ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Stage Stores, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Stage Stores, Inc. and subsidiary (the "Company") as of February 2, 2019 and February 3, 2018, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the two years in the period ended February 2, 2019, and the related notes (collectively referred to as the "financial statements”). We also have audited the Company’s internal control over financial reporting as of February 2, 2019, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 2, 2019 and February 3, 2018, and the results of its operations and its cash flows for each of the three years in the period ended February 2, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2019, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
April 5, 2019
We have served as the Company's auditor since 2001.
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Stage Stores, Inc.
|
Consolidated Balance Sheets
|
(in thousands, except par value)
|
|
|
|
|
|
|
|
February 3, 2018
|
|
February 2, 2019
|
|
As Adjusted
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
$
|
15,830
|
|
|
$
|
21,250
|
|
Merchandise inventories, net
|
424,555
|
|
|
438,377
|
|
Prepaid expenses and other current assets
|
52,518
|
|
|
52,407
|
|
Total current assets
|
492,903
|
|
|
512,034
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
224,803
|
|
|
252,788
|
|
Intangible assets
|
2,225
|
|
|
17,135
|
|
Other non-current assets, net
|
24,230
|
|
|
24,449
|
|
Total assets
|
$
|
744,161
|
|
|
$
|
806,406
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Accounts payable
|
$
|
106,825
|
|
|
$
|
145,991
|
|
Current portion of debt obligations
|
4,812
|
|
|
2,985
|
|
Accrued expenses and other current liabilities
|
65,715
|
|
|
64,442
|
|
Total current liabilities
|
177,352
|
|
|
213,418
|
|
|
|
|
|
Long-term debt obligations
|
250,294
|
|
|
180,350
|
|
Other long-term liabilities
|
61,990
|
|
|
68,524
|
|
Total liabilities
|
489,636
|
|
|
462,292
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01, 100,000 shares authorized, 33,469 and 32,806 shares issued, respectively
|
335
|
|
|
328
|
|
Additional paid-in capital
|
423,535
|
|
|
418,658
|
|
Treasury stock, at cost, 5,175 shares, respectively
|
(43,579
|
)
|
|
(43,298
|
)
|
Accumulated other comprehensive loss
|
(5,857
|
)
|
|
(5,177
|
)
|
Accumulated deficit
|
(119,909
|
)
|
|
(26,397
|
)
|
Total stockholders' equity
|
254,525
|
|
|
344,114
|
|
Total liabilities and stockholders' equity
|
$
|
744,161
|
|
|
$
|
806,406
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
33
|
|
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Stage Stores, Inc.
|
Consolidated Statements of Operations and Comprehensive Loss
|
(in thousands, except earnings per share)
|
|
|
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Fiscal Year
|
|
|
|
2017
|
|
2018
|
|
As Adjusted
|
Net sales
|
$
|
1,580,149
|
|
|
$
|
1,592,275
|
|
Credit income
|
61,333
|
|
|
58,912
|
|
Total revenues
|
1,641,482
|
|
|
1,651,187
|
|
Cost of sales and related buying, occupancy and distribution expenses
|
1,250,876
|
|
|
1,228,780
|
|
Selling, general and administrative expenses
|
451,174
|
|
|
465,118
|
|
Impairment of trade name
|
14,910
|
|
|
—
|
|
Interest expense
|
11,798
|
|
|
7,680
|
|
Loss before income tax
|
(87,276
|
)
|
|
(50,391
|
)
|
Income tax expense (benefit)
|
438
|
|
|
(13,068
|
)
|
Net loss
|
(87,714
|
)
|
|
(37,323
|
)
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
Employee benefit related adjustment, net of tax of $0 and $233, respectively
|
(1,849
|
)
|
|
733
|
|
Amortization of employee benefit related costs, net of tax of $0 and $192, respectively
|
600
|
|
|
605
|
|
Pension settlement charges, net of tax of $0 and $106, respectively
|
569
|
|
|
332
|
|
Total other comprehensive (loss) income
|
(680
|
)
|
|
1,670
|
|
Comprehensive loss
|
$
|
(88,394
|
)
|
|
$
|
(35,653
|
)
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
Basic
|
$
|
(3.13
|
)
|
|
$
|
(1.37
|
)
|
Diluted
|
$
|
(3.13
|
)
|
|
$
|
(1.37
|
)
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
Basic
|
28,117
|
|
|
27,510
|
|
Diluted
|
28,117
|
|
|
27,510
|
|
The accompanying notes are an integral part of these consolidated financial statements.
34
|
|
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|
|
|
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Stage Stores, Inc.
|
Consolidated Statements of Cash Flows
|
(in thousands)
|
|
Fiscal Year
|
|
|
|
2017
|
|
2018
|
|
As Adjusted
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(87,714
|
)
|
|
$
|
(37,323
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization of long-lived assets
|
58,655
|
|
|
65,422
|
|
Impairment of long-lived assets
|
2,780
|
|
|
1,739
|
|
Impairment of trade name
|
14,910
|
|
|
—
|
|
Gain on retirements of property, equipment and leasehold improvements
|
(2,370
|
)
|
|
(918
|
)
|
Deferred income taxes
|
—
|
|
|
(1,078
|
)
|
Stock-based compensation expense
|
4,804
|
|
|
8,386
|
|
Amortization of debt issuance costs
|
369
|
|
|
289
|
|
Deferred compensation obligation
|
281
|
|
|
12
|
|
Amortization of employee benefit related costs and pension settlement charges
|
1,169
|
|
|
1,235
|
|
Construction allowances from landlords
|
810
|
|
|
1,228
|
|
Other changes in operating assets and liabilities:
|
|
|
|
|
|
Decrease in merchandise inventories
|
13,822
|
|
|
1,743
|
|
Increase in other assets
|
(2,173
|
)
|
|
(8,856
|
)
|
(Decrease) increase in accounts payable and other liabilities
|
(49,779
|
)
|
|
43,582
|
|
Net cash (used in) provided by operating activities
|
(44,436
|
)
|
|
75,461
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Additions to property, equipment and leasehold improvements
|
(30,949
|
)
|
|
(38,630
|
)
|
Proceeds from insurance and disposal of assets
|
5,612
|
|
|
2,413
|
|
Business acquisition
|
—
|
|
|
(36,144
|
)
|
Net cash used in investing activities
|
(25,337
|
)
|
|
(72,361
|
)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from revolving loan borrowings
|
633,554
|
|
|
575,210
|
|
Payments of revolving loan borrowings
|
(608,798
|
)
|
|
(555,624
|
)
|
Proceeds from long-term debt obligation
|
50,000
|
|
|
—
|
|
Payments of long-term debt obligations
|
(2,985
|
)
|
|
(6,414
|
)
|
Payments of debt issuance costs
|
(1,138
|
)
|
|
(34
|
)
|
Payments for stock related compensation
|
(482
|
)
|
|
(251
|
)
|
Cash dividends paid
|
(5,798
|
)
|
|
(8,540
|
)
|
Net cash provided by financing activities
|
64,353
|
|
|
4,347
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
(5,420
|
)
|
|
7,447
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
Beginning of period
|
21,250
|
|
|
13,803
|
|
End of period
|
$
|
15,830
|
|
|
$
|
21,250
|
|
|
|
|
|
Supplemental disclosures including non-cash investing and financing activities:
|
Interest paid
|
$
|
11,545
|
|
|
$
|
7,282
|
|
Income taxes paid (refunded)
|
169
|
|
|
(8,761
|
)
|
Unpaid liabilities for capital expenditures
|
5,630
|
|
|
2,937
|
|
The accompanying notes are an integral part of these consolidated financial statements.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stage Stores, Inc.
|
Consolidated Statements of Stockholders’ Equity
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive Loss
|
|
Retained Earnings (Accumulated Deficit)
|
|
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
Total
|
Balance, January 28, 2017
|
32,340
|
|
|
$
|
323
|
|
|
$
|
410,504
|
|
|
(5,175
|
)
|
|
$
|
(43,286
|
)
|
|
$
|
(5,648
|
)
|
|
$
|
18,267
|
|
|
$
|
380,160
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(37,323
|
)
|
|
(37,323
|
)
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,670
|
|
|
—
|
|
|
1,670
|
|
Dividends on common stock, $0.30 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,540
|
)
|
|
(8,540
|
)
|
Deferred compensation
|
—
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of equity awards, net
|
466
|
|
|
5
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax withholdings paid for net settlement of stock awards
|
—
|
|
|
—
|
|
|
(239
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(239
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
8,386
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,386
|
|
Reclassification of tax effects to retained earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,199
|
)
|
|
1,199
|
|
|
—
|
|
Balance, February 3, 2018
|
32,806
|
|
|
$
|
328
|
|
|
$
|
418,658
|
|
|
(5,175
|
)
|
|
$
|
(43,298
|
)
|
|
$
|
(5,177
|
)
|
|
$
|
(26,397
|
)
|
|
$
|
344,114
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(87,714
|
)
|
|
(87,714
|
)
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(680
|
)
|
|
—
|
|
|
(680
|
)
|
Dividends on common stock, $0.20 per share
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,798
|
)
|
|
(5,798
|
)
|
Deferred compensation
|
—
|
|
|
—
|
|
|
281
|
|
|
—
|
|
|
(281
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of equity awards, net
|
663
|
|
|
7
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax withholdings paid for net settlement of stock awards
|
—
|
|
|
—
|
|
|
(201
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(201
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
4,804
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,804
|
|
Balance, February 2, 2019
|
33,469
|
|
|
$
|
335
|
|
|
$
|
423,535
|
|
|
(5,175
|
)
|
|
$
|
(43,579
|
)
|
|
$
|
(5,857
|
)
|
|
$
|
(119,909
|
)
|
|
$
|
254,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
36
Stage Stores, Inc.
Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business.
We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of
February 2, 2019
, we operated in
42
states through
727
BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and
68
GORDMANS off-price stores, as well as an e-commerce website (www.stage.com). Our department stores are predominantly located in small towns and rural communities. Our off-price stores are predominantly located in mid-sized, non-rural Midwest markets.
Principles of Consolidation.
The consolidated financial statements include the accounts of Stage Stores, Inc. and its subsidiary. All intercompany transactions have been eliminated in consolidation. We report our department stores, off-price stores and e-commerce website in a single operating segment. Revenues from guests are derived from merchandise sales. We do not rely on any major guest as a source of revenue.
Reclassifications
. Certain amounts reported in the prior year financial statements have been reclassified to conform to the current year’s presentation.
Fiscal Year.
References to a particular year are to our fiscal year, which is the 52- or 53-week period ending on the Saturday closest to January 31st of the following calendar year.
|
|
|
|
Fiscal Year
|
Ended
|
Number of Weeks
|
2018
|
February 2, 2019
|
52
|
2017
|
February 3, 2018
|
53
|
Use of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to inventory, deferred tax assets, intangible assets, long-lived assets, sales returns, gift card breakage, loyalty rewards, pension obligations, self-insurance and contingent liabilities. Actual results may differ materially from these estimates. We base our estimates on historical experience and on various assumptions which are believed to be reasonable under the circumstances.
Cash and Cash Equivalents.
We
consider highly liquid investments with initial maturities of less than three months to be cash equivalents. Cash and cash equivalents also includes amounts due from credit card sales transactions.
Concentration of Credit Risk.
Financial instruments which potentially subject us to concentrations of credit risk are primarily cash. Our cash management and investment policies restrict investments to low-risk, highly-liquid securities and we perform periodic evaluations of the relative credit standing of the financial institutions with which we deal.
Merchandise Inventories.
We value merchandise inventories using the lower of cost or net realizable value with cost determined using the weighted average cost method. We capitalize distribution center costs associated with preparing inventory for sale, such as distribution payroll, benefits, occupancy, depreciation and other direct operating expenses as part of merchandise inventories. We also include in inventory the cost of freight to our distribution centers and stores as well as duties and fees related to import purchases.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Property, Equipment and Leasehold Improvements.
Additions to property, equipment and leasehold improvements are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of leasehold improvements do not exceed the term of the related lease, including applicable available renewal options where appropriate. The estimated useful lives in years are generally as follows:
|
|
|
|
|
Buildings & improvements
|
20
|
Information systems
|
3
|
-
|
10
|
Store and office fixtures and equipment
|
5
|
-
|
10
|
Warehouse equipment
|
5
|
-
|
15
|
Leasehold improvements - stores
|
5
|
-
|
15
|
Leasehold improvements - corporate office
|
10
|
-
|
12
|
Impairment of Long-Lived Assets.
Property, plant, equipment and other long-lived assets are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the asset’s physical condition, the future economic benefit of the asset, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate the carrying amount of the asset may not be recoverable, we determine whether impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. If impairment has occurred, we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. Management’s judgment is necessary in the identification of impaired assets and fair value estimates.
Intangible Assets and Impairment of Intangible Assets.
Indefinite life intangible assets are tested for impairment annually or more frequently when indicators of impairment exist. As a part of the acquisition of Peebles, Inc. in 2003 and the Gordmans Acquisition in 2017, we acquired the rights to the PEEBLES and the GORDMANS trade names and trademarks (collectively the “Trademarks”), which were identified as indefinite life intangibles. The values of the Trademarks were determined to be
$14.9 million
and
$1.9 million
, respectively, at the time of acquisition. We completed our annual impairment testing during the fourth quarter of
2018
and recognized a charge of
$14.9 million
as full impairment of the
Peebles trade name
due to our multi-year plan to convert department stores to off-price stores and eliminate the use of the Peebles nameplate
.
Self-Insurance Reserves.
We maintain self-insured retentions with respect to general liability, workers compensation and health benefits for our employees. We estimate the accruals for the liabilities based on historical claim experience and loss development factors for claims incurred but not yet reported. Although management believes adequate reserves have been provided for expected liabilities arising from our self-insured obligations, projections of future losses are inherently uncertain, and it is reasonably possible that estimates of these liabilities will change over the near term as circumstances develop.
Revenue Recognition.
Our significant revenue recognition accounting policies are disclosed in Note 2 to the consolidated financial statements.
Vendor Allowances.
We receive consideration from our merchandise vendors in the form of allowances and reimbursements. Given the promotional nature of our business, the allowances are generally intended to offset our costs of handling, promoting, advertising and selling the vendors’ products in our stores. These allowances are recognized in accordance with Accounting Standards Codification (“ASC”) 705-20,
Accounting for Consideration Received from a Vendor
. Vendor allowances related to the purchase of inventory are recorded as a reduction to the cost of inventory until sold. Vendor allowances are recognized as a reduction of cost of goods sold or the related selling expense when the purpose for which the vendor funds were intended to be used has been fulfilled and amounts have been authorized by vendors.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Rent Expense.
We record rent expense on a straight-line basis over the lease term, including the build out period, and where appropriate, applicable available lease renewal option periods. The difference between the payment and expense in any period is recorded as deferred rent in other long-term liabilities in the consolidated financial statements. We record construction allowances from landlords when contractually earned as a deferred rent credit in other long-term liabilities. Such deferred rent credit is amortized over the related lease term, commencing on the date we contractually earned the construction allowance, as a reduction of rent expense.
Certain leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level. These amounts are excluded from minimum rent and are included in the determination of total rent expense when it is probable that the expense has been incurred and the amount is reasonably estimable.
Advertising Expenses.
Advertising costs are charged to operations when the related advertising first takes place. Advertising costs were
$73.6 million
and
$83.6 million
, in
2018
and
2017
, respectively, which are net of advertising allowances received from vendors of
$2.0 million
and
$3.1 million
, respectively.
Insurance Recoveries.
We incurred casualty losses during
2018
and
2017
. We received total insurance proceeds of
$6.3 million
and
$15.7 million
during
2018
and
2017
, respectively, and recognized net gains of
$6.4 million
and
$4.3 million
in
2018
and
2017
, respectively, which are included in selling, general and administrative expenses (“SG&A”). Insurance proceeds and net gains realized in 2018 were predominantly related to fixture and equipment claims for stores impacted by Hurricane Harvey and other casualty events such as floods and tornadoes.
Stock-Based Compensation.
We recognize as compensation expense an amount equal to the fair value of share-based payments granted to employees and independent directors, net of forfeitures. That cost is recognized ratably in SG&A expense over the period during which an employee or independent director is required to provide service in exchange for the award.
Income Taxes.
The provision for income taxes is computed based on the pretax income (loss) included in the consolidated financial statements. The asset and liability approach is used to recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting purposes and the tax basis of assets and liabilities. A valuation allowance is established if it is more likely than not that some portion of the deferred tax asset will not be realized. See Note 14 for additional disclosures regarding income taxes and deferred income taxes.
Earnings Per Share.
Basic earnings per share is computed using the weighted average number of common shares outstanding during the measurement period. Diluted earnings per share is computed using the weighted average number of common shares as well as all potentially dilutive common share equivalents outstanding during the measurement period.
We granted non-vested stock and restricted stock unit awards that contain non-forfeitable dividend rights. Under ASC 260-10,
Earnings Per Share
, these awards are participating securities and are included in the calculation of basic and diluted earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. See Note 10 for additional disclosures regarding earnings per share.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Recently Adopted Accounting Pronouncements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606),
and subsequently issued related ASUs, which were incorporated into Topic 606. Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The standard establishes a five-step revenue recognition model, which includes (i) identifying the contract with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. The standard also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On February 4, 2018, we adopted the new standard using the full retrospective method. As a result of the adoption of ASU 2014-09, the condensed consolidated statements of operations reflect the reclassification of credit income related to our private label credit card program from selling, general and administrative expenses to revenue. In addition, the condensed consolidated balance sheets and condensed consolidated statement of cash flows reflect the reclassification of the asset for the right to recover sales return merchandise from merchandise inventories to prepaid expenses and other current assets. The tables that follow depict the impact of the reclassification adjustments on the prior period financial statement presentations.
The condensed consolidated balance sheets reflect the reclassification of the asset for the right to recover sales return merchandise from merchandise inventories to prepaid expenses and other current assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets (in thousands)
|
|
February 3, 2018
|
|
ASU 2014-09
|
|
February 3, 2018
|
|
As previously reported
|
|
Adjustments
|
|
As adjusted
|
Assets:
|
|
|
|
|
|
Merchandise inventories, net
|
$
|
439,735
|
|
|
$
|
(1,358
|
)
|
|
$
|
438,377
|
|
Prepaid expenses and other current assets
|
51,049
|
|
|
1,358
|
|
|
52,407
|
|
The condensed consolidated statement of operations reflects the reclassification of credit income from selling, general and administrative expenses to revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Operations and Comprehensive Loss (in thousands)
|
|
February 3, 2018
|
|
ASU 2014-09
|
|
February 3, 2018
|
|
As previously reported
|
|
Adjustments
|
|
As adjusted
|
Net sales
|
$
|
1,592,275
|
|
|
$
|
—
|
|
|
$
|
1,592,275
|
|
Credit income
|
—
|
|
|
58,912
|
|
|
58,912
|
|
Total revenues
|
1,592,275
|
|
|
58,912
|
|
|
1,651,187
|
|
Selling, general and administrative expenses
|
406,206
|
|
|
58,912
|
|
|
465,118
|
|
The condensed consolidated statement of cash flows reflects the reclassification of the asset for the right to recover merchandise returned from merchandise inventories to prepaid expenses and other current assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statement of Cash Flows (in thousands)
|
|
February 3, 2018
|
|
ASU 2014-09
|
|
February 3, 2018
|
|
As previously reported
|
|
Adjustments
|
|
As adjusted
|
Cash flows from operating activities:
|
|
|
|
|
|
Decrease in merchandise inventories
|
$
|
1,419
|
|
|
$
|
324
|
|
|
$
|
1,743
|
|
Increase in other assets
|
(8,532
|
)
|
|
(324
|
)
|
|
(8,856
|
)
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
In March 2017, the FASB issued ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. If a subtotal for operating income is shown on the income statement, then the other components of the net periodic benefit cost must be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. The new standard also requires disclosure of the line item(s) in the income statement that include net periodic benefit costs. Additionally, only the service cost component of the net periodic benefit cost is eligible for capitalization. The change in presentation of service cost must be applied retrospectively, while the capitalization of service cost must be applied on a prospective basis. On February 4, 2018, we adopted ASU 2017-07. The pension plan that we sponsor is frozen, and therefore, service costs no longer accrue under the plan. The adoption of the new standard did not change the presentation of our condensed consolidated statements of operations.
In August 2018, the FASB issued ASU 2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans
, which eliminates the requirement to disclose the amounts in accumulated other comprehensive income that are expected to be recognized as components of net periodic pension cost over the next fiscal year and adds the requirement to disclose the reasons for significant gains and losses related to the changes in the benefit obligation for the period. We early adopted the new standard in the fourth quarter of 2018, and have updated our pension plan disclosures accordingly.
Recent Accounting Pronouncements Not Yet Adopted.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The guidance in this ASU supersedes the leasing guidance in
Topic 840, Leases
. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than 12 months. Additionally, this guidance requires disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. This guidance and related amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted.
The new leases standard is effective for us in the first quarter of fiscal 2019, which began on February 3, 2019. We elected the modified retrospective method of adoption, and will report comparative periods under the legacy guidance in Topic 840, including the related disclosures, with a cumulative-effect adjustment to retained earnings, if any, as of the adoption date. We also elected the package of practical expedients in the transition guidance, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the short-term lease exemption for our non-real estate leases, which means we will not recognize a right-of-use asset or liability for non-real estate leases that qualify for the short-term exemption and will recognize those lease expenses on a straight-line basis over the lease term in our consolidated statements of operations. Further, we elected to not separate lease and non-lease components for all of our leases.
Our lease portfolio consists primarily of real estate assets, which includes our retail stores, distribution centers and corporate offices. Some of our retail lease agreements include variable payments based on a percentage of retail sales over contractual amounts, and others include periodic payments with adjustments for inflation. Some of our leases also require us to pay maintenance, utilities, real estate taxes, insurance, and other operating expenses associated with the leased space. Based upon the nature of the items leased and the structure of the leases, the majority of our leases are classified as operating leases and will continue to be operating leases under the new accounting standard.
We are finalizing our implementation related to policies, processes and internal controls over lease recognition to assist in the application of the new lease standard as well as completing the implementation of new software to address the new lease guidance requirements. We will finalize our accounting assessment and quantitative impact of the adoption during the first quarter of 2019. While we continue to assess all of the effects of the new standard, the adoption will result in recognition of significant new right-of-use assets and lease liabilities on our consolidated balance sheet, and significant new disclosures in the footnotes to our consolidated financial statements. We are unable to quantify the impact at this time. We do not expect the adoption of the standard to have a significant impact on our consolidated statements of operations or cash flows. Our bank covenants under our Credit Facility will not be affected by the adoption of this new standard.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our disclosures.
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)
, which aligns the requirements for capitalizing implementation costs in a hosting arrangement that is a service contract with the requirements for capitalizing implementations costs incurred to develop or obtain internal-use software. The guidance also requires disclosure of the nature of hosting arrangements that are service contracts. The new standard will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the impact of the new guidance on our financial statements and disclosures.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 2 - REVENUE
Net Sales
We recognize revenue for merchandise sales, net of expected returns and sales tax, at the time of in-store purchase or delivery of the product to our guest. When merchandise is shipped to our guests, we estimate receipt based on historical experience. Revenue is deferred and a liability is established for sales returns based on historical return rates and sales for the return period. We recognize an asset and corresponding adjustment to cost of sales for our right to recover returned merchandise. At each financial reporting date, we assess our estimates of expected returns, refund liabilities and return assets. For merchandise sold in our stores and online, tender is accepted at the point of sale. When we receive payment before the guest has taken possession of the merchandise, the amount received is recorded as deferred revenue until the transaction is complete. Our performance obligations for unfulfilled merchandise orders are typically satisfied within one week. Shipping and handling fees charged to guests relate to fulfillment activities and are included in net sales with the corresponding costs recorded in cost of sales.
We record deferred revenue for the sale of gift cards and merchandise credits issued for returned merchandise, and we recognize revenue in net sales upon redemption. Gift card and merchandise credit redemptions typically occur within
12 months
of the date of issuance with the majority redeemed within the first
three months
. Our gift cards and merchandise credits do not expire. Based on historical redemption rates, a small percentage of gift cards and merchandise credits will never be redeemed. We recognize estimated breakage income for gift cards and merchandise credits that will never be redeemed in proportion to actual historical redemption patterns.
In March 2019, we integrated our off-price and department store loyalty programs into one.
Under the program, members can accumulate points, based on their spending, toward earning a reward certificate that can be redeemed for future merchandise purchases. Points earned by loyalty members reset to zero at the end of each calendar year. Reward certificates expire
30 days
after the date of issuance. We allocate and defer a portion of our sales to reward certificates expected to be earned, based on the relative stand-alone sales transaction price and reward certificate value, and recognize the reward certificate as a net sale when it is redeemed.
The following table presents the composition of net sales by merchandise category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2018
|
|
2017
|
Merchandise Category
|
|
Department Stores
|
|
Off-price Stores
|
|
Total Company
|
|
Department Stores
|
|
Off-price Stores
|
|
Total Company
|
Women’s
|
|
$
|
433,452
|
|
|
$
|
79,004
|
|
|
$
|
512,456
|
|
|
$
|
478,971
|
|
|
$
|
63,293
|
|
|
$
|
542,264
|
|
Men’s
|
|
221,605
|
|
|
41,012
|
|
|
262,617
|
|
|
236,055
|
|
|
31,400
|
|
|
267,455
|
|
Children's
|
|
125,378
|
|
|
36,725
|
|
|
162,103
|
|
|
141,218
|
|
|
27,720
|
|
|
168,938
|
|
Apparel
|
|
780,435
|
|
|
156,741
|
|
|
937,176
|
|
|
856,244
|
|
|
122,413
|
|
|
978,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear
|
|
185,018
|
|
|
18,065
|
|
|
203,083
|
|
|
188,277
|
|
|
3,866
|
|
|
192,143
|
|
Accessories
|
|
87,663
|
|
|
18,835
|
|
|
106,498
|
|
|
100,042
|
|
|
18,896
|
|
|
118,938
|
|
Cosmetics/Fragrances
|
|
142,162
|
|
|
12,824
|
|
|
154,986
|
|
|
147,785
|
|
|
10,586
|
|
|
158,371
|
|
Home/Gifts/Other
|
|
89,268
|
|
|
84,588
|
|
|
173,856
|
|
|
73,729
|
|
|
65,706
|
|
|
139,435
|
|
Non-apparel
|
|
504,111
|
|
|
134,312
|
|
|
638,423
|
|
|
509,833
|
|
|
99,054
|
|
|
608,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue adjustments not allocated
(a)
|
|
4,305
|
|
|
245
|
|
|
4,550
|
|
|
4,043
|
|
|
688
|
|
|
4,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,288,851
|
|
|
$
|
291,298
|
|
|
$
|
1,580,149
|
|
|
$
|
1,370,120
|
|
|
$
|
222,155
|
|
|
$
|
1,592,275
|
|
(a)
Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Contract Liabilities
Contract liabilities reflect our performance obligations related to gift cards, merchandise credits, loyalty program rewards and merchandise orders that have not been satisfied as of a given date, and therefore, revenue recognition has been deferred. Contract liabilities are recorded in accrued expenses and other current liabilities. Contract liabilities for each period presented were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
Gift cards and merchandise credits, net
|
|
$
|
12,433
|
|
|
$
|
12,122
|
|
Loyalty program rewards, net
|
|
1,484
|
|
|
1,118
|
|
Merchandise fulfillment liability
|
|
488
|
|
|
234
|
|
Total contract liabilities
|
|
$
|
14,405
|
|
|
$
|
13,474
|
|
The following table summarizes contract liability activity for each period presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
13,474
|
|
|
$
|
11,669
|
|
Net sales recognized during the period from amounts included in contract liability balances at the beginning of the period
|
|
(8,818
|
)
|
|
(6,522
|
)
|
Current period additions to contract liability balances included in contract liability balances at the end of the period
|
|
9,749
|
|
|
8,327
|
|
Ending balance
|
|
$
|
14,405
|
|
|
$
|
13,474
|
|
Credit Income
We earn credit income from our private label credit card (“PLCC”) through a profit-sharing arrangement with Comenity Bank, an affiliate of Alliance Data Systems Corporation. Comenity Bank owns the PLCC portfolio and manages the account activation, receivables funding, card authorization, card issuance, statement generation, remittance processing and guest service functions for our PLCC program. We perform certain duties, including electronic processing and transmitting of transaction records, and executing marketing promotions designed to increase card usage. We also accept payments in our stores from cardholders on behalf of Comenity Bank. We receive a monthly net portfolio yield payment from Comenity Bank, and we can potentially earn an annual bonus based upon the performance of the PLCC portfolio. The receivable for credit income, which is recorded in prepaid expenses and other current assets, was
$4.9 million
and
$5.8 million
as of
February 2, 2019
and
February 3, 2018
respectively.
We recorded deferred revenue for certain upfront payments received from Comenity Bank upon execution of the PLCC agreement, and we recognized
$1.8 million
and
$1.4 million
in credit income related to these upfront payments in 2018 and 2017, respectively. As of
February 2, 2019
, deferred revenue of
$2.9 million
remained to be amortized.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 3 - FAIR VALUE MEASUREMENTS
We recognize or disclose the fair value of our financial and non-financial assets and liabilities on a recurring and non-recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we assume the highest and best use of the asset by market participants in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability.
We applied the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
Level 1 -
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2 -
|
Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
Level 3 -
|
Inputs that are both unobservable and significant to the overall fair value measurement reflect our estimates of assumptions that market participants would use in pricing the asset or liability.
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
Balance
|
|
Quoted Prices in Active
Markets for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
Other assets:
|
|
|
|
|
|
|
|
Securities held in grantor trust for deferred compensation plans
(a)(b)
|
$
|
19,536
|
|
|
$
|
19,536
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
Balance
|
|
Quoted Prices in Active
Markets for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
Other assets:
|
|
|
|
|
|
|
|
Securities held in grantor trust for deferred compensation plans
(a)(b)
|
$
|
20,293
|
|
|
$
|
20,293
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(a)
The liability for the amount due to participants corresponding in value to the securities held in the grantor trust is recorded in other long-term liabilities.
(b)
Using the market approach, the fair values of these securities represent quoted market prices multiplied by the quantities held. Net gains and losses related to the changes in fair value in the assets and liabilities under the various deferred compensation plans are recorded in SG&A expenses and were nil during
2018
and
2017
.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
Balance
|
|
Quoted Prices in Active
Markets for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Store property, equipment and leasehold improvements
(a)
|
$
|
1,583
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
Balance
|
|
Quoted Prices in Active
Markets for Identical
Instruments
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Store property, equipment and leasehold improvements
(a)
|
$
|
778
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
778
|
|
(a)
Using an undiscounted cash flow model, we evaluate the cash flow trends of our stores at least annually and when events or changes in circumstances, such as a store closure, indicate that property, equipment and leasehold improvements may not be fully recoverable. When a store’s projected undiscounted cash flows indicate its carrying value may not be recoverable, we use a discounted cash flow model to estimate the fair value of the underlying long-lived assets. An impairment write-down is recorded if the carrying value of a long-lived asset exceeds its fair value. Key assumptions in estimating future cash flows include, among other things, expected future operating performance, including expected closure date and lease term, and changes in economic conditions. We believe estimated future cash flows are sufficient to support the carrying value of our long-lived assets. Significant changes in the key assumptions used in our cash flow projections may result in additional asset impairments. See Note 4 for additional disclosures on impairments charges.
Due to the short-term nature of cash and cash equivalents, payables and short-term debt obligations, the carrying value approximates the fair value of these instruments. In addition, we believe that the Credit Facility obligation approximates its fair value because interest rates are adjusted daily based on current market rates.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 4 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The components of property, equipment and leasehold improvements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
Land
|
$
|
1,544
|
|
|
$
|
1,544
|
|
Buildings and improvements
|
12,969
|
|
|
12,966
|
|
Fixtures and equipment
|
530,385
|
|
|
526,313
|
|
Leasehold improvements
|
413,271
|
|
|
411,753
|
|
Property, equipment and leasehold improvements
|
958,169
|
|
|
952,576
|
|
Less: Accumulated depreciation
|
733,366
|
|
|
699,788
|
|
Property, equipment and leasehold improvements, net
|
$
|
224,803
|
|
|
$
|
252,788
|
|
Depreciation expense and impairment charges were as follows for each period presented (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Depreciation expense
|
$
|
58,637
|
|
|
$
|
65,401
|
|
Store impairment charges
|
2,780
|
|
|
1,739
|
|
Total depreciation and store impairment
|
$
|
61,417
|
|
|
$
|
67,140
|
|
Depreciation expense and store impairment charges included in cost of sales and related buying, occupancy and distribution expenses for
2018
and
2017
were
$48.5 million
and
$52.9 million
, respectively.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 5 - DEBT OBLIGATIONS
Debt obligations consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
Revolving loan
|
$
|
204,044
|
|
|
$
|
179,288
|
|
Term loan
|
50,000
|
|
|
—
|
|
Finance obligations
|
554
|
|
|
1,549
|
|
Other financing
|
508
|
|
|
2,498
|
|
Total debt obligations
|
255,106
|
|
|
183,335
|
|
Less: Current portion of debt obligations
|
4,812
|
|
|
2,985
|
|
Long-term debt obligations
|
$
|
250,294
|
|
|
$
|
180,350
|
|
During 2018, we entered into two amendments to our senior secured revolving credit facility agreement. These amendments provide us with term loans in the aggregate amount of
$50.0 million
(“Term Loan”). As a result, the credit facility agreement now includes the pre-existing revolving loan (“Revolving Loan”) and the Term Loan (jointly referred to as the “Credit Facility”). The Term Loan increased total availability under the Credit Facility to
$450.0 million
, with a seasonal increase to
$475.0 million
and a
$25.0 million
letter of credit sublimit. The Term Loan is payable in
quarterly
installments of
$1.3 million
beginning on
June 15, 2019
, with the remaining balance due upon maturity. The Credit Facility matures on
December 16, 2021
.
We use the Credit Facility to provide financing for working capital and general corporate purposes, as well as to finance capital expenditures and to support our letter of credit requirements. Borrowings under the Credit Facility are limited to the availability under a borrowing base that is determined principally on eligible inventory as defined by the Credit Facility agreement.
The Credit Facility is secured by our inventory, cash, cash equivalents and substantially all of our other assets.
The daily interest rates are determined by a prime rate or LIBOR, plus an applicable margin, as set forth in the Credit Facility agreement.
During
2018
, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the Credit Facility were
3.86%
and
$280.2 million
, respectively, as compared to
2.69%
and
$224.5 million
in
2017
.
Letters of credit issued under the Credit Facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At
February 2, 2019
, outstanding letters of credit totaled approximately
$6.7 million
. These letters of credit expire within
12 months
of issuance.
The Credit Facility agreement contains a covenant requiring us to maintain excess availability at or above
$35.0 million
or
10%
of the Adjusted Combined Loan Cap (as defined therein). The Credit Facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to
$30.0 million
in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At
February 2, 2019
, we were
in compliance with the debt covenants of the Credit Facility agreement
and we expect to remain in compliance. Excess availability under the Credit Facility at
February 2, 2019
was
$82.3 million
.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
At
February 2, 2019
,
$50.0 million
remained outstanding under our Term Loan. Minimum annual principal payments required under the Term Loan are as follows (in thousands).
|
|
|
|
|
Fiscal Year
|
Minimum
Principal Payments
|
2019
|
$
|
3,750
|
|
2020
|
5,000
|
|
2021
|
41,250
|
|
Total
|
$
|
50,000
|
|
While infrequent in occurrence, occasionally we are responsible for the construction of leased stores and for paying project costs. ASC 840-40-55
, The Effect of Lessee Involvement in Asset Construction,
requires us to be considered the owner (for accounting purposes) of this type of project during the construction period. Such leases are accounted for as finance obligations with the amounts received from the landlord being recorded in debt obligations. Interest expense is recognized at a rate that will amortize the finance obligation over the initial term of the lease. Where ASC 840-40-55 was applicable, we have recorded finance obligations with interest rates of
6.1%
and
12.3%
on our consolidated financial statements related to
two
store leases as of
February 2, 2019
. Minimum annual payments required under existing finance obligations as of
February 2, 2019
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Minimum Payments
|
|
Less: Interest
|
|
Principal Payments
|
2019
|
$
|
580
|
|
|
$
|
26
|
|
|
$
|
554
|
|
At
February 2, 2019
,
$0.5 million
remained outstanding under our 2016 secured equipment financing note, which will be repaid in 2019. The note bears an effective interest rate of
3.2%
.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 6 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
Accrued compensation and benefits
|
$
|
12,582
|
|
|
$
|
11,828
|
|
Gift cards and merchandise credits, net
|
12,433
|
|
|
12,122
|
|
Self-insurance liability
|
8,873
|
|
|
9,994
|
|
Accrued occupancy
|
6,542
|
|
|
6,129
|
|
Other
|
25,285
|
|
|
24,369
|
|
Accrued expenses and other current liabilities
|
$
|
65,715
|
|
|
$
|
64,442
|
|
NOTE 7 - OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
Deferred rent
|
$
|
32,994
|
|
|
$
|
38,109
|
|
Deferred compensation
|
19,536
|
|
|
20,293
|
|
Pension liability
|
7,960
|
|
|
7,247
|
|
Deferred revenue under ADS agreement
|
1,500
|
|
|
2,875
|
|
Other long-term liabilities
|
$
|
61,990
|
|
|
$
|
68,524
|
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 8 - COMMITMENTS AND CONTINGENCIES
We have numerous contractual commitments for purchases of merchandise inventories, services arising in the ordinary course of business, letters of credit, Credit Facility and other debt service and leases. Contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities. In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise typically up to six months in advance of expected delivery.
From time to time, we are involved in various legal proceedings arising in the ordinary course of our business. We do not believe that any pending legal proceedings, either individually or in the aggregate, are material to our financial condition, results of operations or cash flows.
NOTE 9 - STOCKHOLDERS’ EQUITY
Our deferred compensation plan covering executives and certain officers provides an investment option that allows participants to elect to purchase shares of our common stock (“Company Stock Investment Option”). We established a grantor trust to facilitate the collection of funds and purchase our shares on the open market at prevailing market prices. All shares purchased through the grantor trust are held in the trust until the participants are eligible to receive the benefits under the terms of the plan. At the time of the participant’s eligibility, the deferred compensation obligation related to the Company Stock Investment Option is settled by the delivery of the fixed number of shares held by the grantor trust on the participant’s behalf. In
2018
and
2017
, participants in our deferred compensation plan elected to invest approximately
$0.3 million
and
$0.2 million
, respectively, of the total amount of deferred compensation withheld, in the Company Stock Investment Option. The purchase of shares made by the grantor trust on behalf of the participants is included in treasury stock and the corresponding deferred compensation obligation is included in additional paid-in capital.
On March 7, 2011, our Board of Directors (“Board”) approved a stock repurchase program (“2011 Stock Repurchase Program”), which authorizes us to repurchase up to
$200.0 million
of our outstanding common stock. The 2011 Stock Repurchase Program will expire when we have repurchased
$200.0 million
of our outstanding common stock, unless terminated earlier by our Board. As of
February 2, 2019
, we had
$58.4 million
available under the program. Also in March 2011, our Board authorized us to repurchase shares of our outstanding common stock equal to the amount of the proceeds and related tax benefits from the exercise of stock options, stock appeciation rights (“SARs”) and other equity grants. Purchases of shares of our common stock may be made from time to time, either on the open market or through privately negotiated transactions and are financed by our existing cash, cash flow and other liquidity sources, as appropriate.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 10 - EARNINGS PER SHARE
Basic loss per share is computed using the weighted average number of common shares outstanding during the measurement period. Diluted loss per share is computed using the weighted average number of common shares as well as all potentially dilutive common share equivalents outstanding during the measurement period.
The following tables show the computation of basic and diluted loss per share for each period (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Basic:
|
|
|
|
Net loss
|
$
|
(87,714
|
)
|
|
$
|
(37,323
|
)
|
Distributed earnings allocated to participating securities
|
(191
|
)
|
|
—
|
|
Net loss allocated to common shares
|
(87,905
|
)
|
|
(37,323
|
)
|
|
|
|
|
Basic weighted average shares outstanding
|
28,117
|
|
|
27,510
|
|
Basic loss per share
|
$
|
(3.13
|
)
|
|
$
|
(1.37
|
)
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Diluted:
|
|
|
|
|
|
Net loss
|
$
|
(87,714
|
)
|
|
$
|
(37,323
|
)
|
Distributed earnings allocated to participating securities
|
(191
|
)
|
|
—
|
|
Net loss allocated to common shares
|
(87,905
|
)
|
|
(37,323
|
)
|
|
|
|
|
Basic weighted average shares outstanding
|
28,117
|
|
|
27,510
|
|
Dilutive effect of stock awards
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
28,117
|
|
|
27,510
|
|
Diluted loss per share
|
$
|
(3.13
|
)
|
|
$
|
(1.37
|
)
|
The number of shares attributable to outstanding stock-based compensation awards that would have been considered dilutive securities, but were excluded from the calculation of diluted loss per share because the effect was anti-dilutive were as follows (in thousands):
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Number of anti-dilutive shares due to net loss for the period
|
256
|
|
|
—
|
|
|
|
|
|
Number of anti-dilutive SARs due to exercise price greater than average market price of our common stock
|
14
|
|
|
124
|
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 11 - OPERATING LEASES
We lease stores, our corporate headquarters, two distribution centers and equipment under operating leases. The majority of store leases, which are typically for an initial
10
-year term and often with
two
renewal options of
five
years each, require us to pay base rent plus expenses, such as common area maintenance, utilities, taxes and insurance. Certain store leases provide for contingent rents that are not measurable at inception. These contingent rents are primarily based on a percentage of sales that are in excess of a predetermined level. A number of store leases provide for escalating minimum rent.
Minimum rental commitments on long-term, non-cancelable operating leases at
February 2, 2019
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Commitments
|
|
Sublease Income
|
|
Net Minimum Lease Commitments
|
2019
|
|
$
|
108,541
|
|
|
$
|
(1,447
|
)
|
|
$
|
107,094
|
|
2020
|
|
98,859
|
|
|
(1,492
|
)
|
|
97,367
|
|
2021
|
|
83,377
|
|
|
(1,582
|
)
|
|
81,795
|
|
2022
|
|
67,447
|
|
|
(1,582
|
)
|
|
65,865
|
|
2023
|
|
46,887
|
|
|
(1,054
|
)
|
|
45,833
|
|
Thereafter
|
|
77,910
|
|
|
—
|
|
|
77,910
|
|
Total
|
|
$
|
483,021
|
|
|
$
|
(7,157
|
)
|
|
$
|
475,864
|
|
Rental expense for operating leases, net of sublease income, consisted of the following for each period presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2018
|
|
2017
|
Minimum rentals
|
|
$
|
105,271
|
|
|
$
|
104,240
|
|
Contingent rentals
|
|
2,149
|
|
|
2,224
|
|
Sublease income
|
|
(1,474
|
)
|
|
(1,474
|
)
|
Total
|
|
$
|
105,946
|
|
|
$
|
104,990
|
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 12 - STOCK-BASED COMPENSATION
As approved by our shareholders, we established the Stage Stores, Inc. Second Amended and Restated 2008 Equity Incentive Plan (“2008 EIP”) and the Stage Stores 2017 Long-Term Incentive Plan (“2017 LTIP” and, collectively, the “Equity Incentive Plans”) to reward, retain and attract key personnel. The Equity Incentive Plans provide for grants of non-qualified or incentive stock options, SARs, performance shares or units, stock units and stock grants. To fund the 2008 EIP and the 2017 LTIP,
4,484,346
and
1,365,654
shares of our common stock were reserved for issuance upon exercise of awards, respectively. On June 1, 2017, the 2017 LTIP replaced the 2008 EIP and no new awards will be granted under the 2008 EIP. Outstanding shares reserved under the 2008 EIP are authorized for issuance under the 2017 LTIP and if not issued, become available under the 2017 LTIP when the shares are no longer subject to issuance under the 2008 EIP.
Stock-based compensation expense by type of grant for each period presented was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Non-vested stock
|
$
|
3,978
|
|
|
$
|
5,626
|
|
Restricted stock units
|
808
|
|
|
434
|
|
Stock-settled performance share units
|
826
|
|
|
2,760
|
|
Cash-settled performance share units
|
94
|
|
|
—
|
|
Total stock-based compensation expense
|
5,706
|
|
|
8,820
|
|
Related tax benefit
|
—
|
|
|
(3,313
|
)
|
Stock-based compensation expense, net of tax
|
$
|
5,706
|
|
|
$
|
5,507
|
|
|
|
|
|
As of
February 2, 2019
, we had unrecognized compensation cost of
$5.6 million
related to stock-based compensation awards granted. That cost is expected to be recognized over a weighted average period of
2.0 years
.
Non-vested Stock
We grant shares of non-vested stock to our employees and non-employee directors. Shares of non-vested stock awarded to employees vest
25%
annually over a
four
-year period from the grant date. Shares of non-vested stock awarded to non-employee directors cliff vest after
one year
. At the end of the vesting period, shares of non-vested stock convert
one for one to common stock
. Certain non-vested stock awards have shareholder rights, including the right to vote and to receive dividends. The fair value of non-vested stock awards with dividend rights is based on the closing share price of our common stock on the grant date. The fair value of non-vested stock awards that do not have dividend rights is discounted for the present value of expected dividends during the vesting period. Compensation expense is recognized ratably over the vesting period.
The following table summarizes non-vested stock activity during
2018
:
|
|
|
|
|
|
|
|
|
Non-vested Stock
|
|
Number of
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Outstanding at February 3, 2018
|
|
1,637,037
|
|
|
$
|
6.67
|
|
Granted
|
|
631,266
|
|
|
2.41
|
|
Vested
|
|
(746,902
|
)
|
|
7.11
|
|
Forfeited
|
|
(141,785
|
)
|
|
7.08
|
|
Outstanding at February 2, 2019
|
|
1,379,616
|
|
|
4.43
|
|
The weighted-average grant date fair value for non-vested stock granted in
2018
and
2017
, was
$2.41
and
$2.21
, respectively. The aggregate intrinsic value of non-vested stock that vested during
2018
and
2017
was
$0.7 million
and
$1.2 million
, respectively. The payment of the employees’ tax liability for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liability. As a result, the actual number of shares issued during
2018
was
656,012
.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Restricted Stock Units (“RSUs”)
We grant RSUs to our employees, which vest
25%
annually over a
four
-year period from the grant date.
Each vested RSU is settled in cash in an amount equal to the fair market value of one share of our common stock on the vesting date, not to exceed five times the per share fair market value of our common stock on the grant date
. Unvested RSUs have the right to receive a dividend equivalent payment equal to cash dividends paid on our common stock. RSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for RSUs is remeasured based on the closing share price of our common stock at each reporting period until the award vests. Compensation expense is recognized ratably over the vesting period and adjusted with changes in the fair value of the liability.
The following table summarizes RSU activity during
2018
:
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Number of
Units
|
|
Weighted
Average Grant
Date Fair
Value
|
Outstanding at February 3, 2018
|
|
1,283,750
|
|
|
$
|
2.14
|
|
Granted
|
|
1,415,000
|
|
|
2.18
|
|
Vested
|
|
(387,186
|
)
|
|
2.15
|
|
Forfeited
|
|
(571,250
|
)
|
|
2.16
|
|
Outstanding at February 2, 2019
|
|
1,740,314
|
|
|
2.16
|
|
Stock-settled Performance Share Units (“Stock-settled PSUs”)
We grant stock-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a
three
-year performance cycle. These awards cliff vest following a
three
-year performance cycle, and if earned, are settled in shares of our common stock, unless otherwise determined by our Board of directors (“Board”), or its Compensation Committee. The actual number of shares of our common stock that may be earned ranges from
zero
to a maximum of twice the number of target units awarded to the recipient. Grant recipients do not have any shareholder rights on unvested or unearned stock-settled PSUs. The fair value of these PSUs is estimated using a
Monte Carlo simulation
, based on the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period for stock-settled PSUs.
The following table summarizes stock-settled PSU activity during
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Granted
|
Target PSUs Outstanding at
February 3, 2018
|
Target
PSUs
Granted
|
Target PSUs Vested and Earned
|
Target PSUs Vested and Unearned
|
Target
PSUs Forfeited
|
Target PSUs
Outstanding at February 2, 2019
|
Weighted
Average
Grant Date
Fair Value per
Target PSU
|
2016
|
321,706
|
|
—
|
|
(9,302
|
)
|
(240,052
|
)
|
(72,352
|
)
|
—
|
|
$
|
8.69
|
|
2017
|
600,000
|
|
—
|
|
—
|
|
—
|
|
(130,000
|
)
|
470,000
|
|
1.80
|
|
2018
|
—
|
|
280,000
|
|
—
|
|
—
|
|
—
|
|
280,000
|
|
3.05
|
|
Total
|
921,706
|
|
280,000
|
|
(9,302
|
)
|
(240,052
|
)
|
(202,352
|
)
|
750,000
|
|
2.27
|
|
The aggregate intrinsic value of stock-settled PSUs that vested and were earned during
2018
was
$0.02 million
. No stock-settled PSUs were earned in
2017
. The payment of the employees’ tax liability for a portion of the vested shares was satisfied by withholding shares with a fair value equal to the tax liability. As a result, the actual number of stock-settled PSUs issued during
2018
was
7,036
.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Cash-settled Performance Share Units (“Cash-settled PSUs”)
We grant cash-settled PSUs as a means of rewarding management for our long-term performance based on total shareholder return relative to a specific group of companies over a
three
-year performance cycle. These awards cliff vest following a
three
-year performance cycle, and if earned, are settled in cash. The amount of settlement ranges from
zero
to a maximum of twice the number of target units awarded multiplied by the fair market value of one share of our common stock on the vesting date. Grant recipients do not have any shareholder rights on unvested or unearned cash-settled PSUs. Cash-settled PSUs are accounted for as a liability in accordance with accounting guidance for cash settled stock awards. The liability for cash-settled PSUs is remeasured based on their fair value at each reporting period until the award vests, which is estimated using a
Monte Carlo simulation
. Assumptions used in the valuation include the expected term of the award, a risk-free rate, expected dividends, expected volatility, and share price of our common stock and the specified peer group. The expected term is estimated based on the vesting period of the awards, the risk-free rate is based on the yield on U.S. Treasury securities matching the vesting period, and the volatility is based on the historical volatility over the expected term. Compensation expense is recognized ratably over the corresponding vesting period and adjusted with changes in the fair value of the liability.
The following table summarizes cash-settled PSU activity during
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Granted
|
Target PSUs Outstanding at
February 3, 2018
|
Target
PSUs
Granted
|
Target
PSUs Forfeited
|
Target PSUs
Outstanding at February 2, 2019
|
Weighted
Average
Grant Date
Fair Value per
Target PSU
|
2018
|
—
|
|
460,000
|
|
(160,000
|
)
|
300,000
|
|
$
|
3.05
|
|
SARs
Prior to 2012, we granted SARs to our employees, which generally vested
25%
annually over a
four
-year period from the grant date. Outstanding SARs expired, if not exercised or forfeited, within
seven
years from the grant date.
The following table summarizes SARs activity during
2018
:
|
|
|
|
|
|
|
|
|
Number of
Outstanding Shares
|
|
Weighted Average
Exercise Price
|
Outstanding, vested and exercisable at February 3, 2018
|
97,900
|
|
|
$
|
18.83
|
|
Expired
|
(97,900
|
)
|
|
18.83
|
|
Outstanding, vested and exercisable at February 2, 2019
|
—
|
|
|
|
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 13 - BENEFIT PLANS
401(k) Plan.
We have a contributory 401(k) savings plan (“401(k) Plan”) generally available to full and part-time employees with
60
days of service, who are age
21
or older. Under the 401(k) Plan, participants may contribute up to
50%
of their qualifying earnings on a pre-tax basis, and up to
10%
of their qualifying earnings on a post-tax basis, subject to certain restrictions. We currently match
50%
of each participant’s pre-tax contributions, limited up to
6%
of each participant’s compensation under the Plan. We may make discretionary matching contributions during the year. Our matching contributions expense for the 401(k) Plan were approximately
$2.0 million
and
$1.7 million
in
2018
and
2017
, respectively.
Deferred Compensation Plans.
We have
two
nonqualified deferred compensation plans (“DC Plans”) which provide executives and other key employees with the opportunity to participate in unfunded, deferred compensation programs that are not qualified under the Internal Revenue Code of 1986, as amended, (“Code”). Generally, the Code and ERISA restrict contributions to a 401(k) plan by highly compensated employees. The DC Plans are intended to allow participants to defer income on a pre-tax basis. Under the DC Plans, participants may defer up to
50%
of their base salary and up to
100%
of their bonus and earn a rate of return based on actual investments chosen by each participant. We have established grantor trusts for the purposes of holding assets to provide benefits to the participants. For the plan covering executives, we will match
100%
of each participant’s contributions, up to
10%
of the sum of their base salary and bonus. For the plan covering other key employees, we may make a bi-weekly discretionary matching contribution. We currently match
50%
of each participant’s contributions, up to
3%
of the participant’s compensation. For both DC Plans, our contributions are vested
100%
. In addition, we may, with approval by our Board, make an additional employer contribution in any amount with respect to any participant as is determined in our sole discretion. Our matching contribution expense for the DC Plans was approximately
$0.7 million
and
$0.9 million
for
2018
and
2017
, respectively.
Non-Employee Director Equity Compensation Plan.
In 2003, we adopted, and our shareholders approved, and in 2004 we amended and restated, the Stage Stores, Inc. Amended and Restated 2003 Non-Employee Director Equity Compensation Plan. We reserved
225,000
shares of our common stock to fund this plan. Under this plan, non-employee directors had the option to defer all or a portion of their annual compensation fees and to receive such deferred fees in the form of restricted stock or deferred stock units as defined in this plan. At
February 3, 2018
and
February 2, 2019
there were
no
participants in or amounts deferred under this plan. The plan was terminated effective
March 22, 2019
.
Frozen Defined Benefit Plan.
We sponsor a defined benefit plan (“DB Plan”), which covers substantially all employees who had met eligibility requirements and were enrolled prior to June 30, 1998. The DB Plan was frozen effective June 30, 1998.
Benefits for the DB Plan are administered through a trust arrangement, which provides monthly payments or lump sum distributions. Benefits under the DB Plan were based upon a percentage of the participant’s earnings during each year of credited service. Any service after the date the DB Plan was frozen will continue to count toward vesting and eligibility for normal and early retirement for existing participants. The measurement dates used to determine pension benefit obligations were
February 2, 2019
and
February 3, 2018
.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Information regarding the DB Plan is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
34,749
|
|
|
$
|
34,962
|
|
Employer service cost
|
510
|
|
|
490
|
|
Interest cost
|
1,367
|
|
|
1,430
|
|
Actuarial (gain) loss
|
(906
|
)
|
|
1,835
|
|
Settlements
|
(2,379
|
)
|
|
(1,989
|
)
|
Plan disbursements
|
(2,122
|
)
|
|
(1,979
|
)
|
Projected benefit obligation at end of year
|
31,219
|
|
|
34,749
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
27,502
|
|
|
26,161
|
|
Actual return on plan assets
|
(1,077
|
)
|
|
4,456
|
|
Employer contributions
|
1,335
|
|
|
853
|
|
Settlements
|
(2,379
|
)
|
|
(1,989
|
)
|
Plan disbursements
|
(2,122
|
)
|
|
(1,979
|
)
|
Fair value of plan assets at end of year
|
23,259
|
|
|
27,502
|
|
|
|
|
|
Underfunded status
|
$
|
(7,960
|
)
|
|
$
|
(7,247
|
)
|
|
|
|
|
Amounts recognized in the consolidated balance sheet consist of:
|
|
|
|
Accrued benefit liability - included in other long-term liabilities
|
$
|
(7,960
|
)
|
|
$
|
(7,247
|
)
|
Amount recognized in accumulated other comprehensive loss, pre-tax
(a)
|
7,502
|
|
|
6,822
|
|
|
|
|
|
(a)
Consists solely of net actuarial losses as there are no prior service costs.
|
|
|
|
Our funding policy is to make contributions to maintain the minimum funding requirements for our pension obligation in accordance with ERISA. We may elect to contribute additional amounts to maintain a level of funding to minimize the Pension Benefit Guaranty Corporation premium costs or to cover short-term liquidity needs of the DB Plan in order to maintain current invested positions. We contributed
$1.3 million
in 2018, and we expect to contribute approximately
$1.3 million
in
2019
.
The following benefit payments are expected to be paid (in thousands):
|
|
|
|
|
Fiscal Year
|
Payments
|
2019
|
$
|
2,275
|
|
2020
|
2,535
|
|
2021
|
2,705
|
|
2022
|
2,979
|
|
2023
|
2,703
|
|
Fiscal Years 2024 - 2028
|
12,562
|
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
The allocations of DB Plan assets by category are as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2019 Target Allocation
|
|
2018
|
|
2017
|
Equity securities
|
50%
|
|
48%
|
|
51%
|
Fixed income securities
|
50
|
|
49
|
|
47
|
Other - primarily cash
|
—
|
|
3
|
|
2
|
Total
|
100%
|
|
100%
|
|
100%
|
We employ a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return on DB Plan assets for a prudent level of risk. The investment portfolio consists of actively managed and indexed mutual funds of domestic and international equities and investment-grade corporate bonds and U.S. government securities. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and annual liability measurements.
The following tables present the DB Plan assets measured at fair value on a recurring basis in the consolidated financial statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
Balance
|
|
Quoted Prices in Active
Markets for Identical
Instruments
(Level 1)
|
|
Significant Other Observable
Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
Mutual funds:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
11,126
|
|
|
$
|
11,126
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed income securities
|
11,346
|
|
|
11,346
|
|
|
—
|
|
|
—
|
|
Other - primarily cash
|
787
|
|
|
787
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
23,259
|
|
|
$
|
23,259
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2018
|
|
Balance
|
|
Quoted Prices in Active
Markets for Identical
Instruments
(Level 1)
|
|
Significant Other Observable
Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
Mutual funds:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
14,162
|
|
|
$
|
14,162
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Fixed income securities
|
12,833
|
|
|
12,833
|
|
|
—
|
|
|
—
|
|
Other - primarily cash
|
507
|
|
|
507
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
27,502
|
|
|
$
|
27,502
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Assumptions used in the actuarial calculations were as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Benefit Obligation Weighted Average Assumptions
|
|
2018
|
|
2017
|
Discount rate
|
|
4.35
|
%
|
|
3.98
|
%
|
|
|
|
|
|
|
|
Fiscal Year
|
Net Periodic Benefit Expense Weighted Average Assumptions
|
|
2018
|
|
2017
|
Discount rate
|
|
3.98
|
%
|
|
4.33
|
%
|
Expected return on assets
|
|
6.50
|
%
|
|
6.50
|
%
|
The discount rate was determined using yields on a hypothetical bond portfolio that matches the approximated cash flows of the DB Plan. We develop our long-term rate of return assumptions using long-term historical actual return data considering the mix of investments that comprise plan assets and input from professional advisors.
The components of net periodic benefit cost for the DB Plan, which were recognized in selling, general and administrative expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Employer service cost
|
$
|
510
|
|
|
$
|
490
|
|
Interest cost on pension benefit obligation
|
1,367
|
|
|
1,430
|
|
Expected return on plan assets
|
(1,679
|
)
|
|
(1,654
|
)
|
Amortization of net loss
|
600
|
|
|
797
|
|
Settlement charges
(a)
|
569
|
|
|
438
|
|
Net periodic pension cost
|
$
|
1,367
|
|
|
$
|
1,501
|
|
|
|
|
|
(a)
Non-cash pension settlement charges were recognized as a result of lump sum distributions exceeding interest cost for the year.
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Other changes in DB Plan assets and benefit obligations recognized in other comprehensive loss are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Amortization of net loss
|
$
|
(600
|
)
|
|
$
|
(797
|
)
|
Settlement charges
|
(569
|
)
|
|
(438
|
)
|
Net loss (gain)
|
1,849
|
|
|
(966
|
)
|
Net change recognized in other comprehensive loss, pre-tax
|
$
|
680
|
|
|
$
|
(2,201
|
)
|
The actuarial net loss recognized in other comprehensive loss in 2018 is comprised of the following changes:
|
|
|
|
|
|
|
(Gain) / Loss
|
|
Demographic experience, including assumption changes
|
$
|
(906
|
)
|
(a)
|
Investment return different from assumed during the prior year
|
2,755
|
|
(b)
|
Net loss
|
$
|
1,849
|
|
|
|
|
|
(a)
The discount rate increased compared to the prior year, which reduced the net periodic pension cost and improved the funded position.
|
(b)
The actual return on the fair value of plan assets since the prior measurement date was less than expected, which caused the funded rate to deteriorate.
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 14 - INCOME TAXES
All of our operations are domestic. We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. Income tax expense (benefit) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Federal income tax expense (benefit):
|
|
|
|
Current
|
$
|
—
|
|
|
$
|
(12,216
|
)
|
Deferred
|
—
|
|
|
428
|
|
|
—
|
|
|
(11,788
|
)
|
State income tax expense (benefit):
|
|
|
|
|
|
Current
|
438
|
|
|
193
|
|
Deferred
|
—
|
|
|
(1,473
|
)
|
|
438
|
|
|
(1,280
|
)
|
Total income tax expense (benefit)
|
$
|
438
|
|
|
$
|
(13,068
|
)
|
A reconciliation between the federal income tax expense (benefit) computed at statutory tax rates and the actual income tax expense (benefit) recorded is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
Federal income tax benefit at the statutory rate
|
$
|
(18,328
|
)
|
|
$
|
(16,992
|
)
|
State income taxes, net
|
(1,799
|
)
|
|
(1,345
|
)
|
Other
|
477
|
|
|
1,375
|
|
Tax deficiencies related to share-based payments
|
942
|
|
|
1,948
|
|
Tax credits
|
(2,060
|
)
|
|
(4,386
|
)
|
Valuation allowance on net deferred tax assets
|
21,206
|
|
|
6,077
|
|
Tax Act
|
—
|
|
|
255
|
|
Total income tax expense (benefit)
|
$
|
438
|
|
|
$
|
(13,068
|
)
|
|
|
|
|
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
Deferred tax assets (liabilities) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
February 2, 2019
|
|
February 3, 2018
|
Gross deferred tax assets:
|
|
|
|
Net operating loss
|
$
|
20,360
|
|
|
$
|
6,758
|
|
Accrued expenses
|
2,426
|
|
|
2,203
|
|
Lease obligations
|
7,969
|
|
|
9,355
|
|
Deferred compensation
|
7,822
|
|
|
7,147
|
|
Deferred income
|
1,263
|
|
|
2,583
|
|
Other
|
10,246
|
|
|
4,650
|
|
|
50,086
|
|
|
32,696
|
|
Gross deferred tax liabilities:
|
|
|
|
Inventory
|
(2,517
|
)
|
|
(1,862
|
)
|
Depreciation and amortization
|
(19,707
|
)
|
|
(24,342
|
)
|
|
(22,224
|
)
|
|
(26,204
|
)
|
|
|
|
|
Valuation allowance
|
(27,862
|
)
|
|
(6,492
|
)
|
Net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
We record valuation allowances when it is more-likely-than-not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. Management assesses all available positive and negative evidence to estimate our ability to generate sufficient future taxable income of the appropriate character, and in the appropriate taxing jurisdictions, to permit use of our existing deferred tax assets. In determining the need for valuation allowances, we have considered and made judgments and estimates regarding estimated future taxable income and ongoing prudent and feasible tax planning strategies. These estimates and judgments include some degree of uncertainty and changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets.
We believe that the reversal of existing deferred tax liabilities will create taxable income that will allow us to recognize an equal amount of tax assets. We have generated cumulative federal and state net operating losses estimated at
$77.9 million
, which are included in deferred tax assets. Under the 2017 Tax Act, the federal losses generated in tax years ending after December 31, 2017, can be carried forward indefinitely, but are limited to offset
80%
of taxable income in any one year. For state income tax purposes, these losses will expire in no less than
5 years
, depending upon the states with many states adopting the federal unlimited carryforward.
We have elected to recognize penalties and interest accrued related to unrecognized tax benefits as an income tax expense. In 2018 and 2017, we had
no
unrecognized tax benefits, and the amount of penalties and interest accrued were
nil
.
We are currently under U.S. federal income tax examination for tax years 2013 through 2016 forward. We are also subject to audit by the taxing authorities of
38
states for years generally after 2014 and
3
additional states relating to the Gordmans Acquisition beginning in 2017. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with our expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
Stage Stores, Inc.
Notes to Consolidated Financial Statements – (continued)
NOTE 15
- GORDMANS ACQUISITION
On
April 7, 2017
, we acquired select assets of
Gordmans Stores, Inc.
and its subsidiaries (collectively, the “Sellers”) through a bankruptcy auction. The terms of the transaction agreement required us to take assignment of a minimum of
50
of the Sellers’ store leases, with rights to take assignment of the leases for an additional
seven
stores and a distribution center. We also acquired all of the Sellers’ inventory, furniture, fixtures and equipment at the
57
store locations and distribution center, as well as the trademarks and other intellectual property of the Sellers.
The Gordmans stores, which we operate as an off-price concept, add scale to our business, while allowing us to leverage strategic synergies and our current infrastructure. The acquisition also brings beneficial geographic and guest diversification.
The purchase price for the inventory and other assets acquired from the Sellers was approximately
$36.1 million
, all of which was paid by the end of the second quarter 2017 using existing cash and availability under the Credit Facility. We took assignment of
55
of the
57
store locations and the distribution center, and we renegotiated the terms of many of those leases. We also entered into new leases for
three
former Gordmans store locations in 2017.
The estimated fair values of the assets acquired at the acquisition date, were as follows (in thousands):
|
|
|
|
|
|
April 7, 2017
|
Inventory
|
$
|
31,770
|
|
Property, plant and equipment and other assets
|
4,374
|
|
Total
|
$
|
36,144
|
|
Acquisition and integration related costs of
$9.1 million
were recognized in selling, general and administrative expenses in 2017.
Net sales included in our consolidated statements of operations from Gordmans stores that we operated since the acquisition on April 7, 2017, were
$291.3 million
and
$222.2 million
in
2018
and 2017, respectively.
Pro forma net sales and earnings for 2017 are not presented due to the impracticability in substantiating this information as the Gordmans Acquisition was limited to select assets and assignment of leases acquired through a bankruptcy auction. Furthermore, the results of operations may be impacted by the Sellers’ liquidation and may not be indicative of future performance.