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NEW YORK & COMPANY, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS (Cautionary Statements Under the Private Securities Litigation Reform Act of 1995) This Quarterly Report on Form 10-Q includes forward-looking statements. Certain matters discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of this Quarterly Report on Form 10-Q are forward-looking statements intended to qualify for safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. Some of these statements can be identified by terms and phrases such as "anticipate," "believe," "intend," "estimate," "expect," "continue," "could," "may," "plan," "project," "predict" and similar expressions and include references to assumptions that the Company believes are reasonable and relate to its future prospects, developments and business strategies. Factors that could cause the Company's actual results to differ materially from those expressed or implied in such forward-looking statements, include, but are not limited to those discussed under the heading "Item 3. Quantitative and Qualitative Disclosures About Market Risk" in this Quarterly Report on Form 10-Q and the risks and uncertainties as described in the Company's documents filed with the SEC, including its Annual Report on Form 10-K, as filed on April 15, 2014. The Company undertakes no obligation to revise the forward-looking statements included in this Quarterly Report on Form 10-Q to reflect any future events or circumstances. The Company's actual results, performance or achievements could differ materially from the results expressed or implied by these forward-looking statements. Overview The Company is a specialty retailer of women's fashion apparel and accessories, and the modern wear-to-work destination for women, providing perfectly fitting pants and NY Style that is feminine, polished, on-trend and versatile-all at compelling values. The Company's proprietary branded New York & Company® merchandise is sold exclusively through its national network of retail stores and online at www.nyandcompany.com. The target customers for the Company's merchandise are women between the ages of 25 and 45. As of August 2, 2014, the Company operated 509 stores in 43 states. The Company's strategic initiatives for fiscal year 2014 are to accomplish the following: driving top line and comparable store sales growth in each channel of its business; increasing brand awareness and driving traffic to stores by attracting new customers and engaging existing customers; and growing the Company brand through key merchandise initiatives. In support of these strategic initiatives, the Company is opening new Outlet stores and optimizing its existing real estate portfolio to maximize sales and profitability. Furthermore, the Company believes its omni-channel retail initiatives and the recent upgrade of its eCommerce website will continue to drive traffic and increase sales across both store and eCommerce channels. In addition, the Company remains focused on its key merchandise initiatives and core sub-brands-including the 7th Avenue Suiting, Love NY&C, Soho Jeans, and Eva Mendes Collection-and continues to grow the pant and denim categories. In September 2013, the Company launched its Eva Mendes Collection in select New York & Company stores and online, which had a positive debut. The Company has since expanded the Eva Mendes Collection and features it across the majority of the New York & Company store base. The Company believes that the marketing and publicity around the Eva Mendes Collection continues to broaden awareness and interest in the New York & Company brand, building the strength of the brand. Net sales for the three months ended August 2, 2014 ("second quarter of fiscal year 2014") were $226.1 million, as compared to $223.1 million for the three months ended August 3, 2013 ("second 10-------------------------------------------------------------------------------- Table of Contents quarter of fiscal year 2013"). Net sales increased, while the Company's store base was reduced to 506 stores at the beginning of the second quarter of fiscal year 2014, versus 519 stores at the beginning of the second quarter of fiscal year 2013, reflecting the Company's on-going real estate optimization strategy. Comparable store sales increased 2.3% for the three months ended August 2, 2014, as compared to an increase of 2.1% for the three months ended August 3, 2013. Net loss for the three months ended August 2, 2014 was $0.1 million, or breakeven per diluted share. This compares to a net loss of $2.7 million, or $0.04 per diluted share, for the three months ended August 3, 2013. Capital spending for the six months ended August 2, 2014 was $8.9 million, as compared to $7.0 million for the six months ended August 3, 2013. During the six months ended August 2, 2014, the Company opened six New York & Company Outlet stores and remodeled five existing New York & Company stores. This compares to the opening of one New York & Company Outlet store and the remodeling of four existing New York & Company stores during the six months ended August 3, 2013. In addition, the Company continues to invest in its information technology infrastructure, primarily relating to the implementation of its omni-channel strategy and the continuing upgrade of its eCommerce website and mobile capabilities. At August 2, 2014, total inventory was up 3.0%, as compared to August 3, 2013, reflecting lower levels of in-store inventory offset by higher levels of in-transit inventory as the Company executed its contingency plans related to the uncertainty regarding a potential work stoppage by the International Longshore and Warehouse Union. The contract between the ports through which the Company sources a portion of its products on the West Coast and the International Longshore and Warehouse Union expired on July 1, 2014. On February 25, 2014, the Company entered into a lease for 182,709 square feet of office space at 330 West 34th Street, New York, New York, pursuant to which, the Company plans to move its corporate headquarters to by January 1, 2015 upon expiration of its existing lease at 450 West 33rd Street, New York, New York. The lease for the new corporate headquarters expires in 2030. For further information related to the new corporate headquarters lease, please refer to Note 9, "Other Events" in the Notes to Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q. The Company views the retail apparel market as having two principal selling seasons: spring (first and second quarter) and fall (third and fourth quarter). The Company's business experiences seasonal fluctuations in net sales and operating income, with a significant portion of its operating income typically realized during its fourth quarter. Any decrease in sales or margins during either of the principal selling seasons in any given year could have a disproportionate effect on the Company's financial condition and results of operations. Seasonal fluctuations also affect inventory levels. The Company must carry a significant amount of inventory, especially before the holiday season selling period in the fourth quarter and prior to the Easter and Mother's Day holidays toward the end of the first quarter and beginning of the second quarter. 11-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables summarize the Company's results of operations as a percentage of net sales and selected store operating data for the three and six months ended August 2, 2014 and August 3, 2013: Three months Three months Six months Six months ended ended ended endedAs a % of net sales August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold, buying and occupancy costs 72.6 % 73.1 % 72.1 % 72.0 % Gross profit 27.4 % 26.9 % 27.9 % 28.0 % Selling, general and administrative expenses 27.3 % 27.9 % 27.8 % 28.2 % Operating income (loss) 0.1 % (1.0 )% 0.1 % (0.2 )% Interest expense, net - % - % - % - % Income (loss) before income taxes 0.1 % (1.0 )% 0.1 % (0.2 )% Provision (benefit) for income taxes 0.2 % 0.2 % 0.2 % - % Net loss (0.1 )% (1.2 )% (0.1 )% (0.2 )% Three months Three months Six months Six months ended ended ended ended Selected operating data: August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013 (Dollars in thousands, except square foot data) Comparable store sales increase 2.3 % 2.1 % 0.1 % - % Net sales per average selling square foot(1) $ 86 $ 83 $ 169 $ 167 Net sales per average store(2) $ 445 $ 432 $ 877 $ 873 Average selling square footage per store(3) 5,169 5,219 5,169 5,219 -------------------------------------------------------------------------------- º (1) º Net sales per average selling square foot is defined as net sales divided by the average of beginning and end of period selling square feet. º (2) º Net sales per average store is defined as net sales divided by the average of beginning and end of period number of stores. º (3) º Average selling square footage per store is defined as end of period selling square feet divided by end of period number of stores. Three months ended Three months ended Six months ended Six months ended August 2, 2014 August 3, 2013 August 2, 2014 August 3, 2013 Store Selling Store Selling Store Selling Store Selling Store count and selling square feet: Count Square Feet Count Square Feet Count Square Feet Count Square Feet Stores open, beginning of period 506 2,627,462 519 2,717,288 507 2,637,074 519 2,725,273 New stores 4 14,963 - - 6 22,523 1 3,236 Closed stores (1 ) (4,005 ) (7 ) (41,976 ) (4 ) (15,778 ) (8 ) (47,732 ) Net impact of remodeled stores on selling square feet - (7,418 ) - (3,115 ) - (12,817 ) - (8,580 ) Stores open, end of period 509 2,631,002 512 2,672,197 509 2,631,002 512 2,672,197 12 -------------------------------------------------------------------------------- Table of Contents Three months ended August 2, 2014 Compared to Three months ended August 3, 2013 Net Sales. Net sales for the three months ended August 2, 2014 increased 1.4% to $226.1 million, as compared to $223.1 million for the three months ended August 3, 2013. Net sales increased, while the Company's store base was reduced to 506 stores at the beginning of the second quarter of fiscal year 2014, versus 519 stores at the beginning of the second quarter of fiscal year 2013, reflecting the Company's on-going real estate optimization strategy. Comparable store sales for the three months ended August 2, 2014 increased by 2.3%, as compared to an increase of 2.1% in the prior year. In the comparable store base, average dollar sales per transaction increased by 3.8%, while the number of transactions per average store decreased by 1.5%, as compared to the same period last year. During the three months ended August 2, 2014, net sales from the Company's eCommerce and Outlets channels increased to approximately 9% and 12% of total net sales, respectively. Gross Profit. Gross profit for the three months ended August 2, 2014 increased to $61.9 million, or 27.4% of net sales, as compared to $60.0 million, or 26.9% of net sales, for the three months ended August 3, 2013. The increase in gross profit as a percentage of net sales during the three months ended August 2, 2014, as compared to the three months ended August 3, 2013, was primarily driven by a 120 basis point improvement in buying and occupancy costs reflecting management's continued focus on reducing costs, partially offset by a 70 basis point decrease in merchandise margin, driven largely by increased promotional activity and shipping costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $61.7 million, or 27.3% of net sales, for the three months ended August 2, 2014, as compared to $62.2 million, or 27.9% of net sales, for the three months ended August 3, 2013. The decrease in selling, general and administrative expenses during the three months ended August 2, 2014, as compared to the three months ended August 3, 2013, was primarily attributable to a decrease in incentive-based compensation and store selling expenses combined with favorable insurance credits, which were partially offset by an increase in marketing expenses. Operating Income (Loss). For the reasons discussed above, operating income for the three months ended August 2, 2014 was $0.2 million, as compared to an operating loss of $2.2 million for the three months ended August 3, 2013. Interest Expense, Net. Net interest expense was $0.1 million for both the three months ended August 2, 2014 and the three months ended August 3, 2013. Provision for Income Taxes. As previously disclosed, the Company continues to provide for adjustments to the deferred tax valuation allowance initially recorded during the three months ended July 31, 2010. The income tax provision for the three months ended August 2, 2014 was $0.2 million, as compared to a provision of $0.4 million for the three months ended August 3, 2013. Net Loss. For the reasons discussed above, net loss for the three months ended August 2, 2014 was $0.1 million, or breakeven per diluted share, as compared to a net loss of $2.7 million, or $0.04 per diluted share, for the three months ended August 3, 2013. Six Months Ended August 2, 2014 Compared to Six Months Ended August 3, 2013 Net Sales. Net sales for the six months ended August 2, 2014 decreased 1.1% to $445.7 million, as compared to $450.5 million for the six months ended August 3, 2013. The decline in net sales is largely due to a reduction in the Company's store base to 507 stores at the beginning of fiscal year 2014, versus 519 stores at the beginning of fiscal year 2013, reflecting the Company's on-going real estate optimization strategy. Comparable store sales for the six months ended August 2, 2014 increased 0.1%, as compared to remaining flat in the prior year. In the comparable store base, average dollar sales per transaction increased by 2.3%, while the number of transactions per average store decreased by 2.2%, as compared to the same period last year. During the six months ended August 2, 2014, net sales from the Company's eCommerce and Outlet channels increased to approximately 10% and 11% of total net sales, respectively. 13-------------------------------------------------------------------------------- Table of Contents Gross Profit. Gross profit for the six months ended August 2, 2014 was $124.1 million, or 27.9% of net sales, as compared to $126.3 million, or 28.0% of net sales, for the six months ended August 3, 2013. The decrease in gross profit as a percentage of net sales during the six months ended August 2, 2014, as compared to the six months ended August 3, 2013, was due to a 70 basis point decrease in merchandise margin, primarily attributable to increased promotional activity and shipping costs, partially offset by a 60 basis point decrease in buying and occupancy costs reflecting management's continued focus on reducing costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $123.9 million, or 27.8% of net sales, for the six months ended August 2, 2014, as compared to $127.4 million, or 28.2% of net sales, for the six months ended August 3, 2013. The decrease in selling, general and administrative expenses during the six months ended August 2, 2014, as compared to the six months ended August 3, 2013, was primarily attributable to a decrease in incentive-based compensation combined with favorable insurance credits, which were partially offset by an increase in marketing expenses. Operating Income (Loss). For the reasons discussed above, operating income for the six months ended August 2, 2014 was $0.2 million, as compared to an operating loss of $1.0 million for the six months ended August 3, 2013. Interest Expense, Net. Net interest expense was $0.2 million for both the six months ended August 2, 2014 and for the six months ended August 3, 2013. Provision (Benefit) for Income Taxes. As previously disclosed, the Company continues to provide for adjustments to the deferred tax valuation allowance initially recorded during the three months ended July 31, 2010. The provision for income taxes for the six months ended August 2, 2014 was $0.5 million as compared to a benefit of $0.1 million for the six months ended August 3, 2013. Net Loss. For the reasons discussed above, net loss for the six months ended August 2, 2014 was $0.4 million, or $0.01 per diluted share, as compared to a net loss of $1.1 million, or $0.02 per diluted share, for the six months ended August 3, 2013. Liquidity and Capital Resources The Company's primary uses of cash are to fund working capital, operating expenses, debt service and capital expenditures related primarily to the construction of new stores, remodeling of existing stores and development of the Company's information technology infrastructure. Historically, the Company has financed these requirements from internally generated cash flow. The Company intends to fund its ongoing capital and working capital requirements, as well as debt service obligations, primarily through cash flows from operations, supplemented by borrowings under its credit facility, if needed. The Company is in compliance with all debt covenants as of August 2, 2014. The following tables contain information regarding the Company's liquidity and capital resources: August 2, February 1, August 3, 2014 2014 2013 (Amounts in thousands) Cash and cash equivalents $ 63,166 $ 69,723 $ 59,462 Working capital $ 56,309 $ 52,418 $ 48,018 14 -------------------------------------------------------------------------------- Table of Contents Six months Six months ended ended August 2, 2014 August 3, 2013 (Amounts in thousands) Net cash provided by operating activities $ 2,141 $ 5,053 Net cash used in investing activities $ (8,879 ) $ (6,996 ) Net cash provided by financing activities $ 181 $ 472 Net decrease in cash and cash equivalents $ (6,557 ) $ (1,471 ) Operating Activities Net cash provided by operating activities was $2.1 million for the six months ended August 2, 2014, as compared to $5.1 million for the six months ended August 3, 2013. The decrease in net cash provided by operating activities during the six months ended August 2, 2014, as compared to the six months ended August 3, 2013, is primarily due to changes in restricted cash, accounts receivable, income taxes receivable, prepaid expenses, and income taxes payable, partially offset by changes in inventories, accounts payable, accrued expenses, deferred rent, and other assets and liabilities. Investing Activities Net cash used in investing activities was $8.9 million for the six months ended August 2, 2014, as compared to $7.0 million for the six months ended August 3, 2013. Net cash used in investing activities during the six months ended August 2, 2014 reflects $7.6 million related to the opening of new Outlet stores and the remodeling of existing New York & Company stores, and $1.3 million related to non-store capital projects, which principally represent information technology enhancements. During the six months ended August 2, 2014, the Company opened six new Outlet stores and remodeled five existing New York & Company stores. Net cash used in investing activities during the six months ended August 3, 2013 reflects capital expenditures of $4.8 million related to the opening of new Outlet stores and the remodeling of existing stores, and $2.2 million related to non-store capital projects, which principally represent information technology enhancements, including the upgrade of the Company's eCommerce platform and website. On February 25, 2014, the Company entered into a lease for 182,709 square feet of office space at 330 West 34th Street, New York, New York, pursuant to which, the Company plans to move its corporate headquarters to by January 1, 2015 upon expiration of its existing lease at 450 West 33rd Street, New York, New York. The lease for the new corporate headquarters expires in 2030. In connection with the signing of the new corporate headquarters lease agreement, the Company issued an $8.0 million standby letter of credit to the lessor, which the Company may reduce by $2.0 million annually from 2017 through 2019. During fiscal year 2014, the Company expects capital expenditures related to the new office space to be approximately $13.0 million. Total cash rental obligations to be paid over the 16-year life of the lease are approximately $160.0 million. For fiscal year 2014 capital expenditures are expected to range between $35.0 and $40.0 million, as compared to $18.8 million in fiscal year 2013. This increase reflects continued investments in the Company's information technology infrastructure, including its eCommerce website; real estate spending to support the opening of new stores and the remodeling of existing locations; and approximately $13.0 million related to the Company's relocation and build-out of its new corporate headquarters in New York City. For fiscal year 2014, the Company currently expects to open between 8 and 12 new Outlet stores and 1 New York & Company store, remodel 10 to 11 existing New York & Company stores, and close between 12 and 14 New York & Company stores, ending the year with between 502 and 508 stores, including between 59 and 63 Outlet stores. 15-------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash provided by financing activities for the six months ended August 2, 2014 consisted of $0.3 million of proceeds from the exercise of stock options, partially offset by shares withheld for payment of employee payroll taxes. Net cash provided by financing activities for the six months ended August 3, 2013 represents proceeds from the exercise of stock options. Long-Term Debt and Credit Facilities On August 10, 2011, Lerner New York, Inc., Lernco, Inc. and Lerner New York Outlet, Inc., wholly-owned indirect subsidiaries of New York & Company, Inc., entered into a Third Amended and Restated Loan and Security Agreement (the "Loan Agreement," which was filed with the Company's Quarterly Report on Form 10-Q with the SEC on September 8, 2011) with Wells Fargo Bank, N.A., as Agent and sole lender. The Loan Agreement expires on August 10, 2016. The Loan Agreement provides the Company with up to $100 million of credit, consisting of a $75 million revolving credit facility (which includes a subfacility for issuance of letters of credit up to $45 million) with a fully committed accordion option that allows the Company to increase the revolving credit facility to a maximum of $100 million or decrease it to a minimum of $60 million, subject to certain restrictions. Under the Loan Agreement, the Company is currently subject to a Minimum Excess Availability (as defined in the Loan Agreement) covenant of $7.5 million. The Company's credit facility contains other covenants, including restrictions on the Company's ability to pay dividends on its common stock; incur additional indebtedness; and prepay, redeem, defease or purchase other debt. Subject to such restrictions, the Company may incur more indebtedness for working capital, capital expenditures, stock repurchases, acquisitions, and for other purposes. Under the Loan Agreement, the revolving loans under the credit facility bear interest, at the Company's option, either at a floating rate equal to the Eurodollar rate plus a margin of between 1.75% and 2.00% per year for Eurodollar rate loans or a floating rate equal to the Prime rate plus a margin of between 0.75% and 1.00% per year for Prime rate loans, depending upon the Company's Average Compliance Excess Availability (as defined in the Loan Agreement). The Company pays the lender under the revolving credit facility a monthly fee on outstanding commercial letters of credit at a rate of between 0.875% and 1.00% per year and on standby letters of credit at a rate of between 1.75% and 2.00% per year, depending upon the Company's Average Compliance Excess Availability, plus a monthly fee on the unused commitments under the revolving credit facility at a rate of 0.375% per year. The maximum borrowing availability under the Company's revolving credit facility is determined by a monthly borrowing base calculation based on applying specified advance rates against inventory and certain other eligible assets. As of August 2, 2014, the Company had availability under its revolving credit facility of $30.4 million, net of letters of credit outstanding of $22.5 million, as compared to availability of $37.1 million, net of letters of credit outstanding of $11.5 million, as of February 1, 2014, and availability of $41.1 million, net of letters of credit outstanding of $12.5 million, as of August 3, 2013. The lender has been granted a pledge of the common stock of Lerner New York Holding, Inc. and certain of its subsidiaries, and a first priority security interest in substantially all other tangible and intangible assets of New York & Company, Inc. and its subsidiaries, as collateral for the Company's obligations under the credit facility. In addition, New York & Company, Inc. and certain of its subsidiaries have fully and unconditionally guaranteed the credit facility, and such guarantees are joint and several. 16-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies Management has determined the Company's most critical accounting policies are those related to inventories, long-lived assets, intangible assets and income taxes. Management continues to monitor these accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to these policies as discussed in the Company's Annual Report on Form 10-K filed with the SEC on April 15, 2014. Adoption of New Accounting Standards Please refer to Note 2, "New Accounting Pronouncements" in the Notes to Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q. |