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DOVR > SEC Filings for DOVR > Form 10-Q on 13-Nov-2013All Recent SEC Filings

Show all filings for DOVER SADDLERY INC

Form 10-Q for DOVER SADDLERY INC


13-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q, including the following discussion, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, the words "projected", "anticipated", "planned", "expected", and similar expressions are intended to identify forward-looking statements. In particular, statements regarding future financial targets or trends are forward-looking statements. Forward-looking statements are not guarantees of our future financial performance, and undue reliance should not be placed on them. Our actual results, performance or achievements may differ significantly from the results, performance or achievements discussed in or implied by the forward-looking statements. Factors that could cause such a difference are detailed in "Item 1A. Risk Factors" in our Amended Annual Report on Form 10-K/A for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission (the "SEC") on June 5, 2013 (the "Amended 10-K") ("fiscal 2012") and in our subsequent periodic reports on Form 10-Q. We disclaim any intent or obligation to update any forward-looking statement.

Overview

The Company is a leading, specialty retailer and the largest multi-channel marketer of equestrian products in the U.S. For over 35 years, Dover Saddlery has been a premier upscale marketing brand in the English-style riding industry. We sell our products through a multi-channel strategy, including direct and retail. This multi-channel strategy has allowed us to use catalogs and our proprietary database of over two million names of equestrian enthusiasts as the primary marketing tools to increase catalog sales and to drive additional business to our e-commerce websites and retail stores.

Based on consistent revenue growth in 2011 and 2012, the Company opened three new stores last year, and opened an additional store in Huntington, NY on April 18, 2013, in Winter Park, FL on October 24, 2013 and in Austin, TX on November 8, 2013. In addition, the Company is planning to open 1 more store before the end of 2013. The Company will continue to pursue other new store locations that may be opened in 2013. However, our strategy to increase the number of retail store locations is based on finding optimal locations where demand for equestrian products is high and adequate capital to invest in its store expansion plan.

Consolidated Performance and Trends

The Company reported net income for the three months ended September 30, 2013 of $443,000 or $0.08 per diluted share, compared to net income of $174,000 or $0.03 per diluted share for the corresponding period in 2012, an increase of 154.6%. The Company reported net income for the nine months ended September 30, 2013 of $260,000 or $0.05 per diluted share, compared to net income of $716,000 or $0.13 per diluted share for the corresponding period in 2012.

The third quarter of 2013 results reflect improved performance in the direct channel and our continuing efforts to execute our growth strategy in the retail market channel where revenues increased 15.6% to $11.4 million in the quarter. This trend of increased revenue in the retail market channel may be slowed or eroded by delays in the execution of our new store expansion strategy, constraints in available capital, and interim declines in consumer demand at our retail stores impacted by continued economic uncertainty and consequential consumer behavior. The Company responds to fluctuations in revenues primarily by delaying the opening of new stores, adjusting marketing efforts and operations to support our retail stores and managing costs. The success of our new store growth plan is dependent upon the response of our customers to these marketing strategies and evolving market conditions. Our direct market channel revenues increased 5.8%, to $11.2 million in the third quarter of 2013, due to improved consumer spending and promotions. We respond to fluctuations in our direct customers' response by adjusting the quantities of catalogs mailed and other internet marketing and customer-related strategies and tactics in order to maximize revenues and manage costs.

Given continued economic uncertainty, it is very difficult to accurately predict economic trends; however, we have resumed our store rollout strategy since 2011 and plan to continue to execute on prime new locations through the next 12 months.


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Exploration of Strategic Initiatives

The Company's Board and Senior Management are committed to manage and grow the Company in the best interests of its stockholders, including the growth in the long-term value of their holdings of Company stock. Senior Management believes, and the Board agrees, that it would be in the best interests of the Company's stockholders to explore options that may accelerate the realization of value for the benefit of its stockholders; and while alternatives are reviewed, Senior Management should remain focused on executing on the Company's Operational Plan to realize the long-term value of its assets.

Therefore, on September 23, 2013, the Company announced that its Board of Directors and Senior Management have initiated a process to identify and consider a range of operational, financial and strategic alternatives to better pursue its growth strategy and that may accelerate the enhancement of value for the benefit of its stockholders. During this process, the Company plans to evaluate all of its current and projected risks, opportunities and strategic alternatives.

At the direction of the Board, the Company has engaged Duff & Phelps Securities, LLC as its exclusive financial advisor in connection with the review process. While the Board has previously received unsolicited expressions of interest in relation to various potential strategic transactions from time to time, it is not currently in discussions with any particular party.

While undertaking this process, the Board and Senior Management will remain highly focused on executing the Company's long-term operational plan, which includes among other initiatives the continued rollout of its retail store expansion plan and the integration and realization of the strategic and financial benefits of the new retail stores opened over the past several years.

The Company stated that there can be no assurance that the Board's exploration of strategic alternatives will result in any transaction being pursued, entered into or consummated, and there is no set timetable for the strategic review process. The Company does not intend to comment further regarding the evaluation of strategic alternatives until such time as the Board has determined the outcome of the process or otherwise has deemed that disclosure is appropriate.

Single Reporting Segment

The Company operates and manages its business as one operating segment utilizing a multi-channel distribution strategy.

Results of Operations

The following table sets forth our unaudited restated results of operations as a percentage of revenues for the periods shown (1):

                                              Three Months Ended                Nine Months Ended
                                         September 30,   September 30,    September 30,   September 30,
                                             2013            2012             2013            2012

Revenues, net                                   100.0%          100.0%           100.0%          100.0%
Cost of revenues                                  62.1            62.8             62.9            62.3
Gross profit                                      37.9            37.2             37.1            37.7
Selling, general and administrative
expenses                                          33.8            34.3             35.7            34.6
Income from operations                             4.1             3.0              1.4             3.1
Interest expense, financing and other
related costs, net                                 0.7             0.6              0.7             0.7
Other investment (income) loss, net                0.0             0.1              0.1             0.0
Income before income tax provision                 3.4             2.3              0.8             2.5
Provision for income taxes                         1.5             1.4              0.4             1.3
Net income                                         2.0             0.9              0.4             1.2

(1) Certain of these amounts may not properly sum due to rounding.


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The following table presents certain selected unaudited operating data (dollars in thousands):

                                          Three Months Ended                    Nine Months Ended
                                   September 30,      September 30,      September 30,      September 30,
                                       2013               2012               2013               2012

Revenues, net - direct            $        11,180    $        10,567    $        33,175    $        33,472
Revenues, net - retail stores              11,435              9,895             30,409             26,276
Revenues, net - total             $        22,615    $        20,462    $        63,584    $        59,748

Other restated operating data:
Number of retail stores (1)                    19                 17                 19                 17
Capital expenditures                          567                716              1,312              1,837
Gross profit margin                         37.9%              37.2%              37.1%              37.7%
Adjusted EBITDA(2)                          1,324                908              2,007              2,706
Adjusted EBITDA margin(2)                    5.9%               4.4%               3.2%               4.5%

(1) Includes eighteen Dover-branded stores and one Smith Brothers store. The Huntington, NY Dover-branded store opened in April, 2013. Subsequent to the Company's third fiscal quarter, on October 24th and November 8th, the Company opened its nineteenth and twentieth Dover-branded stores in Winter Park, FL and Austin, TX, respectively.

(2) When we use the term "Adjusted EBITDA", we are referring to net income minus interest income and other income plus interest expense, income taxes, non-cash stock-based compensation, depreciation, amortization and other investment (income) loss, net. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.

Adjusted EBITDA has some limitations as an analytical tool and you should not consider it in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities or any other measure calculated in accordance with U.S. generally accepted accounting principles. Some of the limitations are:

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or capital commitments;

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

Adjusted EBITDA does not reflect the impact of an impairment charge that might be taken, when future results are not achieved as planned, in respect of goodwill resulting from any premium the Company might pay in the future in connection with potential acquisitions;

Adjusted EBITDA does not reflect the interest expense or cash requirements necessary to service interest or principal payments on our debt;

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

Although stock-based compensation is a non-cash charge, additional stock options might be granted in the future, which might have a future dilutive effect on earnings and earnings per share; and

Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.


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The following table reconciles net income to Adjusted EBITDA (in thousands):

                                           Three Months Ended                    Nine Months Ended
                                    September 30,      September 30,      September 30,      September 30,
                                        2013               2012               2013               2012

Net income                         $          443*    $          174*    $         260**    $         716**
Depreciation                                   295                237                843                661
Amortization of intangible
assets                                          17                  -                 52                  -
Stock-based compensation                        81                 62                219                186
Interest expense, financing and
other related costs, net                       154                128                426                390
Other investment (income) loss,
net                                              4                 15               (33)               (16)
Provision for income taxes                     330                292                240                769
Adjusted EBITDA                    $        1,324*    $          908*    $       2,007**    $       2,706**

(*) Includes gift card breakage income of $30,146 and $41,632 for the three months ended September 30, 2013 and 2012, respectively.

(**) Includes gift card breakage income of $90,438 and $566,258 for the nine months ended September 30, 2013 and 2012, respectively. 2012 includes the cumulative impact of the change in gift card breakage income of $441,362 recorded in the first quarter and breakage income of $124,896 for the nine months ended September 30, 2012.

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

Revenues

Total revenues increased $2.1 million, or 10.5%, to $22.6 million for the three months ended September 30, 2013 from $20.5 million for the three months ended September 30, 2012. Revenues in our direct market channel increased $0.6 million, or 5.8%, to $11.2 million from $10.6 million in the corresponding period in 2012. Revenues in our retail market channel increased $1.5 million, or 15.6%, to $11.4 million from $9.9 million in 2012. The increase in our direct market channel was due to improved consumer spending and promotions. The increase in revenues from our retail market channel was due to strong sales growth from our newer stores as they mature, two additional retail stores and promotions. Same store sales for the three month period increased 4.2% over the prior year. In addition, breakage income of $30,146 was recognized during the three months ending September 30, 2013, compared to $41,632 for the three months ended September 30, 2012. The revenue was recognized in both retail and direct market channels based on where the gift card was issued.

Gross Profit

Gross profit for the three months ended September 30, 2013 increased $1.0 million, or 12.5%, to $8.6 million as compared to the $7.6 million in the corresponding period in 2012. Gross profit, as a percentage of revenues, for the three months ended September 30, 2013 increased 0.7% to 37.9% from 37.2% for the corresponding period in 2012. The increase in gross profit as a percentage of revenues was attributable to variations in overall product mix.

Selling, General and Administrative

Selling, general and administrative expenses increased $0.6 million, or 8.9% to $7.6 million for the three months ended September 30, 2013 from $7.0 million for the three months ended September 30, 2012. SG&A expenses, as a percentage of revenues, decreased to 33.8% of revenues from 34.3% of revenues for the corresponding period in 2012. SG&A increased primarily as a result of an additional $379,000 in labor, lease expense, catalog costs and depreciation expense. Labor, lease and depreciation expense increased primarily due to the additional number of stores as compared to last year. Catalog costs largely reflect the timing of the expenses.

Interest Expense

Interest expense, including amortization of financing costs, attributed to our term note and revolving credit facility increased $22,000 or 16.7%, to $154,000 from $132,000 due to the increased balance of the Revolver Facility.


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Other Investment Income

Net income (loss) from investment activities consists of the Company's share of net earnings or loss of its affiliate as they occur. The Company's net investment loss for the three months ending September 30, 2013 was $4,000, a decrease of $11,000 over its net investment loss of $15,000 in 2012. The Company's investment income or loss from investment activities are related to our investments in Hobby Horse Clothing Company, Inc. ("HH") and Horsepharm, LLC.

Income Tax Provision

The provision for income taxes was $330,000 for the three months ended September 30, 2013, reflecting an effective tax rate of 43%, compared to $292,000 for the corresponding period in 2012, reflecting effective tax rate of 63%. The effective tax rate for the quarter was based upon management's best estimates of the estimated effective rates for each entire year.

Net Income

The net income for the third quarter of 2013 increased by $269,000, or 154.6%, to $443,000, compared to $174,000 in the third quarter of 2012. This increase in the net income was due primarily to increased revenue in both the direct and retail channels. The resulting quarterly income per diluted share increased to $0.08 in the third quarter of 2013 compared to $0.03 per diluted share for the corresponding period in 2012.

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

Revenues

Total revenues increased $3.9 million, or 6.4%, to $63.6 million for the nine months ended September 30, 2013 from $59.7 million for the year ended September 30, 2012. Revenues in our direct market channel decreased $0.3 million, or 0.9%, to $33.2 million from $33.5 million in the corresponding period in 2012. Revenues in our retail market channel increased $4.1 million, or 15.7%, to $30.4 million from $26.3 million in 2012. The decrease in our direct market channel was due to weakness in consumer spending in this channel for the first quarter and a shift from direct to retail for some of their purchases. The increase in revenues from our retail market channel was due to strong sales growth from our newer stores as they mature, two additional retail stores and promotions. Same store sales for the nine month period increased 1.9% over the prior year. Same store sales in the first quarter of 2013 were lower due to weather, but have improved during the second and third quarters of this year. In addition, breakage income of $90,438, was recognized during the nine months ending September 30, 2013, compared to $565,258, including a cumulative impact of $441,362, during the nine months ending September 30, 2012.

Gross Profit

Gross profit for the nine months ended September 30, 2013 increased $1.1 million, or 4.8%, to $23.6 million from $22.5 million for the corresponding period in 2012. Gross profit, as a percentage of revenues, for the nine months ended September 30, 2013 decreased 0.6% to 37.1% from 37.7% for the corresponding period in 2012. The increase in gross profit of $1.1 million was attributable to increased revenues in the retail channel and improved product margins offset by cumulative breakage income recorded in the first quarter of 2012. The decrease in gross profit as a percentage of revenues was attributable primarily to the variations in our overall product mix and pricing.

Selling, General and Administrative

Selling, general and administrative expenses increased $2.0 million, or 9.9%, for the nine months ended September 30, 2013 to $22.7 million from $20.7 million for the corresponding period in 2012. Increased lease expense of $293,000, professional fees of $129,000, labor costs of $891,000, tax expense of $158,000 and depreciation of $182,000 were the primary causes for this increase in SG&A expenses. SG&A expenses, as a percentage of revenues, increased to 35.7% from 34.7% for the corresponding period in 2012 due to the increases in lease expense, professional fees, labor costs, tax expense and depreciation. Labor, lease, tax and depreciation increased primarily due to the additional number of stores as compared to last year. Professional fees largely reflect our ongoing investments to improve our Internet channel as well as increases in consulting services.

Interest Expense

Interest expense, including amortization of financing costs, attributed primarily to our term note and revolving credit facility increased $22,000 or 5.4% to $426,000 for the nine months ended September 30, 2013 from $404,000 for the same period in 2012 due to the increased outstanding balance of our Revolver Facility.


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Other Investment Income

Net income from investment activities consists of the Company's share of net earnings or loss of its affiliate as they occur. The Company's net investment gain for the nine months ended September 30, 2013 was $33,000, an increase of $17,000 over its net investment income gain of $16,000 in 2012. The Company's investment income from investment activities are related to our investments in Hobby Horse Clothing Company, Inc. ("HH") and Horsepharm, LLC.

Income Tax Provision

The provision for income taxes was $240,000 for the nine months ended September 30, 2013, reflecting an effective tax rate of 49%, compared to a tax provision of $769,000 for the corresponding period in 2012, reflecting an effective tax rate of 52%. The effective tax rates were based upon management's best estimates of the estimated effective rates for each entire year.

Net Income

Net income for the nine months ended September 30, 2013 decreased $456,000 or 63.7%, to $260,000 from $716,000 of net income for the corresponding period in 2012. This decrease in profitability was due primarily to increased SG&A expenses related to lease expense, professional fees, labor costs, tax expense and depreciation along with the cumulative impact of the breakage income recorded in 2012. In addition weaker than expected direct sales (as explained in Revenues above) reduced the gross margin contribution. The resulting income per diluted share decreased to $0.05 for the nine months ended September 30, 2013 as compared to $0.13 for the corresponding period in 2012.

Seasonality and Quarterly Fluctuations

Since 2001, our quarterly product sales have ranged from a low of approximately 20% to a high of approximately 32% of any calendar year's results. The beginning of the spring outdoor riding season in the northern half of the country has typically generated a slightly stronger third quarter of the year, and the holiday buying season has generated additional demand for our normal equestrian product lines in the fourth quarter of the year. Revenues for the first and third quarters of the calendar year have tended to be somewhat lower than the second and fourth quarters. We anticipate that our revenues will continue to vary somewhat by season. The timing of our new retail store openings has had, and is expected to continue to have, a significant impact on our quarterly results. We will incur one-time expenses related to the opening of each new store. As we open new stores, (i) revenues may spike and then settle, and
(ii) pre-opening expenses, including occupancy and management overhead, are incurred, which may not be offset by correlating revenues during the same financial reporting period. As a result of these factors, new retail store openings may result in temporary declines in operating profit, both in dollars and as a percentage of sales.

Liquidity and Capital Resources

For the nine months ended September 30, 2013, our cash was reduced by $69,000. Cash was utilized primarily for seasonal working capital requirements. The primary source for cash generated related to increased borrowings under our Revolver Facility. On March 29, 2013, the Company and the bank amended the Revolver Facility so that the Company can borrow three Capex Term Loans for capital expenditures used to open new stores. Under the amended Revolver Facility, the Company can borrow up to $13,000,000, of which up to $1,000,000 can be in the form of letters of credit and up to $8,000,000 can be advanced as Capex Term Loans, and increase the $13,000,000 maximum up to $20,000,000 at the discretion of the bank. To allow for additional borrowings for store openings the Company amended the covenants under the Credit Facility to eliminate the funded debt ratio and fixed charge coverage ratio as well as add the maximum balance sheet leverage ratio and minimum debt service charge ratio effective March 31, 2013. The Company was in compliance with all covenants under both credit facilities as of September 30, 2013.

If necessary, we plan in the future to seek additional financing from banks and leasing companies, or through public offerings or private placements of debt or equity securities, strategic relationships, or other arrangements. In the event we fail to meet our financial covenants with our bank, we may not have access through our line of credit to sufficient working capital to pursue our growth strategy or in certain situations, continuing operations, or our loans may be called requiring the repayment of all amounts on our loans.

Operating Activities

Cash utilized in our operating activities for the nine months ended September 30, 2013 was $3.9 million compared to $2.4 million for the corresponding period in 2012. For the nine months ended September 30, 2013, cash outflows consisted primarily of seasonal increases in inventory, prepaid and other assets and initial stocking of new stores of $4.6 million, as well as reductions in accrued expenses and other current liabilities, gift certificate liability, income taxes payable of $2.3 million. Cash inflows were attributable to the results of operations which consisted of net income and reductions in accounts receivable as well increases in


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accounts payable and other non-cash expenses totaling $3.0 million of cash. For the nine months ended September 30, 2012, cash outflows of $3.9 million consisted primarily of seasonal increases in accounts receivable, prepaid and other assets, inventory and initial stocking of new stores, as well as . . .

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