VINCE HOLDING CORP. — Form 10-Q Summary
Reporting period: The filing covers the three months ended April 29, 2017, compared with the three months ended April 30, 2016. Although the request metadata says 2016 Q1, the filing itself reports the first quarter of 2017. Vince is a luxury apparel brand selling through wholesale, retail stores and e-commerce.
Financial results and liquidity
| Metric | Quarter ended Apr. 29, 2017 | Prior-year quarter |
|---|---|---|
| Net sales | $58.0 million | $67.6 million |
| Gross profit / margin | $25.6 million / 44.1% | $28.3 million / 41.8% |
| SG&A | $33.8 million | $31.8 million |
| Operating loss | $8.2 million | $3.5 million |
| Net loss / diluted loss per share | $9.3 million / $0.19 | $1.9 million / $0.05 |
| Cash used in operating activities | $19.8 million | $32.0 million |
At April 29, 2017, cash was $15.4 million; current assets were $70.8 million and current liabilities were $38.4 million. Debt principal totaled $66.1 million: $45.0 million under the term loan and $21.1 million under the revolver. Revolver availability was $15.1 million, net of the amended loan cap, with $7.5 million in letters of credit outstanding. The balance sheet reported $64.4 million of long-term debt after deferred financing costs and a stockholders’ deficit of $23.0 million.
Operating cash use reflected a $9.3 million net loss and working-capital outflows, notably $11.4 million from accounts payable and accrued expenses and $10.0 million from receivables. Capital expenditures were $1.8 million. Financing provided $15.9 million, primarily from net revolver borrowings. Cash declined $5.6 million during the quarter.
Changes versus the prior comparable period
- Sales fell 14.2%. Wholesale revenue decreased 20.9% to $35.4 million, primarily because management eliminated summer delivery in the first quarter. Direct-to-consumer sales declined 1.0% to $22.6 million; comparable sales, including e-commerce, fell 5.7%, partly due to lower average order value.
- Gross margin improved 2.3 percentage points. Management attributed the change mainly to fewer excess-inventory liquidation discounts and a favorable channel mix, partly offset by higher supply-chain costs.
- SG&A rose 6.2%, and its share of sales increased to 58.2% from 47.0%. Expenses included $1.6 million for remediation and optimization of systems implemented in the prior year, alongside higher product-development, store, marketing and depreciation costs.
- The direct-to-consumer segment moved from $1.7 million of operating income to a $1.3 million operating loss. Wholesale operating income decreased to $9.0 million from $10.3 million.
- Store count was 54, versus 51 a year earlier; wholesale distribution doors were 2,311, versus 2,345.
Outlook, risks and notable items
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The filing cites an uncertain retail environment, possible sales declines, vendor demands for accelerated payment or prepayment, constrained borrowing flexibility, and potential additional equity contributions. Management’s proposed mitigating actions were not fully executed when the statements were issued.
- Financing plans and covenants: Sun Fund V provided a conditional commitment for up to $30 million in connection with a rights offering. Funding depends, among other things, on an acceptable term-loan amendment and the absence of uncured defaults or a material adverse effect. The company made a $6.2 million specified equity contribution in April and a further $11.8 million in May and June to support term-loan leverage covenant compliance. At June 8, $3.2 million remained in funds retained by the holding company. Revolver terms were temporarily modified through July 31, 2017; a commercial finance examination could affect availability. The company reported covenant compliance as of April 29.
- Tax Receivable Agreement: The estimated obligation was $140.6 million, including $137.8 million in other long-term liabilities. A payment relating to 2016 was expected in the fourth quarter of 2017.
- Listing risk: NYSE notified the company that its share price and market capitalization did not meet continued-listing standards. The share-price cure deadline was November 17, 2017; the company also needed to submit a business plan addressing market capitalization or stockholders’ equity requirements.
- Controls: Disclosure controls were deemed ineffective due to material weaknesses involving risk assessment and IT general controls associated with ERP and payroll system implementation. Remediation was underway, with full remediation targeted by the end of 2017, subject to testing.
- Litigation: A putative shareholder class action filed May 5, 2017 alleges misleading statements or omissions relating to the ERP transition. The company considered an unfavorable outcome remote but said it could not estimate a possible loss or range at this early stage.
- Other risks: The company identified exposure to variable interest rates; a one-percentage-point increase would add approximately $661,000 of annual interest expense based on debt outstanding at quarter-end. Apparel sales are seasonal and sensitive to consumer spending, weather and shipment timing.
Important facts for investors to verify
- Whether the rights offering and required term-loan amendment were completed, and the resulting proceeds and dilution.
- Subsequent cash balances, revolver availability, vendor payment terms and the outcome of the commercial finance examination.
- Whether the company maintained covenant compliance and met required debt payments and Tax Receivable Agreement obligations.
- Progress toward restoring NYSE listing compliance and remediating the material weaknesses in internal controls.
- Developments in sales, comparable sales, margins and operating costs, and the status and potential exposure of the shareholder litigation.