Vince Holding Corp. — Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and six months ended August 4, 2018 (the company’s fiscal 2018 second quarter), compared with periods ended July 29, 2017. This differs from the request metadata of “2017 Q2.” Vince is a luxury apparel and accessories company with Wholesale and Direct-to-consumer segments; it sells through department and specialty stores, retail locations, and e-commerce. Financial amounts below are in thousands of dollars unless otherwise noted.
Financial performance and position
| Metric | Three months ended Aug. 4, 2018 | Prior-year quarter | Six months ended Aug. 4, 2018 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $63,128 | $60,822 | $117,642 | $118,867 |
| Gross profit / margin | $27,719 / 43.9% | $25,556 / 42.0% | $53,255 / 45.3% | $51,147 / 43.0% |
| SG&A | $30,143 | $34,416 | $60,043 | $68,200 |
| Operating loss | $(2,424) | $(8,860) | $(6,788) | $(17,053) |
| Net loss | $(3,822) | $(10,134) | $(9,459) | $(19,424) |
| Basic and diluted loss per share | $(0.33) | $(2.05) | $(0.81) | $(3.93) |
- Quarterly sales rose 3.8%; six-month sales declined 1.0%. Quarterly Wholesale sales fell 3.6% to $37,844, while Direct-to-consumer sales grew 17.2% to $25,284. Comparable sales, including e-commerce, increased 14.4% in the quarter and 13.3% for six months.
- Gross margin improved by 1.9 percentage points in the quarter and 2.3 points for six months. Management cited lower product and supply-chain costs and favorable channel mix, partly offset by inventory-reserve adjustments.
- SG&A declined 12.4% in the quarter and 12.0% for six months. Management attributed the reductions largely to lower product-development, severance, prior-year systems-remediation, and one-time cost-reduction expenses.
- Cash used in operating activities was $13,436 for six months, versus $37,777 in the prior-year period. Inventory absorbed $12,802 of cash, partly reflecting earlier fall-season receipts and planned product returns from exited wholesale partners. Capital expenditures were $1,026; financing activities provided $14,410. Cash and cash equivalents were $5,321 at period-end.
- At August 4, debt principal was $64,400: $29,000 under the term loan and $35,400 under the revolving facility. Revolver availability, net of the loan cap, was $23,723; outstanding letters of credit were $7,230. The company reported compliance with applicable debt covenants at that date.
- Total assets were $246,784 and stockholders’ equity was $65,901 at August 4. Inventory was $61,616, up from $48,921 at February 3, 2018. The estimated Tax Receivable Agreement obligation was $58,273.
Material changes and subsequent events
- Direct-to-consumer growth and improved margins were offset in part by reduced Wholesale sales, consistent with the planned reduction in full-price wholesale partners. Management intends to recapture some exited-door sales through retail and e-commerce while focusing wholesale distribution.
- On August 21, 2018, after quarter-end, the company refinanced its existing facilities with a $27,500 senior secured term loan and an $80,000 senior secured revolving facility. Existing debt was repaid, and the old facilities were terminated. The company incurred $2,229 in fees and expenses. The new term loan has quarterly amortization and financial covenants that step up over time; the revolver includes a borrowing-base limit and a springing fixed-charge-coverage covenant.
- The company opened two retail stores and closed one during the quarter; it had 58 stores at August 4, compared with 55 a year earlier.
- The company adopted Topic 606 in fiscal 2018 using the modified-retrospective method. It reported no material impact on the income statement; balance-sheet presentation changed, including sales-return-related classifications.
Outlook, risks, and unusual items
- Management said it expects sufficient liquidity for working capital, capital spending, Tax Receivable Agreement payments, debt maturities, and covenants over the next 12 months, but cautioned that future operating cash flow is uncertain and depends on successfully executing initiatives.
- The filing provides no specific revenue, earnings, or margin guidance. The company cited seasonality, consumer spending and confidence, inventory management, competition, cost pressures, wholesale-partner concentration, debt service and covenant compliance, and execution of its growth and distribution plans among its risks.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses in risk assessment and governance, IT general controls, transaction-processing controls, and controls over tradename-impairment valuation. Management described remediation efforts and targeted full remediation during fiscal 2018, subject to successful testing; additional substantive procedures were being performed.
- A stockholder lawsuit filed September 7, 2018 alleges false or misleading statements or omissions concerning the ERP-system transition from Kellwood. The company called an unfavorable outcome remote based on information available, but said it could not estimate a possible loss and would incur defense costs.
- The company had $41,435 of goodwill and $71,100 of net tradename value, in addition to a history of impairment charges. Management identified further impairment as a risk.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing is for the quarter ended August 4, 2018, not 2017 Q2.
- Review post-refinancing borrowings, actual revolver availability, interest costs, and compliance with the new facilities’ financial covenants.
- Track whether Direct-to-consumer growth and comparable-sales gains continue to offset Wholesale declines and whether inventory levels and planned returns normalize.
- Assess progress in remediating material weaknesses, especially IT controls and tradename-valuation controls.
- Monitor the ERP-related litigation, including any developments that could change the company’s current assessment or permit estimation of potential exposure.
- Evaluate cash generation and the company’s ability to meet debt service, capital spending, and the $58,273 Tax Receivable Agreement obligation.