STAGE STORES INC - FORM 10-Q - September 13, 2018

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

Form 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2018

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

For the transition period from ______ to ______

Commission File Number 1-14035

Stage Stores, Inc.
(Exact name of registrant as specified in its charter)
NEVADA
 (State or other jurisdiction of incorporation or organization)
91-1826900
 (I.R.S. Employer Identification No.)
 
 
2425 West Loop South, Houston, Texas
 (Address of principal executive offices)
77027
 (Zip Code)

(800) 579-2302
(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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. (Check one):
Large accelerated filer
o
 
Accelerated filer
þ
Non-accelerated filer
o (Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
 
 
 
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with 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 o No þ

As of September 6, 2018, there were 28,242,790 shares of the registrant’s common stock outstanding.


TABLE OF CONTENTS
 
 
 
 
 
 
 
 
Page No.
Item 1.
 
 
 
 
 
August 4, 2018, February 3, 2018 and July 29, 2017
 
 
 
 
Three and Six Months Ended August 4, 2018 and July 29, 2017
 
 
 
 
Six Months Ended August 4, 2018 and July 29, 2017
 
 
 
 
Six Months Ended August 4, 2018
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 




PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
Stage Stores, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value)
(Unaudited)
 
 
 
February 3, 2018
 
July 29, 2017
 
August 4, 2018
 
As Adjusted
 
As Adjusted
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
26,573

 
$
21,250

 
$
26,132

Merchandise inventories, net
476,883

 
438,377

 
458,319

Prepaid expenses and other current assets
48,525

 
52,407

 
64,443

Total current assets
551,981

 
512,034

 
548,894

 
 
 
 
 
 
Property, equipment and leasehold improvements, net of accumulated depreciation of $722,938, $699,788 and $721,472, respectively
236,151

 
252,788

 
269,977

Intangible assets
17,135

 
17,135

 
17,135

Other non-current assets, net
24,409

 
24,449

 
23,925

Total assets
$
829,676

 
$
806,406

 
$
859,931

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

 
 
Accounts payable
$
122,680

 
$
145,991

 
$
126,904

Current portion of debt obligations
3,542

 
2,985

 
3,050

Accrued expenses and other current liabilities
73,506

 
64,442

 
70,754

Total current liabilities
199,728


213,418

 
200,708

 
 
 
 
 
 
Long-term debt obligations
268,682

 
180,350

 
227,385

Other long-term liabilities
65,431

 
68,524

 
78,209

Total liabilities
533,841


462,292

 
506,302

 
 
 
 
 
 
Commitments and contingencies


 


 



 

 
 

 
 
Common stock, par value $0.01, 100,000 shares authorized, 33,418, 32,806 and 32,766 shares issued, respectively
334

 
328

 
328

Additional paid-in capital
421,621

 
418,658

 
414,524

Treasury stock, at cost, 5,175 shares, respectively
(43,388
)
 
(43,298
)
 
(43,210
)
Accumulated other comprehensive loss
(4,823
)
 
(5,177
)
 
(5,385
)
Accumulated deficit
(77,909
)
 
(26,397
)
 
(12,628
)
Total stockholders' equity
295,835

 
344,114

 
353,629

Total liabilities and stockholders' equity
$
829,676


$
806,406

 
$
859,931

 
 
 
 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
3

Stage Stores, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
 

July 29, 2017
 
 
 
July 29, 2017
 
August 4, 2018
 
As Adjusted
 
August 4, 2018
 
As Adjusted
Net sales
$
369,294

 
$
377,081

 
$
713,523

 
$
685,688

Credit income
14,305

 
13,190

 
29,819

 
26,118

Total revenues
383,599

 
390,271

 
743,342

 
711,806

Cost of sales and related buying, occupancy and distribution expenses
286,807

 
284,140

 
568,548

 
530,529

Selling, general and administrative expenses
110,914

 
113,833

 
218,191

 
215,270

Interest expense
2,650

 
1,918

 
4,903

 
3,504

Loss before income tax
(16,772
)

(9,620
)
 
(48,300
)

(37,497
)
Income tax expense (benefit)
150

 
(3,362
)
 
300

 
(12,252
)
Net loss
$
(16,922
)

$
(6,258
)
 
$
(48,600
)

$
(25,245
)
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Amortization of employee benefit related costs, net of tax of $0, $81, $0 and $161, respectively
$
155

 
$
132

 
$
354

 
$
263

Total other comprehensive income
155


132

 
354


263

Comprehensive loss
$
(16,767
)

$
(6,126
)
 
$
(48,246
)

$
(24,982
)
 
 
 
 
 
 
 
 
Loss per share:
 
 
 
 
 
 
 
Basic
$
(0.60
)
 
$
(0.23
)
 
$
(1.74
)
 
$
(0.93
)
Diluted
$
(0.60
)
 
$
(0.23
)
 
$
(1.74
)
 
$
(0.93
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
28,152

 
27,535

 
27,959

 
27,401

Diluted
28,152

 
27,535

 
27,959

 
27,401

 
 
 
 
 
 
 
 



The accompanying notes are an integral part of these condensed consolidated financial statements.
4

Stage Stores, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
Six Months Ended
 
 
 
July 29, 2017
 
August 4, 2018
 
As Adjusted
Cash flows from operating activities:
 
 
 
Net loss
$
(48,600
)
 
$
(25,245
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation, amortization and impairment of long-lived assets
31,217

 
33,177

Loss (gain) on retirements of property, equipment and leasehold improvements
17

 
(528
)
Deferred income taxes
—

 
5,520

Stock-based compensation expense
3,049

 
4,312

Amortization of debt issuance costs
148

 
144

Deferred compensation obligation
90

 
(76
)
Amortization of employee benefit related costs
354

 
424

Construction allowances from landlords
757

 
1,098

Other changes in operating assets and liabilities:
 

 
 

Increase in merchandise inventories
(38,506
)
 
(18,199
)
Decrease (increase) in other assets
2,412

 
(23,240
)
(Decrease) increase in accounts payable and other liabilities
(19,958
)
 
30,802

Net cash (used in) provided by operating activities
(69,020
)

8,189

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property, equipment and leasehold improvements
(12,822
)
 
(15,502
)
Proceeds from insurance and disposal of assets
1,802

 
1,307

Business acquisition
—

 
(36,144
)
Net cash used in investing activities
(11,020
)

(50,339
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from revolving credit facility borrowings
298,509

 
277,013

Payments of revolving credit facility borrowings
(233,148
)
 
(211,891
)
Proceeds from long-term debt obligation
25,000

 
—

Payments of long-term debt obligations
(1,472
)
 
(4,850
)
Payments of debt issuance costs
(354
)
 
(8
)
Payments for stock related compensation
(260
)
 
(135
)
Cash dividends paid
(2,912
)
 
(5,650
)
Net cash provided by financing activities
85,363


54,479

Net increase in cash and cash equivalents
5,323


12,329

 
 
 
 
Cash and cash equivalents:
 

 
 

Beginning of period
21,250

 
13,803

End of period
$
26,573


$
26,132

 
 
 
 
Supplemental disclosures including non-cash investing and financing activities:
 

 
 

Interest paid
$
4,866

 
$
3,324

Income taxes paid
$
14

 
$
247

Unpaid liabilities for capital expenditures
$
4,798

 
$
5,563

 
 
 
 


The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Stage Stores, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
For the Six Months Ended August 4, 2018
(in thousands, except per share data)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Total
Balance at February 3, 2018
32,806

 
$
328

 
$
418,658

 
(5,175
)
 
$
(43,298
)
 
$
(5,177
)
 
$
(26,397
)
 
$
344,114

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(48,600
)
 
(48,600
)
Other comprehensive income
—

 
—

 
—

 
—

 
—

 
354

 
—

 
354

Dividends on common stock, $0.10 per share
—

 
—

 
—

 
—

 
—

 
—

 
(2,912
)
 
(2,912
)
Deferred compensation
—

 
—

 
90

 
—

 
(90
)
 
—

 
—

 
—

Issuance of equity awards, net
612

 
6

 
(6
)
 
—

 
—

 
—

 
—

 
—

Tax withholdings paid for net settlement of stock awards
—

 
—

 
(170
)
 
—

 
—

 
—

 
—

 
(170
)
Stock-based compensation expense
—

 
—

 
3,049

 
—

 
—

 
—

 
—

 
3,049

Balance at August 4, 2018
33,418

 
$
334

 
$
421,621

 
(5,175
)
 
$
(43,388
)

$
(4,823
)
 
$
(77,909
)
 
$
295,835




The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Stage Stores, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1 - BASIS OF PRESENTATION
    
The accompanying condensed consolidated financial statements of Stage Stores, Inc. and its subsidiary (“we,” “us” or “our”) have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. Those adjustments that are, in the opinion of management, necessary for a fair presentation of the results of the interim periods have been made. Results of operations for such interim periods are not necessarily indicative of the results of operations for a full year due to seasonality and other factors. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto filed with our Annual Report on Form 10-K for the year ended February 3, 2018 (“Form 10-K”).    

We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of August 4, 2018, we operated in 42 states through 764 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 59 GORDMANS off-price stores, as well as an e-commerce website. 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.

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.  For example, a reference to “2018” is a reference to the fiscal year ending February 2, 2019, and “2017” is a reference to the fiscal year ended February 3, 2018. Fiscal years 2018 and 2017 are comprised of 52 weeks and 53 weeks, respectively. References to the “three months ended August 4, 2018” and “three months ended July 29, 2017” are for the respective 13-week fiscal quarters. References to quarters relate to our fiscal quarters. References to the “six months ended August 4, 2018” and “six months ended July 29, 2017” are for the respective 26-week fiscal periods.

On April 7, 2017, we acquired select assets of Gordmans Stores, Inc. and its subsidiaries through a bankruptcy auction (“Gordmans Acquisition”). The results of the Gordmans branded stores that we operated since the Gordmans Acquisition are included in our condensed consolidated statements of operations (see Note 9).     

 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.
    


7

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

 
 
 
 
 
 
 
 
 
 
 
 
 
July 29, 2017
 
ASU 2014-09
 
July 29, 2017
 
As previously reported
 
Adjustments
 
As adjusted
Assets:
 
 
 
 
 
Merchandise inventories, net
$
460,405

 
$
(2,086
)
 
$
458,319

Prepaid expenses and other current assets
62,357

 
2,086

 
64,443


    
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)
 
Three Months Ended
 
 
 
Three Months Ended
 
July 29, 2017
 
ASU 2014-09
 
July 29, 2017
 
As previously reported
 
Adjustments
 
As adjusted
Net sales
$
377,081

 
$
—

 
$
377,081

Credit income
—

 
13,190

 
13,190

Total revenues
377,081

 
13,190

 
390,271

Selling, general and administrative expenses
100,643

 
13,190

 
113,833

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
Six Months Ended
 
July 29, 2017
 
ASU 2014-09
 
July 29, 2017
 
As previously reported
 
Adjustments
 
As adjusted
Net sales
685,688

 
—

 
685,688

Credit income
—

 
26,118

 
26,118

Total revenues
685,688

 
26,118

 
711,806

Selling, general and administrative expenses
189,152

 
26,118

 
215,270

    
    


8

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)
 
Six Months Ended
 
 
 
Six Months Ended
 
July 29, 2017
 
ASU 2014-09
 
July 29, 2017
 
As previously reported
 
Adjustments
 
As adjusted
Cash flows from operating activities:
 
 
 
 
 
Increase in merchandise inventories
$
(19,251
)
 
$
1,052

 
$
(18,199
)
Increase in other assets
(22,188
)
 
(1,052
)
 
(23,240
)


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.

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. The new standard requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for all leases with terms longer than 12 months. A policy election can be made, by underlying asset class, to keep leases with an initial term of 12 months or less off the balance sheet and recognize those lease payments in the consolidated statements of operations on a straight-line basis over the lease term. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. As a result, lessees will be required to put most leases on their balance sheets while recognizing expense on their income statements in a manner similar to current accounting. In addition, this guidance requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. The new standard will be effective for us in the first quarter of fiscal 2019, which begins on February 3, 2019. ASU 2016-02 requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provides an optional transition method for the adoption of the new leases standard. If elected, the comparative periods would continue to be reported under the legacy guidance in Topic 840, including the related disclosures, and a cumulative-effect adjustment would be made to retained earnings as of the adoption date.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which clarifies certain aspects of the new leases standard. The amendments in this ASU address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other things. The amendments have the same effective date and transition requirements as the new leases standard.
We continue to evaluate the impact that the adoption of Topic 842 will have on our consolidated financial statements and disclosures, including the effect of the optional practical expedients permitted under the transition guidance. Based on our assessment to date, we expect the adoption of Topic 842 will result in a significant increase in lease-related assets and liabilities on our consolidated balance sheets. The ultimate impact of adopting the new standard will depend on our lease portfolio as of the adoption date.



9

NOTE 2 - DEBT OBLIGATIONS

Debt obligations for each period presented consisted of the following (in thousands):

 
August 4, 2018
 
February 3, 2018
 
July 29, 2017
Revolving credit facility
$
244,649

 
$
179,288

 
$
224,824

Term loan
25,000

 
—

 
—

Finance obligations
1,064

 
1,549

 
2,142

Other financing
1,511

 
2,498

 
3,469

Total debt obligations
272,224


183,335

 
230,435

Less: Current portion of debt obligations
3,542

 
2,985

 
3,050

Long-term debt obligations
$
268,682


$
180,350

 
$
227,385

 
    
On August 3, 2018, we entered into an amendment to our senior secured revolving credit facility agreement (“credit facility” or “credit facility agreement”). The amendment provides us with a $25.0 million term loan, which increased total availability under our credit facility from $400.0 million to $425.0 million, with a seasonal increase to $450.0 million and a $25.0 million letter of credit sublimit. Both the existing credit facility and the term loan mature on December 16, 2021. The term loan is payable in quarterly installments of $0.6 million beginning on February 4, 2019, with the remaining balance due upon maturity.

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. For the six months ended August 4, 2018, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were 3.30% and $259.9 million, respectively.

Letters of credit issued under the credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At August 4, 2018, outstanding letters of credit totaled approximately $12.4 million. These letters of credit expire within 12 months of issuance and may be renewed.

The credit facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The credit facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At August 4, 2018, 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 was $95.2 million as of August 4, 2018.


    





10

NOTE 3 - 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.

Under our loyalty programs, 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 and 60 days after the date of issuance for our department stores and off-price stores, respectively. 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):
 
 
Three Months Ended
 
 
August 4, 2018
 
July 29, 2017
Merchandise Category
 
Department Stores
 
Off-price Stores
 
Total Company
 
Department Stores
 
Off-price Stores
 
Total Company
Women’s
 
$
117,209

 
$
19,264

 
$
136,473

 
$
126,695

 
$
17,022

 
$
143,717

Men’s
 
53,124

 
8,913

 
62,037

 
54,442

 
7,625

 
62,067

Children's
 
29,400

 
7,530

 
36,930

 
29,397

 
6,217

 
35,614

Apparel
 
199,733

 
35,707

 
235,440

 
210,534

 
30,864

 
241,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Footwear
 
45,141

 
4,505

 
49,646

 
43,864

 
756

 
44,620

Accessories
 
18,426

 
3,889

 
22,315

 
20,991

 
5,184

 
26,175

Cosmetics/Fragrances
 
31,287

 
2,428

 
33,715

 
32,860

 
2,558

 
35,418

Home/Gifts/Other
 
11,989

 
16,746

 
28,735

 
11,093

 
16,175

 
27,268

Non-apparel
 
106,843

 
27,568

 
134,411

 
108,808

 
24,673

 
133,481

 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue adjustments not allocated (a)
 
(281
)
 
(276
)
 
(557
)
 
2,224

 
(22
)
 
2,202

 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
306,295

 
$
62,999

 
$
369,294

 
$
321,566

 
$
55,515

 
$
377,081

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



11

 
 
Six Months Ended
 
 
August 4, 2018
 
July 29, 2017
Merchandise Category
 
Department Stores
 
Off-price Stores
 
Total Company
 
Department Stores
 
Off-price Stores
 
Total Company
Women’s
 
$
220,696

 
$
39,231

 
$
259,927

 
$
240,087

 
$
22,126

 
$
262,213

Men’s
 
94,460

 
16,458

 
110,918

 
96,914

 
9,694

 
106,608

Children's
 
58,478

 
15,626

 
74,104

 
62,085

 
8,150

 
70,235

Apparel
 
373,634

 
71,315

 
444,949

 
399,086

 
39,970

 
439,056

 
 
 
 
 
 
 
 
 
 
 
 
 
Footwear
 
89,624

 
9,324

 
98,948

 
89,507

 
1,161

 
90,668

Accessories
 
37,298

 
8,255

 
45,553

 
41,253

 
6,779

 
48,032

Cosmetics/Fragrances
 
62,473

 
4,910

 
67,383

 
61,797

 
3,285

 
65,082

Home/Gifts/Other
 
24,798

 
35,253

 
60,051

 
22,009

 
21,162

 
43,171

Non-apparel
 
214,193

 
57,742

 
271,935

 
214,566

 
32,387

 
246,953

 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue adjustments not allocated (a)
 
(3,169
)
 
(192
)
 
(3,361
)
 
219

 
(540
)
 
(321
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
584,658

 
$
128,865

 
$
713,523

 
$
613,871

 
$
71,817

 
$
685,688

 
 
 
 
 
 
 
 
 
 
 
 
 

(a) Includes adjustments related to deferred revenue, estimated sales returns, breakage income, shipping and miscellaneous revenues, which are not allocated to merchandise categories.

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):

 
 
August 4, 2018
 
February 3, 2018
 
July 29, 2017
Gift cards and merchandise credits, net
 
$
9,657

 
$
12,122

 
$
8,883

Loyalty program rewards, net
 
4,612

 
1,118

 
630

Merchandise fulfillment liability
 
850

 
234

 
886

Total contract liabilities
 
$
15,119

 
$
13,474

 
$
10,399



12

The following table summarizes contract liability activity for each period presented (in thousands):

 
 
Three Months Ended
Six Months Ended
 
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Beginning balance
 
14,028

 
11,303

 
$
13,474

 
$
11,669

Net sales recognized during the period from amounts included in contract liability balances at the beginning of the period
 
(5,484
)
 
(3,833
)
 
(6,284
)
 
(4,403
)
Current period additions to contract liability balances included in contract liability balances at the end of the period
 
6,575

 
2,929

 
7,929

 
3,133

Ending balance
 
$
15,119

 
$
10,399

 
$
15,119

 
$
10,399


Credit Income

The portfolio for our private label credit card is owned and serviced by Comenity Bank, an affiliate of Alliance Data Systems Corporation. Comenity Bank manages the account activation, receivables funding, card authorization, card issuance, statement generation, remittance processing and guest service functions for our private label credit card 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 private label credit card portfolio. The receivable for credit income, which is recorded in prepaid expenses and other current assets, was $4.7 million, $5.8 million, $4.1 million and $4.9 million as of August 4, 2018, February 3, 2018, July 29, 2017 and January 28, 2017, respectively.





13

NOTE 4 - STOCK-BASED COMPENSATION

Stock-based compensation expense by type of grant for each period presented was as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Non-vested stock
1,079

 
1,395

 
$
2,266

 
$
2,903

Restricted stock units
259

 
129

 
751

 
202

Stock-settled performance share units
412

 
735

 
783

 
1,409

Cash-settled performance share units
96

 
—

 
150

 
—

Total stock-based compensation expense
1,846

 
2,259

 
3,950

 
4,514

Related tax benefit
—

 
(849
)
 
—

 
(1,697
)
Stock-based compensation expense, net of tax
$
1,846

 
$
1,410

 
$
3,950

 
$
2,817


As of August 4, 2018, we have estimated unrecognized compensation cost of $12.9 million related to stock-based compensation awards granted, which is expected to be recognized over a weighted average period of 2.3 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 vests 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 for the six months ended August 4, 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
 
(688,534
)
 
7.19

Forfeited
 
(50,478
)
 
3.03

Outstanding at August 4, 2018
 
1,529,291

 
4.79


The weighted-average grant date fair value for non-vested stock granted during the six months ended August 4, 2018 and July 29, 2017 was $2.41 and $2.21, respectively. The aggregate intrinsic value of non-vested stock that vested during the six months ended August 4, 2018 and July 29, 2017, was $1.6 million and $1.1 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 six months ended August 4, 2018 was 612,037.

 


14

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 for the six months ended August 4, 2018:
 
Restricted Stock Units
 
Number of Units
 
Weighted
Average Grant
 Date Fair Value
Outstanding at February 3, 2018
 
1,283,750

 
$
2.14

Granted
 
1,375,000

 
2.19

Vested
 
(320,936
)
 
2.14

Outstanding at August 4, 2018
 
2,337,814

 
2.17



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 for the six months ended August 4, 2018:

Period Granted
 
Target PSUs
Outstanding at February 3, 2018
 
Target PSUs Granted
 
Target PSUs
Outstanding at August 4, 2018
 
Weighted Average
Grant Date
Fair Value
per Target PSU
2016
 
321,706

 
—

 
321,706

 
$
8.69

2017
 
600,000

 
—

 
600,000

 
1.80

2018
 
—

 
280,000

 
280,000

 
3.05

Total
 
921,706

 
280,000

 
1,201,706

 
3.94


The weighted-average grant date fair value for stock-settled PSUs granted during the six months ended August 4, 2018 and July 29, 2017 was $3.05 and $1.80, respectively. No stock-settled PSUs vested during the six months ended August 4, 2018 and July 29, 2017, respectively.




15

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 six months ended August 4, 2018:

Period Granted
 
Target PSUs
Outstanding at February 3, 2018
 
Target PSUs Granted
 
Target PSUs
Outstanding at August 4, 2018
 
Weighted Average
Grant Date
Fair Value
per Target PSU
2018
 
—

 
460,000

 
460,000

 
$
3.05


    
Stock Appreciation Rights (“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 expire, if not exercised or forfeited, within seven years from the grant date.

The following table summarizes SARs activity for the six months ended August 4, 2018:
Stock Appreciation Rights
 
Number of 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 August 4, 2018
 
—

 
 



16

NOTE 5 - EARNINGS PER SHARE

The following tables show the computation of basic and diluted loss per common share for each period presented (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Basic:
 
 
 
 
 
 
 
Net loss
$
(16,922
)
 
$
(6,258
)
 
$
(48,600
)
 
$
(25,245
)
Distributed earnings allocated to participating securities
(68
)
 
(51
)
 
(131
)
 
(202
)
Net loss allocated to common shares
(16,990
)
 
(6,309
)
 
(48,731
)

(25,447
)
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
28,152

 
27,535

 
27,959

 
27,401

Basic loss per share
$
(0.60
)
 
$
(0.23
)
 
$
(1.74
)
 
$
(0.93
)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Diluted:
 

 
 

 
 
 
 
Net loss
$
(16,922
)
 
$
(6,258
)
 
$
(48,600
)
 
$
(25,245
)
Distributed earnings allocated to participating securities
(68
)
 
(51
)
 
(131
)
 
(202
)
Net loss allocated to common shares
(16,990
)
 
(6,309
)
 
(48,731
)

(25,447
)
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
28,152

 
27,535

 
27,959

 
27,401

Dilutive effect of stock awards
—

 
—

 
—

 
—

Diluted weighted average shares outstanding
28,152

 
27,535

 
27,959


27,401

Diluted loss per share
$
(0.60
)
 
$
(0.23
)
 
$
(1.74
)
 
$
(0.93
)
 
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 common share because the effect was anti-dilutive were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Number of anti-dilutive shares due to net loss for the period
357

 
—

 
248

 
—

Number of anti-dilutive SARs due to exercise price greater than average market price of our common stock
—


119

 
29

 
138



NOTE 6 - STOCKHOLDERS’ EQUITY

During the six months ended August 4, 2018, we paid $2.9 million in cash dividends. On August 23, 2018, our Board declared a quarterly cash dividend of $0.05 per share of common stock, payable on September 19, 2018 to shareholders of record at the close of business on September 4, 2018.



17

NOTE 7 - PENSION PLAN

We sponsor a frozen defined benefit pension plan. The components of net periodic pension cost, which were recognized in selling, general and administrative expenses, were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Employer service cost
$
133

 
$
120

 
$
256

 
$
245

Interest cost on pension benefit obligation
317

 
363

 
675

 
727

Expected return on plan assets
(456
)
 
(412
)
 
(870
)
 
(815
)
Amortization of net loss
155

 
213

 
354

 
424

Net periodic pension cost
$
149


$
284

 
$
415


$
581

 
Our funding policy is to make contributions to maintain the minimum funding requirements for our pension obligations in accordance with the Employee Retirement Income Security Act. 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 the short-term liquidity needs of the plan in order to maintain current invested positions. We contributed $0.4 million during the six months ended August 4, 2018, and we expect to contribute an additional $0.9 million in 2018.


NOTE 8 - 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 apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and base 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.
         


18


Financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
 
August 4, 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)
$
20,188

 
$
20,188

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 29, 2017
 
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)
$
19,019

 
$
19,019

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
(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 items 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 selling, general and administrative expenses and were nil for the six months ended August 4, 2018 and July 29, 2017, and for the fiscal year ended February 3, 2018.
    


19


Non-financial assets measured at fair value on a nonrecurring basis were as follows (in thousands):
 
August 4, 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)
$
1,101

 
$
—

 
$
—

 
$
1,101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 29, 2017
 
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)
$
251

 
$
—

 
$
—

 
$
251


(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, with a 10% discount rate, 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. For the six months ended August 4, 2018 and July 29, 2017, and during fiscal year 2017, we recognized impairment charges of $1.1 million, $0.2 million, and $1.7 million, respectively. Impairment charges are recorded in cost of sales and related buying, occupancy and distribution expenses.

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.



20

NOTE 9 - 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, two of which opened in the second quarter 2017, and one opened in the third quarter 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 were recognized in selling, general and administrative expenses and were $2.9 million and $9.2 million for the three and six months ended July 29, 2017, respectively.

Net sales included in our condensed consolidated statements of operations from Gordmans stores that we operated beginning on April 7, 2017, were as follows for each period presented (in thousands):
 
Three Months Ended
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Net sales
$
62,999

 
$
55,515

 
$
128,865

 
$
71,817


Pro forma net sales and earnings for the three and six months ended July 29, 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 have been impacted by the Sellers’ liquidation and may not be indicative of future performance.


21

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Concerning Forward-Looking Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 (“Act”) provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statements. We wish to take advantage of the “safe harbor” provisions of the Act.

Certain statements in this report are forward-looking statements within the meaning of the Act, and such statements are intended to qualify for the protection of the safe harbor provided by the Act. The words “anticipate,” “estimate,” “expect,” “objective,” “goal,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “may,” “target,” “forecast,” “guidance,” “outlook,” and similar expressions generally identify forward-looking statements. Similarly, descriptions of our objectives, strategies, plans, goals or targets are also forward-looking statements. Forward-looking statements relate to the expectations of management as to future occurrences and trends, including statements expressing optimism or pessimism about future operating results or events and projected sales, earnings, capital expenditures and business strategy.

Forward-looking statements are based upon a number of assumptions and factors concerning future conditions that may ultimately prove to be inaccurate and could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements that are made herein and in other reports and releases are not guarantees of future performance and actual results may differ materially from those discussed in such forward-looking statements as a result of various factors. These factors include, but are not limited to, the ability for us to maintain normal trade terms with vendors, the ability for us to comply with the various covenant requirements contained in the credit facility agreement, the demand for apparel, and other factors. The demand for apparel and sales volume can be affected by significant changes in economic conditions, including an economic downturn, employment levels in our markets, consumer confidence, energy and gasoline prices, the value of the Mexican peso, and other factors influencing discretionary consumer spending. Other factors affecting the demand for apparel and sales volume include unusual weather patterns, an increase in the level of competition in our market areas, competitors’ marketing strategies, changes in fashion trends, changes in the average cost of merchandise purchased for resale, availability of product on normal payment terms and the failure to achieve the expected results of our merchandising and marketing plans as well as our store opening or relocation plans. Additional assumptions, factors and risks concerning future conditions are discussed in the Risk Factors section of the Form 10-K, and may be discussed from time to time in our other filings with the SEC, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Most of these factors are difficult to predict accurately and are generally beyond our control.

Forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. Although management believes the expectations expressed in forward-looking statements are based on reasonable assumptions within the bounds of our knowledge, forward-looking statements, by their nature, involve risks, uncertainties and other factors, any one or a combination of which could materially affect our business, financial condition, results of operations or liquidity.

Readers should carefully review the Form 10-K in its entirety including, but not limited to, our financial statements and the notes thereto and the risks and uncertainties described in Part I, Item 1A (Risk Factors) of the Form 10-K. This report should be read in conjunction with the Form 10-K, and you should consider all of these risks, uncertainties and other factors carefully in evaluating forward-looking statements.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.



22

For purposes of the following discussion, all references to the “second quarter 2018” and the “second quarter 2017” are for the 13-week fiscal periods ended August 4, 2018 and July 29, 2017, respectively, and all reference to the “year-to-date 2018” and the “year-to-date 2017” are for the 26-week fiscal periods ended August 4, 2018 and July 29, 2017, respectively.

The financial information, discussion and analysis that follow should be read in conjunction with our consolidated financial statements and the related notes included in this Form 10-Q as well as the financial and other information included in the Form 10-K.

Our Business

We are a retailer of trend-right, moderately priced, name-brand apparel, accessories, cosmetics, footwear and home goods. As of August 4, 2018, we operated in 42 states through 764 BEALLS, GOODY’S, PALAIS ROYAL, PEEBLES and STAGE specialty department stores and 59 GORDMANS off-price stores, as well as an e-commerce website. 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.

Results of Operations

Select financial results for the second quarter 2018 were as follows (comparisons are to the second quarter 2017):

•
Net sales decreased $7.8 million, or 2.1%.
•
Comparable sales decreased 0.2%. Comparable sales consist of store sales after a store has been in operation for 14 full months and e-commerce sales.
•
Net loss was $16.9 million compared to $6.3 million.
•
Loss per common share was $0.60, compared to a loss per common share of $0.23.
•
EBIT was $(14.1) million compared to $(7.7) million (see the reconciliation of non-GAAP financial measures on page 24).
•
Cash dividends of $1.5 million, or $0.05 per common share, were paid.

2018 Outlook and Strategy

Our department store sales declined for the year-to-date 2018 compared to the year-to-date 2017, reflecting lower comparable sales and store closures. We are focused on driving sales in our department stores by emphasizing trending categories, such as active, outdoor and denim, with top brands like Nike, Adidas, Puma, Columbia and Realtree. We have also expanded the home category in our department stores through synergies with our off-price stores, and we anticipate continued growth in this category. We continue to review our department store portfolio and exit stores that do not meet our sales productivity and profitability standards. During the year-to-date 2018, we permanently closed nine department stores, and we plan to close a total of approximately 30 to 40 department stores in 2018, excluding store conversions to off-price.

Our off-price stores have had strong sales growth for the year-to-date 2018 compared to the year-to-date 2017. We are focused on expanding our off-price business, with plans to open one new off-price store and convert a total of nine department stores to off-price stores in 2018. One conversion store was opened in the first quarter 2018, four opened in mid-August and the remaining four stores are planned to open in time for the holiday season.

Store counts at the end of the second quarter 2018 and second quarter 2017 were as follows:    
    
 
August 4, 2018
 
July 29, 2017
Department stores
764

 
793

Off-price stores
59

 
57

Total stores
823

 
850


We anticipate continued growth in our e-commerce sales, which have had double-digit sales increases over the past several years.
    
    
    


23

Our 2018 strategic initiatives are focused on:

•
Off-Price Growth - In the first quarter 2018, we converted one department store to an off-price store located in Rosenberg, Texas, a suburb of Houston, and it is projected to deliver an annual sales increase of more than 25% compared to its volume as a department store. We are testing conversions in new metro markets similar to Rosenberg, as well as conversions in Midwestern markets, and we expect to leverage what we learn from these tests to accelerate our off-price store conversion process in 2019.

•
Differentiation - We are differentiating both our department stores and off-price stores from the competition by growing the outperforming areas of their respective businesses. Beauty is a core strength in our department stores, and we are leveraging this strength to drive beauty and fragrance sales growth in our off-price stores. Additionally, we expanded our Beauty Bar concept in our department stores to over 300 stores during the year-to-date 2018, and we now have Beauty Bar in nearly 500 stores. In our off-price stores, home is a core strength, representing nearly 30% of sales, and we are leveraging this strength to drive more value and expanded assortments into our department store home business. We are also focused on accelerating the positive sales trends in athletic and outdoor by adding new brands and expanded assortments in these categories.

•
Guest Acquisition and Retention - Our loyalty programs and private label credit card program are integral to the value proposition for our guests. Spend and retention rates for guests enrolled in these programs are significantly higher than non-members, and we are focused on growing these programs and expanding private label credit card usage as a percentage of sales. To communicate value to existing members and attract new guests, we have increased our digital marketing efforts, which enables us to be more targeted and nimble with our promotions. As of August 4, 2018, our Style Circle Rewards® and gRewards® loyalty programs have grown to nearly 10 million members. In our department stores, we expect our private label credit card sales penetration to reach 50% for 2018. In our off-price stores, we believe we can attain a 15% penetration for 2018 and 25% in the longer term.

•
Guest Experience - We are enhancing the guest experience by focusing on service, maintaining an ongoing flow of new merchandise offerings, and expanding categories that generate guest excitement. We are also pursuing opportunities to gain market share by shifting our assortments to capitalize on specialty retailers exiting our markets. In our off-price stores, for example, we are expanding on toys, baby apparel and baby gear.

Non-GAAP Financial Measures

The following table presents earnings (loss) before interest and taxes (EBIT), a non-GAAP financial measure. We believe the presentation of this supplemental non-GAAP financial measure helps facilitate comparisons of our operating performance across periods. In addition, management uses this non-GAAP financial measure to assess the results of our operations. Non-GAAP financial information should not be considered in isolation or viewed as a substitute for net income, cash flow from operations, diluted earnings per common share or other measures of performance as defined by GAAP.  Moreover, the inclusion of non-GAAP financial information as used herein is not necessarily comparable to other similarly titled measures of other companies due to the potential inconsistencies in the method of presentation and items considered. The following table sets forth the supplemental financial information and the reconciliation of GAAP disclosures to non-GAAP financial measures (in thousands): 

 
Three Months Ended
 
Six Months Ended
 
August 4, 2018
 
July 29, 2017
 
August 4, 2018
 
July 29, 2017
Net loss (GAAP)
$
(16,922
)
 
$
(6,258
)
 
$
(48,600
)
 
$
(25,245
)
Interest expense
2,650

 
1,918

 
4,903

 
3,504

Income tax expense (benefit)
150

 
(3,362
)
 
300

 
(12,252
)
EBIT (non-GAAP)
$
(14,122
)
 
$
(7,702
)
 
$
(43,397
)
 
$
(33,993
)



24

Second Quarter 2018 Compared to Second Quarter 2017

The following table sets forth the results of operations for the periods presented (in thousands, except percentages):
 
Three Months Ended
 
 
 
 
 
August 4, 2018
 
July 29, 2017
 
Change
 
Amount
 
% to Sales (a)
 
Amount
 
% to Sales (a)
 
Amount
 
%
Net sales
$
369,294

 
100.0
 %
 
$
377,081

 
100.0
 %

$
(7,787
)
 
(2.1
)%
Credit income
14,305

 
3.9
 %
 
13,190

 
3.5
 %
 
1,115

 
8.5
 %
Total revenues
383,599

 
103.9
 %
 
390,271

 
103.5
 %
 
(6,672
)
 
(1.7
)%
Cost of sales and related buying, occupancy and distribution expenses
286,807

 
77.7
 %
 
284,140

 
75.4
 %

2,667

 
0.9
 %
Selling, general and administrative expenses
110,914

 
30.0
 %
 
113,833

 
30.2
 %

(2,919
)
 
(2.6
)%
Interest expense
2,650

 
0.7
 %
 
1,918

 
0.5
 %

732

 

Loss before income tax
(16,772
)
 
(4.5
)%
 
(9,620
)
 
(2.6
)%

(7,152
)
 

Income tax expense (benefit)
150

 
—
 %
 
(3,362
)
 
(0.9
)%

3,512

 

Net loss
$
(16,922
)
 
(4.6
)%
 
$
(6,258
)
 
(1.7
)%

$
(10,664
)
 

 
 
 
 
 
 
 
 
 
 
 
 
(a) Percentages may not foot due to rounding.

Net Sales

Sales decreased $7.8 million, or 2.1%, to $369.3 million for the second quarter 2018 from $377.1 million for the second quarter 2017, primarily due to a decrease in department store comparable sales, store closures and increased deferred revenue associated with our guest loyalty programs, partially offset by increases in off-price store sales and e-commerce sales. Comparable sales for the second quarter 2018 decreased 0.2%. Comparable sales benefited from our off-price stores, the majority of which became part of the comparable sales base in the second quarter 2018. Comparable sales decreased 2.2% for department stores and increased 11.4% for off-price stores. Sales were robust in May as temperatures normalized and spring seasonal apparel results improved. With the absence of a strong natural sales catalyst in June, guest traffic declined, contributing to the decrease in comparable sales for the quarter. Comparable sales turned positive again in July as back-to-school shopping ramped up. Our e-commerce business continues to grow and had a double-digit sales increase for the second quarter 2018 compared to the second quarter 2017.

In our department stores, non-apparel categories outperformed apparel categories. Non-apparel comparable sales decreased 0.1% and apparel comparable sales decreased 3.3%. Home and gifts, footwear, children’s and men’s were our best performing merchandise categories, while women’s and accessories underperformed. In our off-price stores, women’s, men’s, children’s and footwear had positive comparable sales, home and gifts comparable sales were flat, and accessories and cosmetics lagged.

Geographically, comparable sales for our department stores in Texas, Louisiana, Oklahoma and New Mexico, where the economies are generally impacted by the oil and gas industry, outperformed the balance of our department store chain by 80 basis points for the second quarter 2018 compared to the second quarter 2017, with comparable sales in these four states down 1.8% and the balance of the chain down 2.6%. This variance was less than in prior quarters due to weaker sales in our Mexican border stores in the second quarter 2018.



25

Credit Income
    
Credit income earned from our private label credit card program increased $1.1 million, or 8.5%, to $14.3 million for the second quarter 2018 from $13.2 million for the second quarter 2017, primarily due to incremental credit income from our off-price stores.

Cost of Sales

Cost of sales increased $2.7 million, or 0.9%, to $286.8 million for the second quarter 2018 from $284.1 million for the second quarter 2017. As a percent of sales, cost of sales increased 230 basis points to 77.7% for the second quarter 2018 from 75.4% for the second quarter 2017 due to increased promotional markdowns in department stores, higher freight costs, and higher distribution center costs related to processing inventory for our off-price stores. Cost of sales also deleveraged due to increased deferred revenue associated with our loyalty programs.

Selling, General and Administrative Expenses (“SG&A Expenses”)

SG&A expenses for the second quarter 2018 decreased $2.9 million to $110.9 million from $113.8 million for the second quarter 2017, primarily due to Gordmans Acquisition related costs of $2.9 million incurred in the second quarter 2017. As a percent of sales, SG&A expenses decreased 20 basis points to 30.0% for the second quarter 2018 from 30.2% for the second quarter 2017.

Interest Expense

Interest expense was $2.7 million for the second quarter 2018, compared to $1.9 million for the second quarter 2017. Interest expense is primarily comprised of interest on borrowings under the credit facility, related letters of credit and commitment fees, amortization of debt issuance costs and interest on finance obligations. The increase in interest expense is primarily due to an increase in average borrowings and higher interest rates under the credit facility for the second quarter 2018 compared to the second quarter 2017. For the second quarter 2018, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 3.43% and $272.4 million, respectively, as compared to 2.64% and $238.5 million for the second quarter 2017.

Income Taxes

Our effective income tax rate for the second quarter 2018 was 0.9%, and our estimated tax expense was $0.2 million. This compares to an effective tax rate of 34.9% and an income tax benefit of $3.4 million for the second quarter 2017. The lower effective income tax rate in the second quarter 2018 compared to the second quarter 2017 is primarily attributable to the valuation of all tax benefits due to the uncertainty of realization, which is dependent upon generation of future taxable income.



26

Year-to-Date 2018 Compared to Year-to-Date 2017

The following table sets forth the results of operations for the periods presented (in thousands, except percentages):
 
Six Months Ended
 
 
 
 
 
August 4, 2018
 
July 29, 2017
 
Change
 
Amount
 
% to Sales (a)
 
Amount
 
% to Sales (a)
 
Amount
 
%
Net sales
$
713,523

 
100.0
 %
 
$
685,688

 
100.0
 %
 
$
27,835

 
4.1
%
Credit income
29,819

 
4.2
 %
 
26,118

 
3.8
 %
 
3,701

 
14.2
%
Total revenues
743,342

 
104.2
 %
 
711,806

 
103.8
 %
 
31,536

 
4.4
%
Cost of sales and related buying, occupancy and distribution expenses
568,548

 
79.7
 %
 
530,529

 
77.4
 %
 
38,019

 
7.2
%
Selling, general and administrative expenses
218,191

 
30.6
 %
 
215,270

 
31.4
 %
 
2,921

 
1.4
%
Interest expense
4,903

 
0.7
 %
 
3,504

 
0.5
 %
 
1,399

 

Loss before income tax
(48,300
)
 
(6.8
)%
 
(37,497
)
 
(5.5
)%
 
(10,803
)
 

Income tax expense (benefit)
300

 
—
 %
 
(12,252
)
 
(1.8
)%
 
12,552

 

Net loss
$
(48,600
)
 
(6.8
)%
 
$
(25,245
)
 
(3.7
)%
 
$
(23,355
)
 

 
 
 
 
 
 
 
 
 
 
 
 
(a) Percentages may not foot due to rounding.

Net Sales

Sales increased $27.8 million, or 4.1%, to $713.5 million for the year-to-date 2018 from $685.7 million for the year-to-date 2017, primarily due to a $57.0 million increase in sales in our off-price stores, partially offset by a decrease in our department store comparable sales and store closures. Comparable sales for the year-to-date 2018 decreased 1.3%. Comparable sales benefited from our off-price stores, the majority of which became part of the comparable sales base in the second quarter 2018. Comparable sales decreased 2.5% for department stores and increased 11.4% for off-price stores. Our e-commerce business continues to grow and had a double-digit sales increase for the year-to-date 2018 compared to the year-to-date 2017.

In our department stores, non-apparel categories outperformed our apparel categories. Non-apparel comparable sales increased 1.6% and apparel comparable sales decreased 4.8%. Home and gifts, cosmetics, footwear, handbags and men’s were our best performing merchandise categories. In our off-price stores, women’s, men’s, children’s and footwear had positive comparable sales, home and gifts comparable sales were flat, and accessories and cosmetics lagged.

Geographically, comparable sales for our department stores in Texas, Louisiana, Oklahoma and New Mexico, where the economies are generally impacted by the oil and gas industry, outperformed the balance of our department store chain in the year-to-date 2018 compared to the year-to-date 2017, with comparable sales in these four states down 1.6% and the balance of the chain down 3.5%.



27

Credit Income
    
Credit income earned from our private label credit card program increased $3.7 million, or 14.2%, to $29.8 million for the year-to-date 2018 from $26.1 million for the year-to-date 2017, primarily due to incremental credit income from our off-price stores.

Cost of Sales

Cost of sales increased $38.0 million, or 7.2%, to $568.5 million for the year-to-date 2018 from $530.5 million for the year-to-date 2017. As a percent of sales, cost of sales increased 230 basis points to 79.7% for the year-to-date 2018 from 77.4% for the year-to-date 2017 due to increased promotional markdowns in department stores, higher freight costs, and higher distribution center costs related to processing inventory for our off-price stores. Cost of sales also deleveraged due to increased deferred revenue associated with our loyalty programs.

SG&A Expenses

SG&A expenses for the year-to-date 2018 increased $2.9 million to $218.2 million from $215.3 million for the year-to-date 2017. The increase in SG&A expenses is primarily attributable to higher store expenses from the addition of our off-price stores and higher advertising expenses related to increased marketing efforts for these stores, partially offset by Gordmans Acquisition related costs of $9.2 million incurred in the year-to-date 2017. As a percent of sales, SG&A expenses decreased 80 basis points to 30.6% for the year-to-date 2018 from 31.4% for the year-to-date 2017.

Interest Expense

Interest expense was $4.9 million for the year-to-date 2018, compared to $3.5 million for the year-to-date 2017. Interest expense is primarily comprised of interest on borrowings under the credit facility, related letters of credit and commitment fees, amortization of debt issuance costs and interest on finance obligations. The increase in interest expense is primarily due to an increase in average borrowings and higher interest rates under the credit facility for the year-to-date 2018 as compared to the year-to-date 2017. For the year-to-date 2018, the weighted average interest rate on outstanding borrowings and the average daily borrowings under the credit facility, including the term loan, were 3.30% and $259.9 million, respectively, as compared to 2.54% and $215.4 million for the year-to-date 2017.

Income Taxes

Our effective income tax rate for the year-to-date 2018 was 0.6%, and our estimated tax expense was $0.3 million. This compares to an effective tax rate of 32.7% and an income tax benefit of $12.3 million for the year-to-date 2017.
The lower effective income tax rate in the year-to-date 2018 compared to year-to-date 2017 is primarily attributable to the valuation of all tax benefits due to the uncertainty of realization, which is dependent upon generation of future taxable income.






28

Seasonality and Inflation

Our business, like many other retailers, is subject to seasonal influences, with a significant portion of sales and income typically realized during the last quarter of our fiscal year. Working capital requirements fluctuate during the year and generally reach their highest levels during the third and fourth quarters. Because of the seasonality of our business, results from any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
 
We do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.

Liquidity and Capital Resources

Our liquidity is currently provided by (i) existing cash balances, (ii) operating cash flows, (iii) trade credit terms from our vendors and their factors and (iv) the credit facility, including the term loan. Our primary cash requirements are for operational needs, including rent and salaries, inventory purchases, and capital investments in our stores, omni-channel, supply chain and information technology. We also have used our cash flows and other liquidity sources to pay quarterly cash dividends. Our cash requirements for 2017 included the Gordmans Acquisition and additional investments required to support the integration of the Gordmans operations into our infrastructure.

We believe that our sources of liquidity will be sufficient to cover working capital needs, planned capital expenditures and debt service requirements for the remainder of 2018 and the foreseeable future. 
 
Key components of our cash flow are summarized below (in thousands):
 
Six Months Ended
 
August 4, 2018

July 29, 2017
Net cash (used in) provided by:



Operating activities
$
(69,020
)

$
8,189

Investing activities
(11,020
)

(50,339
)
Financing activities
85,363


54,479


Operating Activities

During the year-to-date 2018, we used $69.0 million in cash from operating activities. Net loss, adjusted for non-cash expenses, used cash of approximately $13.7 million. Changes in operating assets and liabilities used net cash of approximately $56.1 million, which included a $38.5 million increase in merchandise inventories, primarily due to the seasonal build of inventories, and a $20.0 million decrease in accounts payable and other liabilities, partially offset by a $2.4 million decrease in other assets. Additionally, cash flows from operating activities included construction allowances from landlords of $0.8 million, which funded a portion of the capital expenditures related to leasehold improvements in our corporate office building.

During the year-to-date 2017, we generated $8.2 million in cash from operating activities. Net loss, adjusted for non-cash expenses, generated cash of approximately $17.7 million.  Changes in operating assets and liabilities used net cash of approximately $10.6 million, which included increases of $18.2 million in merchandise inventories, primarily due to the seasonal build of inventories, and $23.2 million in other assets, partially offset by an increase of $30.8 million in accounts payable and other liabilities. Additionally, cash flows from operating activities included construction allowances from landlords of $1.1 million, which funded a portion of the capital expenditures related to store leasehold improvements in relocated, expanded and remodeled stores.

The year-over-year change reflects an increase in off-price store inventory levels, and a shift in the timing of payments due to earlier merchandise receipts and a higher payables balance at the end of 2017 compared to 2016.





29

Investing Activities

Net cash used in investing activities was $11.0 million for the year-to-date 2018, compared to $50.3 million for the year-to-date 2017. Investing activities for the year-to-date 2017 included $36.1 million paid for the Gordmans Acquisition, which was funded with existing cash and availability under the credit facility, and was predominately for inventory acquired.

Capital expenditures were $12.8 million for the year-to-date 2018, compared to $15.5 million for the year-to-date 2017, reflecting a decrease in store expansions and remodels. We received construction allowances from landlords of $0.8 million in the year-to-date 2018 and $1.1 million in the year-to-date 2017, which are reflected in cash flows from operating activities, and were used to fund a portion of the capital expenditures related to leasehold improvements in our corporate office building and stores. These funds are recorded as a deferred rent credit on the balance sheet and are recognized as an offset to rent expense over the lease term commencing with the date the allowances are earned.

We estimate that capital expenditures in 2018, net of construction allowances to be received from landlords, will be approximately $30.0 million to $35.0 million. The expenditures will principally be for investments in our stores, omni-channel, supply chain and technology.

Financing Activities

Net cash provided by financing activities for the year-to-date 2018 was $85.4 million, compared to $54.5 million for the year-to-date 2017.

On August 3, 2018, we entered into an amendment to our senior secured revolving credit facility agreement. The amendment provides us with a $25.0 million term loan, which increased total availability under our credit facility from $400.0 million to $425.0 million, with a seasonal increase to $450.0 million and a $25.0 million letter of credit sublimit. Both the existing credit facility and the term loan mature on December 16, 2021. The term loan is payable in quarterly installments of $0.6 million beginning on February 4, 2019, with the remaining balance due upon maturity.

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. For the six months ended August 4, 2018, the weighted average interest rate on outstanding borrowings and the average daily borrowings on the credit facility, including the term loan, were 3.30% and $259.9 million, respectively, compared to 2.54% and $215.4 million for the year-to-date 2017.

Letters of credit issued under the credit facility support certain merchandise purchases and collateralize retained risks and deductibles under various insurance programs. At August 4, 2018, outstanding letters of credit totaled approximately $12.4 million. These letters of credit expire within 12 months of issuance and may be renewed.

The credit facility agreement contains a covenant requiring us to maintain excess availability at or above $35.0 million or 10% of the Adjusted Combined Loan Cap (as defined therein). The credit facility agreement also contains covenants which, among other things, restrict (i) the amount of additional debt or capital lease obligations, (ii) the payment of dividends to $30.0 million in a fiscal year, and (iii) the repurchase of common stock under certain circumstances. At August 4, 2018, 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 was $95.2 million as of August 4, 2018.

During the year-to-date 2018, we paid $2.9 million in cash dividends. On August 23, 2018, our Board declared a quarterly cash dividend of $0.05 per share of common stock, payable on September 19, 2018 to shareholders of record at the close of business on September 4, 2018.


30

Recent Accounting Standards

Disclosure concerning recent accounting standards is incorporated by reference to Note 1 of our Condensed Consolidated Financial Statements (Unaudited) contained in this Form 10-Q.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk from exposure to changes in interest rates on borrowings under the credit facility. For the year-to-date 2018, a 10% increase or decrease in the weighted average interest rate on our weighted average borrowings under the credit facility would have had a $0.4 million impact on our interest expense.

ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting

As defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, the term “internal control over financial reporting” means a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and 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 issuer;

(2)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

(3)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material adverse effect on the financial statements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in our internal control over financial reporting during the three months ended August 4, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

No response is required under Item 103 of Regulation S-K.

ITEM 1A.    RISK FACTORS

There have not been any material changes from the risk factors as previously disclosed in the Form 10-K.




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ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 7, 2011, our Board approved a stock repurchase program (“2011 Stock Repurchase Program”), which authorized us to repurchase up to $200.0 million of our outstanding common stock. The 2011 Stock Repurchase Program will expire when we have exhausted the authorization, unless terminated earlier by our Board. Through August 4, 2018, we repurchased approximately $141.6 million of our outstanding common shares under the 2011 Stock Repurchase 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 appreciation rights 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.

The table below sets forth information regarding our repurchases of common stock during the three months ended August 4, 2018:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total Number of Shares Purchased (a)
 
Average Price Paid Per Share (a)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (b)
 
 
 
 
 
 
 
 
 
May 6, 2018 to June 2, 2018
 
3,517

 
$
2.84

 
—

 
$
58,351,202

 
 
 
 
 
 
 
 
 
June 3, 2018 to July 7, 2018
 
13,258

 
2.50

 
—

 
$
58,351,202

 
 
 
 
 
 
 
 
 
July 8, 2018 to August 4, 2018
 
5,420

 
2.23

 
—

 
$
58,351,202

 
 
 
 
 
 
 
 
 
Total
 
22,195

 
$
2.49

 
—

 
 

(a) Although we did not repurchase any of our common stock during the three months ended August 4, 2018 under the 2011 Stock Repurchase Program:
•
We reacquired 2,947 shares of common stock from certain employees to cover tax withholding obligations from the vesting of restricted stock at a weighted average acquisition price of $2.33 per common share; and
•
The trustee of the grantor trust established by us for the purpose of holding assets under our deferred compensation plan purchased an aggregate of 19,248 shares of our common stock in the open market at a weighted average price of $2.51 in connection with the option to invest in our stock under the deferred compensation plan and reinvestment of dividends paid on our common stock held in trust in the deferred compensation plan.
(b) Reflects the $200.0 million authorized under the 2011 Stock Purchase Program, less the $141.6 million repurchased as of August 4, 2018 using our existing cash, cash flow and other liquidity sources since March 2011.



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ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    MINE SAFETY DISCLOSURES

None.

ITEM 5.    OTHER INFORMATION

None.



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ITEM 6.    EXHIBITS

The following documents are the exhibits to this Form 10-Q. For convenient reference, each exhibit is listed according to the Exhibit Table of Item 601 of Regulation S-K.
Exhibit
Number
 
Description
 
 
 
10.1

 
 
31.1*
 
 
31.2*
 
 
32*
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
_______________________________________
*
Filed electronically herewith.



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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.

 
STAGE STORES, INC.
 
 
Dated: September 13, 2018
/s/ Michael L. Glazer
 
Michael L. Glazer
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
 
Dated: September 13, 2018
/s/ Jason T. Curtis
 
Jason T. Curtis
 
Senior Vice President,
 
Interim Chief Financial Officer and Treasurer
 
(Principal Financial Officer)


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