TUESDAY MORNING CORP/DE - Quarter Report: 2014 March (Form 10-Q)

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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 MARCH 31, 2014

 

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 0-19658

 

TUESDAY MORNING CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

6250 LBJ Freeway

Dallas, Texas 75240

(Address of principal executive offices) (Zip code)

 

(972) 387-3562

(Registrant’s telephone number, including area code)

 

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  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at May 6, 2014
Common Stock, par value $0.01 per share		43,471,961

 

 

Table of Contents

 

PART I.	FINANCIAL INFORMATION	3
ITEM 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of March 31, 2014 and June 30, 2013	3
	Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 2014 and 2013	4
	Consolidated Statements of Comprehensive Income/(Loss) for the Three Months and Nine Months Ended March 31, 2014 and 2013	5
	Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2014 and 2013	6
	Notes to Consolidated Financial Statements (Unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	20
ITEM 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION	20
ITEM 1.	Legal Proceedings	20
ITEM 1A.	Risk Factors	21
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
ITEM 6.	Exhibits	22

 

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PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Tuesday Morning Corporation

Consolidated Balance Sheets

March 31, 2014 (unaudited) and June 30, 2013

(In thousands, except per share data)

 

		March 31, 2014			June 30, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	41,615		$	28,896
Inventories		205,784			211,981
Prepaid expenses		7,556			6,609
Deferred income taxes		—			991
Other current assets		603			2,310
Total Current Assets		255,558			250,787
Property and equipment, net		67,237			66,009
Deferred financing costs		1,565			2,011
Other assets		701			1,203
Deferred income tax — non current		3,655			1,870
Total Assets		$	328,716		$	321,880
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	73,341		$	72,958
Accrued liabilities		40,289			35,719
Deferred income taxes payable		3,655			—
Income taxes payable		122			85
Total Current Liabilities		117,407			108,762
Deferred rent		2,711			2,885
Other liabilities — non current		—			2,289
Income tax payable - non current		404			487
Total Liabilities		120,522			114,423
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.01 per share, authorized 10,000,000 shares; none issued or outstanding		—			—
Common stock, par value $0.01 per share, authorized 100,000,000 shares; 45,222,267 shares issued and 43,467,961 shares outstanding at March 31, 2014 and 44,517,731 shares issued and 42,785,978 shares outstanding at June 30, 2013		452			445
Additional paid-in capital		217,825			214,012
Retained deficit		(3,565		)	(802		)
Less: 1,754,306 common shares in treasury, at cost, at March 31, 2014 and 1,731,753 common shares in treasury, at cost, at June 30, 2013		(6,518		)	(6,198		)
Total Stockholders’ Equity		208,194			207,457
Total Liabilities and Stockholders’ Equity		$	328,716		$	321,880

 

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

 

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Tuesday Morning Corporation

Consolidated Statements of Operations (unaudited)

(In thousands, except per share data)

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2014			2013			2014			2013
Net sales		$	182,765		$	178,073		$	652,214		$	636,179
Cost of sales		114,664			111,916			421,348			443,515
Gross profit		68,101			66,157			230,866			192,664
Selling, general and administrative expenses		75,730			77,891			232,678			237,875
Operating loss		(7,629		)	(11,734		)	(1,812		)	(45,211		)
Other income (expense):
Interest income		5			2			20			2
Interest expense		(360		)	(384		)	(1,129		)	(1,292		)
Other income (expense), net		(4		)	(140		)	79			(1,349		)
Other expense, net		(359		)	(522		)	(1,030		)	(2,639		)
Loss before income taxes		(7,988		)	(12,256		)	(2,842		)	(47,850		)
Income tax provision (benefit)		440			110			(79		)	(7,057		)
Net loss		$	(8,428	)	$	(12,366	)	$	(2,763	)	$	(40,793	)
Earnings Per Share
Net loss per common share:
Basic		$	(0.20	)	$	(0.29	)	$	(0.06	)	$	(0.97	)
Diluted		$	(0.20	)	$	(0.29	)	$	(0.06	)	$	(0.97	)
Weighted average number of common shares:
Basic		43,072			42,427			42,863			42,164
Diluted		43,072			42,427			42,863			42,164
Dividends per common share		$	—		$	—		$	—		$	—

 

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

 

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Tuesday Morning Corporation

Statement of Comprehensive Loss (unaudited)

(In thousands)

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2014			2013			2014			2013
Net loss		$	(8,428	)	$	(12,366	)	$	(2,763	)	$	(40,793	)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments		—			(2		)	—			54
Less: Reclassification adjustment for losses included in net income/(loss)		—			—			—			(1		)
Other Comprehensive Income, before tax		—			(2		)	—			53
Less: Income tax provision (benefit) related to items of other comprehensive income		—			(1		)	—			20
Comprehensive Loss		$	(8,428	)	$	(12,367	)	$	(2,763	)	$	(40,760	)

 

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

 

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Tuesday Morning Corporation

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

		Nine Months Ended March 31,
		2014			2013
Net cash flows from operating activities:
Net loss		$	(2,763	)	$	(40,793	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		9,090			10,402
Amortization of financing fees		446			443
Deferred income taxes		3,265			(7,139		)
Loss on disposal of assets		361			2,055
Share-based compensation		1,829			2,350
Other non-cash items		—			54
Change in operating assets and liabilities:
Inventories		6,237			28,776
Prepaid and other current assets		1,262			335
Accounts payable		383			(2,723		)
Accrued liabilities		4,570			8,208
Other payable — non-current		(2,289		)	—
Deferred rent		(174		)	(554		)
Income taxes payable		(450		)	49
Net cash provided by operating activities		21,767			1,463
Net cash flows from investing activities:
Proceeds from sale of assets		34			—
Capital expenditures		(10,713		)	(8,312		)
Net cash used in investing activities		(10,679		)	(8,312		)
Net cash flows from financing activities:
Repayments under revolving credit facility		(25,100		)	(94,665		)
Proceeds under revolving credit facility		25,100			94,665
Change in cash overdraft		—			—
Excess tax benefit related to exercise of stock options		—			—
Purchase of treasury stock		(320		)	(87		)
Proceeds from the exercise of employee stock options		1,951			1,678
Net cash provided by financing activities		1,631			1,591
Net increase (decrease) in cash and cash equivalents		12,719			(5,258		)
Cash and cash equivalents, beginning of period		28,896			39,740
Cash and cash equivalents, end of period		$	41,615		$	34,482

 

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

 

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Tuesday Morning Corporation

Notes to Consolidated Financial Statements (unaudited)

 

The terms “Tuesday Morning,” the “Company,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.

 

1.                   Basis of presentation — The unaudited interim consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These financial statements include all adjustments, consisting only of those of a normal recurring nature, which, in the opinion of management, are necessary to present fairly the results of the interim periods presented and should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.  The balance sheet at June 30, 2013 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.  For further information, refer to the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.  The results of operations for the three and nine month periods ended March 31, 2014 are not necessarily indicative of the results to be expected for the full fiscal year ending June 30, 2014.

 

The preparation of unaudited interim consolidated financial statements, in conformity with GAAP, requires us to make assumptions and use estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates relate to:  inventory valuation under the retail method; and estimation of reserves and valuation allowances specifically related to insurance, income taxes, and litigation.  Actual results could differ from these estimates.  Our fiscal year ends on June 30 and we operate our business as a single operating segment.

 

2.                   Share-based incentive plans — Stock Option Awards.  We have established the Tuesday Morning Corporation 1997 Long-Term Equity Incentive Plan, as amended (the “1997 Plan”), the Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004 Plan”), and the Tuesday Morning Corporation 2008 Long-Term Equity Incentive Plan (the “2008 Plan”), which allow for the granting of stock options to directors, officers and key employees of, and certain other key individuals who perform services for us and our subsidiaries.  The 1997 Plan authorized grants of options to purchase up to 4.8 million shares of authorized, but unissued common stock. Equity awards may no longer be granted under the 1997 Plan, but options previously granted under the plan are still exercisable.  The 2004 Plan and the 2008 Plan authorize grants of options to purchase up to 2.0 million and 5.4 million shares, respectively, of authorized, but unissued common stock.

 

Stock options are awarded with a strike price at a fair market value equal to the average of the high and low trading prices of our common stock on the date of grant under the 1997 Plan and the 2004 Plan.  Stock options are awarded with a strike price at a fair market value equal to the closing price of our common stock on the date of the grant under the 2008 Plan.

 

Options granted under the 1997 Plan and the 2004 Plan typically vest over periods of one to five years and expire ten years from the date of grant, while options granted under the 2008 Plan typically vest over periods of one to four years and expire ten years from the date of grant.  Options granted under the 2004 Plan and the 2008 Plan may have certain performance requirements in addition to service terms.  If the performance conditions are not satisfied, the options are forfeited.  There were 10,000 and 135,000 performance shares outstanding under the 2004 Plan and 2008 Plan, respectively.  The exercise prices of stock options outstanding on March 31, 2014, range between $1.24 per share and $35.23 per share.  There were 6,637 and 1.9 million shares available for grant under the 2004 Plan and the 2008 Plan, respectively, at March 31, 2014.

 

Restricted Stock Awards.  Under the terms of the 2004 Plan and the 2008 Plan, we may also grant restricted stock awards to directors, officers, key employees and certain other key individuals who perform services for us and our subsidiaries.  Restricted stock awards are not transferable, but bear certain rights of common stock ownership including voting and dividend rights.  Shares are valued at the fair market value of our common stock at the date of award.  There are no restricted stock awards outstanding under the 1997 Plan, which terminated pursuant to its terms as of December 29, 2007.  Under the 2004 Plan and the 2008 Plan, as of March 31, 2014, there were 345,443 shares of restricted stock outstanding with award vesting periods of one to four years and a weighted average fair value of $12.48 per share.

 

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Performance Shares and Performance Units.  As of March 31, 2014 there were 10,000 performance shares outstanding under the 2004 Plan and 135,000 performance shares outstanding under the 2008 Plan.

 

Share-based Compensation Costs.  Share-based compensation costs were recognized as follows (in thousands):

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2014			2013			2014			2013
Amortization of share-based compensation during the period		$	873		$	1,423		$	1,866		$	2,364
Amounts capitalized in ending inventory		(222		)	(333		)	(531		)	(643		)
Amounts recognized and charged to cost of sales		142			237			494			629
Amounts charged against income for the period before tax		$	793		$	1,327		$	1,829		$	2,350

 

3.                   Comprehensive income or loss — Comprehensive income or loss is defined as net income or loss plus the change in equity during a period from transactions and other events, excluding those resulting from investments by and distributions to stockholders.  We account for foreign currency forward contracts as cash flow hedges in accordance with ASC 815 (formerly SFAS No. 133), “Accounting for Derivative Instruments and Hedging Activities.”  Changes in the fair value of the contracts that are considered to be effective are recorded in other comprehensive income or loss until the hedged item is recorded in earnings.  Effective cash flow hedges are reclassified out of other comprehensive income or loss and into cost of sales when the hedged inventory is sold.  Ineffective cash flow hedges are recorded in other income or loss and were not material for the periods presented.  The effect of foreign exchange contracts on our financial position or results of operations has historically been immaterial.  Comprehensive loss for the three months ended March 31, 2014 was $8.4 million compared to a comprehensive loss for the three months ended March 31, 2013 of $12.4 million, while comprehensive loss for the nine months ended March 31, 2014 was $2.8 million compared to a comprehensive loss for the nine months ended March 31, 2013 of $40.8 million.

 

4.                   Commitments and contingencies — On May 13, 2013, the Company was named as a defendant in the following lawsuit, Kathleen Mason v. Tuesday Morning Corporation d/b/a Delaware TMC Corporation, filed in County Court in Dallas County, Texas, cause number CC-13-02863-E (subsequently refiled and issued cause number CC-13-03372-E).  The plaintiff was the former President and Chief Executive Officer of the Company and her employment was terminated in June 2012.  In the petition, the plaintiff alleged disability discrimination, deliberate indifference and retaliation in violation of the Texas Commission on Human Rights Act.  Each claim stemmed from the plaintiff’s allegation that the Company regarded the plaintiff as having a disability (cancer) and fired her because of her disability.  The plaintiff sought more than $1 million in monetary relief, including claims for compensatory damages, attorneys’ fees, costs and interest.  The Company denied the allegations.  The Company filed a Special Exception and Answer to Plaintiff’s Original Petition on July 12, 2013.  On March 29, 2014, the Company and the plaintiff entered into a confidential settlement agreement and release.  On April 17, 2014, the Court executed an Order to Dismiss with Prejudice thereby dismissing the litigation.  The terms of the settlement did not have a material adverse effect on the Company’s financial condition or results of operations.

 

The Company is defending against a class action lawsuit filed in California Superior Court, Los Angeles County, on December 5, 2008 — Julia Randell, et. al., v. Tuesday Morning, Inc., No. BC403298 (Cal. Super. Ct.) —  in which the original complaint alleged violations of California’s meal and rest period laws.  The named plaintiffs, who are former employees of the Company, subsequently amended the complaint three times.  Narrowing their class allegations, the two named plaintiffs moved on March 14, 2012 to certify a class on the issue of whether the Company’s alleged practice of providing “on-duty” meal periods to Senior Sales Associates violates the California Labor Code.  The Court granted that motion on June 20, 2012, certifying a class comprised of current and former Senior Sales Associates who worked for the Company in California, and who were required to take meal breaks “on duty” at any point from April 1, 2005 to the present.  The Company filed motions to decertify the class and for summary judgment on January 4, 2013, which the Court denied on March 29, 2013.  On March 20, 2014, the parties executed a settlement agreement and release which, subject to Court approval, resolves the matter on a class basis.  On April 16, 2014, the Court granted preliminary approval of the settlement and authorized the parties to provide notice of the settlement and its terms to class members.  The hearing on the motion for final approval of the settlement is scheduled for October 9, 2014.  The terms of the settlement are not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

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5.                   Income (loss) per common share - The following table sets forth the computation of basic and diluted income (loss) per common share (in thousands, except per share amounts):

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2014			2013			2014			2013
Net loss		$	(8,428	)	$	(12,366	)	$	(2,763	)	$	(40,793	)
Less: Income to participating securities		—			—			—			—
Net loss attributable to common shares		$	(8,428	)	$	(12,366	)	$	(2,763	)	$	(40,793	)
Weighted average number of common shares outstanding basic		43,072			42,427			42,863			42,164
Effect of dilutive stock equivalents		—			—			—			—
Weighted average number of common shares outstanding dilutive		43,072			42,427			43,863			42,164
Net loss per common share basic		$	(0.20	)	$	(0.29	)	$	(0.06	)	$	(0.97	)
Net loss per common share diluted		$	(0.20	)	$	(0.29	)	$	(0.06	)	$	(0.97	)

 

All options representing rights to purchase shares were excluded from diluted loss per share for the three and nine month periods ended March 31, 2014 and March 31, 2013, as the Company had a net loss for those periods.

 

6.                   Revolving credit facility — We have a credit agreement providing for an asset-based, five-year senior secured revolving credit facility in the amount of up to $180.0 million which matures on November 17, 2016 (the “Revolving Credit Facility”).  Our indebtedness under the Revolving Credit Facility is secured by a lien on substantially all of our assets.  The Revolving Credit Facility contains certain restrictive covenants, which affect, among others, our ability to incur liens or incur additional indebtedness, change the nature of our business, sell assets or merge or consolidate with any other entity, or make investments or acquisitions unless they meet certain requirements.  Our financial covenant requires that we maintain availability of 10% of our calculated borrowing base, but never less than $15 million.  Our Revolving Credit Facility may, in some instances, limit payment of cash dividends and repurchases of the Company’s common stock.  In order to make a restricted payment, including payment of a dividend or a repurchase of shares, we must maintain availability of 17.5% of our lenders’ aggregate commitments under the Revolving Credit Facility for three months prior to, and on a pro forma basis for the six months immediately following, and after giving effect to, the restricted payment and we must satisfy a fixed charge coverage ratio requirement.  As of March 31, 2014, we were in compliance with all required covenants.

 

At March 31, 2014, we had no amounts outstanding under the Revolving Credit Facility, $6.9 million of outstanding letters of credit and availability of $99.2 million under the Revolving Credit Facility.  Letters of credit under the Revolving Credit Facility are primarily for self-insurance purposes.  We incur commitment fees of up to 0.375% on the unused portion of the Revolving Credit Facility.  Any borrowing under the Revolving Credit Facility incurs interest at LIBOR or the prime rate, plus an applicable margin, at our election (except with respect to swing loans, which incur interest solely at the prime rate plus the applicable margin).  These rates are increased or reduced as our average daily availability changes.  Interest expense of $0.4 million for the quarter ended March 31, 2014 was due to commitment fees of $0.2 million and the amortization of financing fees of $0.2 million.  Interest expense for the quarter ended March 31, 2013 was $0.4 million, due to $0.2 million in commitment fees and $0.2 million in amortized financing fees.

 

7.                   Depreciation — Accumulated depreciation of owned equipment and property at March 31, 2014 and June 30, 2013 was $119.7 million and $112.2 million, respectively.

 

8.                   Income taxes — Tuesday Morning Corporation or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  With a few exceptions, Tuesday Morning Corporation is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2009.  The Internal Revenue Service has concluded an examination of the Company for all taxable years ended on or before June 30, 2010.  The effective tax rates for the quarters ended March 31, 2014 and March 31, 2013 were (5.5%) and (0.9%), respectively.  The effective tax rate was lower for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to the deferred tax asset valuation allowance which was established starting in the quarter ended December 31, 2012.  The effective tax rates for nine months ended March 31, 2014 and March 31, 2013 were 2.8% and 14.7%, respectively.  The effective tax rate was lower for the nine months ended March 31, 2014 as compared to the nine months ended March 31, 2013 due to the deferred tax asset valuation allowance which was established starting in the quarter ended December 31, 2012.  The inventory markdown, recorded in the quarter ending December 31, 2012, generated a large net operating loss, which, in turn, requires a full valuation allowance against deferred tax assets.  A deviation from the customary relationship between income tax expense/(benefit) and pretax income/(loss) results from the full valuation allowance.

 

9.                   Cash and cash equivalents — Cash and cash equivalents are comprised of cash, credit card receivables and all highly liquid instruments with original maturities of three months or less.  Cash equivalents are carried at cost, which approximates fair value.  At March 31, 2014 and at June 30, 2013, credit card receivables from third party consumer credit card providers were $4.5 million and $7.4 million, respectively.

 

10.            Recent accounting pronouncements — There were no accounting pronouncements issued during the third quarter of fiscal 2014 that affected the Company.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

 

Business Overview

 

·                  We sell deeply discounted, upscale decorative home accessories, housewares, seasonal goods and famous-maker gifts significantly below retail prices charged by department stores and specialty and on-line retailers in 811 stores in 41 states.  We also have a promotional sale each month that creates a sense of urgency and excitement for our customer base.

 

·                  We are currently executing a business turnaround strategy to improve our store operations, merchandise offerings, sales productivity and overall profitability.  A number of specific costs have been and will continue to be incurred as we execute this strategy.  To provide enhanced information regarding our business performance, we have shown the effects of these specific costs in the Results of Operations section.

 

·                  One key goal of our new strategy is to significantly increase our inventory turnover.  As a result, our approach to pricing, the timing of markdowns, and our level and quality of inventory differs significantly from prior years.

 

·                  Net sales for the third quarter of fiscal 2014 were $182.8 million, increasing $4.7 million, or 2.6%, from $178.1 million for the same period last year.  Comparable store sales for the quarter ended March 31, 2014 increased by 6.4%, compared to the same period last year, which was due to an 8.4% increase in customer transactions partially offset by a 1.9% decrease in average ticket.  Net sales for the nine months ended March 31, 2014 increased $16.0 million, or 2.5%, to $652.2 million from $636.2 million for the same period last year.  Comparable store sales for the nine months ended March 31, 2014 increased by 5.7%, compared to the same period last year, which was due to a 9.4% increase in customer transactions partially offset by a 3.4% decrease in average ticket.

 

·                  Cost of sales, as a percentage of net sales, for the third quarter of fiscal 2014 was 62.7%, compared to 62.8% for the same period last year.  Cost of sales, as a percentage of net sales, for the nine months ended March 31, 2014 was 64.6%, compared to 69.7% for the same period last year.

 

·                  For the third quarter of fiscal 2014, selling, general and administrative expenses decreased $2.2 million to $75.7 million, from $77.9 million for the same quarter last year.  For the nine months ended March 31, 2014, selling, general and administrative expenses decreased approximately $5.2 million to $232.7 million, from $237.9 million for the same period last year.

 

·                  We incurred a net loss of $8.4 million and a net loss per share of $0.20 for the quarter ended March 31, 2014, compared to a net loss of $12.4 million and a net loss per share of $0.29 for the same period last year.  For the nine months ended March 31, 2014, we incurred a net loss of $2.8 million and net loss of $0.06 per share, compared to a net loss of $40.8 million and a net loss of $0.97 per share for the same period last year.

 

·                  Inventory levels at March 31, 2014 decreased $6.2 million to $205.8 million from $212.0 million at June 30, 2013 due to normal seasonal selling patterns, combined with favorable results from our inventory productivity initiative.  Compared to the same date last year, inventories decreased $31.1 million from $236.9 million at March 31, 2013.

 

·                  Cash and cash equivalents at March 31, 2014 increased $12.7 million to $41.6 million from $28.9 million at June 30, 2013.  Compared to the same date last year, cash and cash equivalents increased $7.1 million from $34.5 million at March 31, 2013.

 

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Results of Operations

 

The following tables set forth certain financial information from our consolidated statements of operations for the third quarter and the nine months ended March 31, 2014 and the corresponding periods in 2013.  Our business is highly seasonal, with a significant portion of our net sales and most of our operating income generated in the quarter ending December 31.  There can be no assurance that the trends in sales or operating results will continue in the future.  In addition to our reported results, we have also provided adjusted (non-GAAP) financial information to provide readers with additional information comparing our core results between the third quarter and the nine months ended March 31, 2014 and the corresponding periods in 2013.

 

(in thousands, except for per share data, percentages and ratios)

 

		Three Months Ended March 31, 2014									Three Months Ended March 31, 2013
		GAAP			Non-GAAP Adjustments			Adjusted (Non-GAAP)			GAAP			Non-GAAP Adjustments			Adjusted (Non-GAAP)
Net sales		$	182,765		—			$	182,765		$	178,073		—			$	178,073
Percent increase from prior year		2.6		%	—			2.6		%	3.1		%	—			3.1		%
Comparable store sales increase (1)		6.4		%	—			6.4		%	2.8		%	—			2.8		%
Gross profit		$	68,101		$	—		$	68,101		$	66,157		$	—		$	66,157
Selling, general and administrative expenses (2)		$	75,730		$	(2,202	)	$	73,528		$	77,891		$	(4,839	)	$	73,052
Operating income/(loss) (3)		$	(7,629	)	$	2,202		$	(5,427	)	$	(11,734	)	$	4,839		$	(6,895	)
Interest income		$	5		—			$	5		$	2		—			$	2
Interest expense		$	(360	)	—			$	(360	)	$	(384	)	—			$	(384	)
Other income/(expense), net		$	(4	)	—			$	(4	)	$	(140	)	$	148		$	8
Income tax provision/(benefit)		$	440		$	(567	)	$	(127	)	$	110		$	(2,530	)	$	(2,420	)
Net income/(loss) (3)		$	(8,428	)	$	2,769		$	(5,659	)	$	(12,366	)	$	7,517		$	(4,849	)
Diluted income/(loss) per share (3)		$	(0.20	)	$	0.06		$	(0.13	)	$	(0.29	)	$	0.18		$	(0.11	)
Ratios as a percent of net sales:
Gross profit		37.3		%	—			37.3		%	37.2		%	—			37.2		%
Selling, general and administrative expenses		41.4		%	(1.2		)%	40.2		%	43.7		%	(2.7		)%	41.0		%
Operating income/(loss)		(4.2		)%	1.2		%	(3.0		)%	(6.6		)%	2.7		%	(3.9		)%

 

(1)  Stores are included in the comparable store sales calculation at the beginning of the quarter following the anniversary date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is still considered the same store for purposes of this computation.

(2)  See “Non-GAAP Financial Measures” below for details on these adjustments.  The components of the adjustments to selling, general and administrative expenses are set forth in the first table under “Non-GAAP Financial Measures” below.

(3)  See “Non-GAAP Financial Measures” below for a discussion of these non-GAAP measures and reconciliation to their most directly comparable GAAP financial measures and further information on their uses and limitations.

 

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(in thousands, except for per share data, percentages and ratios)

 

		Nine Months Ended March 31, 2014									Nine Months Ended March 31, 2013
		GAAP			Non-GAAP Adjustments			Adjusted (Non-GAAP)			GAAP			Non-GAAP Adjustments			Adjusted (Non-GAAP)
Net sales		$	652,214		—			$	652,214		$	636,179		—			$	636,179
Percent increase from prior year		2.5		%	—			2.5		%	3.2		%	—			3.2		%
Comparable store sales increase (1)		5.7		%	—			5.7		%	3.7		%	—			3.7		%
Gross profit (2)		$	230,866		$	1,810		$	232,676		$	192,664		$	41,809		$	234,473
Selling, general and administrative expenses (2)		$	232,678		$	(4,839	)	$	227,839		$	237,875		$	(11,731	)	$	226,144
Operating income/(loss) (3)		$	(1,812	)	$	6,649		$	4,837		$	(45,211	)	$	53,540		$	8,329
Interest income		$	20		—			$	20		$	2		—			$	2
Interest expense		$	(1,129	)	—			$	(1,129	)	$	(1,292	)	—			$	(1,292	)
Other income/(expense), net		$	79		—			$	79		$	(1,349	)	$	1,535		$	186
Income tax provision/(benefit)		$	(79	)	$	166		$	87		$	(7,057	)	$	9,678		$	2,621
Net income/(loss) (3)		$	(2,763	)	$	6,483		$	3,720		$	(40,793	)	$	45,397		$	4,604
Diluted income/(loss) per share (3)		$	(0.06	)	$	0.15		$	0.09		$	(0.97	)	$	1.08		$	0.11
Ratios as a percent of net sales:
Gross profit		35.4		%	0.3		%	35.7		%	30.3		%	6.6		%	36.9		%
Selling, general and administrative expenses		35.7		%	(0.7		)%	34.9		%	37.4		%	(1.8		)%	35.5		%
Operating income/(loss)		(0.3		)%	1.0		%	0.7		%	(7.1		)%	8.4		%	1.3		%

 

(1)  Stores are included in the comparable store sales calculation at the beginning of the quarter following the anniversary date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is still considered the same store for purposes of this computation.

(2)  See “Non-GAAP Financial Measures” below for details on these adjustments.  The adjustment to gross profit and the components of the adjustments to selling, general and administrative expenses are set forth in the first table under “Non-GAAP Financial Measures” below.

(3)  See “Non-GAAP Financial Measures” below for a discussion of these non-GAAP measures and reconciliation to their most directly comparable GAAP financial measures and further information on their uses and limitations.

 

Non-GAAP Financial Measures

 

We report our financial information in accordance with United States generally accepted accounting principles (GAAP).  However, we present certain financial measures identified as non-GAAP under the rules of the SEC to assess our results.  We believe that the non-GAAP financial measures provide useful information to the Company’s management, investors, and other interested parties because they allow them to understand and compare our core operating results during the third quarter and nine months ended March 31, 2014 to the corresponding prior year periods in a more consistent manner.  We believe this also facilitates the comparison of our results to the results of our peer companies.  The non-GAAP financial measures presented in the tables below should not be viewed as an alternative or substitute for our reported GAAP results, but in addition to our GAAP results.

 

The following non-GAAP financial measures are adjusted to exclude the impact of the following business turnaround related charges and adjustments: our inventory write-down, management and board transition charges (including compensation and severance, consulting, legal, search and recruiting costs related to the transition), costs associated with exiting the e-Commerce business and changes in our deferred tax asset valuation allowance.  The amount of the turnaround related inventory write-down excluded from cost of sales (and the calculation of gross profit on a non-GAAP basis) and the adjustments to selling, general and administrative expenses are included in the first table below.

 

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Adjusted Operating Income/(Loss):  The following table reconciles operating loss, the most directly comparable GAAP financial measure, to adjusted operating income/(loss), a non-GAAP financial measure:

 

(in thousands, except for percentages and ratios)

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2014			2013			2014			2013
Operating loss (GAAP)		$	(7,629	)	$	(11,734	)	$	(1,812	)	$	(45,211	)
As a percent of net sales		-4.2		%	-6.6		%	-0.3		%	-7.1		%
Non-GAAP adjustments:
Adjustment reducing cost of sales:
Inventory write-down		$	—		$	—		$	1,810		$	41,809
Adjustments reducing selling, general and administrative expenses:
Store reorganization and clean-up		—			—			—			1,125
Compensation		606			3,907			2,160			5,594
Legal, consulting, and recruiting		1,596			932			2,679			5,012
Adjusted operating income/(loss) (non-GAAP)		$	(5,427	)	$	(6,895	)	$	4,837		$	8,329
As a percent of net sales		-3.0		%	-3.9		%	0.7		%	1.3		%

 

Adjusted Net Income/(Loss) from Continuing Operations:  The following table reconciles net loss from continuing operations, the most directly comparable GAAP financial measure, to adjusted net income/(loss) from continuing operations, a non-GAAP financial measure:

 

(in thousands)

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2014			2013			2014			2013
Net loss from continuing operations (GAAP)		$	(8,428	)	$	(12,366	)	$	(2,763	)	$	(40,793	)
Non-GAAP adjustments:
Inventory write-down, net of tax of $—, $—, $787, and $15,466(2)		—			—			1,023			26,343
Store reorganization and clean-up, net of tax of $—, $—, $—, and $416(2)		—			—			—			709
Compensation, net of tax of $72, $1,492, $940, and $2,117(1)(2)		534			2,415			1,220			3,477
Legal, consulting, and recruiting, net of tax of $189, $355, $1,166, and $1,865(1)(2)		1,407			577			1,513			3,147
Disposal of systems, net of tax of $—, $56, $$—, and $570(1)(2)		—			92			—			965
Deferred tax asset valuation allowance		828			4,433			2,727			10,756
Adjusted net income/(loss) from continuing operations (non-GAAP)		$	(5,659	)	$	(4,849	)	$	3,720		$	4,604

 

(1)         The effective tax rate utilized in this non-GAAP adjusted net income/(loss) reconciliation is 11.9% for the three months ended March 31, 2014 and 38.2% for the three months ended March 31, 2013.  This rate is inclusive of a deferred tax asset valuation allowance of $18.9 million as of March 31, 2014 and of $10.8 million as of March 31, 2013.

(2)         The effective tax rate utilized in this non-GAAP adjusted net income/(loss) reconciliation is 43.5% for the nine months ended March 31, 2014 and 37.1% for the nine months ended March 31, 2013.  This rate is inclusive of a deferred tax asset valuation allowance of $18.9 million as of March 31, 2014 and of $10.8 million as of March 31, 2013.

 

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Adjusted Diluted Income/(Loss) per share from Continuing Operations:  The following table reconciles diluted loss per share from continuing operations, the most directly comparable GAAP financial measure, to adjusted diluted income/(loss) per share from continuing operations, a non-GAAP financial measure:

 

		Three Months Ended March 31,						Nine Months Ended March 31,
		2014			2013			2014			2013
Diluted loss per share from continuing operations (GAAP)		$	(0.20	)	$	(0.29	)	$	(0.06	)	$	(0.97	)
Non-GAAP adjustments:
Inventory write-down, net of tax (2)		—			—			0.02			0.63
Store reorganization and clean-up, net of tax (2)		—			—			—			0.02
Compensation, net of tax(1) (2)		0.01			0.07			0.03			0.08
Legal, consulting, and recruiting, net of tax(1) (2)		0.04			0.01			0.04			0.07
Disposal of systems, net of tax(1) (2)		—			0.00			—			0.02
Deferred tax asset valuation allowance		0.02			0.10			0.06			0.26
Adjusted diluted income/(loss) per share from continuing operations (non-GAAP)		$	(0.13	)	$	(0.11	)	$	0.09		$	0.11

 

(1)         The effective tax rate utilized in this non-GAAP adjusted diluted income/(loss) per share reconciliation is 11.9% for the three months ended March 31, 2014 and 38.2% for the three months ended March 31, 2013.  This rate is inclusive of a deferred tax asset valuation allowance of $18.9 million as of March 31, 2014 and of $10.8 million as of March 31, 2013.

(2)         The effective tax rate utilized in this non-GAAP adjusted diluted income/(loss) per share reconciliation is 43.5% for the nine months ended March 31, 2014 and 37.1% for the nine months ended March 31, 2013.  This rate is inclusive of a deferred tax asset valuation allowance of $18.9 million as of March 31, 2014 and of $10.8 million as of March 31, 2013.

 

Three Months Ended March 31, 2014

Compared to the Three Months Ended March 31, 2013

 

Net sales for the third quarter of fiscal 2014 were $182.8 million, increasing $4.7 million or 2.6% from $178.1 million for the same period last year.  Comparable store sales for the quarter ended March 31, 2014 increased by 6.4% compared to the third quarter of fiscal 2013.  Stores are included in the same store sales calculation at the beginning of the quarter following the anniversary date of the store opening. A store that relocates within the same geographic market or modifies its available retail space is still considered the same store for purposes of this computation.  Non-comparable store sales include sales from new stores not included in comparable store sales and sales from stores that have closed.  The increase in comparable store sales for the third quarter of fiscal 2014 was comprised of an 8.4% increase in customer transactions partially offset by a 1.9% decrease in average ticket.  Our comparable store sales increase was partially offset by a decrease in our non-comparable store sales and e-Commerce sales, which decreased a total of $6.0 million or 3.4% of net sales for the prior year quarter.  The non-comparable store sales decrease is driven by 26 store closures, partially offset by eight store openings, which have occurred since the end of the third quarter of fiscal 2013.  We discontinued e-Commerce sales in June 2013.

 

(in thousands)

 

		Three Months			Three Months
		Ended			Ended						%
		March 31,			March 31,			Increase/			Increase/
		2014			2013			(Decrease)			(Decrease)
Comparable Store Sales		$	178,317		$	167,619		$	10,698		6.4	%
Non-comparable Store Sales		4,448			8,187			(3,739		)	-45.7	%
Total Store Sales		182,765			175,806			6,959			4.0	%
e-Commerce		—			2,267			(2,267		)	-100.0	%
Total Company Sales		$	182,765		$	178,073		$	4,692		2.6	%

 

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We opened four new stores and closed 12 existing stores during the third quarter of fiscal 2014.  In addition, we relocated five existing stores during the third quarter of fiscal 2014.  Our store base decreased by eight stores for the third quarter of fiscal 2014, while the store base decreased by 14 stores for the same period in fiscal 2013.

 

Store Openings/Closings

 

		Three Months Ended March 31, 2014		Three Months Ended March 31, 2013		Fiscal Year Ended June 30, 2013
Stores open at beginning of period		819		843		852
Stores opened during the period		4		—		10
Stores closed during the period		(12	)	(14	)	(34	)
Stores open at end of period		811		829		828

 

Gross profit for the third quarter of fiscal 2014 was $68.1 million, an increase of 2.9% compared to $66.2 million in gross profit for the same quarter in fiscal 2013.  Gross profit as a percentage of net sales was 37.3% for the third quarter of fiscal 2014, relatively flat compared to 37.2% for the third quarter of fiscal 2013.  Improvement in gross profit was primarily driven by freight and distribution efficiencies.

 

Selling, general and administrative expenses decreased $2.2 million for the third quarter of fiscal 2014 to $75.7 million, compared to $77.9 million for the same quarter last year.  As a percent of net sales, selling, general and administrative expenses decreased to 41.4% for the third quarter of fiscal 2014 from 43.7% for the same quarter of fiscal 2013.  We incurred selling, general and administrative expenses of $2.2 million in the third quarter of fiscal 2014 and $4.8 million in the third quarter of fiscal 2013 in connection with our business turnaround, primarily related to executive compensation, severance, and legal expenses.  Excluding these expenses, which we do not believe to be indicative of our on-going expense structure, selling, general and administrative expenses, as a percent of net sales were 40.2% compared to 41.0% for the same quarter last year.

 

Our operating loss was $7.6 million for the third quarter of fiscal 2014 as compared to an operating loss of $11.7 million for the third quarter of fiscal 2013.  Business turnaround related expenses were $2.6 million less in the third quarter of fiscal 2014 as compared to the same quarter in the prior year.

 

Income tax expense for the quarter ended March 31, 2014 was $0.4 million compared to income tax expense of $0.1 million for the same period last year.  The effective tax rates for the quarters ended March 31, 2014 and March 31, 2013 were (5.5%) and (0.9%), respectively.  The effective tax rate was lower for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013, due to a full deferred tax asset valuation allowance at March 31 2014, compared to a valuation allowance less carryback refund at March 31, 2013.  The deferred tax asset valuation allowance as of March 31, 2014 and March 31, 2013 was $18.9 million and $10.8 million, respectively.

 

We had a net loss of $8.4 million, or $0.20 per share, for the third quarter of fiscal 2014 compared to a net loss of $12.4 million, or $0.29 per share, for the third quarter of fiscal 2013.  Our results were impacted by the effects of the items described above and a reduced effective tax rate due to the establishment of a deferred tax asset valuation allowance beginning in the third quarter of fiscal 2013.  Excluding the business turnaround charges, our non-GAAP adjusted net loss was $5.7 million, or $0.13 per share, for the third quarter ended March 31, 2014, compared to non-GAAP adjusted net loss of $4.8 million, or $0.11 per share, for the same period last year.

 

Nine Months Ended March 31, 2014

Compared to the Nine Months Ended March 31, 2013

 

Net sales increased $16.0 million, or 2.5%, to $652.2 million during the first nine months of fiscal 2014 from $636.2 million for the same period in fiscal 2013.  The increase for the first nine months of fiscal 2014 was primarily due to a 5.7% increase in sales from comparable stores.  The increase in comparable store sales for the first nine months of fiscal 2014 was comprised of a 9.4% increase in customer transactions, partially offset by a 3.4% decrease in average ticket.  Our comparable store sales increase was partially offset by a decrease in our non-comparable store sales and e-Commerce sales, which decreased a total of $18.3 million, or 2.9% of net sales, for the same period in fiscal 2013.  The non-comparable store sales decrease is driven by 26 store closures, partially offset by eight store openings, which have occurred since the end of the third quarter of fiscal 2013.  We discontinued e-Commerce sales in June 2013.

 

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