|
|
 | | | |
- close
- close
- close
- close
| |||||||||
Christopher & Banks 10-Q 2012
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 28, 2012
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 001-31390
CHRISTOPHER & BANKS CORPORATION (Exact name of registrant as specified in its charter)
(763) 551-5000 (Registrant’s telephone number, including area code)
Former fiscal year ended on that Saturday which fell closest to the last day of February (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 x
As of May 25, 2012, 36,693,682 shares of the registrant’s common stock were outstanding.
CHRISTOPHER & BANKS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
FINANCIAL STATEMENTS CHRISTOPHER & BANKS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CHRISTOPHER & BANKS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CHRISTOPHER & BANKS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CHRISTOPHER & BANKS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CHRISTOPHER & BANKS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 — BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in our Transition Report on Form 10-K for the eleven month transition period ended January 28, 2012.
In January 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year ends at the close of business on that Saturday which falls closest to the last day of January. Prior to this change, our fiscal year ended at the close of business on that Saturday which fell closest to the last day of February. In order to transition to our new fiscal calendar, our last fiscal year was shortened from twelve months to eleven months resulting in an eleven month transition period ended January 28, 2012 (the “transition period”). In this Quarterly Report on Form 10-Q, our current fiscal year, the 53-week period ending February 2, 2013, is referred to as (“fiscal 2012”).
The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, necessary to present fairly our financial position as of April 28, 2012 and January 28, 2012, our results of operations for the thirteen-week periods ended April 28, 2012 and May 28, 2011 and our cash flows for the thirteen-week periods ended April 28, 2012 and May 28, 2011.
Private Label Credit Card Program
During the first quarter of fiscal 2012, we launched a private label credit card program with a sponsoring bank which provides for the issuance of credit cards bearing the Christopher & Banks and C.J. Banks brands. The sponsoring bank manages and extends credit to our customers and is the sole owner of the accounts receivable generated under the program. As part of the program, we received a signing bonus of $0.5 million from the sponsoring bank and also earn revenue based on card usage by our customers. The signing bonus is included in other liabilities and is being recognized in net sales ratably over the term of the contract and the other revenues are recognized in net sales in the periods in which the customer transactions occur. In addition, the sponsoring bank reimburses us for certain marketing expenditures related to the program subject to an annual cap on the amount of reimbursable expenses.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS.” ASU 2011-04 amends ASC 820, “Fair Value Measurement,” by expanding existing disclosure requirements for fair value measurements and modifying certain definitions in the guidance, which may change how the fair value measurement guidance of ASC 820 is applied. The Company adopted ASU 2011-04 effective January 29, 2012. The adoption of this pronouncement did not have a significant impact on our condensed consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 amends Accounting Standards Codification (“ASC”) 220-10, “Comprehensive Income,” and requires that all changes in comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and also requires the presentation of reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The Company adopted ASU 2011-05 effective January 29, 2012. This pronouncement requires changes in presentation only and thus did not have a significant impact on our condensed consolidated financial statements.
Correction of an error
In connection with the preparation of our financial statements for the transition period, we determined that purchases and redemptions of available-for-sale securities, as presented within the investing activities section of our consolidated statement of cash flows, incorrectly included activity related to cash equivalents for the year-to-date periods ended May 28, 2011, August 27, 2011 and November 26, 2011. We have revised our statement of cash flows for the thirteen weeks ended May 28, 2011 presented within this quarterly report on Form 10-Q to accurately reflect purchases and redemptions of available-for-sale securities. The effect of this revision was a decrease of purchases of available-for-sale securities by $25 million and a corresponding decrease of redemptions of available-for-sale securities by $25 million. There was no impact on net cash provided by investing activities or cash and cash equivalents or available-for-sale securities, as previously reported. We have concluded this correction is immaterial to the financial statements taken as a whole.
NOTE 2 — CHANGE IN FISCAL YEAR-END
As referenced in Note 1, on January 6, 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year ends at the close of business on that Saturday which falls closest to the last day of January. Prior to this change, our fiscal year ended at the close of business on that Saturday which fell closest to the last day of February. The table below provides unaudited financial information for the comparable thirteen-week period ended April 30, 2011.
NOTE 3 — RESTRUCTURING AND IMPAIRMENT
In the third quarter of the transition period, we announced that, following an in-depth analysis of our store portfolio, the Board approved a plan to close approximately 100 stores, most of which were underperforming. Ultimately, 103 stores were identified for closure. This group of stores generated approximately $35 million of sales and store-level operating losses of approximately $11 million, which included approximately $7 million of non-cash impairment charges, on a trailing 12-month basis through January 28, 2012. Ninety of the 103 stores identified for closure were closed in the transition period, with two closing in November 2011, seven closing in December 2011 and 81 closing in January 2012. We closed five stores in February 2012, six stores in March 2012 and expect to close the remaining two stores before the end of fiscal 2012. In addition to the store closures, we are seeking to restructure the occupancy costs of a majority of our remaining stores.
The Company recorded total restructuring and asset impairment charges of approximately $21.2 million in the transition period consisting of $11.4 million of non-cash asset impairment charges and $8.2 million of net expense related to lease termination liabilities partially offset by the reduction of deferred obligations related to closed stores. These charges consisted primarily of the costs of future obligations related to closed store locations. Discounted liabilities for future lease costs and the fair value of related subleases of closed locations are recorded when the stores are closed and these amounts are subject to adjustments as liabilities are settled. In assessing the discounted liabilities for future costs of obligations related to closed stores, the Company made assumptions regarding amounts of future subleases. If these assumptions or their related estimates change in the future, the Company may be required to record additional exit costs or reduce exit costs previously accrued. Management is also negotiating with landlords to mitigate the amount of lease termination liabilities. As a result, actual settlements may vary substantially from recorded obligations. We also recorded approximately $1.5 million of severance and miscellaneous other store closing costs in the transition period.
In the first quarter of fiscal 2012, we recognized a net benefit of approximately $0.8 million related to restructuring and impairment costs. We recorded a credit of approximately $1.4 million related to 18 stores where the amounts recorded for net lease termination liabilities exceeded the actual settlements negotiated with landlords. We also recorded approximately $0.5 million of additional lease termination liabilities related to three stores closed in the first quarter of fiscal 2012. In addition, we recognized approximately $0.1 million of non-cash asset impairment charges related to five stores we plan to continue to operate.
NOTE 4— INVESTMENTS
Investments consisted of the following (in thousands):
We account for our investments in accordance with ASC 320-10, “Investments — Debt and Equity Securities.” As of April 28, 2012, our available-for-sale investment securities consisted of municipal bonds. These securities were classified as available-for-sale as we did not enter into these investments for speculative purposes or intend to actively buy and sell the securities in order to generate profits on differences in price. Our primary investment objective is preservation of principal. During the first thirteen weeks of fiscal 2012, there were no purchases of available-for-sale securities and proceeds from the sale of available-for-sale securities were approximately $9.0 million. Gross realized gains and losses on the sale of available-for-sale securities during the thirteen weeks ended April 28, 2012 were not material.
Our available-for-sale securities are reviewed for possible impairment at least quarterly, or more frequently if circumstances arise which, in management’s estimation, may indicate impairment. When the fair value of the securities declines below the amortized cost basis, impairment is indicated and it must be determined whether it is other-than-temporary. Impairment is considered to be other-than-temporary if we (i) intend to sell the security, (ii) will more likely than not be forced to sell the security before recovering its cost, or (iii) do not expect to recover the securities’ amortized cost basis. If the decline in fair value is considered other-than-temporary, the cost basis of the security is adjusted to its fair market value and the realized loss is reported in earnings. Subsequent increases or decreases in fair value considered other-than-temporary are reported in equity as other comprehensive income (loss). As of April 28, 2012, there were no other-than-temporary impairments of our available-for-sale securities.
Expected maturities of our investments are as follows (in thousands):
NOTE 5 — MERCHANDISE INVENTORIES AND SOURCES OF SUPPLY
Our merchandise inventories consisted of the following (in thousands):
We do not have long-term purchase commitments or arrangements with any of our suppliers or agents. During the quarter ended April 28, 2012, one of our vendors supplied approximately 20% of our merchandise purchases. For the quarter ended May 28, 2011, this vendor supplied 22% of our merchandise purchases and another vendor supplied 13% of our merchandise purchases. No other vendor supplied greater than 10% of our merchandise purchases for the quarter ended April 28, 2012.
Although we have strong relationships with these vendors, there can be no assurance that these relationships can be maintained in the future or that the vendors will continue to supply merchandise to us. If there should be any significant disruption in the supply of merchandise from these vendors, management believes that it will be able to shift production to other suppliers so as to continue to secure the required volume of product. Nevertheless, it is possible that any significant disruption in supply could have a material adverse impact on our financial position or results of operations.
NOTE 6 — PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
Property, equipment and improvements, net consisted of the following (in thousands):
As a result of an impairment analysis, which included the evaluation of individual under-performing stores and assessing the recoverability of the carrying value of the improvements and equipment related to the stores, we determined that improvements and equipment at certain under-performing stores were impaired. As a result, we recorded asset impairments related to property, equipment and improvements of approximately $0.1 million at five stores during the thirteen-week period ended April 28, 2012.
Our assessment of the recoverability of the carrying value of our assets involves the projection of future cash flows, which requires the use of significant estimates and assumptions. Differences in circumstances or estimates could produce significantly different results. The current challenging economic environment, which continues to negatively affect the retail industry, makes it possible that additional long-lived asset impairments could be identified and recorded in future periods.
NOTE 7 — ACCRUED LIABILITIES
Other accrued liabilities consisted of the following (in thousands):
NOTE 8 — CREDIT FACILITY
We maintain an Amended and Restated Revolving Credit Facility (the “Credit Facility” or “Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility provides us with revolving credit loans and letters of credit of up to $50 million, in the aggregate, subject to a borrowing base formula based on inventory levels. The Credit Facility expires on June 30, 2014 and interest is calculated based on the three-month London Interbank Market Offered Rate (“LIBOR”) plus 2%, reset daily.
On March 22, 2012, we entered into the Eighth Amendment to the Credit Facility (the “Eighth Amendment”) with Wells Fargo. The Eighth Amendment addressed certain terms and financial covenants of the Credit Facility, including reducing the minimum required inventory turns ratio from 2.70 to 1.00, to 2.50 to 1.00 for each quarter during fiscal 2012. The minimum required inventory turns ratio then reverts back to 2.70 to 1.00 for each fiscal quarter ending after February 2, 2013. In addition, the Eighth Amendment adjusted the minimum required cash and investments on hand to $20 million at the end of the first and second quarters of fiscal 2012 and $25 million at the end of each quarter thereafter. The Eighth Amendment also adjusted the maximum line amount available between December 1 and August 31 of each calendar year of the Facility to the lesser of 85% of the net orderly liquidation value of eligible inventory, as defined in the Facility, or 70% of eligible inventory and between September 1 and November 30 of each calendar year of the Facility to the lesser of 90% of the net orderly liquidation value of eligible inventory or 80% of eligible inventory.
Interest under the Credit Facility is payable monthly in arrears. The Credit Facility carries a facility fee of 0.25%, based on the unused portion as defined in the agreement, a collateral monitoring fee and a guaranteed service charge. Borrowings under the Credit Facility are collateralized by our equipment, intangible assets, inventory, inventory letters of credit and letter of credit rights.
We had no revolving credit loan borrowings under the Credit Facility during the first thirteen weeks of fiscal 2012 or the transition period. Historically, we have utilized the Credit Facility only to open letters of credit. The borrowing base at April 28, 2012 was $22.9 million. As of April 28, 2012, we had open on-demand letters of credit and a reserve against our corporate purchasing card totaling $5.1 million. Accordingly, the availability of revolving credit loans under the Credit Facility was $17.8 million at April 28, 2012.
The Credit Facility contains certain restrictive covenants, including restrictions on incurring additional indebtedness and limitations on certain types of investments, as well as requiring the maintenance of certain financial covenants. As of April 28, 2012, the most recent measurement date, we were in compliance with all financial covenants under the Credit Facility and we anticipate we will be in compliance with all financial covenants of the Credit Facility at the end of each quarter in fiscal 2012. While we do not currently anticipate the need to borrow against our Credit Facility in fiscal 2012, failure to remain in compliance with the financial covenants would constrain our operating flexibility and our ability to fund our business operations through use of the Credit Facility.
NOTE 9 — STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
In fiscal 2004, our Board of Directors declared our first cash dividend. The declaration provided for an on-going cash dividend of $0.04 per share to be paid quarterly, subject to Board approval. In July 2006, our Board of Directors authorized an increase in the quarterly cash dividend to $0.06 per share. A quarterly dividend was paid each quarter through October 2011. In December 2011, we announced that our Board of Directors had suspended the payment of a quarterly dividend.
We account for stock-based compensation in accordance with the provisions of ASC 718-10, “Stock Compensation.” Under various plans, we may grant options to purchase common stock to employees and non-employee members of our Board of Directors at a price not less than 100% of the fair market value of our common stock on the option grant date. In general, options granted to employees vest over three years and are exercisable up to ten years from the date of grant, and options granted to Directors vest over a three-year period and are exercisable up to ten years from the grant date.
We may also grant shares of restricted stock to our employees and non-employee members of our Board of Directors. The grantee cannot transfer the shares before the respective shares vest. Shares of nonvested restricted stock are considered to be currently issued and outstanding. Restricted stock grants to employees generally have original vesting schedules of one to three years, while restricted grants to Directors are typically fully vested on the date of grant, but can not be transferred for six months from the date of grant.
Our restricted stock awards are generally subject to forfeiture if employment or service terminates prior to the lapse of the restrictions. In addition, certain of our restricted stock awards have performance-based vesting provisions and are subject to forfeiture, in whole or in part, if these performance conditions are not achieved. We assess, on an ongoing basis, the probability of whether the performance criteria will be achieved and, once it is deemed probable, we begin recognizing compensation expense over the relevant performance period. For those awards not subject to performance criteria, we expense the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, on a straight-line basis over the vesting period. The fair market value of our restricted stock is determined based on the closing price of our common stock on the grant date. Time-based grants of restricted stock participated in dividend payments to the extent dividends were declared and paid prior to vesting. Total pre-tax compensation expense related to stock-based awards for the thirteen weeks ended April 28, 2012 and May 28, 2011 was approximately $0.5 million and $0.6 million, respectively.
Methodology Assumptions
We use the Black-Scholes option-pricing model to value our stock options for grants to our employees and non-employee directors. Using this option-pricing model, the fair value of each stock option award is estimated on the date of grant and is expensed on a straight-line basis over the vesting period, as the stock options are subject to pro-rata vesting. The expected volatility assumption is based on the historical volatility of our stock over a term equal to the expected term of the option granted. The expected term of stock option awards granted is derived from our historical exercise experience and represents the period of time that awards are expected to be outstanding. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option granted.
The weighted average assumptions relating to the valuation of our stock options granted during the thirteen-week periods ended April 28, 2012 and May 28, 2011 were as follows:
Stock-Based Compensation Activity
The following table presents a summary of our stock option activity for the thirteen weeks ended April 28, 2012:
The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the quarter and the exercise price, multiplied by the number of in-the-money options as of the last trading day of the quarter) that would have been received by the option holders had all option holders exercised their options on April 28, 2012.
The following table presents a summary of our restricted stock activity for the thirteen weeks ended April 28, 2012:
The total fair value of shares of restricted stock that vested during the thirteen weeks ended April 28, 2012 and May 28, 2011 was approximately $0.4 million and $0.4 million, respectively. As of April 28, 2012, there was approximately $1.8 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of approximately 1.5 years.
NOTE 10 — INCOME TAXES
As of April 28, 2012, our liability for unrecognized tax benefits associated with uncertain tax positions was approximately $0.9 million and the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.7 million. We recognize interest and penalties related to unrecognized tax benefits as components of income tax expense. At April 28, 2012, we had accrued approximately $0.5 million for the potential payment of interest and penalties.
We are subject to U.S. federal income tax and the income tax of various state and local jurisdictions. Fiscal years 2009 through the transition period remain subject to examination by the Internal Revenue Service. With few exceptions, we are not subject to state income tax examination by tax authorities for taxable years prior to fiscal 2007. At April 28, 2012, we had ongoing audits in various state jurisdictions. We do not believe that the resolution of these examinations will have a significant impact on our liability for unrecognized tax benefits.
As of April 28, 2012, we had a full valuation allowance against our net deferred tax assets. Deferred income tax assets represent potential future income tax benefits. Realization of these assets is ultimately dependent upon future taxable income. We have incurred a net cumulative loss as measured by the results of the prior three years. ASC 740 “Income Taxes,” requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some or all of the recorded deferred tax assets will not be realized in a future period. Forming a conclusion that a valuation allowance is not needed is difficult when negative evidence such as cumulative losses exists. As a result of our evaluation, we have concluded that there is insufficient positive evidence to overcome the negative evidence related to our cumulative losses. Accordingly, we have maintained the full valuation allowance against our net deferred tax assets established in the third quarter of the fiscal year ended February 26, 2011. Recording the valuation allowance does not prevent us from using the deferred tax assets in the future when profits are realized.
As of April 28, 2012, we had federal and state net operating loss carryforwards which will reduce future taxable income. Approximately $20.9 million in federal tax benefits are available from these loss carryforwards and an additional $0.6 million is available in tax credit carryforwards. The state loss carryforwards will result in state tax benefits of approximately $2.1 million. The federal net loss carryforwards expire in November 2031 and beyond. The state net loss carryforwards will expire beginning in November 2014 and beyond. Additionally, we have charitable contribution carryforwards that will expire in 2014.
NOTE 11 — EARNINGS PER SHARE
We calculate earnings per share under the guidance in ASC 260-10, “Earnings per Share,” which clarifies that unvested share-based payment awards that contain nonforfeitable rights to receive dividends or dividend equivalents (whether paid or unpaid) are considered participating securities, and thus, should be included in the two-class method of computing earnings per share (“EPS”). Participating securities under this statement include our unvested employee restricted stock awards with time-based vesting, which receive nonforfeitable dividend payments.
The calculation of EPS for common stock shown below excludes the income attributable to these unvested employee restricted stock awards from the numerator and excludes the dilutive impact of these shares from the denominator.
Total stock options and restricted shares of 2.5 million and 2.9 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen-week periods ended April 28, 2012 and May 28, 2011 as they were anti-dilutive.
NOTE 12 — FAIR VALUE MEASUREMENTS
Under ASC 820-10, “Fair Value Measurements and Disclosures,” fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820-10 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability that are developed based upon the best information available in the circumstances.
The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis:
For the thirteen-week periods ended April 28, 2012 and May 28, 2011, fair value under ASC 820-10 applied to our available-for-sale securities. These financial assets are carried at fair value following the requirements of ASC 820-10.
The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis (in thousands):
Following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value:
Available-for-sale securities: As of April 28, 2012, our available-for-sale securities were valued based on quoted prices for similar assets in active markets or quoted prices for identical or similar assets in markets in which there were fewer transactions.
Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis:
In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets Subsections of FASB Codification Subtopic 360-10, long-lived assets held and used with a carrying amount of $172,000 were written down to their fair value of $34,000, resulting in an impairment charge of $139,000 which was included in earnings for the thirteen weeks ended April 28, 2012.
Our assessment of the recoverability of the carrying value of our assets involves the projection of future cash flows, which requires the use of significant estimates and assumptions. Differences in circumstances or estimates could produce significantly different results. The current challenging economic environment which affects the retail industry makes it possible that additional long-lived asset impairments could be identified and recorded in future periods.
NOTE 13 — LEGAL PROCEEDINGS
We are subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. Although the amount of any liability that could arise with respect to any current proceedings cannot, in our opinion, be accurately predicted, the range of reasonably possible losses on these matters, individually and in the aggregate, is not expected to have a material adverse impact on our financial position, results of operations or liquidity.
NOTE 14 — SEGMENT REPORTING
We operate in the retail apparel industry in which we primarily design, source and sell women’s apparel catering to customers generally ranging in age from 45 to 55 who are typically part of a segment of the female baby boomer demographic. We have identified two operating segments (Christopher & Banks and C.J. Banks) as defined by ASC 820 “Disclosures about Segments of an Enterprise and Related Information.” Our Christopher & Banks and C.J. Banks operating segments have been aggregated into one reportable segment based on the similar nature of products sold, methods of sourcing, merchandising and distribution processes involved, target customers and economic characteristics of the two operating segments.
In the table below, the “Christopher & Banks/C.J. Banks” reportable segment includes activity generated by our Christopher & Banks and C.J. Banks operations. The “Corporate/Administrative” column, which primarily represents operating activity at our corporate office and distribution center facility, is presented to allow for reconciliation of segment-level net sales, operating income (loss) and total assets to our consolidated net sales, operating income (loss) and total assets. Segment operating income (loss) includes only net sales, merchandise gross margin and direct store expenses with no allocation of corporate overhead.
For the quarter ended April 28, 2012, the Christopher & Banks/C.J. Banks operating income included store-level asset impairment charges of approximately $0.1 million. No store-level asset impairment charges were recorded in the quarter ended May 28, 2011.
NOTE 15 — RELATED PARTY TRANSACTIONS
The Company or its subsidiaries have for the past several years purchased goods from G-III Apparel Group Ltd. (“G-III”) or its related entities. On January 3, 2011, Morris Goldfarb, the Chairman of the Board and Chief Executive Officer of G-III, became a director of the Company. In the thirteen weeks ended April 28, 2012, the purchases made by the Company and its subsidiaries from G-III and its related entities aggregated approximately $0.3 million. During the quarter ended May 28, 2011 we did not make any purchases from G-III or its related entities. As of April 28, 2012, the Company had a balance due to G-III of approximately $100,000.
Other than the relationship noted above, related party transactions are limited to employment or other agreements with certain of our current and former officers, all of which have been previously disclosed.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the consolidated financial statements and notes included in Item 1 of this Form 10-Q and the consolidated financial statements, notes and MD&A contained in our Transition Report on Form 10-K for the transition period ended January 28, 2012.
Executive Overview
Christopher & Banks Corporation, a Delaware corporation, is a Minneapolis-based retailer of women’s apparel and accessories, which operates retail stores through its wholly-owned subsidiaries. In January 2012, our Board of Directors amended and restated our By-Laws to provide that our fiscal year ends at the close of business on that Saturday which falls closest to the last day of January. Prior to this change, our fiscal year ended at the close of business on that Saturday which fell closest to the last day of February. In order to transition to our new fiscal calendar, our last fiscal year was shortened from 12 months to 11 months, resulting in an 11-month transition period ended January 28, 2012 (the “transition period”). In this Quarterly Report on Form 10-Q, our current fiscal year, the 53-week period ending February 2, 2013, is referred to as (“fiscal 2012”).
As of April 28, 2012, we operated 665 stores in 44 states, including 393 Christopher & Banks stores, 183 C.J. Banks stores, 64 dual concept stores and 25 outlet stores. Our Christopher & Banks brand offers distinctive fashions featuring exclusively designed, coordinated assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P. Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W. Our dual concept and outlet stores offer an assortment of both Christopher & Banks and C.J. Banks apparel servicing the petite, missy and women-size customer in one location. We also operate e-Commerce web sites for our two brands at www.christopherandbanks.com and www.cjbanks.com which, in addition to offering the apparel and accessories found in our stores, also offer exclusive sizes and styles available only online.
We strive to provide our customers with quality apparel at a reasonable price and a consistent fit. Our overall strategy for our two brands, Christopher & Banks and C.J. Banks, is to offer a compelling, evolving assortment of unique and classic apparel through our stores and e-Commerce web sites in order to satisfy our customers’ expectations for style, quality, value and fit, while providing exceptional, personalized customer service.
Fiscal 2012 First Quarter Summary
We continued to experience challenging business trends in the first quarter of fiscal 2012. Although we reduced prices on a significant number of our styles, we were only able to impact the product styling and balance on approximately 10% of our merchandise assortment delivered in the first quarter. As a result, our customers continued to resist the more fashion-forward, higher-priced styles that we began selling in the third quarter of our transition period. Same store sales declined 15% in the first quarter and merchandise margins decreased by approximately 870 basis points when compared to the first quarter of the transition period. The decrease in margins was the result of an increase in promotional activity as we took deeper markdowns to drive net sales and clear through slower selling product. We reported a net loss of $13.4 million, or $0.38 per share, for the quarter.
We ended the first quarter with cash, cash equivalents, and short and long-term investments of $33.7 million, compared to $61.7 million as of January 28, 2012. Total inventory was $44.5 million at April 28, 2012, compared to $39.5 million at January 28, 2012. The increase in inventory as of April 28, 2012, compared to January 28, 2012, was primarily a result of seasonal increases in in-store inventory. In addition, inventory was up approximately $8.6 million compared to the balance of $35.9 million as of April 30, 2011. Approximately $5.0 million of the increase over the prior year was related to higher in-transit inventory at the end of the first quarter resulting from timing of the recognition of the receipt of merchandise and to the continuing impact of the previously announced shift in delivery and payment terms that took effect in August 2011.
Other Developments
Effective February 17, 2012, we announced that our Board of Directors had elected Joel N. Waller as our President and Chief Executive Officer. Mr. Waller joined Christopher & Banks on December 14, 2011 as President for a one-year term. Mr. Waller replaced Larry C. Barenbaum, our former Chief Executive Officer, who resigned all positions with the Company, including the position of Director, effective February 17, 2012. Mr. Waller brings extensive retail experience to Christopher & Banks, having served as Chief Executive Officer for Wilsons Leather and The Wet Seal, Inc. While his initial focus has been on product development, sourcing and merchandising, Mr. Waller also brings significant management and operational experience to our organization that we believe will assist us in revitalizing our business in our efforts to return to profitability.
We incurred a pre-tax severance charge of approximately $0.3 million in the first quarter of fiscal 2012 in connection with Mr. Barenbaum’s resignation. At the same time, we also announced that our Board of Directors had formed a committee to commence a search for a permanent Chief Executive Officer.
On April 17, 2012, we announced that Peter Michielutti would be joining the Company as Senior Vice President and Chief Financial Officer effective April 23, 2012. Mr. Michielutti brings more than 20 years of financial leadership experience to Christopher & Banks. Most recently he served as Senior Vice President and Chief Financial Officer at CSM Corporation, a commercial real estate company. He also has an extensive retail background, having held the chief financial officer position at Whitehall Jewelers, Wilsons Leather and Fingerhut, in addition to serving as a retail consultant at Prentice Capital. Mr. Michielutti replaced Michael Lyftogt, who returned to his prior position with the Company as Chief Accounting Officer.
Effective May 3, 2012, the Company announced that David A. Levin, William F. Sharpe, III and Patricia A. Stensrud had been elected to its Board of Directors. The election of these three individuals increased the number of Board members to ten, all of whom are independent directors. The three individuals will also be nominees for election as directors at the Company’s Annual Meeting of Stockholders to be held June 28, 2012.
David A. Levin, 60, is President and Chief Executive Officer of Casual Male Retail Group (“CMRG”), the largest specialty retailer of big and tall men’s apparel, a position he has held since April 2000. He has more than 30 years of retail experience, having also served as Executive Vice President of eOutlet.com and as President of Camp Coleman, a division of the Coleman Company; of Prestige Fragrance and Cosmetics, a division of Revlon, Inc.; and of Parade of Shoes, a division of J. Baker, Inc. Mr. Levin is also a director of CMRG.
William F. Sharpe, III, 49, serves as a Partner and Managing Director of Quetico Partners, LLC, a boutique investment banking firm, a position he has held since September 2009. From July 2007 to August 2009 he was Chief Operating Officer and a Managing Director of Lazard Middle Market, following Lazard, Freres & Company’s acquisition of Goldsmith Agio Helms & Lynner, LLC, where he worked in several investment banking roles from February 1998 until its acquisition by Lazard in July 2007.
Patricia A. Stensrud, 64, is the President of A&H Manufacturing, a worldwide package design and manufacturing company with operations in the United States, China and the United Kingdom, a position she has held since May 2011. Ms. Stensrud has prior women’s apparel experience, having served as President of the Women’s Sportswear Division of Tommy Hilfiger and as Chief Executive Officer of the Victoria + Co division of Jones Apparel Group. She is also the founder and managing partner of Hudson Rivers Partners, LLC, a private real estate investment and advisory due diligence firm. Ms. Stensrud also serves on the board of Crown Crafts, Inc.
Outlook and Initiatives
Our results of operations for the quarter ended April 28, 2012 reflect difficulties in improving net sales and in maintaining acceptable gross margins, particularly given the level of our aggressive promotional activity. While we anticipate the challenging sales and margin trends will continue until the second half of fiscal 2012, as highly promotional activity will continue to be required to clear spring merchandise deliveries in the second quarter, we expect some sequential improvement in same store sales and gross margins in the second quarter of fiscal 2012, as compared to the first quarter.
Based on our current plans for fiscal 2012, we believe cash flows from operating activities, working capital and borrowing availability under our Credit Facility will be sufficient to meet our operating and capital expenditure requirements for the remainder of the fiscal year. While we expect to see a continuation of challenging net sales and gross profit margin trends in the second quarter of fiscal 2012, our operating plan contemplates improvements in net sales per store, operating results and cash flows from operations. The plan is dependent on our ability to consistently deliver merchandise that is appealing to our customers on a competitive and profitable basis and to effectively manage our costs in order to satisfy our working capital and other operating cash requirements.
The ability to achieve our operating plan is based on a number of assumptions which involve significant judgment and estimates of future performance. If our net sales, gross margins and operating results continue to fall short of our expectations, we may be required to access some, if not all, of our Credit Facility and potentially require other sources of financing to fund our operations.
We will continue to monitor our performance and liquidity and, if we believe it is appropriate or necessary to borrow under the Credit Facility or obtain additional liquidity, we would anticipate taking further steps intended to improve the Company’s financial position, such as modifying our operating plan, seeking to further reduce costs, decreasing our cash spend and/or capital expenditures, as well as evaluating alternatives and opportunities to obtain additional sources of liquidity through the debt or equity markets. It is possible these actions may not be sufficient or available or, if available, available on terms acceptable to us.
Merchandising
In the third quarter of the transition period, we reestablished the position of Divisional General Merchandise Manager in our merchandise area. We added two Divisional General Merchandise Managers, one for the Christopher & Banks division and one for the C.J. Banks division. One of the Divisional General Merchandise Managers was promoted internally, while the other is a new hire. Both individuals bring strong retail experience and merchandising disciplines to our merchant team. Our merchant team is currently focused on delivering increased net sales and improved gross profit through executing the following initiatives. Although development of these initiatives began in the third and fourth quarters of our transition period, only a minimal amount of our product assortment was impacted in the first quarter of fiscal 2012. We anticipate the impact to our assortments will increase throughout the second quarter, with the full impact realized with September product deliveries in the third quarter.
-Provide a balanced merchandise assortment
In the third and fourth quarters of the transition period, and the first quarter of fiscal 2012, the majority of our merchandise assortments consisted of styles that were too updated, priced too high and lacking in key product categories. We provided our customer with too many upscale choices at prices our customers were unwilling to pay. The result was a significant increase in markdown levels required to compel our customers to purchase and allow us to clear-through slow-selling styles.
Our merchants began impacting a portion of our Summer fiscal 2012 product deliveries by editing the number of styles offered and reducing retail ticket prices to levels more in-line with our traditional offerings and more acceptable to our customers. Going forward, our merchants are focusing on building assortments with fewer styles that are more balanced by increasing the amount of ‘good’ and ‘better’ product offerings and decreasing the number of ‘best’ styles. This involves increasing the penetration of core product in our deliveries, including basic knit layering pieces and classic bottoms, increasing the representation of mid-priced ‘better’ selections, while reducing the number of higher priced ‘best’ styles. Our goal is to reduce the overall number of unique styles we carry, which will allow us to present a more focused and compelling product assortment with fewer, more relevant selections. We expect these efforts will be fully reflected in our September in-store product offerings.
-Reduction and simplification of price points
We increased our retail ticket prices in the transition period and our customers failed to respond positively. The price increases resulted from elevated commodities costs and providing more intricately constructed styles. Our customers were highly resistant to the increased price points. As we move forward, our goal is to mitigate markdown levels by offering more attractive opening price points and simplifying the number of price points offered to our customers.
The change in our approach to pricing is intended to work in conjunction with our ‘good, better, best’ product initiative. As we increase the penetration of core product offerings in our assortments, we expect to be able to drive sales volume by offering more styles at attractive opening price points that we believe our customers will accept without steep discounting. In addition, we will reduce the number of price points across all categories to simplify the shopping experience. Finally, we are committed to offering our customers value. All styles, including those falling into our ‘better’ and ‘best’ classifications, will be priced at levels that are intended to be more attractive to our customers. We believe that this will result in improved net sales, reduced markdowns and increased gross profit.
-Improve inventory flow, speed to market and reduce lead times
Historically we have developed and delivered a full, unique merchandise assortment to our stores on a monthly basis. In order to simplify and accelerate our product development process, we will reduce the number of major product deliveries by half, to six times annually, beginning in September 2012. To maintain product freshness, we intend to supplement the major deliveries with a flow of replenishment product and select new colors and styles to all stores on an ongoing basis. We also intend to incorporate more robust product testing efforts into our development process. At the same time, we intend to work with current and new suppliers to identify opportunities to shorten product lead times and enhance our ability to react more quickly to current selling trends in-season.
-Implement a more targeted promotional cadence and markdown strategy
We are analyzing our promotional cadence and adjusting our markdown strategy in an effort to minimize and reverse the significant merchandise margin erosion we experienced in the transition period and the first quarter of fiscal 2012. While we anticipate that in order to be competitive we will need to continue to be promotional in fiscal 2012, we are testing and implementing more targeted, unique promotions in an effort to improve merchandise margins and lessen our reliance on storewide promotional events. In addition, we have adopted a more focused and timely approach to our markdown process that quickly addresses underperforming styles on a unique basis in an effort to utilize our markdowns as efficiently as possible.
Restructuring/Store Closing Initiative
In the third quarter of the transition period, we announced that, following an in-depth analysis of our store portfolio, our Board approved a plan to close approximately 100 stores, most of which were underperforming. Ultimately, 103 stores were identified for closure, and these closings are expected to positively impact results of operations in fiscal 2012. This group of stores generated approximately $35 million of sales and store-level operating losses of approximately $11 million, which included approximately $7 million of non-cash impairment charges, on a trailing 12-month basis through January 28, 2012. Ninety of the 103 stores identified for closure were closed in the transition period, with two closing in November 2011, seven closing in December 2011 and 81 closing in January 2012. We closed five stores in February 2012, six stores in March 2012 and expect to close the remaining two stores by the end of fiscal 2012. In addition to the store closures, we are seeking to restructure the occupancy costs of a majority of our remaining stores.
The Company recorded total restructuring and asset impairment charges of approximately $21.2 million in the transition period consisting primarily of $11.4 million of non-cash asset impairment charges and $8.2 million of net expense related to lease termination liabilities partially offset by the reduction of deferred obligations related to closed stores. These charges consisted primarily of the costs of future obligations related to closed store locations. Discounted liabilities for future lease costs and the fair value of related subleases of closed locations are recorded when the stores are closed and these amounts are subject to adjustments as liabilities are settled. In assessing the discounted liabilities for future costs of obligations related to closed stores, the Company made assumptions regarding amounts of future subleases. If these assumptions or their related estimates change in the future, the Company may be required to record additional exit costs or reduce exit costs previously accrued. Management is also negotiating with landlords to mitigate the amount of lease termination liabilities. As a result, actual settlements may vary substantially from recorded obligations. We also recorded approximately $1.5 million of severance and miscellaneous other store closing costs in the transition period.
In the first quarter of fiscal 2012, we recognized a net benefit of approximately $0.8 million related to restructuring and impairment costs. We recorded a credit of approximately $1.4 million related to 18 stores where the amounts recorded for net lease termination liabilities exceeded the actual settlements negotiated with landlords. We also recorded approximately $0.5 million of additional net lease termination liabilities related to three stores closed in the first quarter of fiscal 2012. In addition, we recognized approximately $0.1 million of non-cash asset impairment charges related to five stores we plan to continue to operate.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||