Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 30, 2017)
  • 10-Q (Aug 30, 2017)
  • 10-Q (May 31, 2017)
  • 10-Q (Dec 2, 2016)
  • 10-Q (Sep 1, 2016)
  • 10-Q (Jun 9, 2016)

 
8-K

 
Other

Christopher & Banks 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____to____
Commission File No. 001-31390
CHRISTOPHER & BANKS CORPORATION
(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code (763) 551-5000
 
 Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  YES  ☐  NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒  YES  ☐  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨
Accelerated filer ¨
Non-accelerated filer ☒ (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Emerging growth company ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐  YES ☒  NO
As of August 25, 2017, there were 37,855,181 shares of the registrant's common stock outstanding.




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

1


PART I - FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
 
 
July 29, 2017
 
January 28, 2017
 
 
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
22,573

 
$
35,006

Accounts receivable
 
3,833

 
2,549

Merchandise inventories
 
41,917

 
36,834

Prepaid expenses and other current assets
 
4,568

 
3,485

Income taxes receivable
 
255

 
516

Total current assets
 
73,146

 
78,390

Property, equipment and improvements, net
 
51,983

 
55,332

Other non-current assets:
 
 
 
 
Deferred income taxes
 
322

 
321

Other assets
 
641

 
577

Total other non-current assets
 
963

 
898

Total assets
 
$
126,092

 
$
134,620

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
22,994

 
$
13,867

Accrued salaries, wages and related expenses
 
4,338

 
6,613

Accrued liabilities and other current liabilities
 
20,801

 
26,426

Total current liabilities
 
48,133

 
46,906

Non-current liabilities:
 
 
 
 
Deferred lease incentives
 
8,540

 
9,021

Deferred rent obligations
 
6,583

 
6,576

Other non-current liabilities
 
2,574

 
822

Total non-current liabilities
 
17,697

 
16,419

 
 
 
 
 
Commitments and contingencies
 

 

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

 

Common stock — $0.01 par value, 74,000 shares authorized, 47,646 and 47,425 shares issued, and 37,855 and 37,634 shares outstanding at July 29, 2017 and January 28, 2017, respectively
 
476

 
473

Additional paid-in capital
 
127,057

 
126,516

Retained earnings
 
45,440

 
57,017

Common stock held in treasury, 9,791 shares at cost at July 29, 2017 and January 28, 2017
 
(112,711
)
 
(112,711
)
Total stockholders’ equity
 
60,262

 
71,295

Total liabilities and stockholders’ equity
 
$
126,092

 
$
134,620



See Notes to Condensed Consolidated Financial Statements

2


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited) 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
July 29,
 
July 30,
 
July 29,
 
July 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net sales
 
$
86,618

 
$
89,923

 
$
175,173

 
$
189,957

Merchandise, buying and occupancy costs
 
61,990

 
59,774

 
120,007

 
122,096

Gross profit
 
24,628

 
30,149

 
55,166

 
67,861

Other operating expenses:
 
 

 
 
 
 
 
 
Selling, general and administrative
 
29,179

 
30,626

 
60,153

 
66,103

Depreciation and amortization
 
3,167

 
2,974

 
6,266

 
5,996

Impairment of long-lived assets
 
93

 
309

 
163

 
476

Total other operating expenses
 
32,439

 
33,909

 
66,582

 
72,575

Operating loss
 
(7,811
)
 
(3,760
)
 
(11,416
)
 
(4,714
)
Interest expense, net
 
(38
)
 
(42
)
 
(69
)
 
(82
)
Other income
 

 

 

 
911

Loss before income taxes
 
(7,849
)
 
(3,802
)
 
(11,485
)
 
(3,885
)
Income tax provision
 
40

 
82

 
92

 
167

Net loss
 
$
(7,889
)
 
$
(3,884
)
 
$
(11,577
)
 
$
(4,052
)
 
 
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
 
Net loss
 
$
(0.21
)
 
$
(0.11
)
 
$
(0.31
)
 
$
(0.11
)
Basic shares outstanding
 
37,156

 
36,981

 
37,123

 
36,953

 
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
 
Net loss
 
$
(0.21
)
 
$
(0.11
)
 
$
(0.31
)
 
$
(0.11
)
Diluted shares outstanding
 
37,156

 
36,981

 
37,123

 
36,953

 

See Notes to Condensed Consolidated Financial Statements


3


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
July 29, 2017
 
July 30, 2016
 
July 29, 2017
 
July 30, 2016
 
 
 
 
 
 
 
 
 
Net loss
 
$
(7,889
)
 
$
(3,884
)
 
$
(11,577
)
 
$
(4,052
)
Other comprehensive income, net of tax
 

 

 

 

Comprehensive loss
 
$
(7,889
)
 
$
(3,884
)
 
$
(11,577
)
 
$
(4,052
)
 

See Notes to Condensed Consolidated Financial Statements


4


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
Twenty-Six Weeks Ended
 
 
July 29, 2017
 
July 30, 2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(11,577
)
 
$
(4,052
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
6,266

 
5,996

Impairment of long-lived assets
 
163

 
476

Deferred income taxes, net
 

 
11

Gain from company-owned life insurance
 

 
(911
)
Amortization of premium on investments
 

 
10

Amortization of financing costs
 
31

 
31

Deferred lease-related liabilities
 
(442
)
 
(381
)
Stock-based compensation expense
 
550

 
406

Loss on disposal of assets
 

 
1

Changes in operating assets and liabilities:
 
 

 
 
Accounts receivable
 
(1,284
)
 
102

Merchandise inventories
 
(5,082
)
 
(7,571
)
Prepaid expenses and other assets
 
(1,180
)
 
(463
)
Income taxes receivable
 
261

 
(88
)
Accounts payable
 
9,096

 
5,547

Accrued liabilities
 
(7,872
)
 
260

Other liabilities
 
1,793

 
106

Net cash used in operating activities
 
(9,277
)
 
(520
)
Cash flows from investing activities:
 
 
 
 
Purchases of property, equipment and improvements
 
(3,150
)
 
(6,788
)
Proceeds from company-owned life insurance
 

 
911

Maturities of available-for-sale investments
 

 
3,005

Net cash used in investing activities
 
(3,150
)
 
(2,872
)
Cash flows from financing activities:
 
 
 
 
Shares redeemed for payroll taxes
 
(6
)
 
(23
)
Net cash used in financing activities
 
(6
)
 
(23
)
Net decrease in cash and cash equivalents
 
(12,433
)
 
(3,415
)
Cash and cash equivalents at beginning of period
 
35,006

 
31,506

Cash and cash equivalents at end of period
 
$
22,573

 
$
28,091

Supplemental cash flow information:
 
 
 
 
Interest paid
 
$
69

 
$
95

Income taxes (refunded) paid
 
$
(251
)
 
$
102

Accrued purchases of equipment and improvements
 
$
219

 
$
226

 

See Notes to Condensed Consolidated Financial Statements


5


CHRISTOPHER & BANKS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 — Basis of Presentation
 
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared by Christopher & Banks Corporation and its subsidiaries (collectively referred to as “Christopher & Banks”, “the Company”, “we” or “us”) pursuant to the current rules and regulations of the United States ("U.S.") Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been omitted, pursuant to such rules and regulations. These unaudited condensed consolidated financial statements, except the condensed consolidated balance sheet as of January 28, 2017 derived from the Company's audited financial statements, should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2017.
 
The results of operations for the interim period shown in this report are not necessarily indicative of results to be expected for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal adjustments, except as otherwise stated in these notes, considered necessary to present fairly our financial position, results of operations, and cash flows as of July 29, 2017, and July 30, 2016 and for all periods presented.
 
Recently issued accounting pronouncements
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance under ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition requirements and provides a new comprehensive revenue recognition model that requires entities to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, Deferral of the Effective Date, which defers the effective date of the new revenue recognition standard by one year. As a result, ASU 2014-09 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2017. Adoption is allowed by either the full retrospective or modified retrospective approach. We do not believe the adoption of this standard will have a material impact on our consolidated financial statements. The new revenue standard will require the Company to recognize gift card breakage proportional to actual gift card redemptions. The Company continues to evaluate the merits of adopting the standard under the full retrospective or modified retrospective approach, which will require certain reclassifications.
 
In February 2016, the FASB issued ASU 2016-02, Leases, which requires that lease arrangements longer than twelve months result in an entity recognizing an asset and liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the guidance and its impact on our condensed consolidated financial statements.
 
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 addresses simplification of several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The adoption of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements mostly due to the impact of the tax valuation allowance.

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

6


NOTE 2 — Merchandise Inventories and Sources of Supply
 
Merchandise inventories consisted of the following (in thousands):
 
 
July 29, 2017
 
January 28, 2017
Merchandise - in store/eCommerce
 
$
32,648

 
$
28,584

Merchandise - in transit
 
9,269

 
8,250

Total merchandise inventories
 
$
41,917

 
$
36,834

 
There have been no material changes to our ratio of imports to total merchandise purchases or concentration of supplier purchases in the twenty-six weeks ended July 29, 2017 compared to the fiscal 2016 year ended January 28, 2017.

NOTE 3 — Property, Equipment and Improvements, Net
 
Property, equipment and improvements, net consisted of the following (in thousands):
 
Description
 
July 29, 2017
 
January 28, 2017
Land
 
$
1,597

 
$
1,597

Corporate office, distribution center and related building improvements
 
12,700

 
12,700

Store leasehold improvements
 
49,362

 
49,450

Store furniture and fixtures
 
69,244

 
69,598

Corporate office and distribution center furniture, fixtures and equipment
 
4,938

 
4,880

Computer and point of sale hardware and software
 
33,541

 
32,313

Construction in progress
 
1,515

 
1,321

Total property, equipment and improvements, gross
 
172,897

 
171,859

Less accumulated depreciation and amortization
 
(120,914
)
 
(116,527
)
Total property, equipment and improvements, net
 
$
51,983

 
$
55,332

 
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In conjunction with an impairment analysis, the Company determined that improvements and equipment at certain under-performing stores and at stores identified for closure were impaired. As a result, the Company recorded approximately $0.1 million and $0.3 million for long-lived asset impairments during the thirteen week periods ended July 29, 2017 and July 30, 2016, respectively. The Company recorded approximately $0.2 million and $0.5 million for long-lived asset impairments during the twenty-six week periods ended July 29, 2017 and July 30, 2016, respectively.
 
NOTE 4 — Accrued Liabilities
 
Accrued liabilities and other current liabilities consisted of the following (in thousands):
 
 
July 29, 2017
 
January 28, 2017
Gift card and store credit liabilities
 
$
5,128

 
$
7,414

Accrued Friendship Rewards Program loyalty liability
 
3,587

 
3,770

Accrued income, sales and other taxes payable
 
1,866

 
1,239

Accrued occupancy-related expenses
 
3,354

 
3,614

Sales return reserve
 
1,282

 
943

eCommerce obligations
 
2,868

 
3,190

Other accrued liabilities
 
2,716

 
6,256

Total accrued liabilities and other current liabilities
 
$
20,801

 
$
26,426


NOTE 5 — Credit Facility
 
The Company is party to an amended and restated credit agreement (the "Credit Facility") with Wells Fargo Bank, N.A. (“Wells Fargo”), as lender. The Credit Facility was most recently amended and extended on September 8, 2014. The current expiration date is September 8, 2019.

7


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

The Credit Facility contains customary events of default and various affirmative and negative covenants. The sole financial covenant contained in the Credit Facility requires the Company to maintain Availability at least equal to the greater of (a) ten percent (10%) of the borrowing base or (b) $3.0 million. In addition, the Credit Facility permits the payment of dividends to the Company's stockholders if certain financial conditions are met. The Company was in compliance with all covenants and other financial provisions as of July 29, 2017.

The Company's obligations under the Credit Facility are secured by the assets of the Company and its subsidiaries. The Company has pledged substantially all of its assets as collateral security for the loans, including accounts owed to the Company, bank accounts, inventory, other tangible and intangible personal property, intellectual property (including patents and trademarks), and stock or other evidences of ownership of 100% of all of the Company's subsidiaries.
 
The Company had no revolving credit loan borrowings under the Credit Facility during each of the twenty-six week periods ended July 29, 2017, and July 30, 2016. The total Borrowing Base at July 29, 2017 was approximately $36.5 million. As of July 29, 2017, the Company had open on-demand letters of credit of approximately $0.9 million. Accordingly, after reducing the Borrowing Base for the open letters of credit and the required minimum availability of the greater of $3.0 million, or 10.0% of the Borrowing Base, the net availability of revolving credit loans under the Credit Facility was approximately $32.0 million at July 29, 2017.

NOTE 6 — Income Taxes
 
The Company's liability for unrecognized tax benefits associated with uncertain tax positions is recorded within other non-current liabilities. There has been no material change in the reserve for unrecognized tax benefits since the end of the previous year. The Company recognizes interest and penalties related to unrecognized tax benefits as components of income tax expense.
 
The Company and its subsidiaries are subject to U.S. federal income taxes and the income tax obligations of various state and local jurisdictions. Periods after fiscal 2013 remain subject to examination by the IRS. With few exceptions, the Company is not subject to state income tax examination by tax authorities for taxable years prior to fiscal 2012.

As of July 29, 2017, the end of the second quarter of fiscal 2017, the Company had no other ongoing audits in various jurisdictions and does not expect the liability for unrecognized tax benefits to significantly increase or decrease in the next twelve months.

As of July 29, 2017, the possibility of future cumulative losses still exists. Accordingly, the Company has continued to maintain a valuation allowance against its net deferred tax assets. A small deferred tax asset was allowed related to certain tax benefits.

As of July 29, 2017, the Company has federal and state net operating loss carryforwards ("NOLs") which will reduce future taxable income. Approximately $36.2 million in net federal tax benefits are available from federal NOLs. An additional $1.2 million is available in net tax credit carryforwards. The state NOLs will result in net state tax benefits of approximately $2.5 million.

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




8


NOTE 7 — Earnings Per Share
 
The following table sets forth the calculation of basic and diluted earnings per share (“EPS”) shown on the face of the accompanying consolidated statement of operations:
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
July 29,
 
July 30,
 
July 29,
 
July 30,
 
 
2017
 
2016
 
2017
 
2016
Numerator (in thousands):
 
 
 
 
 
 
 
 
Net loss attributable to Christopher & Banks Corporation
 
$
(7,889
)
 
$
(3,884
)
 
$
(11,577
)
 
$
(4,052
)
Denominator (in thousands):
 
 

 
 

 
 
 
 
Weighted average common shares outstanding - basic
 
37,156

 
36,981

 
37,123

 
36,953

Dilutive shares
 

 

 

 

Weighted average common and common equivalent shares outstanding - diluted
 
37,156

 
36,981

 
37,123

 
36,953

Net loss per common share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.21
)
 
$
(0.11
)
 
$
(0.31
)
 
$
(0.11
)
Diluted
 
$
(0.21
)
 
$
(0.11
)
 
$
(0.31
)
 
$
(0.11
)
 
Total stock options of approximately 4.1 million and 2.2 million were excluded from the shares used in the computation of diluted earnings per share for the thirteen week periods ended July 29, 2017 and July 30, 2016, as they were anti-dilutive. Total stock options of approximately 4.1 million and 2.4 million were excluded from the shares used in the computation of diluted earnings per share for the twenty-six week periods ended July 29, 2017 and July 30, 2016, respectively, as they were anti-dilutive.
 
NOTE 8 — Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
 
Level 1 – Quoted prices in active markets for identical assets or liabilities
Level 2 – Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable
Level 3 – Unobservable inputs that are significant to the fair value of the asset or liability.

Assets that are Measured at Fair Value on a Non-recurring Basis:
 
The following table summarizes certain information for non-financial assets for the twenty-six weeks ended July 29, 2017 and the fiscal year ended January 28, 2017, that are measured at fair value on a non-recurring basis in periods subsequent to an initial recognition period. The Company places amounts into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. 
 
 
Twenty-Six Weeks Ended
 
Fiscal Year Ended
Long-Lived Assets Held and Used (in thousands):
 
July 29, 2017
 
January 28, 2017
Carrying value
 
$
163

 
$
877

Fair value measured using Level 3 inputs
 
$

 
$
91

Impairment charge
 
$
163

 
$
786

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

9


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

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

n
NOTE 9 — Legal Proceedings
 
The Company is subject, from time to time, to various claims, lawsuits or actions that arise in the ordinary course of business. We accrue for loss contingencies associated with outstanding litigation or legal claims for which management has determined it is probable that a loss contingency exists and the amount of the loss can be reasonably estimated. In connection with a preliminary settlement of pre-litigation employment claims reached in February 2017, we established a loss contingency of $1.475 million as of January 28, 2017. In connection therewith, on April 13, 2017, a complaint was filed in state Circuit Court in the Fifteenth Judicial Circuit in Palm Beach County, Florida (the “Florida Circuit Court”) by three named plaintiffs in a purported class action asserting claims on behalf of current and former store managers. The plaintiffs principally alleged that they and other similarly situated store managers were improperly classified as exempt employees and thus not compensated for overtime work as required under applicable federal and state law. On May 4, 2017, the Company entered into a settlement agreement with the named plaintiffs and the proposed class. On May 8, 2017, the Florida Circuit Court issued an order approving the class settlement. As approved by the Florida Circuit Court, certain current and former store managers will be eligible to receive payments in connection with time worked in prior years. The settlement of the lawsuit is not an admission by us of any wrongdoing.

As part of the settlement, the Company contributed $1.475 million into a settlement fund in the second fiscal quarter of 2017. Any funds remaining after payment of all submitted claims and related settlement fund costs and expenses will revert to the Company. A final resolution of the matter and the dissolution of the settlement fund is expected by the end of this fiscal year. While the ultimate amount of the claims paid under the settlement is likely to be less than the Company has recorded, the difference is not expected to have a material impact on our consolidated financial position or liquidity.

The ultimate resolution of legal matters can be inherently uncertain and for some matters, we are currently unable to predict the ultimate outcome, determine whether a liability has been incurred or make an estimate of the reasonably possible liability that could result from an unfavorable outcome because of these uncertainties. The Company does not, however, currently believe that the resolution of any pending matter will have a material adverse effect on its financial position, results of operations or liquidity.
 
NOTE 10 — Segment Reporting
 
In the table below, Retail Operations includes activity generated by the Company’s retail store locations (Missy Petite Women ("MPW"), Outlets, Christopher & Banks, and C.J. Banks stores) as well as the eCommerce business. Retail Operations only includes net sales, merchandise gross margin and direct store expenses with no allocation of corporate overhead as that is the information used by the chief operating decision maker to evaluate performance and to allocate resources. The Corporate/Administrative balances include supporting administrative activity at the corporate office and distribution center facility and are included to reconcile the amounts to the condensed consolidated financial statements. 


10


Business Segment Information
(in thousands)
 
 
Retail
 
Corporate/
 
 
 
 
Operations
 
Administrative
 
Consolidated
Thirteen Weeks Ended July 29, 2017
 
 
 
 
 
 
Net sales
 
$
86,618

 
$

 
$
86,618

Depreciation and amortization
 
2,491

 
676

 
3,167

Impairment of long-lived assets
 
93

 

 
93

Operating income (loss)
 
4,146

 
(11,957
)
 
(7,811
)
 
 
 
 
 
 
 
Thirteen Weeks Ended July 30, 2016
 
 
 
 
 
 
Net sales
 
$
89,923

 
$

 
$
89,923

Depreciation and amortization
 
2,360

 
614

 
2,974

Impairment of long-lived assets
 
309

 

 
309

Operating income (loss)
 
7,878

 
(11,638
)
 
(3,760
)
 
 
 
 
 
 
 
Twenty-Six Weeks Ended July 29, 2017
 
 
 
 
 
 
Net sales
 
$
175,173

 
$

 
$
175,173

Depreciation and amortization
 
4,950

 
1,316

 
6,266

Impairment of long-lived assets
 
163

 

 
163

Operating income (loss)
 
13,953

 
(25,369
)
 
(11,416
)
Total assets
 
91,705

 
34,387

 
126,092

 
 
 
 
 
 
 
Twenty-Six Weeks Ended July 30, 2016
 
 
 
 
 
 
Net sales
 
$
189,957

 
$

 
$
189,957

Depreciation and amortization
 
4,746

 
1,250

 
5,996

Impairment of long-lived assets
 
476

 

 
476

Operating income (loss)
 
23,520

 
(28,234
)
 
(4,714
)
Total assets
 
105,274

 
46,601

 
151,875


11


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended January 28, 2017 and our unaudited Condensed Consolidated Financial Statements and related Notes included in Item 1 of this Quarterly Report on Form 10-Q. Unless otherwise noted, transactions and other factors significantly impacting our financial condition, results of operations and liquidity are discussed in order of magnitude.
 
Executive Overview
 
We are a national specialty retailer featuring exclusively-designed, privately-branded women’s apparel and accessories. We offer our customer an assortment of unique, classic and versatile clothing that fits her everyday needs at a good value.
 
We operate an integrated, omni-channel platform that provides our customer the ability to shop when and where she wants, including online or at retail and outlet stores. This approach allows our customers to browse, purchase, return, or exchange our merchandise through the channel that is optimal for her.
 
As of July 29, 2017, we operated 473 stores in 45 states, including 320 Missy, Petite, Women ("MPW") stores, 79 outlet stores, 38 Christopher & Banks ("CB") stores, and 36 C.J. Banks ("CJ") stores. Our CB brand offers unique fashions and accessories featuring exclusively designed assortments of women’s apparel in sizes 4 to 16 and in petite sizes 4P to 16P. Our C.J. Banks brand offers similar assortments of women’s apparel in sizes 14W to 26W. Our MPW concept and outlet stores offer an assortment of both Christopher & Banks and C.J. Banks apparel servicing the Missy, Petite and Women-sized customer in one location.
 
Fiscal 2017 Strategic Priorities Update
 
Our overall business strategy is to build sustainable, long-term revenue growth and consistent profitability through the following strategic initiatives:

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

Offer a differentiated product assortment
We are committed to ensuring we consistently meet our customers’ needs with a differentiated merchandise assortment that fits her lifestyle at a recognizable value. We intend to increase the flow of our fashion offering and provide a more versatile assortment to encourage our customers to shop more frequently and buy more when she visits. To further support the newness of our merchandise presentations, we are analyzing our promotional cadence and adjusting our markdown strategy to increase inventory turnover to keep merchandise fresh and current.

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

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

We are accelerating our efforts to re-engage customers that stopped shopping following the migration of their local CB or CJ store to the MPW format through targeted communications. We are also working to gain new customers and brand awareness through increased investments in digital paid media, and earned media. Additionally, we are increasing the frequency of store grass root events that will continue to capitalize on the strong relationships between our store associates and customers.


12


In the second quarter of fiscal 2017, we launched a “refer a friend” program to incentivize customers to introduce their friends to our brand. In the third quarter of fiscal 2017, we will implement personalization on our eCommerce site and in emails to further strengthen our customer relationships.

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

In fiscal 2017, we expect continued growth in eCommerce by leveraging our new platform launched in fiscal 2016, including improving personalization and enhanced site experiences. New omni-channel capabilities, including new fulfillment functionality, store grading and localized assortment planning, will support improved management of the receipt, allocation, and distribution of merchandise.

In second quarter of fiscal 2017, we launched our “find in store” feature online in our effort to provide more convenience to our customers. We believe that providing more visibility into store inventory will help drive traffic to our stores where our associates can provide personalized service and outfitting recommendations, and ultimately lead to increased customer spend. Later in fiscal 2017, we expect to offer other fulfillment options, such as ship to store or pick up in store.

Performance Measures

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

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

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

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

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

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

 
 
July 29, 2017
 
July 30, 2016
Stores by Format
 
Total Store Count
 
Comparable Sales Stores
 
% of Comparable Sales Stores
 
Total Store Count
 
Comparable Sales Stores
 
% of Comparable Sales Stores
MPW
 
320

 
300

 
94
%
 
315

 
287

 
91
%
Outlet
 
79

 
77

 
97
%
 
83

 
53

 
64
%
Christopher and Banks
 
38

 
38

 
100
%
 
55

 
55

 
100
%
C.J. Banks
 
36

 
36

 
100
%
 
53

 
53

 
100
%
Total Stores
 
473

 
451

 
95
%
 
506

 
448

 
89
%
 
Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

13



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

Second Quarter Fiscal 2017 Results of Operations

The following table presents selected consolidated financial data for the second quarter of fiscal 2017 compared to the second quarter of fiscal 2016:
 
 
Thirteen Weeks Ended
(dollars in thousands)
 
July 29, 2017
 
July 30, 2016
Net sales
 
$
86,618

 
$
89,923

Merchandise, buying and occupancy costs
 
61,990

 
59,774

Gross profit
 
24,628

 
30,149

Other operating expenses:
 
 
 
 
Selling, general and administrative
 
29,179

 
30,626

Depreciation and amortization
 
3,167

 
2,974

Impairment of store assets
 
93

 
309

Total other operating expenses
 
32,439

 
33,909

Operating loss
 
(7,811
)
 
(3,760
)
Interest expense, net
 
(38
)
 
(42
)
Loss before income taxes
 
(7,849
)
 
(3,802
)
Income tax provision
 
40

 
82

Net loss
 
$
(7,889
)
 
$
(3,884
)
 
 
 
 
 
 
 
 
 
 
 
 
Thirteen Weeks Ended
Rate trends as a percentage of net sales
 
July 29, 2017
 
July 30, 2016
Gross margin
 
28.4
 %
 
33.5
 %
Selling, general, and administrative
 
33.7
 %
 
34.1
 %
Depreciation and amortization
 
3.7
 %
 
3.3
 %
Operating loss
 
(9.0
)%
 
(4.2
)%
 
Second Quarter Fiscal 2017 Summary
Net sales decreased 3.7% compared to the same period last year primarily due to a decline in average unit retail prices and a decrease in average store count, partly offset by a sequential improvement in traffic, leading to an increase in transactions;
Net sales sequentially improved through the second quarter reaching a positive single-digit comparable sales % in fiscal July;
eCommerce sales increased 22.1% compared to a 10.8% increase the same period last year;
Gross margin rate decreased 510 basis points compared to the same period last year primarily driven by our efforts to sell through non go-forward product and address slow sellers more quickly through markdowns;
Net loss aggregated to $7.9 million, a $0.21 loss per share, compared to a net loss of $3.9 million, or a $0.11 loss per share, for the same period last year;
As of July 29, 2017, we held $22.6 million of cash and cash equivalents, compared to $28.1 million as of July 30, 2016.

Net Sales
 
 
Thirteen Weeks Ended
 
 
Net sales (in thousands):
 
July 29, 2017
 
July 30, 2016
 
% Change
Net sales
 
$
86,618

 
$
89,923

 
(3.7
)%
 
The components of the 3.7% net sales decrease in the second quarter fiscal 2017 compared to the second quarter of fiscal 2016 were as follows:

14


 
 
Thirteen
Weeks Ended
Sales driver change components
 
July 29, 2017
Number of transactions
 
3.0
 %
Units per transaction
 
0.9
 %
Average unit retail
 
(7.6
)%
Total sales driver change increase
 
(3.7
)%
 
 
 
Thirteen
Weeks Ended
Comparable sales
 
July 29, 2017
Comparable sales
 
(0.6
)%
 
Sales decreased primarily due to a 7.6% decrease in average unit retail prices, a 7.0% decline in average store count, partly offset by a sequential improvement in mall traffic, higher conversion rates and a 0.9% increase in units per transaction. The sales decrease was also correlated to lower inventory levels at the beginning of the quarter and promotional spend to sell through inventory that did not reflect our go-forward strategy, contributing to the decline in average unit retail prices.

To supplement our comparable sales measure, we also monitor changes in other store sales metrics as illustrated in the table below:
 
 
Thirteen
Weeks Ended
Store metrics
 
July 29, 2017
Net sales per store % change
 
(0.7
)%
Net sales per square foot % change
 
(1.9
)%
 
Net sales per store and Net sales per square foot decreased mainly due to a decline in average unit retail prices.

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

 

 

 

 
320

 
320

 
1,241

 
1,241

Outlet
 
82

 

 
(3
)
 

 
79

 
80

 
306

 
329

Christopher and Banks
 
38

 

 

 

 
38

 
38

 
126

 
126

C.J. Banks
 
36

 

 

 

 
36

 
36

 
130

 
130

Total Stores
 
476

 

 
(3
)
 

 
473

 
474

 
1,803

 
1,826

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Square footage presented in thousands

Average store count in the second quarter of fiscal 2017 was 474 stores compared to an average store count of 509 stores in the second quarter fiscal 2016, a decrease of 6.9%. Average square footage in the second quarter of fiscal 2017 decreased 5.7% compared to the second quarter of fiscal 2016.

Gross Profit
 
 
Thirteen Weeks Ended
 
 
Gross profit
 
July 29, 2017
 
July 30, 2016
 
Change
Gross profit
 
$
24,628

 
$
30,149

 
$
(5,521
)
Gross margin rate as a percentage of net sales
 
28.4
%
 
33.5
%
 
(5.1
)%
 

15


Gross margin rate decreased 510 basis points primarily driven by our efforts to sell through non go-forward product and address slow sellers more quickly through markdowns. The gross margin rate decline accelerated in the second quarter compared to the first quarter due to seasonal markdowns that typically occur at the end of the second quarter.

Selling, General, and Administrative (“SG&A”) Expenses
 
 
Thirteen Weeks Ended
 
 
Selling, general, and administrative
 
July 29, 2017
 
July 30, 2016
 
Change
Selling, general, and administrative
 
$
29,179

 
$
30,626

 
$
(1,447
)
SG&A rate as a percentage of net sales
 
33.7
%
 
34.1
%
 
(0.4
)%
 
SG&A decreased by $1.4 million, driven by lower store operating expenses of $1.4 million due to a managed effort to reduce expenses. The SG&A expense decrease was also attributable to the absence of non-recurring charges of eCommerce transition costs of $0.3 million incurred in the second quarter of fiscal 2016. These SG&A expense savings were partially offset by an increase in eCommerce operating expenses of $0.2 million to support higher eCommerce sales. As a percent of net sales, SG&A improved approximately 40 basis points to 33.7%.
 
Depreciation and Amortization (“D&A”)
 
 
Thirteen Weeks Ended
 
 
Depreciation and amortization
 
July 29, 2017
 
July 30, 2016
 
Change
Depreciation and amortization
 
$
3,167

 
$
2,974

 
$
193

D&A rate as a percentage of net sales
 
3.7
%
 
3.3
%
 
0.4
%
 
Depreciation and amortization expense increased primarily due to the deployment of technology solutions, including new omni-channel capabilities partly offset by the effects of the decrease in average store count.

Impairment of Long-Lived Assets
 
 
Thirteen Weeks Ended
 
 
Impairment of long-lived assets
 
July 29, 2017
 
July 30, 2016
 
Change
Impairment of long-lived assets
 
$
93

 
$
309

 
$
(216
)
 
We recorded non-cash impairment charges related to long-lived assets held at store locations.
 
Operating Loss
 
 
Thirteen Weeks Ended
 
 
Operating loss
 
July 29, 2017
 
July 30, 2016
 
Change
Operating loss
 
$
(7,811
)
 
$
(3,760
)
 
$
(4,051
)
Operating loss rate as a percentage of net sales
 
(9.0
)%
 
(4.2
)%
 
(4.8
)%
 
Our operating loss increased in the second quarter of fiscal 2017 compared to the second quarter of fiscal 2016 primarily due to a 510 basis point gross margin rate decline and net sales decrease of $3.3 million, partly offset by a SG&A decrease of $1.4 million, including the absence of fiscal 2016 non-recurring charges of $0.3 million.
 
Interest expense, net
 
 
Thirteen Weeks Ended
 
 
Interest expense, net
 
July 29, 2017
 
July 30, 2016
 
Change
Interest expense, net
 
$
(38
)
 
$
(42
)
 
$
4


The change in interest expense, net is not material.
 

16


Income Tax Provision
 
 
Thirteen Weeks Ended
 
 
Income tax provision
 
July 29, 2017
 
July 30, 2016
 
Change
Income tax provision
 
$
40

 
$
82

 
$
(42
)
 
The change in the income tax provision is not material. For the thirteen weeks ended July 29, 2017, our effective tax rate was (1.3)% compared to (2.2)% in the same period last year.
 
Net earnings
 
 
Thirteen Weeks Ended
 
 
Net loss
 
July 29, 2017
 
July 30, 2016
 
Change
Net loss
 
$
(7,889
)
 
$
(3,884
)
 
$
(4,005
)
Net loss rate as a percentage of net sales
 
(9.1
)%
 
(4.3
)%
 
(4.8
)%

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

First Half Fiscal 2017 Results of Operations

The following table presents selected consolidated financial data for the first half of fiscal 2017 compared to the first half of fiscal 2016:
 
 
Twenty-Six Weeks Ended
(dollars in thousands)
 
July 29, 2017
 
July 30, 2016
Net sales
 
$
175,173

 
$
189,957

Merchandise, buying and occupancy costs
 
120,007

 
122,096

Gross profit
 
55,166

 
67,861

Other operating expenses:
 
 
 
 
Selling, general and administrative
 
60,153

 
66,103

Depreciation and amortization
 
6,266

 
5,996

Impairment of store assets
 
163

 
476

Total other operating expenses
 
66,582

 
72,575

Operating loss
 
(11,416
)
 
(4,714
)
Interest expense, net
 
(69
)
 
(82
)
Other income
 

 
911

Loss before income taxes
 
(11,485
)
 
(3,885
)
Income tax provision
 
92

 
167

Net loss
 
$
(11,577
)
 
$
(4,052
)
 
 
 
 
 
 
 
 
 
 
 
 
Twenty-Six Weeks Ended
Rate trends as a percentage of net sales
 
July 29, 2017
 
July 30, 2016
Gross margin
 
31.5
 %
 
35.7
 %
Selling, general, and administrative
 
34.3
 %
 
34.8
 %
Depreciation and amortization
 
3.6
 %
 
3.2
 %
Operating loss
 
(6.5
)%
 
(2.5
)%


17


First Half Fiscal 2017 Summary
Net sales decreased 7.8% compared to the same period last year primarily due to a decline in average unit retail prices and a decrease in average store count;
Net sales sequentially improved from a 11.5% sales decline and a comparable sales decrease of 8.9% in the first quarter of fiscal 2017 to a 3.7% sales decline and comparable sales decrease of 0.6% in the second quarter of fiscal 2017;
eCommerce sales increased 18.1% compared to a 27.2% increase the same period last year;
Gross margin rate decreased 420 basis points compared to the same period last year primarily driven by our second quarter efforts to sell through non go-forward product and address slow sellers more quickly through markdowns;
Net loss aggregated to $11.6 million, a $0.31 loss per share, compared to a net loss of $4.1 million, or a $0.11 loss per share, for the same period last year.

Net Sales
 
 
Twenty-Six Weeks Ended
 
 
Net sales (in thousands):
 
July 29, 2017
 
July 30, 2016
 
% Change
Net sales
 
$
175,173

 
$
189,957

 
(7.8
)%

The components of the 7.8% net sales decrease in the first half of fiscal 2017 compared to the first half of fiscal 2016 were as follows:

 
 
Twenty-Six
Weeks Ended
Sales driver change components
 
July 29, 2017
Number of transactions
 
1.6
 %
Units per transaction
 
(0.6
)%
Average unit retail
 
(8.8
)%
Total sales driver change increase
 
(7.8
)%

 
 
Twenty-Six
Weeks Ended
Comparable sales
 
July 29, 2017
Comparable sales
 
(4.1
)%

Sales decreased primarily due to an 8.8% decrease in average unit retail prices, a 7.1% decline in average store count, continued weakness in mall traffic, and a 0.6% decrease in units per transaction, partly offset by higher conversion rates. The sales decrease was also correlated to lower inventory levels at the beginning of the year, lower inventory receipts in the first quarter and promotional spend to sell through inventory that did not reflect our go-forward strategy, contributing to the decline in average unit retail prices.

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

 
 
Twenty-Six
Weeks Ended
Store metrics
 
July 29, 2017
Net sales per store % change
 
(5.2
)%
Net sales per square foot % change
 
(6.6
)%

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

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


18


 
 
Store Count
 
Square Footage (1)
 
 
January 28,
 
 
 
 
 
MPW
 
July 29,
 
Avg Store
 
July 29,
 
January 28,
Stores by Format
 
2017
 
Open
 
Close
 
Conversions
 
2017
 
Count
 
2017
 
2017
MPW
 
318

 
1

 
(4
)
 
5

 
320

 
319

 
1,241

 
1,226

Outlet
 
82

 

 
(3
)
 

 
79

 
81

 
306

 
329

Christopher and Banks
 
43

 

 

 
(5
)
 
38

 
39

 
126

 
142

C.J. Banks
 
41

 

 

 
(5
)
 
36

 
37

 
130

 
147

Total Stores
 
484

 
1

 
(7
)
 
(5
)
 
473

 
476

 
1,803

 
1,844

(1) 
Square footage presented in thousands

Average store count in the first half of fiscal 2017 was 476 stores compared to an average store count of 512 stores in the same period of fiscal 2016, a decrease of 7.0%. Average square footage in the first half of fiscal 2017 decreased 5.7% compared to the same period of fiscal 2016.

Gross Profit
 
 
Twenty-Six Weeks Ended
 
 
Gross profit
 
July 29, 2017
 
July 30, 2016
 
Change
Gross profit
 
$
55,166

 
$
67,861

 
$
(12,695
)
Gross margin rate as a percentage of net sales
 
31.5
%
 
35.7
%
 
(4.2
)%

Gross margin rate decreased 420 basis points primarily driven by our efforts to sell through non go-forward product and address slow sellers more quickly through markdowns, and to a lesser extent, the effects of sales leverage on occupancy expenses. The gross margin rate decline accelerated in the second quarter compared to the first quarter due to seasonal markdowns that typically occur at the end of the second quarter.

Selling, General, and Administrative (“SG&A”) Expenses
 
 
Twenty-Six Weeks Ended
 
 
Selling, general, and administrative
 
July 29, 2017
 
July 30, 2016
 
Change
Selling, general, and administrative
 
$
60,153

 
$
66,103

 
$
(5,950
)
SG&A rate as a percentage of net sales
 
34.3
%
 
34.8
%
 
(0.5
)%

SG&A decreased by $5.9 million, driven by lower store operating expenses of $3.2 million and lower net employee compensation expenses of $1.2 million. The SG&A expense decrease was also attributable to the absence of non-recurring charges of $2.2 million, including advisory fees in connection with shareholder activism of $1.5 million and eCommerce transition costs of $0.7 million incurred in the first half of fiscal 2016. These SG&A expense savings were partially offset by an increase in eCommerce operating expenses of $1.0 million to support higher eCommerce sales. As a percent of net sales, SG&A improved approximately 50 basis points to 34.3%.
 
Depreciation and Amortization (“D&A”)
 
 
Twenty-Six Weeks Ended
 
 
Depreciation and amortization
 
July 29, 2017
 
July 30, 2016
 
Change
Depreciation and amortization
 
$
6,266

 
$
5,996

 
$
270

D&A rate as a percentage of net sales
 
3.6
%
 
3.2
%
 
0.4
%

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

Impairment of Long-Lived Assets
 
 
Twenty-Six Weeks Ended
 
 
Impairment of long-lived assets
 
July 29, 2017
 
July 30, 2016
 
Change
Impairment of long-lived assets
 
$
163

 
$
476

 
$
(313
)

19



We recorded non-cash impairment charges related to long-lived assets held at store locations.
 
Operating Loss
 
 
Twenty-Six Weeks Ended
 
 
Operating loss
 
July 29, 2017
 
July 30, 2016
 
Change
Operating loss
 
$
(11,416
)
 
$
(4,714
)
 
$
(6,702
)
Operating loss rate as a percentage of net sales
 
(6.5
)%
 
(2.5
)%
 
(4.0
)%

Our operating loss increased in the first half of fiscal 2017 compared to the first half of fiscal 2016 primarily due to a 420 basis point gross margin rate decline and a net sales decrease of $14.8 million, partly offset by a SG&A decrease of $5.9 million, including the absence of fiscal 2016 non-recurring charges of $2.2 million.
 
Interest expense, net
 
 
Twenty-Six Weeks Ended
 
 
Interest expense, net
 
July 29, 2017
 
July 30, 2016