Vince Holding Corp. — Form 10-K Summary
Period clarification: The supplied filing is for fiscal 2017, ended February 3, 2018 (53 weeks), filed April 25, 2018. It is not a 2016 Q4 filing. Unless noted, dollar amounts below are in millions.
Business context
Vince is a luxury apparel and accessories company selling through Wholesale and Direct-to-consumer channels. Fiscal 2017 sales were $272.6 million: 61% Wholesale and 39% Direct-to-consumer. The company operated 55 stores and sold through about 2,000 distribution locations in more than 40 countries. Nordstrom accounted for 21.9% of fiscal 2017 net sales.
Financial performance and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Net sales | $272.6 | $268.2 |
| Gross profit / margin | $121.8 / 44.7% | $122.8 / 45.8% |
| Operating income (loss) | $(18.3) | $(64.7) |
| Net income (loss) | $58.6 | $(162.7) |
| Cash from operations | $(40.4) | $(29.7) |
| Capital expenditures | $3.4 | $14.3 |
- Sales rose 1.6%, including $1.6 million attributable to the extra fiscal week. Wholesale sales declined 2.3% to $166.1 million; Direct-to-consumer sales rose 8.5% to $106.5 million. Comparable sales, including e-commerce and excluding the extra week, increased 4.5%.
- Gross margin fell 1.1 percentage points, primarily due to a higher markdown mix in Direct-to-consumer and inventory-reserve adjustments; lower off-price discounts partly offset these pressures.
- Fiscal 2017 net income included an $82.0 million pretax, non-cash benefit from remeasuring the Tax Receivable Agreement (TRA) liability, primarily following the U.S. tax-rate reduction and revised income projections. Excluding this item, the reported net income does not represent operating profitability; the company had an operating loss of $18.3 million.
- Cash and equivalents were $5.4 million at year-end, versus $21.0 million a year earlier. Working capital was $36.4 million. Debt principal was $49.9 million: $33.0 million term debt and $16.9 million revolver borrowings. Revolver availability was $38.6 million, net of the borrowing cap, with $8.3 million of letters of credit outstanding.
- Operating cash outflow reflected working-capital use, including higher receivables and inventory and lower accounts payable and accrued expenses. Financing provided $28.2 million, including $29.0 million net proceeds from the rights offering and related investment agreement; the company repaid $9.0 million of term debt and $15.0 million of revolver borrowings from proceeds.
Material changes and outlook
- Wholesale distribution was rationalized through limited distribution arrangements with Nordstrom and Neiman Marcus, with management aiming to shift some sales to company retail and e-commerce and improve Wholesale profitability. The strategy’s success is not assured.
- The company opened one store in fiscal 2017 and planned a net three to five openings in fiscal 2018. It launched a capsule home collection and relaunched handbags in fiscal 2017. Management expected most benefits from cost savings and strategic initiatives to be realized in fiscal 2018.
- Management stated that actions taken—including a $30.0 million equity raise, lender amendments and cost initiatives—were expected to provide sufficient liquidity for the next 12 months. This outlook depends on execution and cash generation; the filing gives no quantified earnings or revenue guidance.
- The term-loan leverage covenant was waived for test periods from July 2017 through April 2019. Amortization payments were set at $3.0 million for the first scheduled quarter and $2.0 million quarterly thereafter, subject to revolver availability. The amendments increased term-loan pricing and imposed other restrictions. The company reported covenant compliance at year-end.
Risks, contingencies and unusual items
- Cash from operations remained negative, year-end cash was low, and liquidity depends on the company’s initiatives, borrowing access and continued lender support. The filing identifies possible alternative measures if liquidity proves insufficient.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective as of February 3, 2018 because of material weaknesses involving risk assessment and oversight of system implementation, IT access and change controls, financial-reporting processes, and tradename valuation controls. Remediation was underway, with full remediation targeted during fiscal 2018, subject to testing.
- Operating leases required $133.5 million of future minimum payments. The TRA liability was $58.6 million; the company may owe 85% of specified realized tax benefits, and payments may be accelerated in certain circumstances.
- Nordstrom concentration, department-store distribution changes, promotional competition, inventory forecasting, overseas sourcing (83% of products made in China), vendor payment demands, system-transition problems, and store economics are material business risks. The company recorded $5.1 million of store-asset impairment charges in fiscal 2017.
- The NYSE continued quarterly monitoring of the company’s business plan through February 2019 following prior market-capitalization and stockholders’ equity noncompliance. Sun Capital affiliates owned approximately 73% of shares as of March 30, 2018. The company also effected a 1-for-10 reverse stock split in October 2017.
- Management said ordinary-course legal, compliance, environmental and labor matters were not expected to have a material adverse effect. The Kellwood-related Shared Services Agreement had effectively terminated after the systems and functions transition.
Most important facts for investors to verify
- Underlying operating performance and cash generation apart from the $82.0 million non-cash TRA remeasurement benefit.
- Actual cash availability, borrowing-base capacity, debt amortization requirements and compliance with amended credit terms.
- Progress in remediating material weaknesses and the reliability of future financial reporting.
- Whether the wholesale reset can retain key partners while shifting demand to profitable direct channels.
- Inventory levels, markdown exposure, vendor terms, store impairment risk and progress against fiscal 2018 initiatives.
- The timing and amount of TRA payments, lease commitments and continued NYSE listing compliance.