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CACH > SEC Filings for CACH > Form 10-Q on 12-Aug-2014All Recent SEC Filings

Show all filings for CACHE INC

Form 10-Q for CACHE INC


12-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained in this Form 10-Q, the matters addressed herein are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements represent the Company's expectation or belief concerning future events. Without limiting the foregoing, the words "believes," "thinks," "anticipates," "estimates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. The Company cautions that forward-looking statements are subject to risks, uncertainties, assumptions and other important factors that could cause actual results to differ materially, or otherwise, from those expressed or implied in the forward-looking statements, including, without limitation, macroeconomic factors that have affected the retail sector, including changes in national, regional and local economic conditions, employment levels and consumer spending patterns, factors specific to our Company and merchandise, such as demand for our merchandise, markdowns, our ability to successfully implement our business strategy and to integrate new members of management and the other risks detailed from time to time in the Company's most recent Form 10-K, Forms 10-Q and other reports filed with the Securities and Exchange Commission. Any weakening of the economy generally or in a number of our markets, or in demand for our merchandise specifically, could adversely affect our financial position and results of operations, cause us to slow our re-modeling of existing locations or cause us to increase store closings. Other unknown or unpredictable factors also could harm the Company's business, financial condition and results. Consequently, there can be no assurance that actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, the Company. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable securities laws.

Overview

On May 9, 2014, the Company commenced a rights offering with its existing stockholders, which resulted in the issuance of 115,377 shares of the Company's common stock for gross proceeds of $230,754. On June 2, 2014, the Company raised approximately $15.0 million (net of $1.1 million in commission and other offering expenses) from the sale of 9.2 million shares of the Company's common stock in an underwritten public offering at a price per share of $1.75. A portion of the proceeds of the public offering (approximately $10.4 million) were used to pay down borrowings under the Credit Facility.

As part of the Company's real estate optimization strategy, the Company intends to accelerate its plan to close unproductive stores with the majority of them to close in the first quarter of fiscal 2015. The Company expects to generate cost savings of approximately $3.0 million related to these store closures in fiscal 2015 with savings expected to approximate $3.8 million on an annualized basis.

In addition, the Company has implemented other cost saving measures including, a reduction in corporate overhead and operational expenses.

In March 2014, the Company launched "Treasured", a new loyalty program which allows its customers to earn reward points based on dollar purchases. This program replaced our previous program "Accents" which provide a 5% lifetime discount one a customer spent $350. We believe that Treasured is a more effective program to generate incremental sales and customer loyalty.

RESULTS OF OPERATIONS

The following table sets forth our results of operations for the 26-week and 13-week periods ended June 28, 2014 and June 29, 2013, respectively, expressed as a percentage of net sales.


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                                              26-Weeks Ended                  13-Weeks Ended
                                                    As adjusted (1)                 As adjusted (1)
                                       June 28,        June 29,        June 28,        June 29,
                                         2014            2013            2014            2013
Sales                                      100.0 %            100.0 %      100.0 %            100.0 %
Cost of sales                               70.4               65.3         68.4               62.7
Gross profit                                29.6               34.7         31.6               37.3
Store operating expenses                    37.3               32.4         36.5               30.5
General and administrative expenses         10.0                8.3          8.7                7.9
Employee separation charges                  0.4                2.2          0.5                1.6
Operating loss                             (18.1 )             (8.2 )      (14.1 )             (2.7 )
Other income (expense)                      (0.1 )              0.0         (0.3 )              0.0
Loss before income taxes                   (18.2 )             (8.2 )      (14.4 )             (2.7 )
Income tax provision                         0.2                8.9          0.2                0.0
Net loss                                   (18.4 )%           (17.1 )%     (14.6 )%            (2.7 )%



(1) As more fully described in Note 1 to the Condensed Consolidated Financial Statements, the Company changed its method of accounting for retail finished goods inventory effective December 29, 2013. Amounts throughout management's discussion and analysis of financial condition and results of operations have been adjusted based on this change.

We use a number of key indicators of financial condition and operating performance to evaluate the performance of our business, some of which are set forth in the following table:

                                            26-Weeks Ended                    13-Weeks Ended
                                      June 28,          June 29,        June 28,           June 29,
                                        2014              2013            2014               2013
Total store count, at end of
period                                        239              250              239               250
Net sales decrease                          (10.7 )%          (3.4 )%         (10.0 )%           (2.5 )%
Comparable store sales increase
(decrease)                                   (8.9 )%          (0.4 )%          (8.8 )%            0.5 %
Average sales per transaction
increase (decrease)                          11.9 %           (9.6 )%          14.1 %           (10.4 )%
Average number of transactions
increase (decrease)                         (20.4 )%          10.2 %          (21.6 )%           12.2 %
Net sales per average square
foot                                $         184     $        197    $          98      $        103
Total square footage, at end of
period (in thousands)                         484              507              484               507

Net Sales

During the 26-week period ended June 28, 2014, net sales decreased to $101.5 million from $113.6 million, a decrease of $12.1 million, or 10.7% as compared to the same 26-week period last year. This reflects a decrease in non-comparable store sales of approximately $2.6 million and a decrease in comparable stores sales of $ 9.2 million, or 8.9%. Included in comparable store sales are e-commerce sales of $11.3 million during the current 26-week period, as compared to $12.0 million in the prior year period. The decrease in net sales at our stores during the 26- week period reflected a 20.4% decrease in the number of sales transactions, partially offset by an 11.9% increase in average dollars per transaction. We believe the decrease in mall traffic, adverse weather conditions earlier in the year, along with underperforming merchandise in our sportswear and accessory categories contributed to the decline in sales during the 26-week period ended June 28, 2014 as compared to the comparable period last year.

During the 13-week period ended June 28, 2014, net sales decreased to $54.1 million from $60.1 million, a decrease of $6.0 million, or 10.0%, as compared to the same 13-week period last year. This reflects a decrease in non-comparable store sales of approximately $1.1 million and a decrease in comparable store sales of $5.0 million or 8.8%. Included in comparable store sales are e-commerce sales of $6.2 million during the 13-week period ended June 28, 2014, as compared to $6.6 million in the prior year period. The decrease in net sales at our stores for the quarter reflected a 21.6% decrease in the number of sales transactions and a 14.1% increase in average dollars per transaction.

Gross Profit

Gross profit during the 26-week period ended June 28, 2014 decreased to $30.0 million from $39.4 million, a decrease of $9.4 million, or 23.8%, as compared to the same 26-week period last year. This decrease was driven by a reduction in gross margin percentage and a decrease in net sales as discussed above. As a percentage of net sales, gross profit decreased to 29.6% from 34.7% for the current 26-week period, as compared to the prior year period, primarily due a decrease in the initial markup and the increase in occupancy cost, coupled with reduced sales over the comparable period last year. We believe that the decrease in mall traffic, adverse weather


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conditions earlier in the year, along with underperforming merchandise in our sportswear and accessory categories resulted in the decline in gross profit. There was no geographic concentration of markdowns in the 26-week period ended June 29, 2013 or June 28, 2014.

Gross profit during the 13-week period ended June 28, 2014 decreased to $17.1 million from $22.4 million, a decrease of $5.3 million, or 23.9%, as compared to the same 13-week period last year. This decrease was driven by a reduction in gross margin percentage and a decrease in net sales as discussed above. As a percentage of net sales, gross profit decreased to 31.6% from 37.3% for the current 13-week period, as compared to the prior year period, primarily due a decrease in the initial markup and the increase in occupancy costs, coupled with reduced sales over the comparable period last year. We believe that the decrease in mall traffic along with underperforming merchandise in our sportswear and accessory categories resulted in the decline in gross profit

Store Operating Expenses

During the 26-week period ended June 28, 2014, store operating expenses increased to $37.8 million from $36.8 million, an increase of $980,000, or 2.7%, as compared to the same 26-week period last year. Store operating expenses increased primarily due to an increase in marketing expenses of $946,000, an increase in health insurance expense of $184,000 and a net decrease in other store expenses of $150,000. The increase in marketing expense was largely due to the costs incurred related to the Company's new loyalty program. The increase in health insurance was primarily due to increased health insurance claims. As a percentage of net sales for the 26-week period ended June 28, 2014, store operating expenses increased to 37.3% from 32.4% as compared to the prior year period, primarily due to the decrease in net sales and to a lesser extent the increase in store expenses.

During the 13-week period ended June 28, 2014, store operating expenses increased to $19.7 million from $18.3 million, an increase of $1.4 million, or 7.7%, as compared to the same 13-week period last year. Store operating expenses increased primarily due to an increase in marketing expense of $1.2 million, an increase in health insurance expense of $316,000 and a net decrease in other store expenses of $148,000. The increase in marketing expense was largely due to the costs incurred related to the Company's new loyalty program. The increase in health insurance was a result of an increase in health insurance claims. As a percentage of net sales, for the fiscal 2014 13-week period, store operating expenses increased to 36.5% from 30.5%, as compared to the prior year period, primarily due to the decrease in net sales and to a lesser extent the increase in store expenses.

We did not perform impairment testing during the 26-week period ended June 28, 2014. We have closed and also impaired the assets of our underperforming stores over the past several years. We believe the results of our fourth quarter, which is typically more profitable, should be considered when performing impairment tests.

General and Administrative Expenses

During the 26-week period ended June 28, 2014, general and administrative expenses increased to $10.1 million from $9.4 million, an increase of $689,000, or 7.3% compared to the same 26-week period last year, largely due to an increase in payroll and payroll related expenses of $713,000. As a percentage of net sales, general and administrative expenses increased to 10.0% from 8.3%, primarily due to the increase in general and administrative expense and due to the decrease in net sales.

During the 13-week period ended June 28, 2014, general and administrative expenses were approximately the same ($4.7 million) as compared to the same 13-week period last year. As a percentage of net sales, general and administrative expenses increased to 8.7% from 7.9%, primarily due to the decrease in net sales.

Employee Separation Charges

Employee separation charges incurred during the 26-week period ended June 28, 2014 were $409,000, a decrease from $2.5 million as compared to the same 26-week period last year attributable to the severance accrual of $1.5 million in connection with the separation agreement with the Company's former Chief Executive Officer as well as severance for other corporate employees, during the 26-week period ended June 29, 2013.

Employee separation charges during the 13-week period ended June 28, 2014 were $275,000, a decrease from $956,000 as compared to the same 13-week period last year due to the decrease in severance for corporate employees.

Other Income/Expense

During the 26-week period ended June 28, 2014, we recorded other expense of $232,000, as compared to other income of $17,000 in the same 26-week period in fiscal 2013, an expense increase of $249,000 as compared to the same 26-week period last year. This increase was primarily due to interest expense of $125,000 in connection with our short term bank borrowings and amortization of deferred financing costs of $108,000.


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During the 13-week period ended June 28, 2014, we recorded other expense of $137,000, as compared to other income of $9,000 in fiscal 2013, an expense increase of $146,000 as compared to the same 13-week period last year. This increase was primarily due to interest expense of $83,000 in connection with our short term bank borrowings and amortization of deferred financing costs of $54,000.

Income Taxes

During the 26-week period ended June 28, 2014, an income tax provision of $175,000 was recorded as compared to an income tax provision of $10.1 million for the same 26-week period last year. During the 26-week period ended June 29, 2013 as a result of the cumulative losses incurred over the past few years and the uncertainty of executing a turn around, the Company recorded a full valuation allowance against the remaining net deferred tax assets.

During the 13-week period ended June 28, 2014 and June 29, 2013, the Company recorded income tax provisions of $125,000 and $20,000, respectively.

Net Loss

As a result of the factors discussed above, the Company recorded a net loss of $18.7 million and $7.9 million for the 26- and 13-week periods ended June 28, 2014, respectively. Comparatively, the Company recorded net loss of $19.4 million and $1.6 million during the 26- and 13-week periods ended June 29, 2013, respectively.


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LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements are primarily for funding operations and remodeling of existing stores. We have satisfied our cash requirements principally through capital raised from our public offerings, borrowings under the Credit Facility, and cash flow from operations. At June 28, 2014, we had working capital of approximately $2.0 million.

The following table sets forth our cash flows for the periods indicated:

                                                             26 Weeks Ended
                                                        June 28,        June 29,
                                                          2014            2013
Net cash used in operating activities                 $ (16,274,000 ) $ (11,084,000 )
Net cash provided by (used in) investing activities      (4,379,000 )       193,000
Net cash provided by financing activities                16,806,000      11,384,000
Net increase (decrease) in cash and equivalents       $  (3,847,000 ) $     493,000

Cash used in operating activities during the 26-week period ended June 28, 2014 of $16.3 million was primarily due to the net loss of $18.7 million and a decrease in accrued liabilities of $2.0 million, partially offset by depreciation and amortization of $3.4 million and an increase in accounts payable of $1.4 million. The decrease in accrued liabilities was primarily due to severance payments which were accrued at year end. The increase in accounts payable was due to the timing of inventory receipts.

The Company's inventory turnover rate decreased approximately 18.2% during the 26-week period ended June 28, 2014 as compared to the comparable period in fiscal 2013. The Company's days sell through was approximately 63 days during the 26-week period ended June 28, 2014 as compared to 51 days in the comparable period in fiscal 2013. The Company's inventory as of June 28, 2014 was approximately $3.7 million higher than inventory as of June 29, 2013. Increased inventory value is a result of an increase in the mix of dress inventory this year and an unusually low inventory last year given the efforts to liquidate non-performing inventory in fiscal 2013. The decrease in our inventory turnover rate and the increase in our days sell through were primarily due to lower promotional activity as compared to last year. Our markdown rate has declined in the current 26-week period as compared to the comparable period last year. We anticipate that our markdown rate will continue to decline as the merchandise and inventory strategy being implemented continues to take effect. Nevertheless, we expect markdowns to continue to put pressure on our working capital.

During the 26-week period ended June 28, 2014, cash used in investing activities was $4.4 million as compared to cash provided by investing activities of $193,000 during the 26-week period ended June 29, 2013. The purchases of equipment and leasehold improvements of $4.4 million was primarily used for remodeling stores. Projected capital expenditures for fiscal 2014 to remodel existing stores and open approximately three outlet stores are approximately $6.0 to $7.0 million.

Cash provided by financing activities during the 26-week period ended June 28, 2014 were $16.8 million as compared to $11.4 million from financing activities during the 26-week period ended June 29, 2013. During 2014, we raised net proceeds of $15.1 million from the issuance of common stock primarily in the public offering.

On July 25, 2013, the Company entered into the Credit Agreement. The Credit Facility pursuant to the Credit Agreement provides the Company with a line of credit of $25.0 million for short term borrowings and letters of credit with a sublimit of $5 million. Short term borrowings are limited to the lower of the line of credit available or the borrowing base available as defined in the Credit Agreement. Borrowings under the Credit Facility are due and payable on July 25, 2018, at which time the facility terminates.

Borrowings under the Credit Facility bear interest, at the Company's option, either at the London interbank offering rate ("LIBOR") Margin or at the Base Rate Margin. LIBOR Margin is equal to LIBOR plus a margin of 1.50% per annum when the average daily availability is equal to or greater than 50% of the borrowing base. When the average daily availability is less than 50% of the borrowing base, the LIBOR Margin is equal to LIBOR, plus a margin of 1.75% per annum. Base Rate Margin is equal to the base rate as defined below, plus a margin of 0.50% per annum when the average daily availability is equal to or greater than 50% of the borrowing base. When the average daily availability is less than 50% the Base Rate Margin is equal to the base rate as defined below, plus a margin of 0.75% per annum. The Base Rate, as defined in the Credit Agreement, is a fluctuating rate per annum equal to the highest of (a) the U. S. federal funds rate, plus a margin of 0.50% per annum, (b) the adjusted LIBOR rate plus a margin of 1.00% or


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(c) the Bank prime rate in effect at that time.

The obligations of the Company under the Credit Facility are secured by liens on all assets of the Company. The Credit Agreement contains various customary covenants, including, but not limited to, limitations on indebtedness, liens, investments, dividends or other capital distributions, purchases or redemptions of stock, sales of assets or subsidiary stock, transactions with affiliates, line of business and accelerated payments of certain obligations and minimum availability requirement.

The Credit Agreement contains events of default customary for similar financings. Upon the occurrence of an event of default, the outstanding obligations under the Credit Facility may be accelerated and become due and payable immediately. In addition, if a certain change of control event occurs with respect to any loan party, the lenders have the right to require the Company to repay any outstanding loans under the Credit Facility.

The Company had outstanding letters of credit of $1.2 million, $1.1 million and $1.6 million at June 28, 2014, December 28, 2013 and June 29, 2013, respectively.

On May 9, 2014, the Company commenced a rights offering with its existing stockholders, which resulted in the issuance of 115,377 shares of the Company's common stock for gross proceeds of $230,754. On June 2, 2014, the Company raised approximately $15.0 million (net of $1.1 million in commission and other offering expenses) from the sale of 9.2 million shares of the Company's common stock in an underwritten public offering at a price per share of $1.75. A portion of the proceeds of the public offering (approximately $10.4 million) were used to pay down borrowings under the Credit Facility.

We believe that cash flow from operations, our current available cash and our Credit Facility will be sufficient to meet our working capital needs for the balance of the fiscal year. However, unforeseen cash requirements, changes in vendor terms, negative changes in macroeconomic conditions, industry trends, competition or any of the other factors cited from time to time in our public filings, including the "Risk Factors" disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed on March 25, 2014 (the "2013 Form 10-K") could result in a material adverse effect on our business, liquidity and financial condition.

Inflation

The Company does not believe that its sales revenue or operating results have been materially impacted by inflation during the past two fiscal years. There can be no assurance, however, that our sales revenue or operating results will not be impacted by inflation in the future.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements or transactions with unconsolidated, limited purpose entities. In the normal course of our business, we enter into operating leases for store locations and utilize letters of credit principally for the importation of merchandise. Other than operating lease commitments and letters of credit, we are not a party to any material off-balance sheet financing arrangements.

Critical Accounting Policies and Estimates

The Company's accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements in our fiscal 2013 Form 10-K. As disclosed in Note 1 of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from those estimates. We evaluate our estimates and judgments on an ongoing basis, and predicate those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The Company's management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements.

Inventories. As discussed in Note 1 the Company changed its accounting for retail finished goods inventory to the lower of cost or market, with cost being determined on the first-in, first-out method. Inventories other than finished goods at retail stores, called production inventory, primarily consists of piece goods, trim and work-in-process The Company historically and continues to value its production inventory at the lower of cost or market value using first-in-first-out method. Market is determined for our in finished goods inventory and production inventory based on an estimate of the net realizable value. The Company determines net realizable


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value based on an analysis of historical results, age, obsolescence, potential use, market conditions, and estimates regarding future selling prices. Based on this analysis, the Company records an adjustment for any decline in its value. If the actual results or conditions are different than those projected by management future period gross margin rates may be unfavorably or favorably affected.

Finite long-lived assets. The Company's judgment regarding the existence of impairment indicators is based on market and operational performance. We assess the impairment of long-lived assets, primarily fixed assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable and exceeds the fair market value. Factors we consider important which could trigger an impairment review include the following:

. . .

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