores) as well as the eCommerce business. Retail Operations only includes net sales, merchandise gross margin and direct store expenses with no allocation of corporate overhead as that is the information used by the chief operating decision maker to evaluate performance and to allocate resources. The Corporate/Administrative balances include supporting administrative activity at the corporate office and distribution center facility and are included to reconcile the amounts to the condensed consolidated financial statements. 


10


Business Segment Information
(in thousands)
 
 
Retail
 
Corporate/
 
 
 
 
Operations
 
Administrative
 
Consolidated
Thirteen Weeks Ended October 28, 2017
 
 
 
 
 
 
Net sales
 
$
98,468

 
$

 
$
98,468

Depreciation and amortization
 
2,327

 
649

 
2,976

Impairment of long-lived assets
 

 

 

Operating income (loss)
 
12,008

 
(13,547
)
 
(1,539
)
 
 
 
 
 
 
 
Thirteen Weeks Ended October 29, 2016
 
 
 
 
 
 
Net sales
 
$
106,668

 
$

 
$
106,668

Depreciation and amortization
 
2,484

 
635

 
3,119

Impairment of long-lived assets
 

 

 

Operating income (loss)
 
16,890

 
(13,271
)
 
3,619

 
 
 
 
 
 
 
Thirty-Nine Weeks Ended October 28, 2017
 
 
 
 
 
 
Net sales
 
$
273,642

 
$

 
$
273,642

Depreciation and amortization
 
7,278

 
1,964

 
9,242

Impairment of long-lived assets
 
163

 

 
163

Operating income (loss)
 
25,960

 
(38,916
)
 
(12,956
)
Total assets
 
100,708

 
28,975

 
129,683

 
 
 
 
 
 
 
Thirty-Nine Weeks Ended October 29, 2016
 
 
 
 
 
 
Net sales
 
$
296,625

 
$

 
$
296,625

Depreciation and amortization
 
7,231

 
1,885

 
9,116

Impairment of long-lived assets
 
476

 

 
476

Operating income (loss)
 
40,410

 
(41,505
)
 
(1,095
)
Total assets
 
107,251

 
45,092

 
152,343


11


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 and our unaudited Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude.
 
Executive Overview
 
We are a national specialty retailer featuring exclusively-designed, privately-branded women’s apparel and accessories. We offer our customer an assortment of unique, classic and versatile clothing that fits her everyday needs at a good value.
 
We operate an integrated, omni-channel platform that provides our customer the ability to shop when and where she wants, including online or at retail and outlet stores. This approach allows our customers to browse, purchase, return, or exchange our merchandise through the channel that is optimal for her.
 
As of October 28, 2017, we operated 472 stores in 45 states, including 321 Missy, Petite, Women ("MPW") stores, 79 outlet stores, 37 Christopher & Banks ("CB") stores, and 35 C.J. Banks ("CJ") stores. Our CB brand offers unique fashions and accessories featuring exclusively designed assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P. Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W. Our MPW concept and outlet stores offer an assortment of both CB and CJ apparel servicing the Missy, Petite and Women-sized customer in one location.
 
Strategic Priorities
 
Our overall business strategy is to build sustainable, long-term revenue growth and consistent profitability through the following strategic initiatives:

Offer a differentiated product assortment;
Increase customer loyalty, acquire new customers, and recapture lapsed customers; and
Leverage our omni-channel capabilities.

Offer a differentiated product assortment
We are committed to ensuring we consistently meet our customers’ needs with a differentiated merchandise assortment that fits her lifestyle at a recognizable value. We have increased the flow of our fashion offerings to provide a more versatile assortment so customers shop more frequently and buy more when they visit. To further support the newness of our merchandise presentations, we increased inventory turnover to keep merchandise fresh and current.

Increase customer loyalty, acquire new customers, and recapture lapsed customers
We have a very loyal customer base that is highly engaged. The personalized customer service that our Associates provide is a differentiator for us and is a contributor to the loyalty our customers exhibit, with approximately 90% of our active customers participating in our loyalty rewards program.

We continue to be focused on maximizing the benefits of our customer relationship management (“CRM”) database, Friendship Rewards Loyalty Program (“Friendship Rewards”), and private-label credit card program to strengthen engagement with our customers. Our Friendship Rewards program, in conjunction with our CRM system, allows us to personalize communications and customize our offers. We continue to leverage our direct and digital marketing channels to encourage additional customer visits and increased spending per visit.

We continue to focus our attention on re-engaging former customers that stopped shopping in the recent past through targeted communications. We also have increased investments in digital paid media to gain new customers and brand awareness. We continue to use store-based grass root events to capitalize on the strong relationships between our store associates and customers.

Earlier this year, we launched a “refer a friend” program to incentivize customers to introduce their friends to our brand. To further strengthen our customer relationships, we recently implemented personalization capabilities on our eCommerce site and in our emails.


12


Leverage Our Omni-Channel Capabilities
Our integrated, omni-channel strategy is designed to provide customers a seamless retail experience together with the ability to shop when and where they want, including retail stores, outlet stores, online and mobile. Our investments in this strategy enable us to address multiple customer touch points to drive spend and build brand affinity by providing a comprehensive view of our customer and our merchandise assortment and depth.

We continue to grow eCommerce by leveraging our new platform launched in fiscal 2016, including improving personalization and enhanced site experiences. New omni-channel capabilities, including new fulfillment functionality, store grading and localized assortment planning, will support improved management of the receipt, allocation, and distribution of merchandise.

In the second quarter of fiscal 2017, we launched our “find in store” feature online in our effort to provide more convenience to our customers. We believe that providing more visibility into store inventory will help drive traffic to our stores where our associates can provide personalized service and outfitting recommendations, and ultimately lead to increased customer spend. We intend to test omni-channel fulfillment including both ship to and pick up in store in early 2018.

Performance Measures

Management evaluates our financial results based on the following key measures of performance:

Comparable sales
Comparable sales is a measure that highlights the performance of our store channel and eCommerce channel sales by measuring the changes in sales over the comparable, prior-year period of equivalent length.

Our comparable sales calculation includes merchandise sales for:
Stores operating for at least 13 full months;
Stores relocated within the same center; and
eCommerce sales.

Our comparable sales calculation excludes:
Stores converted to the MPW format for 13 full months post conversion.

We believe our eCommerce operations are interdependent with our brick-and-mortar store sales and, as such, we believe that reporting combined store and eCommerce comparable sales is a more appropriate presentation. Our customers are able to browse merchandise in one channel and consummate a transaction in a different channel. At the same time, our customers have the option to return merchandise to a store or our third-party distribution center, regardless of the original channel used for purchase.

As we continue to execute our MPW format conversions, we have made changes to the base store population that comprises comparable stores, as illustrated in the table below:

 
 
October 28, 2017
 
October 29, 2016
Stores by Format
 
Total Store Count
 
Comparable Sales Stores
 
% of Comparable Sales Stores
 
Total Store Count
 
Comparable Sales Stores
 
% of Comparable Sales Stores
MPW
 
321

 
301

 
94
%
 
314

 
293

 
93
%
Outlet
 
79

 
79

 
100
%
 
82

 
67

 
82
%
Christopher and Banks
 
37

 
37

 
100
%
 
55

 
55

 
100
%
C.J. Banks
 
35

 
35

 
100
%
 
53

 
53

 
100
%
Total Stores
 
472

 
452

 
96
%
 
504

 
468

 
93
%
 
Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

To supplement our comparable sales performance measure, we also monitor changes in net sales per store and net sales per gross square foot for the entire store base.


13


Third Quarter Fiscal 2017 Results of Operations

The following table presents selected consolidated financial data for the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016:
 
 
Thirteen Weeks Ended
(dollars in thousands)
 
October 28, 2017
 
October 29, 2016
Net sales
 
$
98,468

 
$
106,668

Merchandise, buying and occupancy costs
 
65,229

 
67,447

Gross profit
 
33,239

 
39,221

Other operating expenses:
 
 
 
 
Selling, general and administrative
 
31,802

 
32,483

Depreciation and amortization
 
2,976

 
3,119

Impairment of store assets
 

 

Total other operating expenses
 
34,778

 
35,602

Operating (loss) income
 
(1,539
)
 
3,619

Interest expense, net
 
(38
)
 
(44
)
(Loss) income before income taxes
 
(1,577
)
 
3,575

Income tax provision
 
45

 
82

Net (loss) income
 
$
(1,622
)
 
$
3,493

 
 
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
Rate trends as a percentage of net sales
 
October 28, 2017
 
October 29, 2016
Gross margin
 
33.8
 %
 
36.8
%
Selling, general, and administrative
 
32.3
 %
 
30.5
%
Depreciation and amortization
 
3.0
 %
 
2.9
%
Operating (loss) income
 
(1.6
)%
 
3.4
%
 
Third Quarter Fiscal 2017 Summary
Net sales decreased 7.7% compared to the same period last year primarily due to a decline in average unit retail prices and a decrease in average store count;
Comparable sales decreased 5.0% following a 4.5% increase in the same period last year;
eCommerce sales increased 8.5% following a 16.3% increase the same period last year;
Gross margin rate decreased 300 basis points compared to the same period last year mostly due to a decline in merchandise margin as we continued to move through non go-forward product and address slow sellers more quickly through markdowns, including the effects of unseasonably warm weather;
Net loss aggregated to $1.6 million, a $0.05 loss per share, compared to net income of $3.5 million, or $0.09 per share, for the same period last year;
As of October 28, 2017, we held $17.9 million of cash and cash equivalents, compared to $25.9 million as of October 29, 2016.

Net Sales
 
 
Thirteen Weeks Ended
 
 
Net sales (in thousands):
 
October 28, 2017
 
October 29, 2016
 
% Change
Net sales
 
$
98,468

 
$
106,668

 
(7.7
)%
 
The components of the 7.7% net sales decrease in the third quarter fiscal 2017 compared to the third quarter of fiscal 2016 were as follows:

14


 
 
Thirteen
Weeks Ended
Sales driver change components
 
October 28, 2017
Number of transactions
 
(0.7
)%
Units per transaction
 
(0.6
)%
Average unit retail
 
(6.4
)%
Total sales driver change decrease
 
(7.7
)%
 
 
 
Thirteen
Weeks Ended
Comparable sales
 
October 28, 2017
Comparable sales
 
(5.0
)%
 
Sales decreased primarily due to a 6.5% decline in average store count and a 6.4% decrease in average unit retail prices. The decrease in average unit retail is attributable to higher promotional activities in response to the effects of unseasonably warm weather and deceleration in base store traffic trends partly offset by higher conversion rates.

To supplement our comparable sales measure, we also monitor changes in other store sales metrics as illustrated in the table below:
 
 
Thirteen
Weeks Ended
Store metrics
 
October 28, 2017
Net sales per store % change
 
(3.9
)%
Net sales per square foot % change
 
(5.4
)%
 
Net sales per store and net sales per square foot decreased mainly due to a decline in average unit retail prices.

Store count, openings, closings, and square footage for our stores were as follows:
 
 
 
Store Count
 
Square Footage (1)
 
 
July 29,
 
 
 
 
 
MPW
 
October 28,
 
Avg Store
 
October 28,
 
July 29,
Stores by Format
 
2017
 
Open
 
Close
 
Conversions
 
2017
 
Count
 
2017
 
2017
MPW
 
320

 

 

 
1

 
321

 
320

 
1,246

 
1,241

Outlet
 
79

 

 

 

 
79

 
79

 
318

 
306

Christopher and Banks
 
38

 

 

 
(1
)
 
37

 
38

 
123

 
126

C.J. Banks
 
36

 

 

 
(1
)
 
35

 
36

 
126

 
130

Total Stores
 
473

 

 

 
(1
)
 
472

 
473

 
1,813

 
1,803

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Square footage presented in thousands

Average store count in the third quarter of fiscal 2017 was 473 stores compared to an average store count of 506 stores in the third quarter of fiscal 2016, a decrease of 6.5%. Average square footage in the third quarter of fiscal 2017 decreased 5.1% compared to the third quarter of fiscal 2016.

Gross Profit
 
 
Thirteen Weeks Ended
 
 
Gross profit
 
October 28, 2017
 
October 29, 2016
 
Change
Gross profit
 
$
33,239

 
$
39,221

 
$
(5,982
)
Gross margin rate as a percentage of net sales
 
33.8
%
 
36.8
%
 
(3.0
)%
 

15


Gross margin rate decreased 300 basis points primarily driven by increased promotions and mix shift to slow selling and clearance product partly due to the unseasonably warm weather. The gross margin rate decline marked a sequential improvement compared to the second quarter as the mix of new fashion merchandise strengthened.

Selling, General, and Administrative (“SG&A”) Expenses
 
 
Thirteen Weeks Ended
 
 
Selling, general, and administrative
 
October 28, 2017
 
October 29, 2016
 
Change
Selling, general, and administrative
 
$
31,802

 
$
32,483

 
$
(681
)
SG&A rate as a percentage of net sales
 
32.3
%
 
30.5
%
 
1.8
%
 
SG&A decreased by $0.7 million, mainly due to lower store operating expenses of $1.1 million, lower net employee compensation expenses of $0.3 million, and the absence of costs related to the customer platform transition that occurred in last year's third quarter of $0.2 million. These SG&A expense savings were partially offset by an increase in medical expenses of $0.4 million, and an increase in professional services of $0.5 million. As a percent of net sales, SG&A increased approximately 180 basis points.
 
Depreciation and Amortization (“D&A”)
 
 
Thirteen Weeks Ended
 
 
Depreciation and amortization
 
October 28, 2017
 
October 29, 2016
 
Change
Depreciation and amortization
 
$
2,976

 
$
3,119

 
$
(143
)
D&A rate as a percentage of net sales
 
3.0
%
 
2.9
%
 
0.1
%
 
Depreciation and amortization expense decreased primarily due to a decrease in average store count partly offset by the deployment of technology solutions, including new omni-channel capabilities.

Impairment of Long-Lived Assets
 
 
Thirteen Weeks Ended
 
 
Impairment of long-lived assets
 
October 28, 2017
 
October 29, 2016
 
Change
Impairment of long-lived assets
 
$

 
$

 
$

 
There were no non-cash impairment charges relating to long-lived assets.
 
Operating Loss
 
 
Thirteen Weeks Ended
 
 
Operating loss
 
October 28, 2017
 
October 29, 2016
 
Change
Operating loss
 
$
(1,539
)
 
$
3,619

 
$
(5,158
)
Operating loss rate as a percentage of net sales
 
(1.6
)%
 
3.4
%
 
(5.0
)%
 
Our operating loss increased in the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016 primarily due to a net sales decrease of $8.2 million and a 300 basis point gross margin rate decline, partly offset by a SG&A decrease of $0.7 million.
 
Interest expense, net
 
 
Thirteen Weeks Ended
 
 
Interest expense, net
 
October 28, 2017
 
October 29, 2016
 
Change
Interest expense, net
 
$
(38
)
 
$
(44
)
 
$
6


The change in interest expense, net is not material.
 

16


Income Tax Provision
 
 
Thirteen Weeks Ended
 
 
Income tax provision
 
October 28, 2017
 
October 29, 2016
 
Change
Income tax provision
 
$
45

 
$
82

 
$
(37
)
 
Income tax expense recorded for the thirteen weeks ended October 28, 2017 was $45,000 compared to income tax expense of $82,000 for the same period of fiscal 2016. Our effective tax rate was (2.8)% for the thirteen weeks ended October 28, 2017 compared to 2.3% in the same period last year.
 
Net earnings
 
 
Thirteen Weeks Ended
 
 
Net loss
 
October 28, 2017
 
October 29, 2016
 
Change
Net (loss) income
 
$
(1,622
)
 
$
3,493

 
$
(5,115
)
Net (loss) income rate as a percentage of net sales
 
(1.6
)%
 
3.3
%
 
(4.9
)%

Our net loss increase in the third quarter of fiscal 2017 compared to our net income in the third quarter of 2016 was primarily due to a net sales decrease and gross margin rate decline partly offset by lower SG&A.

Year-to-Date Fiscal 2017 Results of Operations

The following table presents selected consolidated financial data for the first thirty-nine weeks of fiscal 2017 compared to the first thirty-nine weeks of fiscal 2016:
 
 
Thirty-Nine Weeks Ended
(dollars in thousands)
 
October 28, 2017
 
October 29, 2016
Net sales
 
$
273,642

 
$
296,625

Merchandise, buying and occupancy costs
 
185,237

 
189,543

Gross profit
 
88,405

 
107,082

Other operating expenses:
 
 
 
 
Selling, general and administrative
 
91,956

 
98,585

Depreciation and amortization
 
9,242

 
9,116

Impairment of store assets
 
163

 
476

Total other operating expenses
 
101,361

 
108,177

Operating loss
 
(12,956
)
 
(1,095
)
Interest expense, net
 
(107
)
 
(126
)
Other income
 

 
911

Loss before income taxes
 
(13,063
)
 
(310
)
Income tax provision
 
136

 
249

Net loss
 
$
(13,199
)
 
$
(559
)
 
 
 
 
 
 
 
 
 
 
 
 
Thirty-Nine Weeks Ended
Rate trends as a percentage of net sales
 
October 28, 2017
 
October 29, 2016
Gross margin
 
32.3
 %
 
36.1
 %
Selling, general, and administrative
 
33.6
 %
 
33.2
 %
Depreciation and amortization
 
3.4
 %
 
3.1
 %
Operating loss
 
(4.7
)%
 
(0.4
)%


17


Year-to-Date Fiscal 2017 Summary
Net sales decreased 7.7% compared to the same period last year primarily due to an 8.0% decline in average unit retail prices and a 6.7% decrease in average store count;
Comparable sales decreased 5.1% following a 1.0% increase in the same period last year;
eCommerce sales increased 15.1% compared to a 22.3% increase the same period last year;
Gross margin rate decreased 380 basis points compared to the same period last year primarily driven by our efforts to sell through non go-forward product and slow sellers more quickly through markdowns;
Net loss aggregated to $13.2 million, a $0.36 loss per share, compared to a net loss of $0.6 million, or a $0.02 loss per share, for the same period last year.

Net Sales
 
 
Thirty-Nine Weeks Ended
 
 
Net sales (in thousands):
 
October 28, 2017
 
October 29, 2016
 
% Change
Net sales
 
$
273,642

 
$
296,625

 
(7.7
)%

The components of the 7.7% net sales decrease in the first thirty-nine weeks of fiscal 2017 compared to the first thirty-nine weeks of fiscal 2016 were as follows:

 
 
Thirty-Nine Weeks Ended
Sales driver change components
 
October 28, 2017
Number of transactions
 
0.9
 %
Units per transaction
 
(0.6
)%
Average unit retail
 
(8.0
)%
Total sales driver change increase
 
(7.7
)%

 
 
Thirty-Nine Weeks Ended
Comparable sales
 
October 28, 2017
Comparable sales
 
(5.1
)%

Sales decreased primarily due to an 8.0% decrease in average unit retail prices, a 6.7% decline in average store count, continued weakness in base store traffic, and a 0.6% decrease in units per transaction, partly offset by higher conversion rates. Our promotional pricing contributed to a decline in average unit retail prices to sell through inventory that did not reflect our go-forward strategy and partly due to the effects of unseasonably warm weather in the third quarter. The sales decrease was also correlated to lower inventory levels at the beginning of the year and lower inventory receipts in the first quarter.

To supplement our comparable sales measure, we also monitor changes in other store sales metrics as illustrated in the table below:

 
 
Thirty-Nine Weeks Ended
Store metrics
 
October 28, 2017
Net sales per store % change
 
(4.7
)%
Net sales per square foot % change
 
(6.3
)%

Net sales per store and Net sales per square foot decreased mainly due to a decline in average unit retail prices.


18


Store count, openings, closings, and square footage for our stores were as follows:

 
 
Store Count
 
Square Footage (1)
 
 
January 28,
 
 
 
 
 
MPW
 
October 28,
 
Avg Store
 
October 28,
 
January 28,
Stores by Format
 
2017
 
Open
 
Close
 
Conversions
 
2017
 
Count
 
2017
 
2017
MPW
 
318

 
1

 
(4
)
 
6

 
321

 
320

 
1,246

 
1,226

Outlet
 
82

 

 
(3
)
 

 
79

 
80

 
318

 
329

Christopher and Banks
 
43

 

 

 
(6
)
 
37

 
39

 
123

 
142

C.J. Banks
 
41

 

 

 
(6
)
 
35

 
37

 
126

 
147

Total Stores
 
484

 
1

 
(7
)
 
(6
)
 
472

 
476

 
1,813

 
1,844

(1) 
Square footage presented in thousands

Average store count in the first thirty-nine weeks of fiscal 2017 was 476 stores compared to an average store count of 510 stores in the same period of fiscal 2016, a decrease of 6.7%. Average square footage in the first thirty-nine weeks of fiscal 2017 decreased 5.2% compared to the same period of fiscal 2016.

Gross Profit
 
 
Thirty-Nine Weeks Ended
 
 
Gross profit
 
October 28, 2017
 
October 29, 2016
 
Change
Gross profit
 
$
88,405

 
$
107,082

 
$
(18,677
)
Gross margin rate as a percentage of net sales
 
32.3
%
 
36.1
%
 
(3.8
)%

Gross margin rate decreased 380 basis points primarily driven by our efforts to sell through non go-forward product and slow sellers more quickly through markdowns, and to a lesser extent, the effects of sales leverage on occupancy expenses. The gross margin rate decline accelerated in the second quarter compared to the first quarter due to seasonal markdowns that typically occur at the end of the second quarter. The gross margin rate sequentially improved in the third quarter compared to the second quarter as the mix of new fashion merchandise strengthened.

Selling, General, and Administrative (“SG&A”) Expenses
 
 
Thirty-Nine Weeks Ended
 
 
Selling, general, and administrative
 
October 28, 2017
 
October 29, 2016
 
Change
Selling, general, and administrative
 
$
91,956

 
$
98,585

 
$
(6,629
)
SG&A rate as a percentage of net sales
 
33.6
%
 
33.2
%
 
0.4
%

SG&A decreased by $6.6 million, driven by lower store operating expenses of $4.4 million and lower net employee compensation expenses of $1.5 million. The SG&A expense decrease was also attributable to the absence of non-recurring charges of $2.2 million, including advisory fees in connection with shareholder activism of $1.5 million and eCommerce transition costs of $0.7 million incurred in the first thirty-nine weeks of fiscal 2016. These SG&A expense savings were partially offset by an increase in eCommerce operating expenses of $1.4 million to support higher eCommerce sales and higher medical expenses of $0.6 million. As a percent of net sales, SG&A increased approximately 40 basis points to 33.6%.
 
Depreciation and Amortization (“D&A”)
 
 
Thirty-Nine Weeks Ended
 
 
Depreciation and amortization
 
October 28, 2017
 
October 29, 2016
 
Change
Depreciation and amortization
 
$
9,242

 
$
9,116

 
$
126

D&A rate as a percentage of net sales
 
3.4
%
 
3.1
%
 
0.3
%

Depreciation and amortization expense increased primarily due to the deployment of technology solutions, including new omni-channel capabilities partly offset by the effects of the decrease in average store count.


19


Impairment of Long-Lived Assets
 
 
Thirty-Nine Weeks Ended
 
 
Impairment of long-lived assets
 
October 28, 2017
 
October 29, 2016
 
Change
Impairment of long-lived assets
 
$
163

 
$
476

 
$
(313
)

We recorded non-cash impairment charges related to long-lived assets held at store locations.
 
Operating Loss
 
 
Thirty-Nine Weeks Ended
 
 
Operating loss
 
October 28, 2017
 
October 29, 2016
 
Change
Operating loss
 
$
(12,956
)
 
$
(1,095
)
 
$
(11,861
)
Operating loss rate as a percentage of net sales
 
(4.7
)%
 
(0.4
)%
 
(4.3
)%

Our operating loss increased in the first thirty-nine weeks of fiscal 2017 compared to the first thirty-nine weeks of fiscal 2016 primarily due to a 380 basis point gross margin rate decline and a net sales decrease of $23.0 million, partly offset by a SG&A decrease of $6.6 million, including the absence of fiscal 2016 non-recurring charges of $2.2 million.
 
Interest expense, net
 
 
Thirty-Nine Weeks Ended
 
 
Interest expense, net
 
October 28, 2017
 
October 29, 2016
 
Change
Interest expense, net
 
$
(107
)
 
$
(126
)
 
$
19


The change in interest expense, net is not material.

Other income
 
 
Thirty-Nine Weeks Ended
 
 
Other income
 
October 28, 2017
 
October 29, 2016
 
Change
Other income
 
$

 
$
911

 
$
(911
)

Other income in the third quarter of fiscal 2016 reflects the receipt of proceeds from company-owned life insurance.

Income Tax Provision
 
 
Thirty-Nine Weeks Ended
 
 
Income tax provision
 
October 28, 2017
 
October 29, 2016
 
Change
Income tax provision
 
$
136

 
$
249

 
$
(113
)

Income tax expense recorded for the thirty-nine weeks ended October 28, 2017 was $0.1 million, compared to $0.2 million in the same period of fiscal 2016. Our effective tax rate was (1.0)% for the thirty-nine weeks ended October 28, 2017 compared to (80.5)% in the same period last year.
 
Net earnings
 
 
Thirty-Nine Weeks Ended
 
 
Net loss
 
October 28, 2017
 
October 29, 2016
 
Change
Net loss
 
$
(13,199
)
 
$
(559
)
 
$
(12,640
)
Net loss rate as a percentage of net sales
 
(4.8
)%
 
(0.2
)%
 
(4.6
)%


20


Our net loss decrease in the first thirty-nine weeks of fiscal 2017 compared to our net loss in the thirty-nine weeks half of 2016 was primarily due to a gross margin rate decline, a net sales decrease, and the absence of company-owned life insurance proceeds partly offset by lower SG&A.
 
Fiscal 2017 Outlook
 
We have implemented a number of strategic initiatives addressing merchandising, marketing, eCommerce and store operations designed to stabilize the business and drive more consistent financial performance going forward. Given the number of changes and time required to rebalance the merchandise assortment, we will not be providing sales and EPS guidance for the near term.

During the remainder of fiscal 2017, we plan to close 1 CJ store, 1 Outlet store, and 4 MPW stores. Average square footage for the year is expected to be down approximately 5.0% as compared to fiscal 2016 and down 4.4% in the fourth quarter.

We expect capital expenditures for the year to range between $6.5 million and $7.5 million representing investments in store relocations, merchandising technology applications, and the development of omni-channel capabilities.

We expect our taxes for the year to be nominal and to represent minimum fees and taxes.

We expect the 53rd week in fiscal 2017 to add approximately $4.2 million in sales and to reduce operating income by approximately $1.6 million.

Liquidity and Capital Resources
 
Cash flow and liquidity
 
Summary
 
We expect to operate our business and execute our strategic initiatives principally with funds generated from operations and, if necessary, from our amended and restated credit agreement (the “Credit Facility”) with Wells Fargo Bank N.A (“Wells Fargo”), subject to compliance with all covenants and other financial provisions of the Credit Facility. Cash flow from operations has historically been sufficient to provide for our uses of cash.

The following table summarizes our cash and cash equivalents as of the end of the third quarter of fiscal 2017 and the end of fiscal 2016:
 
(in thousands)
 
October 28, 2017
 
January 28, 2017
Cash and cash equivalents
 
$
17,867

 
$
35,006

 
The $17.1 million decrease in cash and cash equivalents is primarily attributable the net loss for the first thirty-nine weeks of fiscal 2017, investments in MPW store conversions and omni-channel capabilities, and changes in working capital. The working capital fluctuations are largely a reflection of seasonal patterns.
 
Cash Flows
 
The following table summarizes our cash flows from operating, investing, and financing activities for the first thirty-nine weeks of fiscal 2017 compared to the first thirty-nine weeks of 2016:
 
 
Thirty-Nine Weeks Ended
(in thousands)
 
October 28, 2017
 
October 29, 2016
Net cash used in operating activities
 
$
(12,667
)
 
$
(764
)
Net cash used in investing activities
 
(4,447
)
 
(4,854
)
Net cash used in financing activities
 
(25
)
 
(6
)
Net decrease in cash and cash equivalents
 
$
(17,139
)
 
$
(5,624
)
 

21


Operating Activities
 
The decrease in cash used in operating activities in the first thirty-nine weeks of fiscal 2017 compared to the first thirty-nine weeks of fiscal 2016 was primarily due to an increase in the net loss for the thirty-nine week period. Changes in working capital were relatively flat for the comparable periods as an increase in inventories, attributable to lower inventory levels at the beginning of the year and a decrease in accrued liabilities, partly offset an increase in accounts payable due to the timing of payments, including fashion merchandise receipts.
 
Investing Activities
 
The decrease in cash used in investing activities in the first thirty-nine weeks of fiscal 2017 compared to the first thirty-nine weeks of fiscal 2016 was mainly attributable to a decrease in capital expenditures as well as the absence of available-for-sale investment maturities and the absence of proceeds from company-owned life insurance. Capital expenditures for the first thirty-nine weeks of fiscal 2017 were approximately $4.4 million, which primarily reflected investments in MPW store conversions and technology associated with our omni-channel capabilities.
 
Financing Activities
 
Financing activities in the first thirty-nine weeks of fiscal 2017 and 2016 were limited to a small number of shares redeemed by employees to satisfy payroll tax obligations.

We did not pay any dividends in the first thirty-nine weeks of fiscal 2017. We have not paid any dividends in the last three fiscal years.
 
Sources of Liquidity

Funds generated by operating activities, available cash and cash equivalents, investments and our Credit Facility are our most significant sources of liquidity. We believe that our sources of liquidity will be sufficient to sustain operations and to finance anticipated capital investments and strategic initiatives over the next twelve months. However, in the event our liquidity is not sufficient to meet our operating needs, we may be required to limit our spending. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing facilities or obtain additional financing, if necessary, on favorable terms.

The Credit Facility with Wells Fargo was amended and extended on September 8, 2014. The current expiration date is September 8, 2019. The Credit Facility provides the Company with revolving credit loans of up to $50.0 million in the aggregate, subject to a borrowing base formula based primarily on eligible credit card receivables, inventory and real estate, as such terms are defined in the Credit Facility, and up to $10.0 million of which may be drawn in the form of standby and documentary letters of credit.

The Company had no revolving credit loan borrowings under the Credit Facility during each of the thirty-nine week periods ended October 28, 2017, and October 29, 2016. The total Borrowing Base at October 28, 2017 was approximately $48.1 million. As of October 28, 2017, the Company had open on-demand letters of credit of approximately $2.3 million. Accordingly, after reducing the Borrowing Base for the open letters of credit and the required minimum availability of the greater of $3.0 million, or 10.0% of the Borrowing Base, the net availability of revolving credit loans under the Credit Facility was approximately $40.9 million at October 28, 2017.

See Note 5 - Credit Facility for additional details regarding our Credit Facility, including a description of the sole financial covenant, with which we were in compliance as of October 28, 2017.

In the fourth quarter of fiscal 2017, the Company also announced that it has engaged a leading commercial real estate company to solicit interest in a sale and leaseback of the Company's corporate facility in Plymouth, MN which if consummated would unlock additional capital and enhance the Company's overall liquidity position.
 
Sourcing
 
There have been no material changes to our ratio of imports to total merchandise purchases or concentration of supplier purchases in the thirty-nine weeks ended October 28, 2017 compared to the fiscal 2016 year ended January 28, 2017.
 

22


Quarterly Results and Seasonality
 
Our quarterly results may fluctuate significantly depending on a number of factors, including general economic conditions, consumer confidence, customer response to our seasonal merchandise mix, timing of new store openings, adverse weather conditions, and shifts in the timing of certain holidays and shifts in the timing of promotional events.
 
Inflation
 
We do not believe that inflation had a material effect on our results of operations for the thirteen week and thirty-nine week periods ended October 28, 2017.
 
Forward-Looking Statements
 
We may make forward-looking statements reflecting our current views with respect to future events and financial performance.  These forward-looking statements, which may be included in reports filed under the Exchange Act, in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed in Item 1A - Risk Factors of our Annual Report on Form
10-K for the fiscal year ended January 28, 2017, which could cause actual results to differ materially from historical results or those anticipated.

The words or phrases “will likely result,” “are expected to,” “estimate,” “project,” “believe,” “expect,” “should,” “anticipate,” “forecast,” “intend” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In particular, we desire to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, we wish to advise readers that the factors listed in Item 1A of our Annual Report on Form
10-K for the fiscal year ended January 28, 2017, as well as other factors, could affect our performance and could cause our actual results for future periods to differ materially from any opinions or statements expressed in the quarterly report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
For a discussion of our exposure to, and management of our market risks, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the fiscal year ended January 28, 2017. There have been no material changes to our exposure to, and management of our market risks in the thirteen weeks ended October 28, 2017

ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Interim Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
 
The Company carried out an evaluation as of the end of the period covered by this report (the “Evaluation Date”), under the supervision and with the participation of its management, including its Interim Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based on that evaluation, the Interim Chief Executive Officer and Interim Chief Financial Officer concluded that as of October 28, 2017 the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
 

23


Changes in Internal Controls
 
There were no significant changes in our internal controls that could materially affect our disclosure controls and procedures subsequent to the Evaluation Date. Furthermore, there was no change in our internal control over financial reporting during the quarter ended October 28, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS
 
The Company is subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated.

The ultimate resolution of legal matters can be inherently uncertain and for some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of these uncertainties. The Company does not, however, currently believe that the resolution of any pending matter will have a material adverse effect on its financial position, results of operations or liquidity.

In connection with a preliminary settlement of pre-litigation employment claims reached in February 2017, we established a loss contingency of $1.475 million as of January 28, 2017. In connection therewith, on April 13, 2017, a complaint was filed in State Circuit Court in the Fifteenth Judicial Circuit in Palm Beach County, Florida (the “Florida Circuit Court”) by three named plaintiffs in a purported class action asserting claims on behalf of current and former store managers. The named plaintiffs principally alleged that they and other similarly situated store managers were improperly classified as exempt employees and thus not compensated for overtime work as required under applicable federal and state law. On May 4, 2017, the Company entered into a settlement agreement with the named plaintiffs and the proposed class. On May 8, 2017, the Florida Circuit Court issued an order approving the class settlement. As approved by the Florida Circuit Court, certain current and former store managers are eligible to receive payments in connection with time worked in prior years. The settlement of the lawsuit is not an admission by us of any wrongdoing.

As part of the settlement, the Company contributed $1.475 million into a settlement fund in the second fiscal quarter of 2017. Following approval of the settlement, opt-in notices were sent to the members of the class. After the opt-in period concluded, settlement checks were mailed to the class members who opted in, which represented approximately 58% of the class members. On November 16, 2017, the Company received approximately $339,000 from the settlement administrator representing the remainder of the settlement fund after payment of all submitted claims and related settlement fund costs and expenses.

ITEM 1A. RISK FACTORS
 
In addition to the other information discussed in this report, the risk factors described in Part I, Item 1A, Risk Factors, in our 2016 Annual Report on Form 10-K for the fiscal period ended January 28, 2017, should be considered as they could materially affect our business, financial condition or future results. There have not been any material changes with respect to the risks described in our 2016 Form 10-K, but these are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table sets forth information concerning purchases of our common stock for the quarter ended October 28, 2017:


24


 
 
 
 
 
 
Total Number of
 
Maximum Number of
 
 
 
 
 
 
Shares Purchased as
 
Shares that May Yet
 
 
Total Number of
 
 
 
Part of Publicly
 
Be Purchased Under
 
 
Shares
 
Average Price
 
Announced Plans or
 
the Plans or
Period
 
Purchased (1)
 
Paid per Share
 
Programs
 
Programs
7/30/17 - 8/26/17
 

 
$

 

 
$

8/27/17 - 9/30/17
 
14,171

 
1.31

 

 

10/1/17 - 10/28/17
 

 

 

 

Total
 
14,171

 
 

 

 


(1) The shares of common stock in this column represent shares surrendered to us by stock plan participants in order to satisfy minimum withholding tax obligations related to the vesting of restricted stock awards.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5. OTHER INFORMATION
 
None.

25


ITEM 6.   EXHIBITS
 
Exhibit
Description
10.1**
10.2**
31.1*
31.2*
32.1*
32.2*
101*
Financial statements from the Quarterly Report on Form 10-Q of Christopher & Banks Corporation for the fiscal quarter ended October 28, 2017, formatted in eXtensible Business Reporting Language ("XBRL"): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss, (iv) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements
 
*   Filed with this report
** Management agreement or compensatory plan or arrangement

26


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
CHRISTOPHER & BANKS CORPORATION
 
 
 
 
Dated: November 30, 2017
By:
 
/s/ Joel Waller
 
 
 
Joel Waller
 
 
 
Interim President, Chief Executive Officer and Director
 
 
 
(Principal Executive Officer)
 
 
 
 
Dated: November 30, 2017
By:
 
/s/ Marc Ungerman
 
 
 
Marc Ungerman
 
 
 
Interim Chief Financial Officer
 
 
 
(Principal Financial Officer)


27