Business context and reporting period
Vince Holding Corp. (then formerly Apparel Holding Corp.) reported the three and nine months ended November 2, 2013, compared with periods ended October 27, 2012. The historical consolidated results include both Vince and non-Vince businesses. On November 27, 2013, following the IPO and restructuring, the company retained the Vince business; the non-Vince businesses were separated and transferred to Kellwood Holding, LLC. Accordingly, the reported historical consolidated results are not a like-for-like presentation of the post-transaction public company.
Financial performance and position
Unless stated otherwise, amounts below are in millions of dollars. Consolidated operating results are historical results including both Vince and non-Vince businesses.
| Metric | Three months ended Nov. 2, 2013 | Prior-year quarter | Nine months ended Nov. 2, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $213.9 | $203.4 | $577.9 | $522.8 |
| Gross profit / margin | $68.5 / 32.0% | $62.9 / 30.9% | $176.5 / 30.5% | $147.1 / 28.1% |
| Income from operations | $13.9 | $16.1 | $26.6 | $17.3 |
| Net loss from continuing operations | $(2.5) | $(8.2) | $(37.3) | $(84.6) |
| Net loss, including discontinued operations | $(2.4) | $(14.9) | $(28.0) | $(96.1) |
| Net loss per share | $(0.09) | $(0.57) | $(1.07) | $(3.67) |
- Quarterly sales rose 5.2%; nine-month sales rose 10.5%. Gross margin improved 110 basis points in the quarter and 240 basis points year to date, primarily reflecting a larger sales contribution from higher-margin Vince and Juniors businesses.
- Quarterly operating income declined despite higher sales, as SG&A rose 15.9% to $53.1 million, or 24.8% of sales, from $45.8 million, or 22.5%. Nine-month SG&A rose 13.4% to $146.6 million.
- Net interest expense fell to $14.8 million from $23.8 million in the quarter and to $58.4 million from $97.9 million for nine months, largely reflecting lower average debt after Sun Capital-related debt contributions and waivers.
- Management-reported segment Adjusted EBITDA was $25.9 million for the quarter versus $29.2 million, and $60.9 million for nine months versus $49.1 million. This is a non-GAAP measure and excludes specified items; it should not be treated as a substitute for GAAP earnings.
- Within the supplemental Vince, LLC results, nine-month sales increased 19.6% to $200.4 million, net income increased to $8.8 million from $6.7 million, and gross margin improved to 46.3% from 45.1%. Quarterly Vince sales rose 11.4% to $85.8 million and net income was $6.4 million. Vince had 27 stores versus 20; comparable-store sales growth was 24.7% for nine months and 16.5% for the quarter. These supplemental historical results include allocated charges and debt costs and may not reflect future standalone results.
- Nine-month operating cash flow was a use of $41.7 million, versus a use of $24.7 million. The 2013 use reflected, among other items, increases in receivables of $11.6 million, inventory of $17.5 million, and lower accounts payable and accrued expenses of $11.9 million. Investing cash use was $5.9 million; financing provided $47.5 million. Cash ended at $1.7 million.
- At November 2, 2013, consolidated current assets were $228.7 million and current liabilities $386.8 million. Debt included $122.3 million of short-term borrowings and $391.1 million of long-term debt, including its current portion. This is the pre-restructuring combined-company balance sheet.
Material changes, outlook, risks and unusual items
- The November 27 IPO sold 10.0 million newly issued shares at $20 each; selling shareholders sold a further 1.5 million shares. The company received approximately $177 million net proceeds, retained about $5 million for general purposes, and applied the remaining proceeds together with new borrowing in the restructuring and debt repayment transactions.
- Vince, LLC entered a new $175 million secured term loan, maturing in 2019, and a secured revolving facility with commitments up to $50 million, maturing in 2018. The term loan bears interest at Eurodollar plus 5.00% (subject to a 1.00% floor) or base rate plus 3.00% (subject to a 2.00% floor), with quarterly amortization of 0.25% of original principal and leverage covenants. The filing does not state a post-closing revolver borrowing balance. Pre-IPO debt and certain other liabilities were repaid, discharged, refinanced, or retained by Kellwood; the remaining 7.625% notes were not obligations of Vince.
- Non-Vince discontinued operations generated $9.3 million of nine-month net income versus an $11.5 million loss a year earlier, primarily due to an $11.9 million tax benefit from a valuation-allowance release. The company disclosed expected future net cash outflows for discontinued operations of about $1.1 million, primarily through fiscal 2014.
- Unusual items included a $0.9 million impairment charge in continuing operations in the first nine months, $7.2 million of public-company transition and other one-time costs excluded from Adjusted EBITDA, and significant noncash capitalized PIK interest. The IPO and restructuring also included a $3.3 million Sun Capital restructuring fee and a $6.0 million CEO debt-recovery bonus.
- Management cited apparel-industry seasonality, consumer spending sensitivity, wholesale shipment timing, execution of Vince’s retail and brand growth, and higher standalone public-company costs. Management provided no quantified forward financial guidance in the supplied filing text. Forward-looking statements are subject to risks and uncertainties; the filing says risk factors had not materially changed from the IPO registration statement.
- Environmental remediation and tax-settlement obligations described in the filing were retained by Kellwood after restructuring; VHC stated it had no obligation for those matters after the transactions. The company reported routine litigation and stated management did not expect it to have a material adverse effect.
Important facts for investors to verify
- Use post-restructuring Vince-only financials, rather than the combined historical consolidated results, when assessing the ongoing public company; confirm the allocation and comparability of historical costs.
- Confirm actual post-IPO debt, cash, revolver usage, interest expense, covenant headroom, and compliance under the new credit agreements.
- Assess the drivers and durability of Vince’s growth, store expansion, comparable-store sales, wholesale demand, margins, and inventory levels.
- Reconcile GAAP results with Adjusted EBITDA and evaluate the effect of transition costs, PIK interest, tax benefits, and other unusual items.
- Review the Tax Receivable Agreement, which provides pre-IPO stockholders 85% of certain realized tax savings, and the ongoing shared-services arrangements with Kellwood.