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DLIA > SEC Filings for DLIA > Form 10-K on 17-Apr-2014All Recent SEC Filings

Show all filings for DELIAS, INC.

Form 10-K for DELIAS, INC.


17-Apr-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Consolidated Financial Data" and our financial statements and related notes appearing elsewhere in this annual report, all of which reflect the Company's Alloy business as a discontinued operation. Descriptions of all documents included as exhibits hereto are qualified in their entirety by reference to the full text of such documents so referenced.

Executive Summary and Overview

We are a multi-channel retail company with a lifestyle brand marketing and catering to teenage girls. We operate the dELiA*s brand, which we believe is a well-established, differentiated, lifestyle brand. We generate revenues by selling a wide variety of product categories to consumers through our website, direct mail catalogs, and retail stores.

Through our e-commerce website and catalogs, we sell our own proprietary brand products, together with brand name products, in key spending categories directly to consumers, including apparel and accessories. Our mall-based retail stores derive revenues primarily from the sale of proprietary apparel and accessories and, to a lesser extent, branded apparel.

Our focus on our proprietary brand and a diverse collection of name brands allows us to adjust our merchandising strategy quickly as fashion trends change. In addition, we strive to keep our merchandise mix fresh by regularly introducing new trends and styles. Our proprietary brand provides us an opportunity to broaden our customer base by offering merchandise of comparable quality to brand name merchandise, at a lower price, while permitting improved gross profit margins. Our proprietary brand also allows us to capitalize on emerging fashion trends when branded merchandise is not available in sufficient quantities, and to exercise a greater degree of control over the flow of our merchandise from our vendors to us, and from us to our customers.

Our strategy is to improve upon our position as a direct marketing company; to increase productivity in our retail stores; and to carry out such strategy while controlling costs. In addition, our strategy includes strengthening the dELiA*s brand through alignment across all channels of our business while continuing extended offerings online and in our catalogs.

We expect that improved productivity in each segment of our business will be the key element of our overall growth strategy. Our focus is to improve productivity in our current retail store base, to invest in web-based marketing programs to drive additional traffic to our website and improve the productivity of catalogs distributed. As productivity improves and market conditions allow, we plan to expand the retail store base over the long term. In addition, as store performance and market conditions allow, we may plan on accelerating our growth in gross square footage. Should we accelerate our growth, we may need additional equity or debt financing.

Goals

We believe that focusing on our dELiA*s brand and implementing the following initiatives should lead to profitable growth and improved results from operations:

Leveraging our omni-channel platform in order to drive top line growth;

implementing web, mobile and social media initiatives, while optimizing our catalog circulation;


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developing merchandise assortments that emphasize key categories more effectively and drive improved gross profit margins;

employing focused inventory management strategies and creating inventory turn improvement;

improving productivity of the existing store base through heightened focus on the selling culture, with emphasis on increased customer conversion;

leveraging our current expense infrastructure and taking additional operating costs out of the business, including monitoring and opportunistically closing underperforming stores; and

expanding the retail store base over the long-term.

Key Performance Indicators

The following measurements are among the key business indicators that management reviews regularly to gauge the Company's results:

store metrics such as comparable store sales, sales per gross square foot, average retail price per unit sold, average transaction values, average units per transaction, traffic conversion rates and store contribution margin (defined as store gross profit less direct costs of running the store);

direct marketing metrics such as average order value and demand generated by book, with demand defined as the amount customers seek to purchase without regard to merchandise availability;

web metrics such as unique site visits, carts opened and carts converted, and site conversion;

fill rate, which is the percentage of any particular order we are able to ship for our direct marketing business, from available on-hand inventory or future inventory orders;

gross profit;

operating income;

inventory turnover and average inventory per store; and

cash flow and liquidity determined by the Company's cash provided by operations.

The discussion below includes references to "comparable stores." We consider a store comparable after it has been open for 15 full months without closure for more than seven consecutive days and whose square footage has not been expanded or reduced by more than 25% within the past year. If a store is closed during a fiscal quarter, it is removed from the computation of comparable store sales for that fiscal quarter.

Our fiscal year is on a 52 or 53 week basis and ends on the Saturday nearest to January 31. The fiscal year ended February 1, 2014 was a 52-week fiscal year, while February 2, 2013 was a 53-week fiscal year, and January 28, 2012 was a 52-week fiscal year. We refer to the extra week in fiscal 2012 as the "53rd week."


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Consolidated Results of Operations

The following table sets forth our statements of operations data for the periods indicated, reflected as a percentage of revenues:

                                                                  Fiscal Year
                                                    2013             2012             2011
STATEMENTS OF OPERATIONS DATA:
Total revenues                                        100.0 %          100.0 %          100.0 %
Cost of goods sold                                     83.7 %           68.7 %           71.8 %

Gross profit                                           16.3 %           31.3 %           28.2 %

Operating expenses:
Selling, general and administrative expenses           53.1 %           42.8 %           44.4 %
Impairment of goodwill                                  0.0 %            2.5 %            0.0 %
Impairment of long-lived assets                         2.6 %            0.1 %            0.3 %
Other operating income                                 (0.9 %)          (1.4 %)          (0.7 %)

Total operating expenses                               54.8 %           44.0 %           44.0 %

Operating loss                                        (38.5 %)         (12.7 %)         (15.8 %)
Interest expense, net                                   3.5 %            0.4 %            0.3 %

Loss from continuing operations before
income taxes                                          (42.0 %)         (13.1 %)         (16.1 %)
Provision (benefit) for income taxes                    0.1 %           (0.4 %)          (1.4 %)

Loss from continuing operations                       (42.1 %)         (12.7 %)         (14.7 %)
(Loss) income from discontinued operations,
net of income taxes                                    (0.8 %)           0.8 %            1.6 %

Net loss                                              (42.9 %)         (11.9 %)         (13.1 %)

Fiscal 2013 Compared with Fiscal 2012 (52 weeks vs. 53 weeks)

Revenues

Total Revenues

Total revenues decreased 24.6% to $136.7 million in fiscal 2013 from $181.2 million in fiscal 2012. Revenues from the retail segment comprised 69.8% of total revenues for fiscal 2013 as compared to 69.3% in fiscal 2012, and revenues from the direct segment comprised 30.2% of total revenues for fiscal 2013 as compared to 30.7% for fiscal 2012. The 53rd week of fiscal 2012 added incremental revenues of approximately $2.1 million.

Direct Marketing Revenues

Direct marketing revenues decreased 25.7% to $41.3 million in fiscal 2013 from $55.6 million in fiscal 2012. The decrease in revenues was primarily due to reduced website traffic as well as lower average order values. The 53rd week of fiscal 2012 added incremental revenues of approximately $1.0 million.

Retail Store Revenues

Retail store revenues decreased 24.1% to $95.4 million in fiscal 2013 from $125.6 million in fiscal 2012. The decrease in revenues included a comparable store sales decrease of 18.4% primarily due to reduced traffic and lower average unit retail, as well as a reduction in store count. The 53rd week of fiscal 2012 added incremental revenues of approximately $1.1 million.


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The following table sets forth select operating data in connection with the revenues of our Company:

                                                        For Fiscal Years Ended
                                                          2013            2012
  Channel Net Sales (in thousands):
  Retail                                              $     95,352      $ 125,595
  Direct                                                    41,298         55,555

                                                      $    136,650      $ 181,150

  Catalogs Mailed (in thousands)                            19,831         20,037

  Number of Stores:
  Beginning of Period                                          104            113
  Stores Opened                                                  2 *            1 **
  Stores Closed                                                  5 *           10 **

  End of Period                                                101            104

  Total Gross Sq. Ft @ End of Period (in thousands)          389.5          399.4

* Totals include two stores that were closed and relocated to an alternative sites in the same mall during fiscal 2013.

** Totals include one store that was closed and relocaed to an alternative site in the same mall during fiscal 2012.

Gross Profit

Total Gross Profit

Gross profit for fiscal 2013 was $22.2 million or 16.3% of revenues, as compared to $56.7 million or 31.3% of revenues in fiscal 2012. The decrease in gross profit percentage and in dollars was principally due to lower merchandise margins and increased markdown and other inventory reserves in connection with clearing legacy product as well as the deleveraging of reduced occupancy costs.

Direct Marketing Gross Profit

Direct marketing gross profit for fiscal 2013 was $12.8 million or 31.1% of revenues, as compared to $24.4 million or 43.9% of revenues in fiscal 2012. The decrease in gross profit percentage and in dollars was primarily due to lower merchandise margins and increased markdown and other inventory reserves in connection with clearing underperforming legacy inventory as well as increased shipping costs.

Retail Store Gross Profit

Retail store gross profit for fiscal 2013 was $9.4 million or 9.8% of revenues, as compared to $32.3 million or 25.7% of revenues in fiscal 2012. The decrease in gross profit percentage and in dollars was primarily due to lower merchandise margins and increased markdown and other inventory reserves in connection with clearing underperforming legacy inventory, and the deleveraging of occupancy costs on lower revenues.

Operating Expenses

Total Selling, General and Administrative

As a percentage of total revenues, our selling, general and administrative ("SG&A") expenses increased to 53.1% in fiscal 2013 from 42.8% in fiscal 2012. This increase was primarily attributable to the deleveraging of selling, overhead, stock-based compensation and depreciation expenses on lower revenues. In total dollars, SG&A expenses decreased 6.5% to $72.5 million in fiscal 2013 from $77.5 million in fiscal 2012 due to lower selling, overhead and depreciation expenses.


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Direct Marketing Selling, General and Administrative

As a percentage of revenues, direct marketing SG&A expenses increased to 68.4% in fiscal 2013 from 51.9% in fiscal 2012. The increase in direct marketing SG&A expenses as a percentage of revenues reflects the deleveraging of selling, overhead, stock-based compensation and depreciation expenses on lower revenues. In dollars, direct marketing SG&A expenses decreased 1.9% to $28.3 million in fiscal 2013 from $28.8 million in fiscal 2012. The decrease reflects lower selling, overhead and depreciation expenses, partially offset by increased stock-based compensation.

Retail Store Selling, General and Administrative

As a percentage of revenues, retail store SG&A expenses increased to 46.4% in fiscal 2013 from 38.8% in fiscal 2012. The increase in retail store SG&A expenses as a percentage of revenues reflects the deleveraging of selling, overhead, stock-based compensation and depreciation expenses on lower revenues. In dollars, retail store SG&A expenses decreased 9.1% to $44.3 million in fiscal 2013 from $48.7 million in fiscal 2012. The decrease reflects lower selling, overhead and depreciation expenses partially offset by increased stock-based compensation.

Impairment of Goodwill

In fiscal 2012, we recognized a goodwill impairment charge related to the direct marketing reporting unit of $4.5 million primarily as a result of the current and projected future performance of the direct business.

Impairment of Long-Lived Assets

We recognized impairment of long-lived assets related to under-performing stores of $3.5 million and $0.2 million in fiscal 2013 and fiscal 2012, respectively.

Other Operating Income

Other operating income, which represents breakage income, was $1.2 million for fiscal 2013 compared to $2.6 million in fiscal 2012.

Loss from Operations

Total Loss from Operations

Our total loss from operations before interest expense and income taxes was $52.6 million in fiscal 2013 as compared to a loss of $22.9 million in fiscal 2012.

Loss from Direct Marketing Operations

Direct marketing loss from operations was $14.6 million in fiscal 2013 as compared to a loss of $6.7 million in fiscal 2012. This increase was attributable to lower revenues, lower merchandise margins and increased shipping costs. The fiscal 2012 loss included the goodwill impairment charge of $4.5 million noted above.

Loss from Retail Store Operations

Retail store loss from operations was $38.0 million in fiscal 2013, as compared to $16.2 million in fiscal 2012. This increase was primarily attributable to lower revenues and lower merchandise margins partially offset by reduced selling, overhead and depreciation expenses. The operating losses for fiscal 2013 and 2012 included $3.5 million and $0.2 million of non-cash impairment charges related to underperforming stores.


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Interest Expense

We recognized interest expense of $4.7 million and $0.7 million in fiscal 2013 and fiscal 2012, respectively. Interest expense was related to costs from our credit facilities. Fiscal 2013 included $2.4 million in non-cash charges related to the conversion of notes payable to equity.

Income Tax Benefit

We recorded income tax expense of $0.1 million in fiscal 2013, compared with a benefit of $0.7 million in fiscal 2012. The Company did not recognize any tax benefit in fiscal 2013 for federal taxes since the Company did not generate taxable income during the two-year carry-back period for the fiscal 2013 NOL. The effective tax rates for fiscal 2013 and 2012 were 0.2% and 2.9%, respectively.

Fiscal 2012 Compared with Fiscal 2011 (53 weeks vs. 52 weeks)

Revenues

Total Revenues

Total revenues increased 5.1% to $181.2 million in fiscal 2012 from $172.3 million in fiscal 2011. Revenues from the retail segment comprised 69.3% of total revenues in fiscal 2012 as compared to 71.5% in fiscal 2011, and revenues from the direct segment comprised 30.7% of total revenues in fiscal 2012 as compared to 28.5% in fiscal 2011. The 53rd week of fiscal 2012 added incremental revenues of approximately $2.1 million.

Direct Marketing Revenues

Direct marketing revenues increased 13.2% to $55.6 million in fiscal 2012 from $49.1 million in fiscal 2011. The increase in direct marketing revenues was attributable to an increase in full price selling. The 53rd week of fiscal 2012 added incremental revenues of approximately $1.0 million.

Retail Store Revenues

Retail store revenues increased 1.9% to $125.6 million in fiscal 2012 from $123.2 million in fiscal 2011. The increase in retail store revenues was driven by a comparable store sales increase of 5.2% partially offset by a reduction in store count. The 53rd week of fiscal 2012 added incremental revenues of approximately $1.1 million.

Gross Profit

Total Gross Profit

Gross profit for fiscal 2012 was $56.7 million or 31.3% of revenues, as compared to $48.6 million, or 28.2% of revenues in fiscal 2011. The increase in gross profit percentage was principally due to increased merchandise margins and the leveraging of reduced occupancy costs partially offset by higher shipping costs.

Direct Marketing Gross Profit

Direct marketing gross profit for fiscal 2012 was $24.4 million or 43.9% of revenues, as compared to $21.8 million, or 44.4% of revenues in fiscal 2011. The decrease in gross profit percentage and in dollars was principally due to increased shipping costs, partially offset by increased merchandise margins.

Retail Store Gross Profit

Retail store gross profit for fiscal 2012 was $32.3 million or 25.7% of revenues, as compared to $26.8 million, or 21.8% of revenues in fiscal 2011. The increase in gross profit percentage and in dollars was primarily due to increased merchandise margins and the leveraging of reduced occupancy costs.


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Operating Expenses

Total Selling, General and Administrative

As a percentage of total revenues, our SG&A expenses decreased to 42.8% in fiscal 2012 from 44.4% in fiscal 2011. This decrease was primarily attributable to lower selling and depreciation expenses in the retail segment. In total dollars, SG&A expenses increased 1.3% to $77.5 million in fiscal 2012 from $76.5 million in fiscal 2011.

Direct Marketing Selling, General and Administrative

As a percentage of revenues, direct marketing SG&A expenses decreased to 51.9% in fiscal 2012 from 53.4% in fiscal 2011. The decrease in direct marketing SG&A expenses as a percentage of revenues reflects the leveraging of selling and overhead expenses. In dollars, direct marketing SG&A expenses increased 9.9% to $28.8 million in fiscal 2012 from $26.2 million in fiscal 2011. The increase reflects higher selling and overhead expenses.

Retail Store Selling, General and Administrative

As a percentage of revenues, retail store SG&A expenses decreased to 38.8% in fiscal 2012 from 40.8% in fiscal 2011. In dollars, retail store SG&A expenses decreased 3.2% to $48.7 million in fiscal 2012 from $50.3 million in fiscal 2011. The decrease in retail store SG&A expenses in dollars and as a percentage of revenues reflects lower selling and depreciation expenses partially offset by increased overhead costs.

Impairment of Goodwill

As a result of our annual goodwill impairment analysis, we recognized a goodwill impairment charge related to the direct marketing reporting unit of $4.5 million in fiscal 2012 primarily as a result of the current and projected future performance of the direct marketing business.

Impairment of Long-Lived Assets

We recognized impairment of long-lived assets related to under-performing stores of $0.2 million and $0.5 million in fiscal 2012 and fiscal 2011, respectively.

Other Operating Income

Other operating income, which represents breakage income, was $2.6 million for fiscal 2012 compared to $1.2 million in fiscal 2011. The increase was due to reduced redemption rates for gift cards issued in fiscal 2010.

Loss from Operations

Total Loss from Operations

Our total loss from operations before interest expense and income taxes was $22.9 million in fiscal 2012 as compared to a loss of $27.2 million in fiscal 2011.

Loss from Direct Marketing Operations

Direct marketing loss from operations was $6.7 million in fiscal 2012 as compared to a loss of $3.6 million in fiscal 2011. The fiscal 2012 loss included the goodwill impairment charge of $4.5 million noted above.


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Loss from Retail Store Operations

Our loss from retail store operations was $16.2 million in fiscal 2012, as compared to $23.7 million in fiscal 2011. This decrease was primarily attributable to increased sales and higher merchandise margins as well as decreased occupancy costs and depreciation expense.

Interest Expense, Net

We recognized net interest expense of $0.7 million and $0.6 million in fiscal 2012 and fiscal 2011, respectively. Interest expense was related to costs from our credit facility with GE Capital and our previous credit facility with Wells Fargo Retail Finance II, LLC ("Wells Fargo"). Interest income was earned from cash balances in banks.

Income Tax Benefit

We recorded an income tax benefit of $0.7 million in fiscal 2012, compared with a benefit of $2.3 million in fiscal 2011. The Company recorded a tax benefit for continuing operations offsetting the impact resulting from taxes charged to discontinued operations. The Company did not recognize any additional tax benefit in fiscal 2012 for federal taxes therefore the valuation allowance increased accordingly. The fiscal 2012 effective rate is also lower due to the goodwill impairment charge which is non-deductible for tax purposes. The fiscal 2011 benefit included adjustments related to the filing of our fiscal 2010 income tax return. The effective tax rates for fiscal 2012 and 2011 were 2.9% and 8.4%, respectively.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, operating expenses and capital expenditures including maintenance and remodeling for existing stores, information technology, distribution and other infrastructure related investments, and construction, fixture and inventory costs related to the opening of any new retail stores. Future capital requirements will depend on many factors, including, but not limited to, additional investments in infrastructure and technology, the pace of new store openings, the availability of suitable locations for new stores, the size of the specific stores we open and the nature of arrangements negotiated with landlords. In that regard, our net investment to open new stores is likely to vary significantly in the future.

Credit Facility

The Company and certain of its wholly-owned subsidiaries were parties to a credit agreement (the "GE Agreement") with GE Capital, as a lender and as agent for the financial institutions from time to time party to the GE Agreement (together with GE Capital in its capacity as a lender, the "GE Lenders"). The GE Agreement provided for a total aggregate commitment of the GE Lenders of $25 million, including a $15 million sublimit for the issuance of letters of credit and a swingline loan facility of $5 million. The GE Agreement had a term of five years and was to mature on May 26, 2016. The obligations of the borrowers under the GE Agreement were secured by substantially all property and assets of the Company and certain of its subsidiaries.

The GE Agreement called for the payment by the Company of a fee of 0.375% per annum on the average unused portion of the GE Agreement, a letter of credit fee calculated using a per annum rate equal to the Applicable Margin with respect to letters of credit (as defined in the GE Agreement) multiplied by the average outstanding face amount of letters of credit issued under the GE Agreement, as well as other customary fees and expenses. Interest accrued on the outstanding principal amount of the revolving credit loans at an annual rate equal to LIBOR (as defined in the GE Agreement) or the Base Rate (as defined in the GE Agreement), plus an applicable margin which was subject to periodic adjustment based on average excess availability under the GE Agreement. Interest on each swingline loan was calculated using the Base Rate. The GE Agreement did not contain any financial covenants with which the Company or any of its subsidiaries or affiliates had to comply during the term of the GE Agreement.


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The GE Agreement contained customary representations and warranties, as well as customary covenants that, among other things, restricted the ability of the Company and its subsidiaries to incur liens, consolidate or merge with other entities, incur certain additional indebtedness and guaranty obligations, pay dividends or make certain other restricted payments. The GE Agreement also contained customary events of default, including payment defaults, breaches of representations and warranties and covenants, cross defaults to other material indebtedness, and bankruptcy and insolvency matters.

On June 14, 2013, the Company and certain of its wholly-owned subsidiaries entered into the Credit Agreement with Salus, as a lender and as agent for the financial institutions from time to time party to the Credit Agreement (together with Salus in its capacity as a lender, the "Lenders"). The Credit Agreement provides for a total aggregate commitment of the Lenders of $30 million. The Credit Agreement has a term of four years and matures on June 14, 2017. The obligations of the borrowers under the Credit Agreement are secured by substantially all property and assets of the Company and certain of its subsidiaries.

The Credit Agreement calls for the payment by the Company of a fee of 0.375% per annum on the average unused portion of the Credit Agreement as well as other customary fees and expenses. Interest accrues on the outstanding principal amount of the revolving credit loans at an annual rate equal to the greater of . . .

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