Vince Holding Corp. — Form 10-Q Summary
Reporting period: Fiscal 2019 second quarter and six months ended August 3, 2019, compared with the periods ended August 4, 2018. Unless stated otherwise, amounts are in millions of dollars.
Business context
Vince is a luxury apparel and accessories company selling through wholesale partners, retail stores, e-commerce and its Vince Unfold subscription business. It reports Wholesale and Direct-to-consumer segments and sources most products from contract manufacturers outside the United States, primarily in Asia.
Financial performance and position
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $71.4, up 13.0% | $126.5, up 7.5% |
| Gross profit / margin | $34.7 / 48.7% | $63.0 / 49.8% |
| SG&A | $32.8 | $66.8 |
| Operating income (loss) | $2.0 | $(3.8) |
| Net income (loss) | $1.0; $0.08 per diluted share | $(6.0); $(0.51) per share |
| Cash from (used in) operations | Not presented separately | $(3.7), versus $(13.4) |
Quarterly comparable sales, including e-commerce, rose 7.1%; first-half comparable sales rose 4.0%. Wholesale sales increased 14.7% in the quarter, partly due to accelerated seasonal shipments. Direct-to-consumer sales grew 10.6%; the company ended the quarter with 60 stores, versus 58 a year earlier.
Cash and cash equivalents were $0.2 at August 3. Total debt principal was $52.1, comprising $26.1 under the term loan and $26.0 under the revolving facility. Revolver availability, net of the loan cap, was $33.9; letters of credit were $5.9. The company reported compliance with applicable debt covenants. The revolving borrowing rate was 3.8% at period-end.
Following adoption of the lease accounting standard, the balance sheet included $85.7 of operating lease right-of-use assets and $100.0 of lease liabilities. The Tax Receivable Agreement obligation was estimated at $58.3. Stockholders’ equity was $68.2.
Material changes versus the prior comparable periods
- Second-quarter gross margin increased 480 basis points to 48.7%, attributed mainly to product mix, product-development efficiencies and sourcing initiatives. First-half margin improved 450 basis points; approximately 170 basis points reflected favorable year-over-year inventory-reserve adjustments.
- The company moved from a second-quarter net loss of $3.8 to net income of $1.0. For the first half, the net loss narrowed to $6.0 from $9.5.
- SG&A rose 8.7% in the quarter and 11.2% for the first half. First-half increases included compensation, strategic consulting, marketing, e-commerce and Vince Unfold investment, and store occupancy.
- First-half operating cash use improved to $3.7 from $13.4, but inventory absorbed $6.5 of cash. Financing provided $5.3, including $6.9 of net revolving borrowings.
- Debt principal increased to $52.1 from $46.5 at February 2, 2019, primarily reflecting increased revolver borrowings. Cash remained very low.
Outlook, risks and unusual items
- Management stated that available liquidity sources were expected to be sufficient to meet obligations for the next 12 months. The filing provides no numerical revenue or earnings guidance.
- The company adopted ASC 842 in fiscal 2019 and recorded a $0.6 cumulative-effect reduction to opening retained earnings, including impairment of selected lease assets and correction of an immaterial prior-period rent error.
- Management disclosed ineffective disclosure controls due to a material weakness in IT program-change management and user-access controls. Remediation was underway, with full remediation targeted during fiscal 2019; additional testing procedures were being used in the meantime.
- The company reported a recent temporary company-wide malware-related systems outage, with no reported data breach or material financial impact. It cautioned that future cyber incidents could disrupt operations.
- Tariffs and trade-policy changes affecting Chinese imports could raise costs or pressure demand. The company said it was evaluating mitigation options, including sourcing changes and selective price increases; in fiscal 2018, 88% of products were produced in China.
- A securities lawsuit concerning disclosures about the ERP-system transition remained in early stages. Management considered an unfavorable judgment remote but could not estimate a possible loss. Other ordinary-course legal matters were also disclosed.
- Results are subject to apparel-industry seasonality and timing of wholesale shipments. Variable-rate debt, fixed-charge covenants, lease commitments and the Tax Receivable Agreement are additional liquidity considerations.
Important facts for investors to verify
- Whether sales growth and improved gross margins persist, particularly given wholesale shipment timing and the inventory-reserve comparison.
- Cash generation, inventory levels, revolver availability and compliance with tightening term-loan fixed-charge coverage requirements.
- Progress and testing evidence for remediation of the material weakness in internal controls.
- Actual effects of tariffs, sourcing changes and any resulting product-cost, pricing or demand pressures.
- Developments in the ERP-related litigation and any changes to the company’s assessment of potential losses.