Annual Report


Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 1, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-34842

 

 

Gordmans Stores, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   26-3171987

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employee

Identification No.)

1926 South 67 th St,

Omaha, Nebraska 68106

(Address of principal executive offices, including zip code)

(402) 691-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨


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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨   Accelerated filer x   Non-accelerated filer ¨    Smaller reporting company  ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).    Yes   ¨     No   x

The aggregate market value of the registrant’s common stock at August 3, 2013 (based on the closing price of the registrant’s common stock on the NASDAQ Global Select Market on such date) held by non-affiliates of the registrant was approximately $126 million.

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding as of April 1, 2014 was 19,401,394.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Gordmans Stores, Inc. definitive Proxy Statement for the 2014 Annual Meeting of the Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.

 

 

 

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GORDMANS STORES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

     PART I    Page  

Item 1.

   Business      5   

Item 1A.

   Risk Factors      15   

Item 1B.

   Unresolved Staff Comments      26   

Item 2.

   Properties      26   

Item 3.

   Legal Proceedings      26   

Item 4.

   Removed and Reserved      26   
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities      27   

Item 6.

   Selected Financial Data      29   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      30   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      51   

Item 8.

   Financial Statements and Supplementary Data      52   

Item 9.

   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      79   

Item 9A.

   Controls and Procedures      79   

Item 9B.

   Other Information      81   
   PART III   

Item 10.

   Directors, Executive Officers and Corporate Governance      81   

Item 11.

   Executive Compensation      81   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      81   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      81   

Item 14.

   Principal Accounting Fees and Services      81   
   PART IV   

Item 15.

   Exhibits, Financial Statement Schedules      81   

Signatures

     86   

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including the factors described in “Item 1A – Risk Factors” in this Annual Report on Form 10-K.

The forward-looking statements are only predictions based on our current expectations and our projections about future events. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other Securities and Exchange Commission filings and public communications. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of these risks and uncertainties. The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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PART I

ITEM 1. BUSINESS

Our Company

Gordmans Stores, Inc. (the “Company”) is an everyday value price department store retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment. Our merchandise assortment includes apparel for all ages, accessories (including fragrances), footwear and home fashions. As of February 1, 2014, we operated 93 stores under the trade name “Gordmans” located in 19 states situated in a variety of shopping center formats, including regional enclosed shopping malls, lifestyle centers and power centers.

Our History

The origins of Gordmans date back to 1915, and over the next 60 years evolved into a moderately-priced promotional department store concept. In 1975, entrepreneur Dan Gordman started the 1/2 Price Stores, the concept of which was to sell department store quality merchandise at half of department store regular prices as a vehicle to clear end-of-season product. More than twenty years later in 1996, Dan’s grandson, Jeff Gordman, led an initiative to reposition the Company in an effort to better communicate our unique selling proposition, which went far beyond merely low prices. The repositioning included strengthening the portfolio of name brands, developing a new prototype store format, and significantly upgrading the store presentation in response to the evolving preferences of our guests. The capstone of this repositioning initiative was the re-naming of the stores from the 1/2 Price Stores to Gordmans, which was completed in fiscal 2000.

On September 17, 2008, Gordmans, Inc. shareholders sold 100% of the outstanding stock of Gordmans, Inc. to an affiliate of private equity firm Sun Capital Partners, Inc. (“Sun Capital”) (the “Sun Capital Transaction”).

In August 2010, we completed an initial public offering of our common stock, including 3,214,286 shares sold by the Company and 2,142,857 shares sold by selling stockholders. Pursuant to a shelf registration statement filed in May 2012 whereby Sun Capital may sell its remaining shares of our common stock, a public offering was completed in May 2012 under which 40,000 shares were issued by the Company and 3,460,061 shares were sold by selling stockholders. Our common stock is listed on the NASDAQ Global Select Market under the symbol “GMAN.”

In August 2013, we declared a special cash dividend of $3.60 per share, or $69.9 million, of which $69.7 million was paid in September 2013 and the remaining $0.2 million will be paid as non-vested restricted stock eligible to receive the dividend becomes vested.

Our Business Model

Our uniquely positioned business model is built to capitalize on what we believe is an underserved need in the marketplace. While we technically compete within the off-price segment of the industry, we are actually a unique hybrid of specialty, department store, big box and off-price retailers. Our mission, “We will delight our guests with big savings, big selection and fun, friendly associates!” reflects our differentiated selling proposition, which is comprised of three elements: (i) savings of up to 60% off department and specialty store regular prices; (ii) a broad selection of fashion-oriented department and specialty store quality apparel, footwear, accessories (including fragrances), and home fashions; and (iii) a shopping experience that is designed to be infused with fun and entertainment and characterized by outstanding guest service in addition to well-organized, easy-to-shop stores. We believe that while other retailers may fare better than us on any one of our key elements of savings, selection or shopping experience, few, if any, attempt to optimize all three simultaneously to the same degree as we do.

We believe that pursuing a product differentiation and cost leadership strategy concurrently sets us apart from our competitors and has been critical to our success. Fashion-infused, name brand apparel, footwear, and

 

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accessories synthesized with unique home fashions merchandise form the foundation of our merchandise differentiation strategy. The goal of delivering everyday value prices that are below the lowest sale prices of department and specialty stores drives our cost leadership strategy. The key aspects of our business strategy are as follows:

 

   

Unique Merchandise Offering .     We synthesize our fashion-oriented, name brand apparel and accessories with an expansive home fashions selection. Certain segments of home fashions make up our destination business of “décor,” such as wall art, floral and garden, and accent furniture and lighting. In addition to décor, we have developed our juniors’ and young men’s apparel categories into destination businesses (defined as categories with a broad and deep selection of brands and styles such that we believe Gordmans becomes a destination of choice for these categories), which combined represents a significant percentage of our total sales and inventory. Our goal is to dedicate a greater proportion of inventory resources to these businesses than any other off-price, mid-tier or department store retailer.

 

   

Outstanding Value Proposition .     From a cost leadership standpoint, it is our goal to offer everyday savings of up to 60% off department and specialty store regular ticketed prices. We believe we are able to achieve this goal because we procure merchandise from our vendors at a lower up front price by not requiring various allowances or imposing chargebacks that are common industry practices. We then pass those savings along to our guests by selling our merchandise at value prices every day. Many other retailers, including many of our competitors, agree to pay a higher initial price to their vendors, but then seek to offset that higher price by demanding various reimbursements and discounts. Such retailers carry their products at a higher ticketed retail price, but then sell the majority of their merchandise at a discount under various promotions and sales. Thus, while our all-in cost of merchandise, and the ultimate selling price to our guests, may be similar to that of our competitors, we offer our vendors and guests greater certainty of pricing, which we believe is attractive to both vendors and guests. Finally, opportunistic merchandise procurement strategies, which in conjunction with everyday value pricing define the off-price segment of the retailing industry, further enhance our value proposition. We undergo a due diligence process to validate our savings that includes verifying manufacturers’ suggested retail prices, obtaining retail prices provided by our vendor partners, examining retail prices on a variety of ecommerce sites and examining retail prices in competitor store locations.

 

   

Fun and Energetic Store Environment .     Our store shopping experience is a critical component of our holistic selling proposition. The stores feature Gordmans Giggles, a children’s theater seating area, Gordmans Grandstand, a sports-themed television viewing seating area, exterior and interior racetracks designed to facilitate easy navigation throughout the store as well as to maximize aisle real estate, and visual punctuation points identified by unique fixtures, overhead elements and flooring that articulate specialized merchandise presentations. Our 50,000 square foot store model is designed to be a fun and easy-to-shop store experience, to optimize both sales productivity and operational efficiency, and finally, to serve as an economical, scalable expansion vehicle.

Our Growth Strategy

We believe we are well positioned to leverage our unique selling proposition, scalable infrastructure and portable retail model to continue to capture market share and drive increased revenue and profitability. Our multi-pronged growth strategy is as follows:

 

   

Expand Store Base .     With a current store base of 93 stores, our objective is to continue to increase our store base. We plan to open seven new stores and close three existing stores in fiscal year 2014 to focus more intently on our other growth strategies, including merchandising, marketing and the implementation and go-live of our second primary distribution center in fiscal year 2014. We believe that we can capitalize on both new market opportunities that are primarily contiguous to our current markets, as well as on selected opportunities to fill in existing markets.

 

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Our flexible store model is adaptable to a variety of shopping center developments, including enclosed regional shopping malls, lifestyle centers, power centers and redeveloped big boxes formerly occupied by other retailers. As part of our new store due diligence process, we employ a rigorous site selection methodology that typically evaluates, among other factors, population densities and growth rates, co-tenancy dynamics, retail sales per capita, traffic counts and household income.

 

   

We operate an efficient store model that allows us to pursue both new construction and second generation space opportunities that produce strong cash flow. We seek to achieve a payback on investment from new stores, which includes our build-out costs (net of landlord contributions), initial inventory (net of payables) and pre-opening expenses, within one to two years.

 

   

Drive Comparable Store Sales .     We seek to maximize our comparable store sales by continuing to execute on a number of initiatives, such as:

 

   

Expanding Our Destination Businesses.     We will continue to focus on our strategic points of differentiation, including juniors’ apparel, young men’s apparel, and décor, which have developed into significant destination businesses. We believe that these businesses in aggregate continue to have significant growth potential through a combination of adding targeted brands and expanding certain existing ones, strengthening and increasing selected product categories, and finally by allocating additional inventory dollars for their development.

 

   

Capitalizing on the Underdeveloped Misses Apparel Business.     The overall size of the women’s apparel industry is significantly larger than that of juniors’ apparel. Although our women’s apparel business improved in fiscal year 2013 compared to the juniors’ business, our women’s apparel sales for fiscal year 2013 were less than that of juniors’ apparel. We believe that by narrowing the gap between women’s and juniors’ apparel, we would experience a noticeable increase in our comparable store sales performance at a total company level. The strategy has been streamlined and refocused on a younger demographic consumer profile, leveraging the strength of the juniors’ apparel business in a strategically contiguous manner.

 

   

Capitalizing on the Underdeveloped Men’s Apparel Business.     The overall size of the men’s apparel industry is significantly larger than that of young men’s apparel. We believe that by narrowing the gap between men’s and young men’s apparel, we would experience a noticeable increase in our comparable store sales performance at a total company level. The strategy has been streamlined and refocused on aggressively expanding classic product and intensification of classic assortments.

 

   

Developing Selected High Growth Potential Niche Businesses.     There are several niche businesses that we have been able to develop that we believe are underserved by the market, particularly by a majority of the other value-oriented retailers. These businesses include team apparel and related accessories, fragrances, special size apparel, pampered pet accessories, intimate apparel, decorative pillows, fashion rugs, legwear and handbags. We believe that these categories have substantial growth potential over the next few years, and that by employing the same expansion strategies that have generated success within our existing destination businesses, we can continue to expand these targeted categories as well.

 

   

Augmenting Our Brands Portfolio.     We have had success adding a significant number of national labels to our brands portfolio across all merchandise divisions. In conjunction with consolidation of the industry over the past several years, our increasing market leverage should enable us to continue to acquire targeted brands desired by our guests, as well as to satisfy guest demand with respect to underdeveloped existing brands.

 

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Injecting Greater Diversity and Breadth Into Our Merchandise Selection .    We continue to look for ways to broaden our merchandise selection by injecting greater diversity and breadth into our merchandise assortments to ensure a better balance by category, price, lifestyle and brand by merchandise classification. We are also focused on revitalizing product presentation and the shopping experience of our guests by reallocating floor space and testing fixtures.

 

   

Rewarding Guest Loyalty .    We launched our guest loyalty program, gRewards, to all stores in the second quarter of fiscal 2013. The guest loyalty program rewards guests for their allegiance to the Company and has reduced our reliance on coupon events. While the guest loyalty program has already expanded our transaction frequency and positively impacted our average sale per transaction, we believe gRewards will have an even more palpable impact on our overall transaction size and frequency as the program matures. We continue to look for ways to best maximize the benefits of the loyalty program, including leveraging our loyalty database to send customized emails that are tailored to the shopping preferences of our loyalty guests.

 

   

Leveraging Our Inventory Optimization Opportunities.     We will seek to increase the productivity of our stores by leveraging our investments in location planning, re-buying, replenishment and price optimization technologies and processes. By understanding the individual characteristics of each store, merchandise purchases can be adjusted to accommodate the stores that truly have a need rather than allocating merchandise into every store irrespective of inventory need. This approach translates into better merchandise assortments tailored to the needs of each store, faster turnover and stronger sell-through performance.

 

   

Leverage Cost Infrastructure .     We intend to enhance our profit margins by leveraging economies of scale with respect to our cost infrastructure. Although we expect to experience some deleveraging in costs when we expand our distribution and logistics infrastructure and move into a new corporate office in fiscal 2014, we believe that over a multi-year period our corporate overhead and distribution center costs will not increase at a rate proportionate with new and comparable store sales growth.

Recent Initiatives and Accomplishments

As a result of our successful efforts on several key long-term initiatives, we opened twenty-five new stores and relocated one store from fiscal years 2011 through 2013, a 37% increase in our store base, which included ten new stores in fiscal 2013. These initiatives included:

 

   

Management .     We strengthened the talent level throughout the organization, including within senior management, the merchandising and stores teams and other support functions. Several talent strategies involving the selection process, assessment tools, succession planning and engagement have facilitated successes in this area.

 

   

Merchandising .     We have executed key merchandising strategies, including: improving product selection, the most important driver of guest loyalty and comparable store sales growth, by injecting greater diversity and breadth into our assortments; strengthening our destination businesses of juniors’ and young men’s apparel, team apparel and accessories and home décor; managing our merchandising assortments to attract a modern guest while continuing to serve the needs of a classic guest; elevating product quality, styling and pricelines in key businesses, including: women’s and men’s sportswear, young men’s, juniors’, intimate apparel and jewelry; and acquiring and intensifying highly recognized, national designers and brands.

 

   

Marketing .     We have reengineered our marketing strategy to focus on unique selling proposition of providing great value on a broad selection of merchandise. In order to accomplish this objective, our media mix is more heavily weighted toward television advertising, which we believe is our most efficacious advertising vehicle. We now employ continuous marketing throughout the year, and we

 

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launched an updated television branding campaign in fiscal 2013 that conveys the holistic nature of our selling proposition utilizing the message ‘big selection, big savings, that’s our style!’. Our in-house advertising capabilities provide us with the flexibility to dynamically deliver creative collateral.

 

   

Enterprise and Business Intelligence Tools .     We implemented our Oracle enterprise resource planning merchandising system in fiscal 2012. This enterprise merchandising system technology provides improved business intelligence reporting tools, enables more sophisticated merchandise allocation algorithms and supports multiple distribution centers and the expansion of our store base.

 

   

Distribution Capacity .     Our 545,000 square foot second distribution center in Indiana is fully constructed and will be open and fully operational in mid-2014. This distribution center will expand capacity and support our existing primary distribution center and our future new store growth.

We plan to open seven new stores and close three existing stores in fiscal 2014 as we focus on driving comparable stores sales and integrating our second distribution center into our current operating environment, among other initiatives. We continue to look for ways to expand our store base as appropriate. We experienced deterioration in gross profit margin and a mid-single digit comparable store sales decrease in fiscal year 2013; however, we remain confident that these initiatives, in conjunction with our new store growth strategy, position us for sustainable long-term growth.

Competition

We compete, to some degree, with all other retail formats: traditional department stores such as Macy’s and Dillard’s, national mid-tier chains including Kohl’s and J.C. Penney, discount stores including Target and Wal-Mart and specialty stores such as Old Navy. We differentiate ourselves from discount stores (such as Target and Wal-Mart, who generally offer discount store brands and private label merchandise at similar prices) primarily by offering department and specialty store name brands, by providing a more upscale shopping environment and by emphasizing apparel and apparel-related accessories within our assortments. Our everyday value price strategy and smaller, better-organized store layouts set us apart from the majority of department stores (such as Macy’s and Dillard’s, who offer a broad selection in a multi-department, multi-level, large store format).

Compared to most off-price retailers (such as T.J. Maxx, Ross Stores and Stein Mart, who offer branded merchandise at discount prices), our stores are significantly larger, which enables us to present a much broader assortment of merchandise. Moreover, unlike most off-price stores, a Gordmans store is visually appealing and well-organized, utilizing merchandising techniques, visual displays, a departmental floor layout, fixture systems, signing and graphics similar to that of department and specialty stores. Finally, we do not carry imperfect merchandise and we offer complete assortments achieved through the negotiation of up-front discounts augmented by opportunistic buying strategies.

We believe our differentiated selling proposition has enabled us to operate successfully in the same markets as our primary off-price, discount and department store competitors. For example, as of February 1, 2014, approximately 49% of our stores operated within one mile of a Kohl’s, 53% operated within one mile of a J.C. Penney and 56% operated within one mile of a Wal-Mart. As of February 1, 2014, a Wal-Mart operates within five miles of 100% of our stores, a Kohl’s is located within five miles of 87% of our stores, and a J.C. Penney is located within five miles of 73% of our stores.

Our primary target guest is a 30 to 50-year-old mother with children living at home with a household income ranging from $50,000 to $100,000. However, given our strength in juniors’ apparel, females between the ages of 15 and 29 also are an important target market. We believe that the broad appeal of our mission has enabled us to capture both discount store shoppers that desire to trade up as well as department and specialty store shoppers that desire better value every day.

 

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Merchandising

Strategy

Our merchandising strategy is to offer the same recognizable brands, current season fashions, and styles carried by major department and specialty store chains at prices of up to 60% below their regular ticketed prices every day. To accomplish this strategy, our buyers seek to negotiate the best up-front net pricing in lieu of end-of-season markdown, advertising and return allowances, as well as other extraneous chargebacks. A variety of opportunistic buying strategies are also employed, including capitalizing on merchandise closeouts, cancelled orders, excess production capacity and excess finished or piece goods inventories.

We have a planning and allocation function that seeks to maximize the return on our investment in merchandise inventory. Systems and processes are in place to enable us to capitalize on emerging trends in the business while simultaneously seeking to optimize inventory efficiencies at a granular, individual store level.

Selection

Our merchandise selection includes a broad range of apparel, footwear, accessories (including fragrances), and home fashions products. Within apparel, we offer young men’s, men’s, juniors’, women’s, team, plus sizes, maternity and children’s clothing, which includes offerings for infants, toddlers, boys and girls. Our accessories business includes designer fragrances, intimate apparel, handbags, sunglasses, fashion jewelry, legwear and sleepwear. Our stores also feature a large home fashions section, which includes wall art, photo frames, accent furniture, accent lighting, candles, ceramics, vases, seasonal décor, floral and garden, gourmet food and candy, toys, luggage, pet accessories, housewares, decorative pillows, fashion rugs, bedding and bath.

The following information reflects the percentage of revenues by major product category as a percentage of net sales:

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 

Apparel

     56.1     55.2     54.3

Home Fashions

     27.9        28.0        28.0   

Accessories (including fragrances)

     16.0        16.8        17.7   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

Licensing Agreements

Destination Maternity Corporation .    In 2006, we executed a license agreement with Destination Maternity Corporation (“Destination Maternity”), a leading maternity retailer, to operate a maternity business in each of our stores. The license agreement expires on February 28, 2017 and contains automatic three-year extension terms and a one year notice period to cancel. The license agreement is for Destination Maternity’s flagship Motherhood Maternity ® brand. The brand is positioned in the value segment of the industry, representing a broad selection of fashion-oriented merchandise at value prices, and is therefore an ideal fit for us.

DSW, Inc.     We have outsourced our footwear business since 1997, and in 2004 entered into a license agreement with DSW, Inc., a $2.4 billion specialty footwear retailer that sells a wide selection of designer and name brand footwear at everyday value prices. The license agreement expires on January 31, 2016 and contains automatic three-year extension terms and a six month notice period to cancel prior to the renewal periods.

Our footwear and maternity departments are staffed by our associates and are supported by operations personnel provided by our licensees who travel to our stores to work with our associates and provide recommendations

 

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regarding merchandise presentation and other operations-related issues. Our licensees own the inventory and have total authority over all aspects of the merchandise procurement process. We receive a license fee equal to a specified percentage of net maternity and footwear sales, respectively.

Sourcing

We maintain long-term, mutually beneficial sourcing relationships with a large group of suppliers. In fiscal year 2013, we purchased merchandise from over 950 vendors, the largest of which comprised only 2.0% of total purchases. This diversification in our supplier base provides us with flexibility and negotiating leverage. We have no long-term purchase commitments or arrangements with any of our suppliers. We have become a preferred partner to the vendor community due to our transparent, streamlined and mutually profitable approach to the business.

Private Label Credit Card

In 2002, we entered into an agreement with Alliance Data Systems (“ADS”) to create, administer and process the Gordmans credit card program, which enhances guest loyalty and allows us to identify and regularly communicate with some of our best guests, as well as serves to augment our guest database. ADS approves all applicants for the Gordmans credit card, carries the receivables for charges made to the card, bears all risk of loss associated with the credit that is extended to our guests, and receives all fees associated with the cards. We recognize sales charged to the Gordmans credit card at the time the charge is approved at the point of sale in the same manner as other credit cards.

Loyalty Program

In fiscal year 2013, we launched our guest loyalty program, gRewards, company-wide. The loyalty program is designed to not only positively impact our average transaction size and frequency, but also to reward guests for their loyalty to the Company. Under the program, loyalty guests earn points toward certificates for qualifying purchases. We implemented a technology platform that includes the electronic delivery and redemption of rewards certificates. We currently have more than 1.5 million guests participating in gRewards, and we are leveraging our loyalty database to deliver mass customization e-mails tailored to the shopping preferences of our loyalty guests. Rewards earned by loyalty guests are redeemed at the point of sale.

Marketing Message and Creative Strategy

The foundation of our marketing message is ‘Incredible selection! Department store quality! Big savings!’, which conveys two of our three elements comprising our unique selling proposition. In addition, our pricing strategy is specifically articulated as ‘Save Up To 60% Off Everything Every Day.’ This pricing strategy is designed to significantly elevate the pricing dimension of our unique selling proposition and communicate it in a clear and compelling fashion, enabling our guests to reconcile the paradox to maintain their aspirational lifestyles in an affordable manner. Our prices are clearly marked and always have the comparative retail selling price noted on the price tag and our receipt messaging displays the amount saved by shopping at Gordmans.

Our television commercials are deployed in an ongoing continuity strategy in excess of 30 weeks per year, which represents a dramatic departure from our own traditional retail event strategies of the last decade. In fiscal year 2013, we allocated more of our television marketing dollars to higher volume markets. While the creative messaging strategy for fiscal year 2013 continued to build upon the existing branding campaign to leverage viewer recall and further reinforce our savings message, it also aimed to show our viewers how we differentiate from our competitors. These branding spots were supplemented with merchandise-driven spots to enhance key retail selling periods as well as to showcase our broad merchandise selection. Our television branding campaign was updated in advance of the fiscal year 2013 holiday season to better convey the holistic nature of our selling proposition utilizing the message ‘Big selection, big savings, that’s our style!’.

 

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Our social and mobile media strategy works synergistically with our television, print, direct mail and email collateral. Through various promotions, dynamic content and exclusive offers, we are engaging our guests in a more targeted and personal fashion. In addition, we offer mobile campaigns that allow us to offer promotions and contact guests directly on their mobile devices as this medium continues to grow.

Our Stores

As of February 1, 2014, we operated 93 stores in 19 states with a total of 5.2 million square feet and an average store size of 56,000 square feet. The stores are comprised of 76 prototype locations with an average age and size of seven years and 54,000 square feet, respectively, and 17 legacy locations with an average age and size of 25 years and 68,400 square feet, respectively. The average age of all stores, including prototype and legacy locations, is 10 years. Of our 93 locations, 81 were comparable stores at the end of fiscal 2013, which we define as stores that have been open at least 16 months.

Our stores are located in large, medium, and small metropolitan statistical areas throughout our 19 state trade area. Our distinctive big box, fashion-oriented apparel and home fashions format provides a strong primary or secondary anchor with the ability to attract significant complementary co-tenants. Our stores are located in a wide variety of shopping center developments including enclosed regional shopping malls, lifestyle centers, power centers and redeveloped big boxes formerly occupied by other retailers. The table below sets forth the number of stores in each of these 19 states.

 

State

   Stores     

State

   Stores     

State

   Stores  

Arkansas

     2       Kentucky      2       North Dakota      3   

Colorado

     7       Minnesota      4       Oklahoma      5   

Idaho

     2       Mississippi      1       South Dakota      2   

Illinois

     12       Missouri      11       Tennessee      2   

Indiana

     7       Nebraska      7       Utah      5   

Iowa

     9       New Mexico      2       Wisconsin      6   

Kansas

     4               

Our 50,000 square foot store model features an easy-to-shop, dual racetrack layout designed to facilitate easy navigation throughout the store as well as to maximize aisle real estate. The open, contemporary floor plan provides a visual roadmap of the entire store from the entrance and provides us with the flexibility to easily expand and contract departments in response to consumer demand and preferences, seasonality and merchandise availability. Other features of the store model include unique entertainment elements such as Gordmans Giggles, a children’s theater, and Gordmans Grandstand, a sports-themed seating area and punctuation points identified by unique fixtures, overhead elements and flooring accentuate specialized merchandise, lifestyle presentations and key items. Virtually our entire inventory is displayed on the selling floor.

Information Technology

We believe that use of technology is extremely important to our business and have made a significant number of technology investments over the last several years, integrating business processes and technology to facilitate growth, efficiency and risk mitigation. We acquire perpetual licenses or subscriptions to use this technology and own few proprietary software applications. We generally pay annual maintenance fees in order to maintain the most current versions of the software and to receive technical support.

We implemented Oracle’s Retail Merchandising System (“RMS”) in fiscal 2012, which is industry-leading software that has elevated many of our processes including business analytics, store optimization, and planning and allocation. As we execute our growth strategy, RMS will allow us to more efficiently allocate and utilize our inventory, leverage our cost infrastructure and analyze our business, as well as effectively operate in a multiple distribution center environment.

 

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Our point-of-sale system enhances the guest experience by optimizing the speed and ease of the checkout process. The system makes extensive use of smart barcodes to eliminate the need for cashier intervention in the processing of promotions. These barcodes also facilitate the tracking of promotional effectiveness, ensuring compliance and reducing fraud. We also make significant use of wireless handheld terminals in our retail locations to expedite the processing of markdowns and measure markdown compliance.

To better optimize store payroll, we implemented a time and attendance system in all locations and built upon this platform with a store labor-scheduling system to more efficiently align payroll resources with both workflow and store traffic patterns. We have also integrated traffic data into our store labor-scheduling system to improve conversion at the store level.

Advanced planning and allocation applications have allowed us to better control inventory and ensure a consistent merchandise receipt flow. Systems also facilitate the creation of location-specific sales, inventory and receipt plans at a detailed level, which seamlessly integrate with our allocation system. Of particular note are a suite of applications and processes pertaining to markdown optimization as well as re-buying and replenishment. These applications use sophisticated pattern recognition algorithms to simulate multiple pricing and sales scenarios dynamically, automatically generating price changes to maximize profitability. Where it calculates that demand will outstrip supply, the system generates repurchase recommendations by item by store.

A warehouse management system has already increased the efficiency of our supply chain. Whereas the legacy application required extensive paper-based processing and manual key-entry, the new radio-frequency based system allows us to shorten the time it takes merchandise to reach the sales floor and to monitor the flow of goods more granularly and accurately. Together with other systems, our warehouse management system allows us to track items continuously from the time of purchase order generation through shipping, receiving, processing and store delivery, and has detailed truck-manifesting capabilities that improve the efficiency with which we plan store labor.

Having achieved compliance with the Payment Card Industry (PCI) Data Security Standard (DSS), we have demonstrated our commitment to keeping guest information secure. We have segmented sensitive network traffic and encrypted specific data elements. Physical security prevents unauthorized access to in-scope equipment in the stores and at the corporate office. Extensive intrusion detection measures and periodic vulnerability scans significantly reduce the risk of a breach.

To help reduce shrink and control theft, we employ technology that integrates video surveillance with transaction data. The system scans transaction logs for signs of improper activity and alerts Loss Prevention associates. A migration to internet protocol-based cameras has begun and has already increased our remote monitoring and apprehension capabilities. Centrally located associates may now assist in-store agents as they track and pursue subjects.

Distribution and Logistics

We centrally distribute the majority of our merchandise from two facilities in Omaha, Nebraska. Through the use of third party national and international freight and logistics companies, we coordinate pick-up of merchandise from our vendors for delivery to our distribution centers where it is received, inspected, processed and distributed to our retail stores. We utilize the services of several third party carriers for delivery of merchandise from our distribution centers to our stores.

Our primary distribution center is a 380,000 square foot (26% of which is mezzanine space) flow-through facility that operates with a leading edge distribution center management system that utilizes radio frequency technology to monitor and manage the movement of merchandise. We believe that our innovative put-to-light merchandise packing technology is a unique feature of this system.

Our primary distribution center is supported by a 140,000 square foot warehouse located approximately four miles from our primary distribution center. This facility relieved the shipping and hardlines staging limitations

 

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we faced in our primary distribution center and will support our planned growth through 2014, when our second distribution center will open and become operational. This facility enables us to support approximately 110 stores from the two Omaha distribution facilities.

Construction of a second distribution center was commenced in early fiscal 2013 and is scheduled to be operational in mid-2014 to support our planned growth beyond 2014. This 545,000 square feet distribution center is located near Indianapolis, Indiana and will be a flow-through facility that operates with technology similar to our primary distribution center. The second distribution center is positioned geographically to maximize our ability to leverage our inbound and outbound transportation expenses and will support our retail expansion growth. We are enhancing many of our systems and processes in order to operate effectively in a multiple distribution center environment.

Our combined distribution centers processed 62.9 million units in fiscal year 2013, which represented a 4.5% decrease from the previous year.

Associates

As of February 1, 2014, we employed approximately 600 salaried associates and 4,900 hourly associates, the latter of which includes approximately 4,000 part-time associates. None of our associates are unionized and we have never suffered from a work stoppage. We offer competitive compensation and attractive benefit plans to our full-time associates who meet eligibility requirements. Our benefits include medical insurance; dental insurance; basic and supplemental life insurance; short-term and long-term disability insurance; medical and dependent care flexible spending accounts; a 401(k) savings plus plan; up to four weeks of vacation; eight paid holidays; and a 20% associate discount on purchases in our stores.

In order to enhance the talent pool of our associates, our management utilizes a talent-based hiring process that employs a structured interview tool to assess an individual’s natural talent for their respective role in the organization.

Seasonality

Our business is subject to the seasonal fluctuations typical of the retail industry. A disproportionate amount of our sales and net income are realized during the fourth quarter, which includes the holiday selling season. Operating cash flows are typically higher in the fourth fiscal quarter due to inventory related to working capital requirements in the third fiscal quarter. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving and Christmas, and regional fluctuations such as sales tax holidays.

Intellectual Property

We currently own five trademarks including: LOGO ; Gordmans; LOGO Something Unexpected; Give the Unexpected; and Something Unexpected. We believe that the recognition associated with our trademarks makes them valuable to our business.

Available Information

Our website address is www.gordmans.com. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish such material to the Securities and Exchange Commission. Such reports can be accessed through the investor relations section of our website. The information on our website, whether currently posted or in the future, is not part of this or any other report we file with or furnish to the Securities and Exchange Commission.

 

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ITEM 1A. RISK FACTORS

Our business faces a number of risks and uncertainties, which are summarized as follows. While the risks and uncertainties described below are those with the most impact on our business, there may be additional risks and uncertainties not currently known to us or that we consider to be immaterial that may have an impact on our business.

Our business is sensitive to consumer spending and general economic conditions, and an economic slowdown or economic uncertainty could adversely affect our financial performance.

Consumer purchases of discretionary retail items, including our merchandise, generally decline during recessionary periods and other periods when disposable income is adversely affected. Our performance is subject to factors that affect domestic and worldwide economic conditions, including employment, consumer debt, market turbulence, residential real estate and mortgage markets, taxation, fuel and energy prices, interest rates, consumer confidence, value of the United States dollar versus foreign currencies and other macroeconomic factors. Deterioration in economic conditions, economic uncertainty or unemployment levels may reduce the level of consumer spending and inhibit consumers’ use of credit, which may adversely affect our revenues and profits. Our financial performance is particularly susceptible to economic and other conditions in regions or states where we have a significant number of stores. Economic conditions and slowdowns in the economy could adversely affect shopping center traffic and new shopping center development and could have a material adverse effect on our business, our financial condition and our results of operations.

Our business is highly dependent upon our ability to identify and respond to new and changing fashion and style trends, guest preferences and other related factors, and our inability to identify and respond to these new trends may lead to inventory markdowns and write offs, which could adversely affect our brand image and results of operations.

Our success depends in large part upon our ability to effectively identify and respond to changing fashion trends and consumer demands, and to translate market trends into appropriate, saleable merchandise offerings. Although we attempt to stay abreast of the fashion tastes of our guests and provide merchandise that satisfies guest demand, fashion trends can change rapidly and we cannot assure you that we will accurately anticipate shifts in fashion trends and adjust our merchandise mix to appeal to changing consumer tastes in a timely manner. If we misjudge the market for our merchandise or are unsuccessful in responding to changes in fashion trends or in market demand, we could experience insufficient or excess inventory levels which could result in higher markdowns, any of which would have a material adverse effect on our business, our financial condition and our results of operations. We believe that our results of operations suffered in fiscal 2013, in part, as a result of our merchandise selection not appealing to consumer tastes, which led to higher markdowns to reduce excess inventory levels.

There can be no assurance that our new merchandise offerings will have the same level of acceptance as our merchandise offerings in the past or that we will be able to adequately and timely respond to the preferences of our guests. The failure of any new merchandise offerings to appeal to our guests could have a material adverse effect on our business, our financial condition and our results of operations.

Our sales and profitability fluctuate on a seasonal basis.

Our business is affected by the seasonal pattern common to most retailers. Historically, our highest net sales occur during the fourth quarter, which includes the holiday selling season. Any significant decrease in net sales during the holiday season would have a material adverse effect on our business, our financial condition and our results of operations. In addition, in order to prepare for this season, we must order and keep in stock significantly more merchandise than we carry during other parts of the year. This inventory build-up in both the third and fourth quarters may require us to expend cash faster than we generate by our operations during this period and to borrow on our revolving line of credit facility. We borrowed on our revolving line of credit facility

 

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in the third and fourth quarters of fiscal 2013, in part, due to this inventory build-up, and $7.3 million was outstanding on the revolving line of credit facility at February 1, 2014. Any unanticipated decrease in demand for our merchandise during this peak shopping season could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, profitability, ability to repay any indebtedness and our brand image with guests.

We face intense competition in the retail industry.

We face substantial competition for guests from regional and national department stores, specialty stores, discount stores, mid-tier stores and off-price retail chains. We compete on the basis of a combination of factors, including among others price, breadth, quality and style of merchandise offered, in-store experience, level of guest service, ability to identify and offer new and emerging fashion trends and brand image. Many of these competitors are larger and have significantly greater financial and marketing resources than we do. Many of our competitors also generate ecommerce sales, and we do not currently sell our merchandise online. Accordingly, we may face periods of intense competition in the future which could have a material adverse effect on our profitability and results of operations. We may not be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on our profitability and results of operations.

Our inability to maintain or improve levels of comparable store sales could cause our stock price to decline.

Comparable store sales are an important indicator of current operating performance, with higher comparable store sales helping us to leverage our fixed expenses and positively impact our operating results. We may not be able to maintain or improve the levels of comparable store sales that we have experienced in the past.

We experienced a 7.4% comparable store sales decrease in fiscal year 2013, and our annual comparable store sales have ranged from a decrease of 7.4% to an increase of 8.4% during the past five fiscal years. If our future comparable store sales decline or fail to meet market expectations, the price of our common stock could decline. In addition, the aggregate results of operations of our stores have fluctuated in the past and will fluctuate in the future. A variety of factors affect comparable store sales, including fashion trends, competition, current national and regional economic conditions, pricing, inflation, the timing of the release of new merchandise and promotional events, changes in our merchandise mix, inventory shrinkage, the success of our multi-channel marketing programs, the timing and level of markdowns and weather conditions. In addition, many retailers have been unable to sustain high levels of comparable store sales growth during and after periods of substantial expansion. These factors may cause our comparable store sales results to be materially lower than in recent periods and our expectations, which could adversely affect our profitability and results of operations and result in a decline in the price of our common stock, which we experienced in fiscal year 2013.

Our advertising, marketing and promotional strategies may be ineffective and inefficient.

Our profitability and results of operations may be materially affected by the effectiveness and efficiency of our marketing expenditures and our ability to select the right markets and media in which to advertise. In particular, we may not be successful in our efforts to create greater awareness of our stores and our promotions, identify the most effective and efficient level of spending in each market and specific media vehicle and determine the appropriate creative message and media mix for our advertising, marketing and promotional expenditures.

We utilize several types of advertising media, including newspaper inserts. The newspaper business is under increasing economic pressure, and the demise of certain newspapers would jeopardize an important distribution method for our advertising. As such, we will continue to allocate a greater portion of our advertising budget to television, as well as mobile, email and social as these mediums continue to grow. We have also begun to leverage our loyalty program, which was launched company-wide in fiscal 2013, as a medium of advertising.

 

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Our planned marketing expenditures and allocation of those expenditures to the various marketing mediums we utilize may not result in increased revenues. In addition, if we are not able to manage our marketing expenditures on a cost-effective basis, our profitability and results of operations could be materially and adversely affected.

The termination or non-renewal of our licensing agreements with DSW Inc. and/or Destination Maternity Corporation could adversely affect our business.

Our footwear business is currently operated under a license agreement with DSW, Inc., and our maternity business is currently operated under a license agreement with Destination Maternity Corporation for its Motherhood Maternity ® brand. In both instances, we receive a license fee equal to a specified percentage of net footwear and maternity revenue. Our total license fee income in fiscal year 2013 was $7.8 million, or approximately 3% of our gross profit. If either DSW or Destination Maternity is unable or unwilling to continue to act as our licensee or supply us with our desired level of inventory, we could suffer a loss of income and guest traffic until such time as we are able to replace these licensees or to establish the structure to manage these businesses directly.

Failure to execute our buying and inventory management strategies could adversely affect our business.

Our business is dependent, to a significant degree, upon our ability to purchase fashion and brand name merchandise, and to do so at prices that are consistent with our cost leadership strategy. We must continuously seek out buying opportunities from our existing suppliers and from new sources, for which we compete with other retailers. Driving traffic to our stores and increasing comparable store sales requires continued replenishment of fresh, high quality, attractively priced merchandise in our stores. Our buying philosophy gives considerable discretion to our buyers, subjecting us to risks on the timing, pricing, quality and nature of inventory flowing to the stores. In addition, we base our purchases of inventory, in part, on sales forecasts. If our sales forecasts do not match guest demand, we may experience higher inventory levels and decreased profit margins, similar to what we experienced in fiscal 2013.

Our ability to purchase merchandise could become limited by the consolidation or demise of merchandise vendors. Our ability to obtain merchandise may also depend on certain manufacturers’ ability to obtain vendor financing through factoring companies, and to the extent they are unable to secure sufficient credit from those factors, we may not be able to purchase merchandise from them.

We have distribution facilities to support our stores and if we encounter difficulties associated with our distribution facilities or if the facilities were to shut down for any reason, we could face shortages of inventory that would have a material adverse effect on our business operations and harm our reputation.

Our primary distribution facilities are located in Omaha, Nebraska, with an additional distribution facility near Indianapolis, Indiana that is scheduled to be operational in mid-2014. Our distribution facilities support our entire business. The majority of our merchandise is shipped to the distribution facilities from our vendors, and then packaged and shipped from our distribution facilities to our stores. The success of our stores depends on their timely receipt of merchandise. The efficient flow of our merchandise requires that we have adequate capacity in our distribution facilities to support our current level of operations, and the anticipated increased levels that may follow from our growth plans. If we encounter difficulties associated with our distribution facilities or if they were to shut down for any reason, including by fire or natural disaster, even though we have a disaster recovery and business continuity plan that provides for off-site merchandise processing capability in the event of a disruption, we could face shortages of inventory, resulting in temporary out-of-stock conditions in our stores, as well as incur significantly higher costs and longer lead times associated with distributing merchandise to our stores, which could have a material adverse effect on our business and harm our reputation.

To support our growth plans beyond 2014, a second primary distribution center near Indianapolis, Indiana has been constructed and is scheduled to be operational mid-2014. Our failure to secure this additional distribution capacity when necessary, or if we encounter difficulties associated with getting this distribution center ready for

 

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use, could impede our growth plans. In addition, we could encounter difficulties related to information technology and integration with material handling equipment, the appropriate allocation of inventory among our stores and the efficient flow of our merchandise as a result of moving from our current one distribution center environment to a two distribution center environment

We rely upon independent third-party transportation providers for substantially all of our merchandise shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver on a timely basis.

We currently rely upon independent third-party transportation providers for substantially all of our merchandise shipments, including shipments from our vendors to our distribution center and from our distribution center to all of our stores. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices (which would increase our shipping costs), labor availability, labor strikes and inclement weather, which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from our current third-party transportation providers which in turn would increase our costs.

Our growth strategy is dependent on a number of factors, any of which could strain our resources or delay or prevent the successful penetration into new markets.

Our growth strategy is partially dependent on opening new stores and operating them profitably. Additional factors required for the successful implementation of our growth strategy include, but are not limited to: obtaining desirable store locations, negotiating acceptable leases, completing projects on budget, supplying proper levels of merchandise and successfully hiring and training store managers and sales associates. In order to optimize profitability for new stores, we must secure desirable retail lease space when opening stores in new and existing markets. We must choose store sites, execute favorable real estate transactions, hire competent personnel and effectively open and operate these new stores. We historically have received developer funding for store build outs, which offset certain capital expenditures we must make to open a new store. For new stores opened in fiscal year 2013, developer funding was received for 93% of the costs incurred in completing the store build outs. If developer funding ceases to be available to us in the future or decreases, or if we experience cost overruns in completing our store build outs, opening new stores would require more capital outlay, which could adversely affect our ability to continue opening new stores.

To the extent we open stores in new markets, if our stores in these markets experience lower than planned net sales and operating results, this would not only adversely impact our sales and operating results but could also impact our ability to continue opening new stores in these markets and other new markets. Further, it could require increased advertising expenses in these markets or the need to relocate underperforming stores either within or outside their current location. To the extent we open new stores in markets where we have existing stores, our existing stores in those markets may experience reduced net sales. Our planned growth will also require additional infrastructure for the development, maintenance and monitoring of those stores. In addition, if our current management systems and information systems are insufficient to support this expansion, our ability to open new stores and to manage our existing stores would be adversely affected. If we fail to continue to improve our infrastructure, we may be unable to implement our growth strategy or maintain current levels of operating performance in our existing stores.

Our growth plans will place increased demands on our financial, operational, managerial and administrative resources. These increased demands may cause us to operate our business less efficiently, which in turn could cause deterioration in the performance of our existing stores.

 

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Our business depends in part on a strong brand image, and if we are not able to maintain or enhance our brand, particularly in new markets where we have limited brand recognition, we may be unable to attract sufficient numbers of guests to our stores or sell sufficient quantities of our merchandise.

Our ability to maintain our reputation is critical to our brand image. Our reputation could be jeopardized if we fail to maintain high standards for merchandise quality and integrity. Any negative publicity about these types of concerns may reduce demand for our merchandise. Failure to maintain high ethical, social and environmental standards for all of our operations and activities or adverse publicity regarding our responses to these concerns could also jeopardize our reputation. Failure to comply with local laws and regulations, to maintain an effective system of internal controls or to provide accurate and timely financial statement information could also hurt our reputation. Damage to our reputation or loss of consumer confidence for any of these reasons could have a material adverse effect on our business, financial condition and results of operations, as well as require additional resources to rebuild our reputation.

We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs.

We lease all of our store locations, our corporate headquarters and our distribution facilities. Our continued growth and success depends in part on our ability to renew leases for successful stores. There is no assurance that we will be able to re-negotiate leases at similar or favorable terms at the end of the lease, and we could be forced to move or exit a market if another favorable arrangement cannot be made. Additionally, in certain cases, we take responsibility for construction of a new store and are reimbursed for our construction costs by the landlord.

We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially harm our business.

If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect us.

Our failure to find store associates that reflect our brand image and embody our culture could adversely affect our business.

Our continued success depends in part upon our ability to attract, motivate and retain a sufficient number of store associates, including store managers, who understand and appreciate our corporate culture and guests, and are able to adequately and effectively represent this culture and establish credibility with our guests. The store associate turnover rate in the retail industry is generally high. Excessive store associate turnover will result in higher associate costs related to finding, hiring and training new store associates. If we are unable to hire and retain store personnel capable of consistently providing a high level of guest service, as demonstrated by their enthusiasm for our culture, understanding of our guests and knowledge of the merchandise we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially and adversely affected and our brand image may be negatively impacted. Competition for such qualified individuals could require us to pay higher wages to attract a sufficient number of associates. Additionally, our labor costs are subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation (including changes in entitlement programs such as health insurance and paid leave programs). Such increase in labor costs may adversely impact our profitability, or if we fail to pay such higher wages we could suffer increased associate turnover.

 

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We depend on key executive management and may not be able to retain or replace these individuals or recruit additional personnel, which could harm our business.

We depend on the leadership and experience of our key executive management. The loss of the services of any of our executive management members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. We believe that our future success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful personnel in the retail industry. Our inability to meet our staffing requirements in the future could impair our growth and harm our business.

We rely significantly on information systems and any failure, inadequacy, interruption or security failure of those systems could harm our ability to effectively operate our business.

Our ability to effectively manage and maintain our inventory, and to ship products to our stores on a timely basis, depends significantly on our information systems. To manage the growth of our operations, personnel and real estate portfolio, we will need to continue to improve and expand our operational and financial systems, real estate management systems, transaction processing, internal controls and business processes; in doing so, we could encounter implementation issues and incur substantial additional expenses. The failure of our information systems to operate effectively, problems with transitioning to upgraded or replacement systems or expanding them into new stores, or a breach in security of these systems could adversely impact the promptness and accuracy of our merchandise distribution, transaction processing, financial accounting and reporting, the efficiency of our operations and our ability to properly forecast earnings and cash requirements. We could be required to make significant additional expenditures to remediate any such failure, problem or breach. Such events may have a material adverse effect on our business.

In addition, we may now and in the future implement new systems to increase efficiencies and profitability. To manage growth of our operations and personnel, we will need to continue to improve and expand our operational and financial systems, transaction processing, internal controls and business processes. When implementing or changing existing processes, we may encounter transitional issues and incur substantial additional costs associated with investments in information technology. Specifically, we implemented Oracle’s RMS in fiscal year 2012 to support our growth strategy and elevate and more efficiently perform many of our critical processes, including business analytics, store optimization, and planning and allocation. Failure to properly implement new systems in the future, including the integration of the second primary distribution center into our current operating environment in mid-2014, could harm our ability to effectively operate our business.

System security risk issues could disrupt our internal operations or information technology services, and any such disruption could harm our net sales, increase our expenses and harm our reputation.

Experienced computer programmers and hackers, or even internal users, may be able to penetrate our network security and misappropriate our confidential information or that of third parties, including our guests, create system disruptions or cause shutdowns. In addition, associate error, malfeasance or other errors in the storage, use or transmission of any such information could result in a disclosure to third parties outside of our network. As a result, we could incur significant expenses addressing problems created by any such inadvertent disclosure or any security breaches of our network. This risk is heightened because we collect and store guest information, including certain credit card information, and use certain guest information for marketing purposes. Retailers in particular have recently been targeted by hackers who seek to misappropriate confidential information. Any compromise of guest information could subject us to guest or government litigation and harm our reputation, which could adversely affect our business and growth. Moreover, we could incur significant expenses or disruptions of our operations in connection with system failures or breaches. In addition, sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the systems. The costs to us to eliminate or alleviate security problems, viruses and bugs, or any problems associated

 

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with the outsourced services, could be significant, and the efforts to address these problems could result in interruptions, delays or cessation of service that may impede our sales, distribution or other critical functions.

There are claims made against us from time to time that can result in litigation or regulatory proceedings which could distract management from our business activities and result in significant liability.

We face the risk of litigation and other claims against us. Litigation and other claims may arise in the ordinary course of our business and include commercial disputes, intellectual property issues, product-oriented allegations and slip and fall claims. In addition, we could face a wide variety of associate claims against us, including general discrimination, privacy, labor and employment, Employee Retirement Income Security Act (“ERISA”) and disability claims. Any claims could result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the U.S. Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time and expense. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liability, and could also materially and adversely affect our operations and our reputation.

In addition, we may be subject to liability if we infringe the trademarks or other intellectual property rights of third parties. If we were to be found liable for any such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. Such infringement claims could subject us to boycotts by our guests and harm to our reputation. In addition, any payments we are required to make and any injunctions we are required to comply with as a result of such infringement actions could adversely affect our financial results.

Changes in laws, including employment laws and laws related to our merchandise, could make conducting our business more expensive or otherwise change the way we do business.

We are subject to numerous regulations, including labor and employment, customs, truth-in-advertising, consumer protection and zoning and occupancy laws and ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of stores and warehouse facilities. If these regulations were to change or were violated by our management, associates, vendors, buying agents or trading companies, the costs of certain goods could increase, or we could experience delays in shipments of our goods, be subject to fines or penalties, or suffer reputational harm, which could reduce demand for our merchandise and hurt our business and results of operations.

In addition to increased regulatory compliance requirements, changes in laws could make ordinary conduct of our business more expensive or require us to change the way we do business. For example, changes in federal and state minimum wage laws could raise the wage requirements for certain of our associates, which would likely cause us to reexamine our entire wage structure for stores. Other laws related to employee benefits and treatment of associates, including laws related to limitations on associate hours, supervisory status, leaves of absence, mandated health benefits or overtime pay, could also negatively impact us, such as by increasing compensation and benefits costs for overtime and medical expenses. Changes in tax laws could increase or decrease tax payments we are required to make, impacting the profitability of our business.

Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise or additional labor costs associated with readying merchandise for sale. It is often difficult for us to plan and prepare for potential changes to applicable laws and future actions or payments related to such changes could be material to us.

We may be subject to unionization, work stoppages, slowdowns or increased labor costs.

Currently, none of our associates are represented by a union. However, our associates have the right at any time under the National Labor Relations Act to form or affiliate with a union. If some, or all, of our workforce were to

 

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become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our costs and adversely impact our profitability. Legislation could be enacted in the future which could have an adverse impact on our business by making it easier for workers to obtain union representation and increasing the penalties employers may incur if they engage in labor practices in violation of the National Labor Relations Act.

We may be unable to protect our trademarks or other intellectual property rights, which could harm our business.

We rely on certain trademark registrations and common law trademark rights to protect the distinctiveness of our brand. However, there can be no assurance that the actions we have taken to establish and protect our trademarks will be adequate to prevent imitation of our trademarks by others or to prevent others from claiming that sales of our merchandise infringe, dilute or otherwise violate third party trademarks or other proprietary rights in order to block sales of our merchandise.

Litigation may be necessary to protect our trademarks and other intellectual property rights, to enforce these rights or to defend against claims by third parties alleging that we infringe, dilute or violate third party trademark or other intellectual property rights. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. Any intellectual property litigation or claims against us could result in the loss or compromise of our intellectual property rights, could subject us to significant liabilities, require us to seek licenses on unfavorable terms, if available at all, prevent us from selling certain products and/or require us to redesign or relabel our merchandise or rename our brand, any of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Our lease obligations could adversely affect our financial flexibility and our competitive position.

We have, and will continue to have, significant lease obligations. As of February 1, 2014, our minimum annual rental obligations under long-term operating leases for fiscal years 2014 and 2015 are $51.0 million and $50.3 million, respectively. Our lease obligations could have other important consequences and significant effects on our business. For example, our lease obligations could:

 

   

increase our vulnerability to adverse changes in general economic, industry and competitive conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to make payments on our leases, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

make it more difficult to satisfy our financial obligations, including payments on our leases; and

 

   

place us at a disadvantage compared to our competitors that have fewer lease obligations.

In addition, an exposure draft issued in May 2013 by the Financial Accounting Standards Board (“FASB”), together with the International Accounting Standards Board, proposes a comprehensive set of changes in generally accepted accounting principles (“GAAP”) for leases. The current exposure draft would have a significant impact on our financial statements, including our results of operations. The current exposure draft form would require us to recognize our right to use leased assets and the related rent payment obligations on the balance sheet. For leases related to our retail store locations, rental payments would be recognized equally over the lease term, consistent with how rental payments are currently amortized. For certain other leases, the current

 

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exposure draft form would generally require the recognition of higher expense early in the lease term as opposed to equally over the lease term. The proposed lease accounting standard could also potentially impact our evaluation of lease terms and how we structure our future store leases.

Our loan agreements may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations and capital needs.

Our loan, security and guaranty agreement relating to our revolving line of credit facility, which provides for borrowings of up to $80 million, contains limitations on our ability to:

 

   

incur additional indebtedness;

 

   

create liens on assets;

 

   

engage in mergers, consolidations, liquidations and dissolutions;

 

   

sell assets (including pursuant to sale leaseback transactions);

 

   

pay consulting fees, dividends and distributions or repurchase capital stock;

 

   

make investments (including acquisitions), loans, or advances;

 

   

engage in certain transactions with affiliates; and

 

   

implement changes in our lines of business.

In addition, this loan agreement requires us to maintain minimum excess availability equal to at least 10% of the revolving line of credit facility.

In connection with the special cash dividend declared on August 26, 2013, we also entered into a senior term loan requiring principal and interest payments over the term of the senior term loan that increase the risk that we may be unable to generate cash sufficient to pay amounts as due or we may have to borrow on our revolving line of credit facility to fund the principal and interest payments. In addition, the interest rate on the senior term loan is subject to variability, which exposes us to interest rate risk and could have a material adverse effect on our financial condition and results of operations.

The senior term loan contains certain financial covenants and additional limitations on our business activities. In particular, our senior term loan requires us to maintain a certain leverage ratio and fixed charge coverage ratio. Our senior term loan includes restrictive covenants substantially similar to those in our loan, security and guaranty agreement relating to our revolving line of credit facility. As a result of these covenants, as well as the covenants in our loan, security and guaranty agreement related to our revolving line of credit facility, we are limited in the manner in which we conduct our business and we may be unable to engage in activities that may be in our best long-term interests or finance future operations or capital needs. A failure by us or our subsidiaries to comply with the covenants under either of our loan agreements would result in an event of default under such indebtedness. The lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the loan agreements. If any of our indebtedness were to be accelerated, it could result in cross defaults under our other debt agreements and could adversely affect our ability to respond to changes in our business and manage our operations. In addition, upon an acceleration of any of our indebtedness, there can be no assurance that our assets would be sufficient to repay the accelerated indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern.

Our results may be adversely affected by fluctuations in energy costs.

Energy costs, including transportation fuel costs, have fluctuated dramatically in the past and may continue to be volatile. These fluctuations may result in an increase in our transportation costs for distribution and utility costs

 

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for our retail stores and distribution centers. A continual rise in energy costs could also adversely affect consumer spending and demand for our merchandise and increase our operating costs, both of which could have a material adverse effect on our financial condition and results of operations.

We may recognize impairment on long-lived assets.

Our long-lived assets, including property and equipment, are subject to periodic testing for impairment. Store assets are reviewed using factors including, but not limited to, our future operating plans and projected future cash flows. Failure to achieve our future operating plans or generate sufficient levels of cash flow at our stores could result in impairment charges on long-lived assets, which could have a material adverse effect on our financial condition or results of operations. No such impairment charges on our long-lived assets were recorded in fiscal years 2013, 2012 and 2011.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Future sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.

In May 2012, the Company filed a shelf registration statement under the Securities Act of 1933, pursuant to which we, Sun Gordmans, LP and the other stockholders named in the registration statement can sell shares of common stock. In May 2012, we sold 40,000 shares of common stock and Sun Gordmans, LP sold 3,456,529 of its shares of common stock. In addition, Sun Gordmans, LP and the other stockholders named in the registration agreement are entitled to piggyback registration rights with respect to the registration of shares of our common stock. We, Sun Gordmans, LP or other stockholders may offer and sell shares in the future in registered public offerings. Also, subject to compliance with the federal securities laws, all of our outstanding shares may be sold on the open market following the expiration of any applicable lock-up period. By selling a large number of shares on the open market, these holders could cause the price of our common stock to decline.

In the future, we may issue additional securities in connection with a capital raise or acquisitions. The amount of shares of our common stock issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors. These provisions include:

 

   

a classified Board of Directors so that not all members of our Board of Directors are elected at one time;

 

   

authorization to issue undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

   

prohibition on stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

requirement that two-thirds of our stockholders approve amendments to our amended and restated certificate of incorporation or amended and restated bylaws;

 

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requirement that special meetings of our stockholders may only be called by a resolution adopted by a majority of our directors then in office;

 

   

authority of our Board of Directors to make, alter, or repeal our amended and restated bylaws; and

 

   

advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Our amended and restated certificate of incorporation contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporate Law, and will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval is obtained prior to the acquisition.

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire.

We cannot assure you that we will pay cash dividends on our common stock in the near future.

On August 26, 2013, our board of directors approved and we declared a $69.9 million, or $3.60 per share of common stock, special cash dividend. However, we do not currently anticipate that we will pay any additional cash dividends on shares of our common stock in the near future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, our financial condition, contractual restrictions (including under our loan agreements), restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, our operating subsidiaries are currently restricted from paying cash dividends by the agreements governing their indebtedness, and we expect these restrictions to continue in the future.

We are a controlled company within the meaning of the rules of The NASDAQ Stock Market, and, as a result, we rely upon exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

As of April 1, 2014, Sun Gordmans, LP held approximately 51% of our common stock and total voting power and, as such, we are a controlled company under The NASDAQ Stock Market corporate governance listing standards. As a controlled company, certain exemptions under The NASDAQ Stock Market listing standards exempted us from the obligation to comply with certain of the NASDAQ Stock Market corporate governance requirements, including:

 

   

that a majority of our board of directors consist of independent directors, as defined under the rules of The NASDAQ Stock Market;

 

   

that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Until we are required to comply with these NASDAQ corporate governance listing standards, holders of our common stock will not have the same protections of stockholders of companies that are subject to all of The NASDAQ Stock Market corporate governance requirements.

 

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Our stock price may be volatile and may decline regardless of our financial operating performance or other factors.

Shares of our common stock were sold in our initial public offering in August 2010 at a price of $11.00 per share and were sold in our public offering in May 2012 at a price of $16.75 per share. On August 26, 2013, our Board of Directors approved and we declared a special cash dividend of $3.60 per share of common stock, which resulted in a reduction in our closing stock price of $3.60 on September 23, 2013, the date of the dividend payment. Our common stock has traded as high as $23.24 and as low as $6.97 during the period from our initial public offering to February 1, 2014. There has been a public market for our common stock for only a short period of time. An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to implement our growth strategy. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, including the development and sustainability of an active trading market for our common stock, future sales of our common stock by significant stockholders, officers and directors, the financial projections we may provide to the public and any changes to these projections or our failure to meet these projections, and the public’s response to press releases or other public announcements by us or third parties, including our filings with the Securities and Exchange Commission or ratings downgrades by any analysts who follow our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We do not own any real property. As of February 1, 2014, we operated 93 stores in 19 states. All of our stores are leased from third parties and the leases typically have base lease terms of 10 years with one or more renewal options. Leases may contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions, co-tenancy violation provisions or minimum sales threshold provisions. Our 70,000 square foot corporate headquarters building, which we relocated to in March 2014, is located in Omaha, Nebraska and is leased under an agreement expiring in 2029 and includes options to renew for two additional five or seven year periods. Our former 78,000 square foot corporate headquarters is under lease through July 2014. A 380,000 square foot distribution center is located in Omaha and is leased under an agreement expiring in 2028, with options to renew for four additional five year periods. We also operate a 140,000 square foot distribution center facility located in Omaha, Nebraska approximately four miles from our primary distribution center. This facility is leased under an agreement expiring in May 2016. To support our growth, we will begin operating a 545,000 square foot second primary distribution center near Indianapolis, Indiana in mid-2014 that is leased under an agreement expiring in 2028, with options to renew for three additional five year periods. We believe that all of our current facilities are in good condition and are suitable and adequate for our current needs. We may from time to time lease new facilities or vacate existing facilities as our operations require, including in connection with opening new stores and support facilities to support new store growth.

ITEM 3. LEGAL PROCEEDINGS

We are subject to various legal claims and proceedings which arise in the ordinary course of our business involving claims incidental to our business, including employment related claims. Although the outcome of these claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these claims will have a material adverse effect on our results of operations, financial condition or cash flow.

ITEM 4. REMOVED AND RESERVED

 

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock began trading on August 5, 2010 on The NASDAQ Global Select Market under the symbol “GMAN”. Prior to that date, there was no public market for our common stock. As of March 28, 2014, there were nine holders of record of our common stock. This does not include persons who hold our common stock in nominee or “street name” accounts through brokers or banks.

The following table sets forth, for each quarter of fiscal years 2013 and 2012, the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market:

 

     Price Range  
Fiscal Year 2013:        High              Low      

First Quarter

   $ 14.46       $ 11.12   

Second Quarter

   $ 15.25       $ 11.12   

Third Quarter

   $ 14.88       $ 9.82   

Fourth Quarter

   $ 10.47       $ 6.97   

Fiscal Year 2012:

     

First Quarter

   $ 22.86       $ 12.89   

Second Quarter

   $ 21.81       $ 15.48   

Third Quarter

   $ 21.10       $ 13.75   

Fourth Quarter

   $ 16.13       $ 11.55   

On August 26, 2013, the Board of Directors approved and the Company declared a special cash dividend of $3.60 per share of common stock, which resulted in a reduction in our closing stock price of $3.60 on September 23, 2013, the date of the dividend payment.

The closing sales price of our common stock on The NASDAQ Global Select Market was $5.22 per share on March 28, 2014.

 

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Stock Price Performance Graph

The following stock performance graph and table compares cumulative total shareholder return on our common shares since our initial public offering on August 5, 2010 with the return on the NASDAQ Composite and a Peer Group of Retail Trade Stocks. Returns are based upon the premise that $100 is invested in each of (a) our common stock, (b) the NASDAQ Composite and (c) our Peer Group of Retail Trade Stocks on August 5, 2010, and that all dividends, if any, were reinvested. Our stock price on February 1, 2014 was adjusted for the $3.60 per share special cash dividend in fiscal 2013, which resulted in a reduction of our closing stock price of $3.60.

 

LOGO

 

     8/5/10      1/29/11      1/28/12      2/2/13      2/1/14  

Gordmans Stores, Inc.

   $ 100.00       $ 132.82       $ 132.55       $ 111.00       $ 98.36   

NASDAQ Composite

   $ 100.00       $ 117.17       $ 122.83       $ 138.64       $ 178.97   

Peer Group

   $ 100.00       $ 118.30       $ 141.08       $ 157.06       $ 170.02   

The information in the previous graph and table is not “soliciting material,” is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference. The share price performance shown on the graph represents past performance and should not be considered an indication of future price performance.

Dividend Policy

Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements, contractual restrictions, compliance with current and future agreements governing our indebtedness, restrictions imposed by applicable law and other factors our board of directors deems relevant. Because we are a holding company, our ability to pay dividends on our common stock is limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us, including restrictions under the terms of the agreements governing our indebtedness.

In August 2013, we declared a special cash dividend of $3.60 per share of common stock on all of our issued and outstanding shares in an amount equal to, in the aggregate, $69.9 million, of which $69.7 million was paid in September 2013 and the remaining $0.2 million will be paid as non-vested restricted stock eligible to receive the dividend becomes vested. No dividends were issued in fiscal years 2011 or 2012.

Recent Sales of Unregistered Securities

None.

 

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Issuer Purchases of Equity Securities

We did not repurchase any of our common stock during the thirteen-week period ended February 1, 2014.

ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes our consolidated financial and operating data as of the dates and for the periods indicated. The operations and cash flow data for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012 and the balance sheet data as of February 1, 2014 and February 2, 2013 have been derived from our audited consolidated financial statements for such fiscal years included elsewhere in this Annual Report on Form 10-K, which were audited by Grant Thornton LLP, an independent registered public accounting firm. The statements of operations and other financial and operating data for the fiscal years ended January 29, 2011 and January 30, 2010 and the balance sheet data as of January 28, 2012, January 29, 2011 and January 30, 2010 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K.

You should read the following information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and accompanying notes thereto, included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results to be expected in any future period.

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
    Year
Ended
January 29,
2011
    Year
Ended
January 30,
2010
 

Statement of Operations Data:

          

Net sales

   $ 619,559      $ 607,692      $ 551,476      $ 517,001      $ 457,533   

License fees from leased departments

     7,828        7,361        6,670        6,321        5,679   

Cost of sales

     (365,463     (350,212     (316,167     (299,060     (269,177
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     261,924        264,841        241,979        224,262        194,035   

Selling, general and administrative expenses

     (247,131     (226,710     (201,084     (198,302     (167,842
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     14,793        38,131        40,895        25,960        26,193   

Interest expense, net

     (2,482     (481     (610     (744     (1,052
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     12,311        37,650        40,285        25,216        25,141   

Income tax expense

     (4,298     (14,119     (15,112     (9,618     (9,273
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 8,013      $ 23,531      $ 25,173      $ 15,598      $ 15,868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

          

Basic

   $ 0.42      $ 1.23      $ 1.32      $ 0.91      $ 1.02   

Diluted

     0.41        1.21        1.30        0.89        0.99   

Weighted average shares outstanding:

          

Basic

     19,288,623        19,165,260        19,098,377        17,212,019        15,488,800   

Diluted

     19,345,308        19,405,218        19,370,290        17,454,458        16,036,422   

Other Financial and Operating Data:

          

Comparable store sales growth (1)

     (7.4 )% (2)       (0.7 )% (3)       0.7     8.4     4.6

Store count, end of year

     93        83        74        68        66   

Average store sales (4)

   $ 6,662      $ 7,322      $ 7,452      $ 7,603      $ 6,932   

Capital expenditures (5)

     36,321        21,040        18,122        7,789        3,643   

Dividends per share

     3.60        —          —          1.29        0.97   

Balance Sheet Data (at period end):

          

Cash and cash equivalents

   $ 5,759      $ 40,824      $ 35,413      $ 29,368      $ 16,601   

Working capital

     43,804        82,946        60,329        36,526        16,163   

Total assets

     206,987        191,126        162,613        125,134        92,118   

Total long-term obligations (6)

     52,250        189        844        2,888        1,513   

Total stockholders’ equity

     41,805        102,388        77,723        52,053        25,949   

 

 

 

(1) We consider all stores opened for at least 16 months as of the end of the reporting period as comparable stores.

 

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(2) Comparable store sales growth for fiscal 2013 is presented for fifty-two week fiscal year 2013 ended February 1, 2014 compared to the 52 week period ended January 26, 2013.

 

(3)

Comparable store sales growth for fiscal 2012 is presented for the 52 weeks ended January 26, 2013 and excludes approximately $5.6 million in comparable store sales which were earned in the 53 rd week of fiscal 2012.

 

(4) Average store sales are calculated as net sales divided by the store count at the end of each fiscal year.

 

(5) Capital expenditures are net of proceeds from the sale-leaseback of real estate related to new store construction and store remodels of $23.8 million, $13.2 million, $13.0 million, $1.2 million, and $0.2 million, respectively, for the fiscal years ended February 1, 2014, February 2, 2013, January 28, 2012, January 29, 2011 and January 30, 2010. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital Expenditures.” Capital expenditures for the fiscal year ended February 1, 2014 include capital expenditures of $1.3 million, which are net of landlord reimbursement of $4.4 million, for new stores opening in the fiscal year ending January 31, 2015. Capital expenditures for the fiscal year ended February 2, 2013 include capital expenditures of $0.4 million for new stores opening in the fiscal year ended February 1, 2014. Capital expenditures for the fiscal year ended January 28, 2012 include capital expenditures of $5.5 million, which are net of landlord reimbursement of $1.9 million, for new stores opened in the fiscal year ended February 2, 2013.

 

(6) Consists of current and noncurrent portions of long-term debt and capital leases.

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this report.

This discussion contains forward-looking statements that are based on the beliefs of, as well as assumptions made by and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including but not limited to those discussed in the section entitled “Risk Factors.”

Executive Overview

Gordmans is an everyday value price department store retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment. Our merchandise assortment includes apparel for all ages, accessories (including fragrances), footwear and home fashions. The origins of Gordmans date back to 1915, and as of February 1, 2014, we operated 93 stores in 19 states situated in a variety of shopping center developments, including regional enclosed shopping malls, lifestyle centers and power centers.

Our expansion strategy includes opening seven new stores in fiscal 2014 and two new states after opening ten new stores in one new state in fiscal 2013 and nine new stores in fiscal 2012 in two new states. We plan to open seven new stores in fiscal 2014, in addition to closing three existing stores, as we focus on driving comparable stores sales and integrating our second distribution center into our current operating environment during fiscal 2014. Our objective is to increase our store base as appropriate.

In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales and comparable store sales and other individual store performance factors, gross profit and selling, general and administrative expenses.

Net Sales .     Net sales reflect our revenues from the sale of our merchandise less returns and discounts and exclusive of sales tax. Net sales include comparable store sales and non-comparable store sales. Fiscal years 2013 and 2011 represent fifty-two week years ended February 1, 2014 and January 28, 2012, respectively, while fiscal year 2012 represents a fifty-three week year ended February 2, 2013.

 

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Comparable Store Sales .     Comparable store sales have been calculated based upon stores that were open at least 16 months as of the end of the reporting period. Comparable store sales include stores that were relocated or remodeled and exclude stores that are closed. We also review the average sale per transaction, comparable store transactions and sales conversion rates. Comparable store sales are an important indicator of current operating performance, with higher comparable store sales helping us to leverage our fixed expenses and positively impacting our operating results.

Gross Profit .     Gross profit is equal to our net sales minus cost of sales, plus license fee income generated from sales of footwear and maternity apparel in our leased departments. Cost of sales includes the direct cost of purchased merchandise, inbound freight to our distribution center, inventory shrinkage and inventory write-downs. Gross margin measures gross profit as a percentage of our net sales. Our gross profit may not be comparable to other retailers, as some companies include all of the costs related to their distribution network in cost of sales while others, like us, exclude a portion of these costs from cost of sales and include those costs in selling, general and administrative expenses. Our gross margin is evaluated in terms of initial markup and the amount of markdowns, with higher initial markup and lower markdowns positively impacting our operating results.

Selling, General and Administrative Expenses .     Selling, general and administrative expenses include all operating costs not included in cost of sales. These expenses include payroll and other expenses related to operations at our corporate office, store expenses, occupancy costs, certain distribution and warehousing costs, pre-opening expenses, depreciation and amortization and advertising expense. Selling, general and administrative expenses as a percentage of net sales is generally higher in lower sales volume periods and lower in higher sales volume periods. Our ability to manage store level and certain other operating expenses directly impacts our operating results.

Overview

Net income for fiscal year 2013 was $8.0 million as compared to net income of $23.5 million for fiscal year 2012. The decrease in net income for fiscal year 2013 as compared to fiscal year 2012 was primarily due to a 7.4% decrease in comparable store sales, a 130 basis point decrease in gross profit margin and higher selling, general and administrative expenses, partially offset by higher net sales attributable to new stores. We continue to have strong working capital and liquidity following the $69.9 million special cash dividend declared in August 2013, which was financed with a combination of cash from operations and a $45 million senior term loan. Below are highlights of our financial results for fiscal year 2013.

 

   

Net sales increased 2.0% for fiscal year 2013 as compared to fiscal year 2012. Higher net sales were driven by an increase in non-comparable store sales due to the addition of ten new stores during fiscal year 2013 and the nine new stores opened in fiscal year 2012. Comparable store sales decreased 7.4% in fiscal year 2013 as compared to the prior year (measured using the fifty-two week fiscal year 2013 ended February 1, 2014 compared to the 52 weeks ended January 26, 2013), which followed a comparable store sales decrease of 0.7% in fiscal year 2012. We have completed a number of initiatives in fiscal year 2013, including the launch of our guest loyalty program, gRewards, in the second quarter of fiscal year 2013. To improve our recent comparable store sales trend, we have a number of initiatives planned in fiscal year 2014, including several merchandising strategies focused on injecting breadth and diversity into our product selection and improving sales conversion at the store level.

 

   

Gross profit margin decreased 130 basis points in fiscal year 2013 as compared to the prior year primarily as a result of higher markdowns to reduce and align merchandise inventory levels. The 130 basis point decrease in gross profit margin followed a 30 basis point decrease in fiscal year 2012 and a 50 basis point improvement in fiscal year 2011.

 

   

Higher selling, general and administrative expenses were primarily attributable to the 12% expansion in our store base, as ten stores were opened during fiscal year 2013.

 

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Basis of Presentation and Results of Operations

Basis of Presentation

The consolidated financial statements include the accounts of Gordmans Stores, Inc. and its subsidiaries, Gordmans Intermediate Holding Corp., Gordmans, Inc., Gordmans Management Company, Inc., Gordmans Distribution Company, Inc. and Gordmans LLC. All intercompany transactions and balances have been eliminated in consolidation. We utilize a typical retail 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest January 31. All references in these financial statements to fiscal years are to the calendar year in which the fiscal year begins. Fiscal years 2013 and 2011 represent fifty-two week years ended February 1, 2014 and January 28, 2012, respectively, while fiscal year 2012 represents a fifty-three week year ended February 2, 2013.

Results of Operations

The following table contains results of operations data for fiscal years 2013, 2012 and 2011.

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 
           (in 000’s)        

Statements of Operations Data:

      

Net sales

   $ 619,559      $ 607,692      $ 551,476   

License fees from leased departments

     7,828        7,361        6,670   

Cost of sales

     (365,463     (350,212     (316,167
  

 

 

   

 

 

   

 

 

 

Gross profit

     261,924        264,841        241,979   

Selling, general and administrative expenses

     (247,131     (226,710     (201,084
  

 

 

   

 

 

   

 

 

 

Income from operations

     14,793        38,131        40,895   

Interest expense, net

     (2,482     (481     (610
  

 

 

   

 

 

   

 

 

 

Income before taxes

     12,311        37,650        40,285   

Income tax expense

     (4,298     (14,119     (15,112
  

 

 

   

 

 

   

 

 

 

Net income

   $ 8,013      $ 23,531      $ 25,173   
  

 

 

   

 

 

   

 

 

 

The table below sets forth the components of the consolidated statements of income as a percentage of net sales.

 

     Year
Ended
February 1,
2014 (1)
    Year
Ended
February 2,
2013 (1)
    Year
Ended
January 28,
2012 (1)
 

Statements of Operations Data:

      

Net sales

     100.0     100.0     100.0

License fees from leased departments

     1.3        1.2        1.2   

Cost of sales

     (59.0     (57.6     (57.3
  

 

 

   

 

 

   

 

 

 

Gross profit

     42.3        43.6        43.9   

Selling, general and administrative expenses

     (39.9     (37.3     (36.5
  

 

 

   

 

 

   

 

 

 

Income from operations

     2.4        6.3        7.4   

Interest expense, net

     (0.4     (0.1     (0.1
  

 

 

   

 

 

   

 

 

 

Income before taxes

     2.0        6.2        7.3   

Income tax expense

     (0.7     (2.3     (2.7
  

 

 

   

 

 

   

 

 

 

Net income

     1.3     3.9     4.6
  

 

 

   

 

 

   

 

 

 

 

 

(1)  

Percentages may not foot due to rounding.

 

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Fiscal Year 2013 Compared to Fiscal Year 2012

Net Sales

Net sales for fiscal year 2013 increased $11.9 million, or 2.0%, to $619.6 million as compared to $607.7 million for fiscal year 2012. This increase was primarily the result of a $60.8 million increase in non-comparable store sales due to the opening of ten new stores in fiscal 2013 and nine new stores in fiscal 2012. Comparable store sales decreased $48.9 million, or 7.4%. The 7.4% comparable store sales decrease is for fifty-two week fiscal year 2013 ended February 1, 2014 compared to the 52 weeks ended January 26, 2013. Comparable store sales decreased 7.0% for fiscal year 2013 compared to the fifty-two weeks ended February 2, 2013. The comparable store sales decrease was primarily due to a low double digit decrease in comparable transactions, which represents our measure for guest traffic, partially offset by a low single digit increase in the average sale per transaction, which improved from fiscal year 2012 in part due to the rollout of our guest loyalty program, gRewards, to all stores in the second quarter of fiscal year 2013. From a major merchandising category perspective, Apparel incurred a mid-single digit comparable store sales decrease for fiscal year 2013, Home Fashions incurred a high single digit comparable store sales decrease and Accessories (including Fragrances) experienced a low double digit comparable store sales decrease for fiscal year 2013.

We believe that the recent decline in comparable store sales, which began in the fourth quarter of fiscal 2012, is primarily the result of our merchandising selection. We believe initiatives, such as the company-wide launch of our guest loyalty program in fiscal 2013, and initiatives planned for fiscal year 2014, including several merchandising sales growth strategies focused on injecting breadth and diversity into our product selection across a number of our Apparel and Home Fashions businesses and revitalizing the presentation of merchandise and the shopping experience for our guests, combined with the addition of several talented associates to our merchandising and stores leadership teams, will lead to improved comparable store sales performance in fiscal year 2014 and beyond.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for fiscal year 2013 increased $0.5 million, or 6.3%, to $7.8 million as compared to $7.4 million for fiscal year 2012 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for fiscal year 2013 decreased $2.9 million, or 1.1%, to $261.9 million as compared to $264.8 million in fiscal year 2012. Gross profit margin for fiscal year 2013 decreased 130 basis points to 42.3% of net sales as compared to 43.6% of net sales for fiscal year 2012. Of this decrease, 100 basis points was due to an increase in markdowns as a percentage of sales during fiscal year 2013 versus fiscal year 2012 to clear excess merchandise that resulted from sales falling short of expectations and align inventory levels and 20 basis points was due to a decrease in mark-up on merchandise purchases. The remaining 10 basis point decrease was primarily the result of an increase in the inventory obsolescence reserve adjustment in fiscal year 2013 as compared to fiscal year 2012 due to higher aged inventory levels at the end of fiscal year 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal year 2013 increased $20.4 million, or 9.0%, to $247.1 million as compared to $226.7 million for fiscal year 2012. As a percentage of net sales, selling, general and administrative expenses for fiscal 2013 increased to 39.9% as compared to 37.3% for fiscal 2012. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher store, corporate, distribution center and advertising expenses associated with the decrease in comparable store sales, as well as higher depreciation and amortization expense.

 

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Store expenses increased $11.6 million in fiscal year 2013 as compared to fiscal year 2012. This increase was primarily due to increased rent and real estate, payroll, maintenance and utilities expenses associated with new store growth. Store expenses were 25.3% of net sales in fiscal 2013 compared to 23.9% of net sales in fiscal 2012, a 140 basis point increase, primarily resulting from higher rent and real estate taxes, higher payroll and higher maintenance expenses as a percentage of net sales associated with a decrease in comparable store sales.

Corporate expenses increased $3.0 million in fiscal 2013 as compared to fiscal 2012 primarily due to a $1.5 million increase in information technology costs related to upgrading our information technology systems and support of our enterprise merchandise system that was implemented in fiscal 2012 and higher payroll expense of $1.2 million. The addition of new staff positions to support our growth and merit compensation increases resulted in a $1.4 million increase, while share-based compensation expense also increased by $0.3 million. These increases in payroll expense were partially offset by a $0.4 million decrease in management bonuses. The remaining increase in corporate expenses resulted primarily from higher store-related legal expenses of $0.3 million. Corporate expenses were 5.7% of net sales in fiscal 2013 compared to 5.3% of net sales in fiscal 2012, a 40 basis point increase, primarily resulting from higher information technology costs and higher payroll expenses as a percentage of net sales associated with a decrease in comparable store sales.

Depreciation and amortization expense increased $2.9 million, or 40 basis points as a percentage of net sales, in fiscal 2013 as compared to fiscal 2012 due to increased property additions associated with ten new store openings in fiscal 2013 and investments in upgrading our information technology systems, including the implementation of Oracle’s enterprise merchandising system in fiscal year 2012. Depreciation and amortization expense in fiscal 2013 also includes $0.1 million of accelerated depreciation expense related to the Company’s plan to close 3 existing stores in fiscal 2014 and the corporate office relocation that occurred in early fiscal 2014.

The $1.6 million increase in distribution center expenses was primarily the result of higher outbound freight delivery charges of $0.7 million primarily associated with new store growth and higher payroll and benefit costs of $0.6 million related to processing the increase in merchandise inventory receipts associated with new store growth. The increase was also the result of higher rent expense of $0.4 million associated with our second distribution center, as rent expense began in November 2013. Distribution center expenses increased 20 basis points as a percentage of net sales to 3.7% of net sales in fiscal 2013 primarily resulting from higher payroll and higher rent expense as a percentage of net sales associated with a decrease in comparable store sales.

The $1.2 million increase in advertising expenses in fiscal 2013 as compared to fiscal 2012 was a result of increases in preprint and direct mail costs, including costs related to ten new store openings during fiscal 2013, as well as costs associated with our guest loyalty program, which was launched company-wide in the second quarter of fiscal 2013. Advertising expenses were 3.0% of net sales in fiscal 2013 compared to 2.8% in fiscal 2012, with the increase associated with a decrease in comparable store sales.

Store pre-opening expenses increased $0.2 million in fiscal 2013 as compared to fiscal 2012 due to ten new store openings in fiscal 2013, compared to nine new store openings in fiscal 2012.

Interest Expense, Net

Interest expense, net for fiscal year 2013 increased $2.0 million to $2.5 million compared to $0.5 million in fiscal year 2012. This increase was primarily the result of interest expense, including the amortization of deferred financing fees, related to the $45.0 million senior term loan that we entered into on August 27, 2013 to partially fund the $69.9 million special cash dividend declared on August 26, 2013, as well as an increase in average borrowings on our revolving line of credit from $0 during fiscal 2012 to $4.0 million during fiscal 2013.

Income Before Taxes

Income before taxes for fiscal year 2013 decreased $25.3 million to $12.3 million compared to $37.7 million in fiscal year 2012. As a percentage of net sales, income before taxes was 2.0% of net sales for fiscal year 2013 compared to 6.2% of net sales in fiscal year 2012.

 

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Income Tax Expense

Income tax expense decreased $9.8 million in fiscal year 2013 to $4.3 million as compared to $14.1 million in fiscal year 2012. The effective income tax rate for fiscal year 2013 was 34.9% compared to an effective rate of 37.5% for fiscal year 2012, with the decrease in the effective income tax rate resulting primarily from federal tax credits having a larger tax percentage impact given the lower taxable income compared to fiscal 2012. Additionally, not all of our taxable income was subject to the 35% federal tax bracket based upon the Company’s lower taxable income. The effective rate differed from the federal enacted rate of 35% primarily due to federal tax credits and state taxes, net of federal benefits.

Net Income

Net income for fiscal year 2013 was $8.0 million compared to $23.5 million in fiscal year 2012, a $15.5 million decrease. As a percentage of net sales, net income was 1.3% of net sales for fiscal year 2013 compared to 3.9% in fiscal year 2012. The decrease in net income resulted primarily from the comparable store sales decrease, the 130 basis point decrease in gross profit margin and the increase in selling, general and administrative expenses associated with our new store growth, partially offset by higher net sales attributable to new stores.

Fiscal Year 2012 Compared to Fiscal Year 2011

Net Sales

Net sales for fiscal year 2012 increased $56.2 million, or 10.2%, to $607.7 million as compared to $551.5 million for fiscal year 2011. This increase was primarily the result of a $54.4 million increase in non-comparable store sales due to the opening of nine new stores in fiscal 2012 and six new stores in fiscal 2011. Comparable store sales increased $2.1 million, which includes $5.6 million of comparable store sales for the 53 rd week of fiscal year 2012. Comparable store sales decreased 0.7% for the 52 weeks ended January 26, 2013 compared to 52 week fiscal year 2011 primarily due to a low single digit decrease in comparable transactions, which represents our measure for guest traffic, partially offset by a low single digit increase in the average sale per transaction. Net sales for fiscal year 2012 includes $6.3 million in sales for the 53 rd week of fiscal 2012. From a major merchandising category perspective, Apparel generated a low single digit comparable store sales increase in fiscal year 2012, led by our Misses and Childrens divisions, while Home Fashions experienced a low single digit comparable store sales decrease for fiscal year 2012 and Accessories (including Fragrances) incurred a mid-single digit comparable store sales decrease for fiscal year 2012.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for fiscal year 2012 increased $0.7 million, or 10.4%, to $7.4 million as compared to $6.7 million for fiscal year 2011 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for fiscal year 2012 increased $22.9 million, or 9.4%, to $264.8 million as compared to $242.0 million in fiscal year 2011. Gross profit margin for fiscal year 2012 decreased 30 basis points to 43.6% of net sales as compared to 43.9% of net sales for fiscal year 2011. Of this decrease, 50 basis points was due to an increase in markdowns as a percentage of sales during fiscal year 2012 versus fiscal year 2011 to clear excess merchandise that resulted from sales falling short of expectations, primarily in the fourth quarter, and 10 basis points was due to an increase in inventory shrinkage. A 30 basis point increase in mark-up on merchandise purchases during the year versus fiscal 2011 resulting from buying efficiencies and competitive pricing opportunities partially offset the gross margin deterioration created by higher markdowns and shrinkage.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal year 2012 increased $25.6 million, or 12.7%, to $226.7 million as compared to $201.1 million for fiscal year 2011. As a percentage of net sales, selling, general and administrative expenses for fiscal 2012 increased to 37.3% as compared to 36.5% for fiscal 2011. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher depreciation expense, higher store expenses and higher distribution center expenses combined with a decrease in comparable store sales.

Store expenses increased $14.5 million in fiscal year 2012 as compared to fiscal year 2011. This increase was primarily due to increased payroll and benefits, rent, maintenance, utilities and cleaning expenses associated with new store growth. Store expenses were 23.9% of net sales in fiscal 2012 compared to 23.7% of net sales in fiscal 2011, a 20 basis point increase, primarily resulting from higher rent and real estate taxes and higher payroll and benefits as a percentage of net sales, partially offset by lower credit card fees as a percentage of net sales.

Corporate expenses increased $2.8 million in fiscal 2012 as compared to fiscal 2011 primarily due to higher payroll and benefits expense of $1.5 million. The addition of new staff positions to support our growth and merit compensation increases resulted in a $2.5 million increase, which was partially offset by a $0.5 million decrease in management bonuses and a $0.5 million decrease in share-based compensation expense. The remaining increase in corporate expenses resulted primarily from a $0.9 million increase in information technology costs related to upgrading our information technology systems and supporting our enterprise merchandise system that was implemented in fiscal 2012 and higher travel expenses of $0.2 million related to our growth. Corporate expenses were 5.3% of net sales in both fiscal 2012 and fiscal 2011.

The $2.7 million increase in distribution center expenses was primarily the result of higher payroll and benefit costs of $1.3 million, higher outbound freight delivery charges of $1.1 million and higher processing expenses of $0.3 million, all related to processing the increase in merchandise inventory receipts associated with new store growth. Distribution center expenses were 3.6% of net sales in fiscal 2012 compared to 3.4% in fiscal 2011, a 20 basis point increase, primarily resulting from higher payroll and higher outbound freight delivery charges as a percentage of net sales combined with a decrease in comparable store sales.

Depreciation and amortization expense increased $2.7 million, or 30 basis points as a percentage of net sales, in fiscal 2012 as compared to fiscal 2011 due to increased property additions associated with nine new store openings in fiscal 2012 and investments in upgrading our information technology systems, including the implementation of Oracle’s enterprise merchandising system in fiscal year 2012.

The $2.0 million increase in advertising expenses in fiscal 2012 as compared to fiscal 2011 was a result of increases in television and direct mail costs, including costs related to nine new store openings during fiscal 2012. Advertising expenses were 2.8% of net sales in fiscal 2012 compared to 2.7% in fiscal 2011.

Store pre-opening expenses increased $0.9 million, or 10 basis points as a percentage of net sales, in fiscal 2012 as compared to fiscal 2011 due to nine new store openings in fiscal 2012, compared to six new store openings and one store relocation in 2011.

Interest Expense, Net

Interest expense, net for fiscal year 2012 decreased to $0.5 million as compared to $0.6 million in fiscal year 2011. This decrease was primarily due to the amendment of the revolving line of credit facility in June 2011, which lowered the interest rate on borrowings and the unused line fee, as well as a reduction in average borrowings from $0.4 million during fiscal 2011 to $0 during fiscal 2012.

 

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Income Before Taxes

Income before taxes for fiscal year 2012 decreased $2.6 million to $37.7 million compared to $40.3 million in fiscal year 2011. As a percentage of net sales, income before taxes was 6.2% of net sales for fiscal year 2012 compared to 7.3% of net sales in fiscal year 2011.

Income Tax Expense

Income tax expense decreased $1.0 million in fiscal year 2012 to $14.1 million as compared to $15.1 million in fiscal year 2011. The effective income tax rate for fiscal years 2012 and 2011 was 37.5%. The effective rate differed from the federal enacted rate of 35% primarily due to state taxes, net of federal benefits.

Net Income

Net income for fiscal 2012 was $23.5 million compared to $25.2 million in fiscal 2011, a $1.6 million decrease. As a percentage of net sales, net income was 3.9% of net sales for fiscal 2012 compared to 4.6% in fiscal year 2011. The decrease in net income resulted primarily from the comparable store sales decrease, the increase in selling, general and administrative expenses associated with our growth and the 30 basis point decrease in gross profit margin, partially offset by higher net sales attributable to new stores.

Seasonality

Our business is subject to seasonal fluctuations, which are typical of retailers that carry a similar merchandise offering. A disproportionate amount of our sales and net income are realized during the fourth quarter, which includes the holiday selling season. In fiscal years 2013, 2012 and 2011, respectively, 32.3%, 33.3% and 33.6% of our net sales were generated in the fourth quarter. Operating cash flows are typically higher in the fourth fiscal quarter due to inventory related working capital requirements in the third fiscal quarter. Based on results from 2004 to 2008, approximately 34% of comparable store sales and more than 100% of net income was realized in the fourth quarter, making up for a net loss historically incurred through the first nine months. However, financial performance in fiscal year 2009 represented a favorable break from the historical trend which has continued through fiscal year 2013. During fiscal years 2013, 2012 and 2011, we generated net income during the first nine months of $5.3 million, $15.6 million and $15.0 million, respectively, and 34.1%, 33.7% and 40.5% of net income was realized in the fourth quarters of fiscal 2013, 2012 and 2011, respectively. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving and Christmas and regional fluctuations for events such as sales tax holidays.

Liquidity and Capital Resources

Our primary ongoing cash requirements are for operating expenses, inventory, new store capital investment, investments in our information technology, investments in our distribution centers, including our second primary distribution center that will become operational in mid-2014, and capital expenditures for existing store improvements, as well as debt service. Our typical investment in a new store is approximately $1.3 million, which represents pre-opening expenses of $0.4 million and inventory of $0.9 million (of which $0.3 million is typically financed through trade payables). The fixed assets and leasehold improvements associated with a new store opening of approximately $1.1 million have typically been financed by landlords through favorable tenant improvement allowances. Our primary sources of funds for our business activities are cash from operations, borrowings under our revolving line of credit facility, tenant improvement allowances and the use of operating leases for new stores.

Our working capital at February 1, 2014 decreased $39.1 million, or 47.2%, to $43.8 million compared to working capital of $82.9 million at February 2, 2013. On August 26, 2013, the Company’s board of directors approved and the Company declared a $69.9 million, or $3.60 per share of common stock, special cash dividend,

 

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Table of Contents

of which $69.7 million was paid on September 23, 2013 with the remaining $0.2 million to be paid as non-vested restricted stock awards vest. To fund a portion of the special cash dividend payment, the Company entered into a $45.0 million senior term loan with a maturity date of August 27, 2018. The majority of the principal is due on the maturity date, with quarterly principal payments due beginning in October 2014 through the maturity date. The senior term loan contains an early payment provision exercisable at the Company’s option, pursuant to which the Company may repay all or a portion of the outstanding principal amount at any time, subject to a prepayment penalty for any prepayments made during the first two years of the agreement. The remainder of the special cash dividend payment was funded by cash from operations, and principal payments on the senior term loan will be funded by cash from operations and, if necessary, borrowings under the revolving line of credit facility. The revolving line of credit facility was amended on August 27, 2013 to increase the borrowing capacity from $60 million to $80 million and may be increased to a maximum borrowing capacity of $100 million. The amended revolving line of credit facility expires on August 27, 2018.

Borrowings of $7.3 million were outstanding under our revolving line of credit facility at February 1, 2014, as compared to no borrowings outstanding under our revolving line of credit facility at February 2, 2013. Cash and cash equivalents were $5.8 million and $40.8 million at February 1, 2014 and February 2, 2013, respectively. Net cash provided by operating activities was $20.8 million for fiscal year 2013 compared to $26.5 million in fiscal year 2012. Average borrowings under our revolving line of credit facility increased to $4.0 million in fiscal year 2013 from $0 in fiscal year 2012, in part due to the portion of the $69.9 million special cash dividend declared on August 26, 2013 that was funded by cash from operations. The largest amount borrowed at one time during fiscal year 2013 was $31.5 million in the fourth quarter when our working capital needs peaked for the holiday selling season, compared to no borrowings under our revolving line of credit facility during fiscal year 2012. Average availability under our revolving line of credit facility increased 18.1% to $62.2 million in fiscal year 2013 compared to $56.3 million in fiscal year 2012 due to the increase in borrowing capacity from $60 million to $80 million in fiscal year 2013. Stockholders’ equity, which includes the reduction in retained earnings for the $69.9 million special cash dividend declared on August 26, 2013, was $41.8 million as of February 1, 2014 compared to $102.4 million as of February 2, 2013.

During the course of our seasonal business cycle, working capital is needed to support inventory for existing stores, particularly during peak selling seasons. Historically, our working capital needs are lowest in the first quarter and peak late in the third quarter or early in the fourth quarter in anticipation of the holiday selling season. Management believes that the net cash provided by operating activities, bank borrowings, vendor trade terms, tenant improvement allowances and the use of operating leases for new stores will be sufficient to fund anticipated current and long-term capital expenditures and working capital requirements.

Capital Expenditures

Net capital expenditures during fiscal years 2013, 2012 and 2011 were $36.3 million, $21.0 million and $18.1 million, respectively. Net capital expenditures were comprised of the following:

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 
           (in 000’s)        

Recurring capital expenditures

      

New and existing stores

   $ 39,115      $ 26,658      $ 26,222   

Technology-related investments

     3,603        5,883        4,582   

Existing distribution center improvements

     785        1,696        360   

Non-recurring capital expenditures

      

Second distribution center

     13,388        —          —     

New corporate office

     3,242        —          —     
  

 

 

   

 

 

   

 

 

 

Gross capital expenditures

     60,133        34,237        31,164   

Less: Proceeds from sale-leaseback transactions

     (23,812     (13,197     (13,042
  

 

 

   

 

 

   

 

 

 

Net capital expenditures

   $ 36,321      $ 21,040      $ 18,122   
  

 

 

   

 

 

   

 

 

 

 

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We lease all of our store locations. In certain cases, we negotiate leases whereby we take responsibility for construction of a new store during the construction period and are reimbursed for our costs from the landlord. When this situation occurs, we report the construction costs as part of our capital expenditures and, as reimbursements are received from the landlord for construction costs where we are the accounting owner during the construction period, we report the proceeds received from the landlord as proceeds from sale-leaseback transactions.

Cash Flow Analysis

A summary of operating, investing and financing activities is shown in the following table:

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 
           (in 000’s)        

Cash flows provided by operating activities

   $ 20,815      $ 26,505      $ 27,116   

Cash flows used in investing activities

     (36,321     (20,617     (17,890

Cash flows used in financing activities

     (19,559     (477     (3,181
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (35,065     5,411        6,045   

Cash and cash equivalents, beginning of period

     40,824        35,413        29,368   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 5,759      $ 40,824      $ 35,413   
  

 

 

   

 

 

   

 

 

 

Cash Flows from Operating Activities

Cash flows from operating activities consist of net income adjusted for non-cash items primarily including depreciation and amortization, deferred taxes, share-based compensation and the effect of working capital changes.

2013 versus 2012 – Operating cash flows of $20.8 million in fiscal 2013 included net income of $8.0 million and non-cash charges of $11.7 million primarily related to $9.8 million in depreciation and amortization expense, $1.3 million of share-based compensation expense, $0.5 million of amortization of deferred financing fees and $0.1 million of changes in deferred income taxes. Net cash provided by operating activities in fiscal 2013 was favorably impacted by a $9.6 million increase in deferred rent primarily due to the ten new stores opened in fiscal 2013 and four of the seven new stores opening in fiscal 2014, an $8.4 million increase in accounts payable due to the increase in inventory and the timing of inventory purchases and a $2.0 million increase in accrued expenses and other liabilities primarily due to the 12% increase in new stores during fiscal 2013. Operating cash flows were also favorably impacted by a $0.9 million decrease in accounts, landlord and income taxes receivable primarily due to a $4.1 million decrease in landlord receivables related to tenant improvement allowances associated with new store growth resulting from more new stores in fiscal 2013 being financed by the landlord during the construction period as compared to fiscal 2012, partially offset by a $2.5 million increase in income taxes receivable resulting from our lower than expected fiscal 2013 financial performance and a $0.7 million increase in accounts receivable. Operating cash flows were reduced by a $16.7 million increase in merchandise inventories primarily due to the ten new stores opened in fiscal 2013 and the comparable store sales decrease we incurred in the fourth quarter, a $1.8 million increase in prepaid expenses and other current assets primarily due to the ten new stores opened in fiscal 2013 and a $1.2 million increase in other assets primarily due to the ten new stores opened in fiscal year 2013.

Net cash provided by operating activities in fiscal year 2013 was $20.8 million compared to $26.5 million for fiscal year 2012, a $5.7 million decrease. The primary driver of the decrease in operating cash flows in fiscal 2013 as compared to fiscal 2012 was the decrease in net income of $15.5 million from $23.5 million for fiscal year 2012 to $8.0 million for fiscal year 2013. The deterioration in our financial performance, most notably the

 

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decrease in comparable store sales, resulted in higher merchandise inventories per comparable store as compared to fiscal 2012. These decreases in operating cash flows in fiscal 2013 as compared to fiscal 2012 were partially offset by a significant increase in accounts payable as compared to the decrease in fiscal 2012, with the increase in accounts payable, in part, resulting from higher merchandise inventories per comparable store. The increase in new store activity in fiscal 2013 as compared to fiscal 2012 also led to a more significant increase in operating cash flows related to accrued expenses and deferred rent in fiscal 2013 as compared to fiscal 2012.

2012 versus 2011 – Operating cash flows of $26.5 million in fiscal 2012 included net income of $23.5 million and non-cash charges totaling $11.3 million primarily related to $7.0 million in depreciation and amortization expense, $3.0 million of changes in deferred income taxes, $1.0 million of share-based compensation expense and $0.3 million of amortization of deferred financing fees. Net cash provided by operating activities in fiscal 2012 was favorably impacted by a $7.1 million increase in deferred rent primarily due to the nine new stores opened in fiscal 2012 and four of the ten new stores opening in fiscal 2013, as well as a $2.4 million decrease in accounts, landlord and income taxes receivable primarily due to a decrease in income taxes receivable and a decrease in landlord receivables related to tenant improvement allowances associated with new store growth. Operating cash flows were reduced by a $12.7 million increase in merchandise inventories primarily due to the nine new stores opened in fiscal 2012, a $1.8 million decrease in accounts payable due to the timing of inventory purchases, a $1.3 million increase in prepaid expenses and other current assets primarily due to the nine new stores opened in fiscal 2012, a $1.2 million decrease in accrued expenses and other liabilities primarily due to lower accrued wages payable and lower accrued performance bonuses payable, and a $0.8 million increase in other assets due to the nine new stores opened in fiscal year 2012.

Net cash provided by operating activities in fiscal year 2012 was $26.5 million compared to $27.1 million for fiscal year 2011, a $0.6 million decrease. The largest decrease in operating cash flows in fiscal year 2012 compared to fiscal year 2011 is attributed to the increase in merchandise inventories in fiscal 2012, which increased $7.1 million more in fiscal year 2012 than in fiscal year 2011 primarily as a result of higher inventory per comparable store and nine new stores opened in fiscal year 2012 compared to six new stores in fiscal year 2011. Changes in deferred income taxes accounted for $3.6 million less in operating cash flows in fiscal year 2012 primarily due to a smaller increase in deferred tax liabilities in fiscal 2012 associated with lower bonus depreciation on investments in property and equipment and software in fiscal year 2012 as compared to fiscal year 2011. Another decrease in operating cash flows in fiscal year 2012 compared to fiscal year 2011 is attributed to the decrease in net income of $1.6 million from fiscal 2011 to fiscal 2012. Other decreases in operating cash flows in fiscal year 2012 compared to fiscal year 2011 resulted from the $1.3 million increase in prepaid expenses and other current assets in fiscal 2012, a $1.2 million smaller increase in deferred rent in fiscal year 2012 as compared to fiscal year 2011, and a $1.0 million greater decrease in accounts payable in fiscal 2012 compared to fiscal 2011.

The largest increase in operating cash flows in fiscal year 2012 compared to fiscal 2011 resulted from changes in accounts, landlord, and income taxes receivable of $12.0 million. Increases in accounts, landlord, and income taxes receivable in fiscal 2011 decreased operating cash flows by $9.6 million primarily related to increases in landlord receivables due from tenant improvement allowances associated with new store growth, as six new stores were opened in fiscal 2011 for which construction began in fiscal 2010 compared to two new stores in fiscal 2010, while accounts, landlord and income taxes receivable decreased $2.4 million in fiscal 2012 primarily due to a decrease in income taxes receivable and a decrease in tenant improvement allowances associated with new store growth. Non-cash depreciation charges increased operating cash flows by $2.7 million more in fiscal 2012 related to higher depreciation expense in fiscal year 2012 compared to fiscal year 2011 due to continued new store growth in fiscal 2012, as nine new stores were opened in fiscal 2012 and six new stores were opened in fiscal 2011, and investments in upgrading our information technology systems. Accrued expenses and other liabilities also decreased $1.5 million less in fiscal 2012 compared to fiscal 2011 primarily due to lower management bonuses.

 

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Cash Flows from Investing Activities

2013 versus 2012 – Net cash used in investing activities during fiscal year 2013 was $36.3 million compared to $20.6 million in fiscal year 2012. Cash of $60.1 million and $34.2 million was used for purchases of property and equipment during fiscal year 2013 and 2012, respectively. Cash used in investing activities related primarily to $39.1 million invested in new and existing stores during fiscal 2013. Of the $39.1 million, $26.3 million was invested in the ten new store openings during fiscal 2013, $5.7 million was used for new stores that are opening in fiscal 2014, and the remaining $7.2 million was used for fixtures and store improvements for existing stores. This compares to $26.7 million invested in new and existing stores during fiscal year 2012, of which $23.0 million was invested in the nine new stores opened during fiscal 2012, $0.4 million was used for new stores that opened in fiscal 2013, and the remaining $3.3 million was used for fixtures and store improvements for existing stores. The increase in cash invested in new store openings to $26.3 million in fiscal 2013 as compared to $23.0 million in fiscal 2012 resulted from ten new store openings in fiscal 2013 compared to nine new stores opened in fiscal 2012, while the remaining increase in cash invested in new and existing stores related to an increase in cash used for fixtures and store improvements for existing stores in fiscal 2013 primarily due to more remodel projects completed in fiscal 2013 as compared to fiscal 2012. As part of our expansion strategy, we will continue to make investments in our new and existing stores, as we plan to open seven new stores in fiscal 2014.

The increase in cash used in investing activities in fiscal 2013 as compared to fiscal 2012 is also due to the $13.4 million invested in the second primary distribution center opening in mid-2014 for which construction began in fiscal 2013 and $3.2 million invested in furniture, fixtures and equipment related to our corporate headquarters, which were relocated to a new leased building in early 2014. Investments in information technology equipment and software during fiscal 2013 was $3.6 million compared to $5.9 million in fiscal year 2012, with the decrease primarily relating to lower software investments. Additionally, existing distribution center improvements were $0.8 million and $1.7 million for fiscal year 2013 and 2012, respectively.

Proceeds from sale-leaseback transactions were $23.8 million and $13.2 million in fiscal year 2013 and 2012, respectively, where the Company was deemed the accounting owner of the property and equipment during the new store construction period pursuant to the underlying lease agreement. The increase in cash generated from proceeds from sale-leaseback transactions resulted from both the increased investment in new and existing stores in fiscal 2013 as compared to fiscal 2012 and $4.4 million of landlord reimbursements received in fiscal 2013 for new stores opening in fiscal 2014.

Capital expenditures, net of proceeds from the sale-leaseback of real estate related to new store construction, of $27.0 million to $30.0 million are planned for fiscal 2014. This includes $12.0 million to $13.0 million of capital expenditures related to our second distribution center for which construction will be completed and will be operational by the second quarter of fiscal 2014 and for furniture, fixtures and equipment and information technology costs associated with our corporate office relocation, which occurred in March 2014. The remaining $15.0 million to $17.0 million of capital expenditures for fiscal 2014 will be primarily for investments in information technology systems, fixtures and store improvements for certain of our existing stores, equipment for our distribution center and for the seven new stores opening in fiscal 2014.

Insurance proceeds of $0.4 million were received in fiscal year 2012 related to casualty claims for damages to existing stores. No insurance proceeds were received in fiscal year 2013.

2012 versus 2011 – Net cash used in investing activities during fiscal year 2012 was $20.6 million compared to $17.9 million in fiscal year 2011. Cash of $34.2 million and $31.2 million was used for purchases of property and equipment during fiscal year 2012 and 2011, respectively. The increase in cash used in investing activities is due to $26.7 million invested in new and existing stores during fiscal 2012. Of the $26.7 million, $23.0 million was invested in the nine new store openings during fiscal 2012, $0.4 million was used for new stores that are opening in fiscal 2013, and the remaining $3.3 million was used for fixtures and store improvements for existing stores. This compares to $26.2 million invested in new and existing stores during fiscal year 2011, of which $16.2 million was invested in the six new stores opened and one store relocated during fiscal 2011. In addition,

 

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$7.4 million was used in fiscal 2011 for the four new stores that opened in the first quarter of 2012, while the remaining $2.6 million was used for fixtures and store improvements for existing stores. The increase in cash invested in new store openings to $23.0 million in fiscal 2012 as compared to $16.2 million in fiscal 2011 resulted from nine new store openings in fiscal 2012 compared to six new stores opened in fiscal 2011. As part of our expansion strategy, we will continue to make investments in our new and existing stores, as we plan to open ten new stores in fiscal 2013. Investments in information technology equipment and software during fiscal 2012 was $5.9 million compared to $4.6 million in fiscal year 2011, with the increase primarily relating to our investment in our new Oracle enterprise merchandising system, which was implemented during fiscal 2012. Distribution center improvements were $1.7 million and $0.4 million for fiscal year 2012 and 2011, respectively.

Proceeds from sale-leaseback transactions were $13.2 million and $13.0 million in fiscal year 2012 and 2011, respectively, where the Company was deemed the accounting owner of the property and equipment during the new store construction period pursuant to the underlying lease agreement. The increase in cash generated from proceeds from sale-leaseback transactions resulted from the increased investment in new and existing stores in fiscal 2012 as compared to fiscal 2011.

Insurance proceeds of $0.4 million and $0.2 million were received in fiscal year 2012 and 2011, respectively, related to casualty claims for damages to existing stores.

Cash Flows from Financing Activities

2013 versus 2012 – Net cash used by financing activities was $19.6 million in fiscal 2013 compared to $0.5 million in fiscal year 2012. To fund a portion of the $69.9 million, or $3.60 per share, special cash dividend declared on August 26, 2013, of which $69.7 million was paid in fiscal 2013, the Company entered into a $45.0 million senior term loan on August 27, 2013. Borrowings of $7.3 million were outstanding on the revolving line of credit facility at February 1, 2014, resulting from borrowings and repayments on the revolving line of credit facility of $62.0 million and $54.7 million, respectively. There were no borrowings on the revolving line of credit facility in fiscal 2012. Cash of $2.0 million was paid for debt issuance costs during fiscal 2013 related to the $45.0 million senior term loan and the refinancing of the revolving line of credit facility in August 2013. Cash of $0.2 million and $0.7 million was used during fiscal 2013 and 2012, respectively, for payments on capital lease and financing agreements. Cash of $0.1 million was used for the repurchase of common stock in fiscal 2013 to fund withholding taxes on restricted stock that vested in fiscal 2013. Proceeds of $0.1 million were received during fiscal 2013 in connection with the exercise of stock options. In May 2012, we received net cash proceeds of $0.2 million in connection with a public offering of shares of our common stock.

2012 versus 2011 – Net cash used by financing activities was $0.5 million in fiscal 2012 compared to $3.2 million in fiscal year 2011. Cash of $0.7 million and $2.0 million was used during fiscal year 2012 and 2011, respectively, for payments on capital lease and financing agreements. In May 2012, we received net cash proceeds of $0.2 million in connection with a public offering of shares of our common stock. Although there was no outstanding balance on the revolving line of credit at January 28, 2012, borrowings and repayments on the revolving line of credit in fiscal 2011 were $16.0 million. There were no borrowings on the revolving line of credit in fiscal 2012. Cash of $6.9 million was used for the repurchase of common stock in fiscal year 2011, while financing cash flows were favorably impacted by an excess tax benefit of $5.6 million related to the common stock repurchased and stock options exercised during fiscal year 2011. Debt issue costs of $0.2 million were paid in fiscal year 2011 in connection with the amendment to our revolving line of credit facility effective June 1, 2011. Proceeds of $0.4 million were received during fiscal year 2011 in connection with the exercise of stock options.

Existing Credit Facilities

Gordmans, Inc. is the borrower under a loan, guaranty and security agreement dated as of February 20, 2009, as amended August 27, 2013, with Wells Fargo Bank, N.A. (successor in merger with Wells Fargo Retail Finance, LLC) as agent and a lender and with certain other lender parties thereto from time to time. Gordmans Stores,

Inc., Gordmans Intermediate Holdings Corp., Gordmans Distribution Company, Inc., Gordmans Management

 

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Company, Inc. and Gordmans LLC are all guarantors under the loan agreement. On August 27, 2013, the Company amended the loan, guaranty and security agreement to increase the borrowing capacity from $60.0 million to $80.0 million, with the ability to increase the maximum available borrowings under the facility to $100.0 million, and remove the covenant that limited the amount of capital expenditures. The description which follows includes the terms of the sixth amendment to the loan agreement, which became effective August 27, 2013.

The revolving line of credit facility is available for working capital and other general corporate purposes and, following the amendment on August 27, 2013, is scheduled to expire on August 27, 2018. At February 1, 2014, we had borrowings outstanding of $7.3 million under our revolving line of credit facility, and there were borrowings on the facility of $62.0 million during fiscal 2013 and repayments of $54.7 million during fiscal 2013. There were no borrowings under the revolving line of credit facility during fiscal year 2012. We had excess availability of $53.8 million and $51.0 million at February 1, 2014 and February 2, 2013, respectively, including letters of credit issued with an aggregate face amount of $0.8 million and $0.2 million at February 1, 2014 and February 2, 2013, respectively.

Interest is payable on borrowings under the revolving line of credit facility monthly at a rate equal to LIBOR or the base rate as selected by management, plus an applicable margin which ranges from 0.50% to 2.50% set quarterly dependent upon the seasonal or non-seasonal period and average net availability under the revolving line of credit facility during the previous quarter.

An unused line fee is payable quarterly in an amount equal to 0.25% of the sum of the average daily unused revolving commitment plus the average daily unused letter of credit commitment. A customary fee is also payable to the administrative agent under the loan agreement on an annual basis.

The availability of the revolving line of credit facility is subject to a borrowing base, which is comprised of eligible credit card receivables and the liquidation value of eligible landed inventory, eligible distribution center inventory and eligible in-transit inventory. Borrowings under the revolving line of credit facility are secured by the Company’s inventory, accounts receivable and all other personal property, except as specifically excluded in the agreement.

Among other provisions, the loan, guaranty and security agreement relating to the Company’s revolving line of credit facility contains customary affirmative and negative covenants, including a negative covenant that restricts the level and form of indebtedness entered into by the Company or its wholly owned subsidiaries. Exceptions to this covenant include borrowings under the $45.0 million senior term loan and indebtedness not to exceed $11,000,000 in any fiscal year and $30,000,000 in the aggregate to finance the acquisition, construction or installation of equipment or fixtures at the Company’s retail store locations, distribution centers or corporate office. The revolving line of credit facility also includes a negative covenant that restricts dividends and other upstream distributions by the Company and its subsidiaries to the extent the Company does not meet minimum excess availability thresholds. Exceptions to this covenant include dividends or other upstream distributions: (i) by subsidiaries of Gordmans, Inc. to Gordmans, Inc. and its other subsidiaries, (ii) that consist of repurchases of stock of employees in an amount not to exceed $500,000 in any fiscal year, (iii) that consist of the payment of taxes on behalf of any employee, officer or director of the Company for vested restricted stock of the Company owned by such employee, officer or director, (iv) to the Company to pay federal, state and local income taxes and franchise taxes solely arising out of the consolidated operations of the Company and its subsidiaries and (v) to the Company to pay certain reasonable directors’ fees and out-of-pocket expenses, reasonable and customary indemnities to directors, officers and employees and other expenses in connection with the ordinary corporate governance, overhead, legal and accounting and maintenance. The loan, guaranty and security agreement also includes a negative covenant that restricts subsidiaries of the Company from making any loans to the Company. As of February 1, 2014, the Company was in compliance with all of its debt covenants under the loan, guaranty and security agreement. Should the Company default on any of its covenants, Wells Fargo Bank, N.A. may make any outstanding amounts on the revolving line of credit facility immediately due and payable.

 

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On August 27, 2013, Gordmans, Inc. entered into a $45.0 million senior term loan with Cerberus Business Finance, LLC. The senior term loan has a maturity date of August 27, 2018, with payments of $0.3 million due on a quarterly basis beginning in October 2014 through October 2015 and payments of $0.4 million due on a quarterly basis beginning January 2016 through the maturity date, with the remaining principal due on the maturity date. The senior term loan contains an early payment provision, exercisable at the Company’s option, pursuant to which the Company may repay all or a portion of the outstanding principal amount at any time, subject to a prepayment penalty applicable during the first two years. The senior term loan carries an interest rate of the prime rate plus 5.25% with a floor of 3.25% or the LIBOR rate plus 7.0% with a floor of 1.5%, as selected by the Company. The senior term loan is secured on a second lien basis by the Company’s inventory, accounts receivable and all other personal property, except as specifically excluded in the agreement. The senior term loan contains certain financial covenants, including a minimum fixed charge coverage ratio, a maximum leverage ratio and limitations on the annual amount of capital expenditures, as well as customary affirmative and negative covenants substantially similar to those under the revolving line of credit facility. As of February 1, 2014, the Company was in compliance with all of its debt covenants under the senior term loan, including the financial covenants, as follows: the fixed charge ratio was 1.38 compared to a minimum required ratio of 1.10, and the leverage ratio was 1.55 compared to a maximum ratio allowed of 1.55. The Company expects to be in compliance with the financial covenants throughout fiscal 2014. Should the Company default on any of its covenants, the lenders may demand that the outstanding balance of the senior term loan be immediately due and payable.

Based on the borrowing rates currently available to the Company for debt with similar terms and the variable interest rate of the senior term loan, which has not changed since the agreement was signed in August 2013, the fair value of the senior term loan approximates its carrying amount of $45.0 million at February 1, 2014. Fair value approximates the carrying value of balances outstanding on the revolving line of credit facility due to both the short-term nature of these borrowings and the variable interest rates of this agreement.

We also entered into two financing arrangements to purchase software during fiscal 2010. During fiscal year 2012, the Company paid off the remaining obligation of $0.2 million outstanding at January 28, 2012 on these arrangements.

Contractual Obligations and Off-Balance-Sheet Arrangements

As noted on the following table, the Company has contractual obligations and commitments as of February 1, 2014 that may affect the financial condition of the Company. However, management believes that there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company’s financial condition, results of operations, or cash flows. Other than the letters of credit set forth in the table below, the Company had no off-balance-sheet arrangements as of February 1, 2014.

The following table summarizes our contractual obligations and commitments as of February 1, 2014:

 

     Payments Due by Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 
     (in 000’s)  

Contractual Obligations:

              

Operating leases (1)(2)

   $ 364,512       $ 51,043       $ 93,377       $ 74,033       $ 146,059   

Senior term loan (3)

     61,527         4,378         10,289         46,860           

Revolving line of credit

     7,250                         7,250           

Letters of credit

     772         772                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 434,061       $ 56,193       $ 103,666       $ 128,143       $ 146,059   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)  

Certain retail store leases contain provisions for additional rent based on varying percentages of sales when sales reach certain thresholds, but are not included in operating lease obligations. Two retail stores with provisions for additional contingent rent exceeded the applicable sales thresholds in fiscal 2013. Contingent rent was $0.1 million in fiscal 2013.

 

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(2)  

Real estate taxes, common area maintenance and insurance are expenses considered additional rent that can vary from year to year, but are not included in operating lease obligations. These expenses represented approximately 37% of lease expense for our retail stores in fiscal 2013.

 

(3)  

Includes $45.0 million of principal payments and $16.5 million of interest payments on the senior term loan.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may cause actual results to differ from reported amounts.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are the most significant to reporting its results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of the Company’s consolidated financial statements. In addition to the policies presented below, there are other items within the Company’s financial statements that require estimation, but are not deemed critical. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in Note A, “Summary of Significant Accounting Policies,” to the consolidated financial statements.

Revenue Recognition

Revenue is recognized at the point-of-sale, net of estimated returns and allowances and exclusive of sales tax. License fees from licensed departments represent a percentage of total footwear and maternity sales due to the licensing of the footwear and maternity businesses to third parties. Footwear and maternity sales under these licensing arrangements are not included in net sales, but are included separately on the statement of operations. Layaway sales are deferred until the final sales transaction has been completed. Sales of gift cards are deferred until they are redeemed for the purchase of our merchandise. The Company reserves for estimated merchandise returns based on historical experience and various other assumptions that we believe to be reasonable. Merchandise returns are often resalable merchandise and are refunded by issuing the same payment tender as the original purchase. A significant increase in merchandise returns could have a materially unfavorable impact on our results of operations. Income from unredeemed gift cards is recorded when the likelihood of redemption becomes remote, which has been determined to be three years from the date of issuance, based on historical redemption patterns. We similarly record deferred revenue on our balance sheet for merchandise credits issued related to guest returns and recognize this revenue upon the redemption of the merchandise credits.

Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market determined on a first-in, first-out (FIFO) basis using the conventional retail inventory method. Under the retail inventory method, the cost value of inventory and gross margins are determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. This method is widely used in the retail industry and involves management estimates with regard to such areas as markdowns and inventory shrinkage. A significant factor involves the recording and timing of permanent markdowns. Under the retail method, permanent markdowns are reflected in inventory valuation when the price of an item is reduced. An inventory shrinkage rate is estimated for interim periods, but is based on a full

 

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physical inventory near the fiscal year end. An inventory obsolescence reserve is estimated based on historical experience and the age of the inventory. A significant increase in the shrinkage rate or inventory obsolescence reserve could have a materially unfavorable impact on our results of operations and on our balance sheet. All inventories are in one class and are classified as finished goods. Inventories in possession of our carrier are included in merchandise inventories as legal title and risk of loss has passed.

Property and Equipment

Property and equipment are recorded at cost and are depreciated for financial reporting purposes using the straight-line method over their estimated useful lives. Leasehold improvements are depreciated over the lesser of their related lease terms or useful life. The Company uses the original lease term, excluding renewal option periods, to determine the estimated useful lives for leases with renewal periods at the Company’s option. Equipment recorded under capital leases are amortized using the straight-line method over the shorter of the related lease terms or useful life of the assets. Any changes in the useful lives of property and equipment resulting from changes in estimates, the condition or utilization of the assets or plans to replace the property and equipment could have a materially unfavorable impact on our results of operations and on our balance sheet.

Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances, such as decisions to close a store, significant changes in the condition or utilization of assets, or significant operating losses, indicate that the carrying amounts of such assets may not be recoverable. Significant judgment is involved in projecting the cash flows of individual stores, which involve a number of factors including historical trends, recent performance and general economic assumptions. If such a review indicates that the carrying amounts of long-lived assets are not recoverable, we reduce the carrying amounts of such assets to their fair values. We have not historically experienced any significant impairment of long-lived assets, although any significant impairment of long-lived assets could have a materially unfavorable impact on our results of operations and balance sheet.

Operating Leases

The Company leases retail stores under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives and minimum rental expenses on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we enter the space and begin the pre-opening merchandising process, approximately seven weeks prior to opening the store to the public.

Tenant improvement assets, as well as the corresponding tenant improvement allowances, are recorded when the amount of new store construction covered by the tenant improvement allowance exceeds the amount attributable to the landlord’s owned asset, generally the building shell. Tenant improvement assets, which generally represent non-structural improvements (i.e. furniture, fixtures and equipment) for which the Company receives reimbursement from the landlord, are depreciated over the initial life of the lease, prior to any lease extensions. For tenant improvement allowances and rent holidays, we record a deferred rent liability on the consolidated balance sheets and amortize the deferred rent over the initial term of the lease as reductions to rent expense on the consolidated statements of operations.

For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, we record minimum rental expenses on a straight-line basis over the terms of the leases on the consolidated statements of operations.

Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. We record a contingent rent liability on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

 

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Self-Insurance

We are self-insured for certain losses related to health, dental, workers’ compensation and general liability insurance, although we maintain stop-loss coverage with third-party insurers to limit liability exposure. Liabilities associated with these losses are estimated, in part, by considering historical claims experience, expected trends and industry factors and other assumptions. Although management believes adequate reserves have been provided for expected liabilities arising from our self-insured obligations, projections of future losses are inherently uncertain, and it is reasonably possible that estimates of these liabilities will change over the near term as circumstances develop, with any significant changes having the potential to unfavorably impact our results of operations.

Share-Based Compensation

We recognize all share-based payments to employees in the consolidated statements of operations based on the grant date fair value of the award for those awards that are expected to vest. Forfeitures of awards are estimated at the time of grant based on historical experience and revised appropriately in subsequent periods if actual forfeitures differ from those estimates. We utilize the Black-Scholes option valuation model to calculate the value of each stock option. Expected volatility was based on historical volatility of the common stock for a peer group of other companies within the retail industry. The expected term of the options represents the period of time until exercise or termination and, for grants beginning in fiscal 2011, is estimated using the simplified method, or the average of the vesting period and the original contractual term, as it is not practical to use our historical experience to estimate the expected term as our shares have not been publicly traded for a significant period of time. In fiscal year 2010, the expected term was based on the historical experience of similar awards. The risk free rate is based on the U.S. Treasury rate at the time of the grants for instruments of a comparable life. The dividend yield was assumed to be 2.0%. Any significant changes in these estimates used to value stock options could have a significant impact on share-based compensation.

Determining the Fair Value of our Common Stock

Prior to our initial public offering, the fair value of our common stock at the date of each option grant was determined by our Board of Directors. Given the absence of an active market for our common stock prior to the initial public offering, our Board of Directors used a market approach for the grants on May 7, 2009 and March 30, 2010. Our Board of Directors considered numerous objective and subjective factors in valuing our common stock in accordance with the guidance in the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , which we refer to as the “AICPA Practice Aid.” These objective and subjective factors included:

 

   

changes to our business plan;

 

   

our operating and financial performance;

 

   

our revenue growth;

 

   

the lack of an active public market for our common stock; and

 

   

the risks inherent in the retail industry.

In determining the fair value of our common stock at March 30, 2010, we used a market approach, as further described below. The significant input assumptions used in the valuation models were based on subjective future expectations combined with management judgment. Assumptions utilized in the market approach are:

 

   

our expected revenue, operating performance, and cash flows and earnings before interest, taxes, depreciation and amortization (EBITDA) for the current and future years, determined as of the valuation date based on our estimates;

 

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multiples of market value compared to the trailing 12 months revenue, determined as of the valuation date, based on a group of comparable public companies we identified; and

 

   

multiples of market value to expected future revenue, determined as of the valuation date, based on the same group of comparable public companies.

In determining the most appropriate comparable companies, we considered several factors, including the other companies’ industry, size and their specific products and services.

May 7, 2009 valuation

In determining our enterprise value at May 7, 2009, we used a market approach. Significant assumptions used in the market approach included the following: a multiple of 4.5 times trailing twelve months’ EBITDA. We also applied a discount for lack of marketability of 30% in arriving at the value of our common stock, which reflected the assessment in May 2009 that an initial public offering was very unlikely. In determining our enterprise value at May 7, 2009, we used the Probability-Weighted Expected Return, or PWER, method as described in the AICPA Practice Aid. We determined that a strategic sale would be 100% likely due to our shareholders historical experience of selling companies after 4 to 6 years of ownership. We determined the probability of an initial public offering at that time to be unlikely, based on management’s and the Board of Directors’ best estimate of the probability at that time. This probability reflects the fact that we had not begun any discussions with underwriters regarding a potential initial public offering and our Board of Directors had not considered an initial public offering as a potential monetization event for our shareholders.

March 30, 2010 valuation

In determining our enterprise value at March 30, 2010, we used a market approach. Significant assumptions used in the market approach included the following: a multiple of 5.5 to 6.0 times trailing twelve months’ EBITDA. We did not apply a discount for lack of marketability in arriving at the value of common stock, which reflected the assessment in March 2010 that an initial public offering was very likely. We determined that an initial public offering would be 95% likely due to our planned timeline to complete an initial public offering by August 2010. We determined the probability of a strategic sale to be 5%. The increase in the March 30, 2010 grants from the May 7, 2009 value of $2.81 per share to $12.99 per share at March 30, 2010 was due primarily to the following factors:

 

   

In early December, our Board of Directors authorized us to retain investment bankers to prepare for an initial public offering. As of March 30, 2010, our Board of Directors increased the probability of completing a successful initial public offering to 95% due to the planned timeline to complete an initial public offering by August 2010.

 

   

The market value of our comparable companies increased, thus increasing the EBITDA multiples we used in our valuation, which increased our aggregate equity value and the value attributable to common stock in our valuation.

 

   

Our trailing twelve months’ EBITDA as a percentage of revenue as of May 7, 2009 was 4.2% compared to 7.5% as of March 30, 2010.

We believe consideration by our Board of Directors of the factors described above was a reasonable approach to estimating the fair value of our common stock for those periods. The assumptions that we have made about the fair value of our common stock represent our Board of Directors’ and management’s best estimate, but they are highly subjective and inherently uncertain. If different assumptions were made, our calculation of the fair value of common stock and the resulting share-based compensation expense could have materially differed from the amounts recognized in our financial statements.

 

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August 10, 2010 valuation

In connection with our initial public offering, all existing options outstanding under the 2009 Stock Option Plan were terminated. In exchange, each participant received the following awards under the 2010 Omnibus Incentive Compensation Plan: (1) 12 months from the date of the option termination agreement, vested restricted stock to replace the intrinsic value of the participant’s vested options under the 2009 Stock Option Plan and (2) unvested restricted stock to replace the intrinsic value of the participant’s unvested options under the 2009 Stock Option Plan, with the same vesting schedule as that of the existing options. The fair value of the restricted stock was estimated based upon the initial public offering price of $11.00 per share on August 5, 2010 and applying a discount of 25.2% for the one year holding period imposed on shares granted in exchange for cancelled options. The termination and exchange of the options did not result in any additional compensation expense.

In addition, each participant received options in an amount determined by the Compensation Committee of the Company’s Board of Directors, with an exercise price equal to the Company’s initial public offering price, subject to time vesting at a rate of 20% per year over five years.

Fiscal Years 2013, 2012 and 2011 valuation

Subsequent to our initial public offering, the fair value of our common stock at the date of each option grant, or the exercise price, was based on the current market value of our stock that is actively traded on the NASDAQ Global Select Market. Forfeitures of awards are estimated at the time of grant based on historical experience and revised appropriately in subsequent periods if actual forfeitures differ from those estimates.

In fiscal year 2013, we declared a special cash dividend of $3.60 per share of common stock. Pursuant to the 2010 Omnibus Incentive Compensation Plan, we modified the exercise price of all outstanding stock options on the dividend date by reducing the exercise price of each non-qualified stock option by $3.60 per share and the incentive stock options by $2.82 per share. In addition, pursuant to the 2010 Omnibus Incentive Compensation Plan, we granted an additional 77,195 shares of incentive stock options to the existing holders in order for the holders to maintain the same equity value in the incentive stock options after the dividend as existed prior to the dividend. The modifications of the options did not result in any additional compensation expense to be recognized over the remaining vesting periods of the stock options.

Income Taxes

We calculate our current and deferred tax provision for the fiscal year based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the applicable year. Adjustments based on filed returns are recorded in the appropriate periods when identified. We file a consolidated federal tax return, generally in the third fiscal quarter of the subsequent fiscal year.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized when we believe our deferred tax assets are not fully realizable. We have considered taxable income in carry-back periods, historical and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and tax planning strategies in determining the need for a valuation allowance against our deferred tax assets. Determination of a valuation allowance for deferred tax assets requires that we make judgments about future matters that are not certain, including projections of future taxable income and evaluating potential tax-planning strategies. To the extent that actual results differ from our current assumptions, the valuation allowance will increase or decrease. In the event we were to determine we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination. Likewise, if we later determine it is more likely than not that the deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.

 

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The income tax laws of jurisdictions in which we operate are complex and subject to different interpretations by the taxpayer and applicable government taxing authorities. Income tax returns filed by us are based on our interpretation of these rules. The amount of income taxes we pay is subject to ongoing audits by federal and state tax authorities, which may result in proposed assessments, including assessments of interest and/or penalties. Our estimate for the potential outcome for any uncertain tax issue is highly subjective and based on our best judgments. Actual results may differ from our current judgments due to a variety of factors, including changes in law, interpretations of law by taxing authorities that differ from our assessments, changes in the jurisdictions in which we operate and results of routine tax examinations. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire. As a result, our effective tax rate may fluctuate.

Related Party Transactions

In connection with the initial public offering, the Company entered into a services agreement with Sun Capital to (1) reimburse Sun Capital for out-of-pocket expenses incurred in providing consulting services to the Company and (2) provide Sun Capital with customary indemnification for any such services. During fiscal years 2013, 2012 and 2011, the Company incurred fees of $64 thousand, $56 thousand and $44 thousand, respectively, to Sun Capital under the terms of the services agreement.

Recent Accounting Standards and Pronouncements

On September 13, 2013, the U.S. Treasury and Internal Revenue Service issued final Tangible Property Regulations (“TPR”) under Internal Revenue Code (“IRC”) Section 162 and IRC Section 263(a). The regulations are not effective until tax years beginning on or after January 1, 2014, or our fiscal year ending January 31, 2015; however, certain portions may require a tax method change on a retroactive basis, thus requiring an IRC Section 481(a) adjustment related to fixed and real asset deferred taxes. The Company is currently evaluating the impact of the regulations concerning amounts paid to acquire, produce, or improve tangible property and recovery of basis upon disposition. The Company is still determining whether or not any changes in an accounting method will be required and, if so, whether they will result in a material impact to the financial statements. At this time, the Company does not anticipate such regulations having a material impact to its financial statements.

In an exposure draft issued in 2013, the Financial Accounting Standards Board (“FASB”), together with the International Accounting Standards Board, has proposed a comprehensive set of changes in generally accepted accounting principles (“GAAP”) for leases . This proposed change in its current exposure draft form would create a new accounting model for us and eliminates the concept of operating leases. The lease accounting model contemplated by the proposed standard is a “right of use” model that assumes that each lease creates an asset (the lessee’s right to use the leased asset) and a liability (the future rental payment obligations) which should be reflected on a lessee’s balance sheet to fairly represent the lease transaction and the lessee’s related financial obligations. Currently, the leases for our stores are accounted for as operating leases, with no related assets and liabilities on our balance sheet. The proposed standard also contains two different approaches for amortizing the right of use asset, and we believe the straight-line approach would be used on our stores. The straight-line approach is similar to how we currently amortize rental payments for our stores on a straight-line basis over the lease term. No date has been determined for the issuance of the final standard. Changes in these accounting rules or their interpretation, or changes in underlying assumptions, estimates or judgments by us could significantly change our reported or expected financial performance. The proposed accounting standard, as currently drafted, would have a material impact on our consolidated balance sheets. This exposure draft is non-cash in nature and would not impact our cash position or our debt covenants, although it could impact how we negotiate leases for our stores in the future.

 

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Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to interest rate risk primarily through borrowings under our revolving line of credit facility and through outstanding borrowings on our senior term loan, both of which bear interest at variable rates.

Borrowings under the revolving line of credit facility bear interest at the base rate plus 0.50% (3.75% at February 1, 2014) with an option to bear interest at the LIBOR interest rate plus 1.75%. Borrowings under the revolving line of credit facility may not exceed the lesser of a calculated borrowing base or $80.0 million. Borrowings of $7.3 million were outstanding under our revolving credit facility at February 1, 2014. Average daily borrowings during fiscal year 2013 were $4.0 million. We performed a sensitivity analysis assuming a hypothetical 100 basis point movement in interest rates applied to the average daily borrowings of the revolving line of credit facility. As of February 1, 2014, the analysis indicated that such a movement would not have a material effect on our consolidated financial position, results of operations or cash flows.

Borrowings under the senior term loan bear interest at the prime rate plus 5.25% with a floor of 3.25% (8.50% at February 1, 2014) with an option to bear interest at the LIBOR interest rate plus 7.0% with a floor of 1.5%. We performed a sensitivity analysis assuming a hypothetical 100 basis point increase in the interest rate applied to the average amount outstanding on the senior term loan (assumes no prepayments of principal), as the interest rate of 8.50% at February 1, 2014 represents the floor. As of February 1, 2014, the analysis indicated that such a movement would result in an increase to interest expense of approximately $0.4 million per year.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 

     Page
Number
 
1.    FINANCIAL STATEMENTS   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     53   

CONSOLIDATED FINANCIAL STATEMENTS:

  

Consolidated Statements of Operations for the years ended February 1, 2014, February 2, 2013 and January  28, 2012

     54   

Consolidated Balance Sheets as of February 1, 2014 and February 2, 2013

     55   

Consolidated Statements of Stockholders’ Equity for the years ended February 1, 2014, February  2, 2013 and January 28, 2012

     56   

Consolidated Statements of Cash Flows for the years ended February 1, 2014, February 2, 2013 and January  28, 2012

     57   

Notes to Consolidated Financial Statements

     58   

2.    FINANCIAL STATEMENT SCHEDULES

  

SCHEDULE I – Condensed Parent Company Only Financial Statements

     76   

SCHEDULE II – Valuation and Qualifying Accounts

     78   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Gordmans Stores, Inc.

We have audited the accompanying consolidated balance sheets of Gordmans Stores, Inc. and subsidiaries (“the Company”) as of February 1, 2014 and February 2, 2013, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended February 1, 2014. Our audits of the consolidated financial statements included the financial statement schedules listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gordmans Stores, Inc. and subsidiaries as of February 1, 2014 and February 2, 2013, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of February 1, 2014, based on the criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 3, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ GRANT THORNTON LLP

Kansas City, Missouri

April 3, 2014

 

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GORDMANS STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in 000’s except share data)

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 

Net sales

   $ 619,559      $ 607,692      $ 551,476   

License fees from leased departments

     7,828        7,361        6,670   

Cost of sales

     (365,463     (350,212     (316,167
  

 

 

   

 

 

   

 

 

 

Gross profit

     261,924        264,841        241,979   

Selling, general and administrative expenses

     (247,131     (226,710     (201,084
  

 

 

   

 

 

   

 

 

 

Income from operations

     14,793        38,131        40,895   

Interest expense, net

     (2,482     (481     (610
  

 

 

   

 

 

   

 

 

 

Income before taxes

     12,311        37,650        40,285   

Income tax expense

     (4,298     (14,119     (15,112
  

 

 

   

 

 

   

 

 

 

Net income

   $ 8,013      $ 23,531      $ 25,173   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.42      $ 1.23      $ 1.32   

Diluted earnings per share

   $ 0.41      $ 1.21      $ 1.30   

Basic weighted average shares outstanding

     19,288,623        19,165,260        19,098,377   

Diluted weighted average shares outstanding

     19,345,308        19,405,218        19,370,290   

See notes to consolidated financial statements.

 

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GORDMANS STORES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in 000’s except share data)

 

     February 1,
2014
    February 2,
2013
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 5,759      $ 40,824   

Accounts receivable

     2,755        2,049   

Landlord receivable

     4,716        8,787   

Income taxes receivable

     3,809        1,300   

Merchandise inventories

     94,711        78,006   

Deferred income taxes

     2,815        2,617   

Prepaid expenses and other current assets

     8,361        6,552   
  

 

 

   

 

 

 

Total current assets

     122,926        140,135   

PROPERTY AND EQUIPMENT, net

     76,393        45,966   

INTANGIBLE ASSETS, net

     1,906        1,992   

OTHER ASSETS, net

     5,762        3,033   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 206,987      $ 191,126   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 42,561      $ 34,211   

Accrued expenses

     28,748        22,789   

Current portion of long-term debt

     7,813        189   
  

 

 

   

 

 

 

Total current liabilities

     79,122        57,189   

NONCURRENT LIABILITIES:

    

Long-term debt, less current portion

     44,437        —     

Deferred rent

     31,591        21,997   

Deferred income taxes

     9,553        9,236   

Other liabilities

     479        316   
  

 

 

   

 

 

 

Total noncurrent liabilities

     86,060        31,549   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock — $0.001 par value, 5,000,000 shares authorized, none issued and outstanding as of February 1, 2014 and February 2, 2013, respectively

     —          —     

Common stock — $0.001 par value, 50,000,000 shares authorized, 19,824,856 issued and 19,420,444 outstanding as of February 1, 2014, 19,804,102 issued and 19,404,322 outstanding as of February 2, 2013

     19        19   

Additional paid-in capital

     53,795        52,461   

Retained earnings (accumulated deficit)

     (12,009     49,908   
  

 

 

   

 

 

 

Total stockholders’ equity

     41,805        102,388   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 206,987      $ 191,126   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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GORDMANS STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in 000’s except share data)

 

     Shares of
Common
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Total  

BALANCE, January 29, 2011

     18,703,086      $ 19      $ 50,830      $ 1,204      $ 52,053   

Share-based compensation expense

     —          —          1,421        —          1,421   

Issuance of restricted stock

     977,547        1        (1     —          —     

Repurchase of common stock

     (399,780     (1     (6,878     —          (6,879

Tax benefit on common stock repurchased/stock options exercised

     —          —          5,573        —          5,573   

Exercise of stock options

     34,811        —          382        —          382   

Net income

     —          —          —          25,173        25,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, January 28, 2012

     19,315,664        19        51,327        26,377        77,723   

Share-based compensation expense

     —          —          956        —          956   

Issuance of common stock pursuant to public offering, net of transaction costs of $457

     40,000        —          178        —          178   

Issuance of restricted stock, net of forfeitures

     48,658        —          —          —          —     

Net income

     —          —          —          23,531        23,531   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, February 2, 2013

     19,404,322        19        52,461        49,908        102,388   

Share-based compensation expense

     —          —          1,250        —          1,250   

Issuance of restricted stock

     8,400        —          —          —          —     

Repurchase of common stock

     (4,632     —          (52     —          (52

Exercise of stock options

     12,354        —          136        —          136   

Dividend declared ($3.60 per share)

     —          —          —          (69,930     (69,930

Net income

     —          —          —          8,013        8,013   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, February 1, 2014

     19,420,444      $ 19      $ 53,795      $ (12,009   $ 41,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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GORDMANS STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in 000’s)

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

     $      8,013      $ 23,531      $ 25,173   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization expense

     9,841        6,978        4,307   

Amortization of deferred financing fees

     499        319        414   

Loss on retirement/sale of property and equipment

     —          48        17   

Deferred income taxes

     119        2,979        6,543   

Share-based compensation expense

     1,250        956        1,421   

Net changes in operating assets and liabilities:

      

Accounts, landlord and income taxes receivable

     856        2,395        (9,640

Merchandise inventories

     (16,705     (12,671     (5,560

Prepaid expenses and other current assets

     (1,809     (1,313     155   

Other assets

     (1,206     (806     (468

Accounts payable

     8,350        (1,823     (799

Deferred rent

     9,594        7,083        8,259   

Accrued expenses and other liabilities

     2,013        (1,171     (2,706
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     20,815        26,505        27,116   
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchase of property and equipment

     (60,133     (34,237     (31,164

Proceeds from sale-leaseback transactions

     23,812        13,197        13,042   

Proceeds from insurance settlement

     —          423        232   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (36,321     (20,617     (17,890
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Dividends paid

     (69,682     —          —     

Borrowings on revolving line of credit

     61,973        —          15,970   

Repayments on revolving line of credit

     (54,723     —          (15,970

Proceeds from senior term loan

     45,000        —          —     

Repurchase of common stock

     (52     —          (6,879

Tax benefit on common stock repurchased and stock options exercised

     —          —          5,573   

Debt issuance costs

     (2,022     —          (213

Payment of long-term debt

     (189     (655     (2,044

Proceeds from the exercise of stock options

     136        —          382   

Proceeds from issuance of common stock pursuant to public offering, net of transaction costs of $457

     —          178        —     
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (19,559     (477     (3,181
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (35,065     5,411        6,045   

CASH AND CASH EQUIVALENTS, Beginning of period

     40,824        35,413        29,368   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

     $      5,759      $ 40,824      $ 35,413   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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GORDMANS STORES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands Except Share and Per Share Amounts)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business – Gordmans Stores, Inc. (the “Company”) operated 93 everyday value price department stores under the trade name “Gordmans” located in 19 states as of February 1, 2014. Gordmans offers a wide assortment of name brand clothing for all ages, accessories (including fragrances), footwear and home fashions for up to 60% off department and specialty store regular prices every day in a fun, easy-to-shop environment.

Basis of Presentation – The consolidated financial statements include the accounts of Gordmans Stores, Inc. and its subsidiaries: Gordmans Intermediate Holding Corp., Gordmans, Inc., Gordmans Management Company, Inc., Gordmans Distribution Company, Inc., and Gordmans LLC. All intercompany transactions and balances have been eliminated in consolidation.

Reporting Year – The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest January 31. All references in these financial statements to fiscal years are to the calendar year in which the fiscal year begins. Fiscal years 2013 and 2011 represent the fifty-two week years ended February 1, 2014 and January 28, 2012, respectively, and fiscal year 2012 represents the fifty-three week year ended February 2, 2013.

Revenue Recognition – Revenue is recognized at the point-of-sale, net of estimated returns and allowances and exclusive of sales tax. License fees from leased departments represent a percentage of total footwear and maternity sales due to the licensing of the footwear and maternity businesses to third parties. Footwear and maternity sales under these licensing arrangements are not included in net sales, but the license fees received from leased departments are included separately on the statement of operations. Layaway sales are deferred until the sale has been paid in full. Sales of gift cards are deferred until they are redeemed for the purchase of the Company’s merchandise. A current liability for unredeemed gift cards is recorded at the time the cards are purchased. The gift card and certificate liability, recorded in accrued expenses, was $3.5 million and $2.9 million at February 1, 2014 and February 2, 2013, respectively. Gift card breakage is recorded as revenue when the likelihood of redemption, based on historical redemption patterns, becomes remote, which has been determined to be three years from the date of issuance. Total gift card breakage was $0.2 million during each of fiscal years 2013 and 2012, respectively, and $0.3 million for fiscal year 2011. The Company records deferred revenue on its consolidated balance sheets for merchandise credits issued which are related to guest returns and recognizes this revenue upon the redemption of the merchandise credits. The Company reserves for estimated merchandise returns primarily based on historical experience and other assumptions believed to be reasonable. The accrued liability for reserve for sales returns was $0.2 million at both February 1, 2014 and February 2, 2013, respectively.

Cash Equivalents – The Company considers all highly liquid assets with an original maturity of three months or less and credit card and debit card receivables from banks, which settle within one to five business days, to be cash equivalents. Cash equivalents include investments in money market mutual funds, U.S. Treasuries, U.S. Agency securities and commercial paper with an original maturity of three months or less.

Accounts Receivable – Accounts receivable primarily consists of non-trade accounts receivable recorded at net realizable value. The Company maintains an allowance for uncollectible accounts that is estimated based on aging and historical experience. The allowance for uncollectible accounts was $0.2 million and $0.1 million at February 1, 2014 and February 2, 2013, respectively.

Landlord Receivable – For certain of the Company’s store operating lease agreements, the Company incurs and pays for the construction invoices directly for both the structural improvements and/or non-structural improvements (i.e. leasehold improvements and furniture, fixtures and equipment) of a new store location or

 

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existing store remodel and is reimbursed by the landlord. When the Company bills the landlord for reimbursement, a landlord receivable is recorded pursuant to the lease agreement which provides for a legal right to receive construction reimbursements from the landlord for tenant improvement allowances either periodically during the construction period or at the completion of construction. Of the total landlord receivable balance, $2.2 million and $8.3 million at February 1, 2014 and February 2, 2013, respectively, relate to amounts due from landlords for construction-related reimbursements on structural improvements (sale-leaseback transactions).

Merchandise Inventories Merchandise inventories are stated at the lower of cost or market determined on a first-in, first-out (FIFO) basis using the conventional retail inventory method. Under the retail inventory method, the cost value of inventory and gross margins are determined by calculating a cost-to-retail ratio and applying it to the retail value of inventory. This method involves management estimates with regard to such things as markdowns and inventory shrinkage. A significant factor involves the recording and timing of permanent markdowns. Under the retail method, permanent markdowns are reflected in inventory valuation when the price of an item is reduced. An inventory shrinkage rate is estimated for interim periods, but is based on a full physical inventory near the fiscal year end. An inventory obsolescence reserve is estimated based on historical experience and the age of the inventory. Inventory reserve for obsolescence was $0.9 million and $0.4 million as of February 1, 2014 and February 2, 2013, respectively. All inventories are in one class and are classified as finished goods. Inventories in possession of the Company’s carrier are included in merchandise inventories as legal title and risk of loss has passed.

Property and Equipment – Property and equipment are recorded at cost and are depreciated for financial reporting purposes using the straight-line method over their estimated useful lives. Leasehold improvements are depreciated over the lesser of their related lease terms or useful life, generally one to ten years. For leases with renewal periods at the Company’s option, the Company uses the original lease term, excluding renewal option periods to determine the estimated useful lives. Furniture, fixtures and equipment are depreciated over a period of three to ten years. Computer software is depreciated over a period of three to ten years. Equipment recorded under capital leases are amortized using the straight-line method over the shorter of the related lease terms or useful life of the assets, generally three to five years.

The Company has determined it is the accounting owner of certain leased store locations during the construction period of such assets pursuant to sale-leaseback accounting. In certain of the Company’s operating lease agreements for leased store locations, the Company is responsible for funding the construction of the structural store assets and the landlord reimburses the Company pursuant to the underlying lease agreement. The landlord maintains title of the real property, or structural assets, during the construction phase of a new store location or existing store remodel. During the construction period, the Company serves as the agent for the construction project and is obligated to fund cost overruns or may benefit if the cost of construction is less than the tenant improvement allowance. When construction payments are made by the Company, a fixed asset is recorded in construction-in-progress within property and equipment. The Company bears substantially all construction period risk for new store construction projects and existing store remodels and the Company pays for the construction costs pursuant to a contractual arrangement that includes the right of reimbursement from the landlord. Accordingly, the Company reports the costs of construction as a purchase of property and equipment in “Purchase of property and equipment” and the reimbursements from landlords as “Proceeds from sale-leaseback transactions” under cash flows from investing activities in the consolidated statements of cash flows. When construction is complete, the Company records a sale-leaseback transaction which represents the title transfer of the structural assets that are sold back to the landlord pursuant to sale-leaseback accounting. No gain or loss associated with the sale of such assets is recognized as the Company receives reimbursement from the landlord for the construction costs and leases are structured as operating leases. The sale-leaseback transaction is disclosed in “Supplemental Cash Flow Information” as a non-cash operating, investing and financing activity. Such sale-leaseback transactions do not involve any future commitments, obligations, provisions or circumstances that require or result in the Company’s continuing involvement and the Company is no longer deemed the accounting owner of the landlord-owned assets once the store construction is completed and the sale-leaseback transaction is recorded.

 

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Long-Lived Assets – The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. If such a review indicates that the carrying amounts of long-lived assets are not recoverable, the Company reduces the carrying amounts of such assets to their fair values. No impairment of long-lived assets was recorded during fiscal years 2013, 2012 and 2011.

Intangible Assets – Intangible assets with indefinite lives are not amortized. Instead, indefinite-lived intangible assets are subject to periodic (at least annual) tests for impairment. At February 1, 2014 and February 2, 2013, the Company completed the impairment test and determined that no impairment existed.

Finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. No impairment was recorded during the fiscal years 2013, 2012 or 2011.

Deferred Financing Fees – Deferred financing fees related to a senior term loan are recorded in “Other assets, net” on the consolidated balance sheets and amortized using the effective interest method over the term of the related financing agreement. Deferred financing fees related to the revolving line of credit facility are recorded in “Other assets, net” on the consolidated balance sheets and amortized using the straight-line method over the term of the related financing agreement. The amortization of deferred financing fees is included in “Interest expense, net” in the consolidated statements of operations.

Operating Leases – The Company leases retail stores, its distribution centers and corporate headquarters under operating leases. Most lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses and/or contingent rent provisions. For purposes of recognizing incentives and recognizing rent expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is generally when the Company enters the space and begins the pre-opening merchandising process, approximately seven weeks prior to opening the store to the public.

Tenant improvement assets, as well as the corresponding tenant improvement allowances, are recorded when the amount of new store construction covered by the tenant improvement allowance exceeds the amount attributable to the landlord’s owned asset, generally the building shell. Tenant improvement assets, which generally represent non-structural improvements (i.e. furniture, fixtures and equipment) for which the Company receives reimbursement from the landlord, are depreciated over the initial life of the lease, prior to any lease extensions. For tenant improvement assets, as well as rent holidays, the Company records a corresponding deferred rent liability in “Deferred Rent” on the consolidated balance sheets and amortizes the deferred rent over the initial term of the lease as a reduction to rent expense on the consolidated statements of operations.

The Company’s store leases generally contain escalating rent payments over the initial term of the lease, however the Company accounts for the lease expense on a straight-line basis over that period. The straight-line rent expense is calculated at the inception of the lease, which entails recording a monthly liability for the difference between rent paid to the landlord and straight-line rent expense as calculated at the beginning of the lease, excluding renewal options. Over the life of the lease, this deferred rent liability is amortized as rent paid to the landlord eventually exceeds the calculated straight-line amount.

Certain leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in “Accrued Expenses” on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

Loyalty Program – The Company maintains a guest loyalty program, gRewards, in which guests earn points toward certificates for qualifying purchases. Rewards for guests were previously restricted to holders of the Company’s private label credit card. In the second quarter of fiscal 2013, the Company launched its guest loyalty program to all stores. The guest loyalty program is available to all guests, and guests who are both enrolled in the

 

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guest loyalty program and hold a private label credit card earn more reward points. Upon reaching specified point values, guests are issued a reward, which they can redeem for purchases in the stores. Rewards earned must be redeemed within 60 days from the date of issuance. The Company accrues for the expected costs related to the redemption of reward certificates. To calculate this expense, the Company estimates gross margin rates and makes assumptions related to card holder redemption rates, which are both based on historical experience. The liability for the loyalty program is included in “Accrued Expenses” on the consolidated balance sheets.

Self-Insurance – The Company is self-insured for certain losses related to health, dental, workers’ compensation and general liability insurance, although the Company maintains stop-loss coverage with third-party insurers to limit liability exposure. Self-insurance exposure is limited for health claims up to $0.2 million per individual per year with no lifetime claim limit, is limited on workers’ compensation claims up to $0.3 million per individual claim and is limited on general liability claims up to $25 thousand per claim. The liabilities are based upon estimates which are reviewed regularly for adequacy based on the most current information available, including historical claim payments, expected trends and industry factors and other assumptions. The Company has estimated self-insurance claims liabilities of $0.9 million and $0.8 million at February 1, 2014 and February 2, 2013, respectively.

Share-Based Compensation – The Company recognized all share-based payments to associates in the consolidated statements of operations based on the grant date fair value of the award for those awards that are expected to vest. Forfeitures of awards are estimated at the time of grant and revised appropriately in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation expense is recognized in “Selling, general and administrative expenses” in the consolidated statements of operations using the straight-line amortization method over the requisite service period which is the vesting period. The Company utilizes the Black-Scholes option valuation model to calculate the valuation of each stock option. Expected volatility is based on historical volatility of the common stock for a peer group of other companies within the retail industry, as the Company’s shares have not been publicly traded for a significant period of time. Beginning in fiscal 2011, for stock option grants, the expected term of the options represents the period of time until exercise or termination and is estimated using the simplified method, or the average of the vesting period and the original contractual term, as it is not practical for the Company to use its historical experience to estimate the expected term because the Company’s shares have not been publicly traded for a significant period of time. The expected term of stock options issued in and prior to fiscal 2010 is based on the historical experience of similar awards. The risk free rate is based on the U.S. Treasury rate at the time of the grants for instruments of a comparable life.

Cost of Sales – Cost of sales includes the direct cost of purchased merchandise, inventory shrinkage, inventory write-downs and inbound freight to our distribution center.

Selling, General and Administrative Expenses – Selling, general and administrative expenses include payroll and other expenses related to operations at the Company’s corporate office, store expenses, occupancy costs, certain distribution and warehousing costs (aggregating to $23.2 million, $21.6 million and $18.8 million for fiscal years 2013, 2012 and 2011, respectively), depreciation and amortization, store pre-opening costs and advertising expense.

Pre-opening Expenses – Expenses associated with the opening of new stores and the relocation of stores, as well as the opening of the second distribution center set to occur in mid-2014, are expensed as incurred. Store pre-opening costs were $3.9 million, $3.7 million and $2.9 million for fiscal years 2013, 2012 and 2011, respectively.

Advertising Expenses – Advertising expenses are expensed as incurred and were $18.9 million, $17.6 million and $15.5 million for fiscal years 2013, 2012 and 2011, respectively.

Income Taxes – Income taxes are accounted for under an asset and liability approach that includes the recognition of deferred tax assets and liabilities for the expected future consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The provision for income taxes represents income taxes paid, taxes payable or receivable for the current year plus the change in deferred taxes

 

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during the year. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are adjusted for changes in tax rates and laws, as appropriate. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes, and (b) federal and state tax credits and state net operating loss carryforwards.

A valuation allowance is provided to reduce deferred tax assets to the amount that is more likely than not to be realized when management cannot conclude that it is more likely than not that a tax benefit will be realized. In determining the need for a valuation allowance, the Company considers many factors, including taxable income in carry-back periods, historical and forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and tax planning strategies.

Uncertain tax positions are evaluated in a two-step process. The Company first determines whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

The evaluation of uncertain tax positions requires numerous estimates based on available information. The Company considers many factors when evaluating and estimating their tax positions and tax benefits. Interest expense and penalties, if any, are accrued on the unrecognized tax benefits and reflected in “Interest expense, net” and “Selling, general and administrative expenses”, respectively.

Earnings Per Share – Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period, which includes vested restricted stock. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period and incremental shares that may be issued in future periods related to outstanding stock awards, including non-vested restricted stock, if dilutive. When calculating incremental shares related to outstanding stock awards, the Company applies the treasury stock method. The treasury stock method assumes that proceeds, consisting of the amount the employee must pay on exercise, compensation cost attributed to future services and not yet recognized, and excess tax benefits that would be credited to additional paid-in capital on exercise of the stock options, are used to repurchase outstanding shares at the average market price for the period. The treasury stock method is applied only to share grants for which the effect is dilutive.

Financial Instruments – Based on the borrowing rates currently available to the Company for debt with similar terms and the variable interest rate of the senior term loan, the fair value of the senior term loan approximates its carrying amount as the interest rate has not changed since the agreement was signed in August 2013. Fair value approximates the carrying value for balances outstanding on the revolving line of credit facility with Wells Fargo Bank, N.A. (successor in merger with Wells Fargo Retail Finance, LLC) and PNC Bank, due to the variable interest rates of these arrangements and the short-term nature of these borrowings. Based on the borrowing rates currently available to the Company for debt with similar terms, the fair value of long-term debt at February 1, 2014 and February 2, 2013 approximates its carrying amount of $52.3 million and $0 at February 1, 2014 and February 2, 2013, respectively. For all other financial instruments including cash and cash equivalents, receivables, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of those instruments.

Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents and receivables. The Company places cash in highly rated financial institutions, in money market accounts and other highly liquid investments, and these amounts are sometimes in excess of the insured amount. Cash equivalents in excess of insured amounts were $3.9 million and $38.9 million at February 1, 2014 and February 2, 2013, respectively. Concentrations of credit risk on receivables are limited due to the nature of the receivable balances.

 

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Use of Accounting Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions are subject to inherent uncertainties, which may cause actual results to differ from reported amounts.

Comprehensive Income – There are no comprehensive income components applicable which cause comprehensive income to differ from net income for all periods presented in the consolidated financial statements.

Segment Reporting – The Company defines an operating segment on the same basis that it uses to evaluate performance internally. The Company has determined that its Chief Executive Officer is the Chief Operating Decision Maker. The Company has one reportable segment. The Company’s operations include activities related to retail stores throughout 19 states.

The following information reflects the percentage of revenues by major product category as a percentage of net sales:

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 

Apparel

     56.1     55.2     54.3

Home Fashions

     27.9        28.0        28.0   

Accessories (including fragrances)

     16.0        16.8        17.7   
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

Public Offering – On May 8, 2012, the Company’s shelf registration statement on Form S-3 (File No. 333-180605) was declared effective, pursuant to which the Company may offer up to 200,000 shares of its own common stock and Sun Gordmans, LP and H.I.G. Sun Partners, Inc. (the “selling stockholders”) can sell up to 13,345,943 of their shares of the Company’s common stock. On May 25, 2012, the Company issued 40,000 shares of its common stock and the selling stockholders sold 3,460,061 of their shares of the Company’s common stock. The public offering closed on May 30, 2012. Proceeds from the offering to the Company in fiscal 2012 of approximately $0.6 million were primarily used to pay approximately $0.5 million of expenses related to the offering.

Adoption of New Accounting Pronouncement – Effective February 3, 2013, the Company adopted new guidance on intangible asset impairment testing that simplifies how any entity tests indefinite-lived intangible assets for impairment. This new guidance allows an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. This qualitative assessment serves as the basis for determining whether further impairment testing is necessary. This guidance was effective for the annual impairment test for indefinite-lived intangible assets for the fiscal year ended February 1, 2014, which resulted in no impairment, and did not impact the Company’s consolidated balance sheets, results of operations or cash flows.

Recently Issued Accounting Pronouncements – In September 2013, the U.S. Treasury and Internal Revenue Service issued final Tangible Property Regulations (“TPR”) under Internal Revenue Code (“IRC”) Section 162 and IRC Section 263(a). The TPR impacts the accounting for amounts paid to acquire, produce or improve tangible property and recovery of basis upon disposition. Certain portions of the TPR may require a tax method change on a retroactive basis, thus requiring an IRC Section 481(a) adjustment related to fixed and real asset deferred taxes. The regulations are not effective until tax years beginning on or after January 1, 2014, or the fiscal year ending January 31, 2015 for the Company. The Company is currently evaluating the impact of the

 

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TPR and whether or not any changes in an accounting method will be required and, if so, whether they will result in a material impact to the financial statements. The Company does not expect this guidance to significantly impact the Company’s consolidated financial statements.

Recently Proposed Accounting Pronouncements – In an exposure draft issued in 2013, the Financial Accounting Standards Board (“FASB”), together with the International Accounting Standards Board, has proposed a comprehensive set of changes in generally accepted accounting principles (“GAAP”) for leases . This proposed change in its current exposure draft form would create a new accounting model for both lessees and lessors and eliminates the concept of operating leases. The lease accounting model contemplated by the proposed standard is a “right of use” model that assumes that each lease creates an asset (the lessee’s right to use the leased asset) and a liability (the future rental payment obligations) which should be reflected on a lessee’s balance sheet to fairly represent the lease transaction and the lessee’s related financial obligations. Currently, the leases for the Company’s stores are accounted for as operating leases, with no related assets and liabilities on the Company’s balance sheet. The proposed standard also contains two different approaches for amortizing the right of use asset, with the straight-line approach used on assets which include the Company’s store leases. The straight-line approach in the proposed standard is similar to how the Company currently amortizes rental payments for its stores over the lease term in the consolidated statements of operations. No date has been determined for the issuance of the final standard. The proposed accounting standard, as currently drafted, would have a material impact on the Company’s consolidated financial statements.

Supplemental Cash Flow Information – The following table sets forth non-cash investing and financing activities and other cash flow information:

 

     Year
Ended
February 1,
2014
     Year
Ended
February 2,
2013
     Year
Ended
January 28,
2012
 

Non-cash investing and financing activities:

        

Purchases of property and equipment in accrued expenses at the end of the period

   $ 5,923       $ 2,062       $ 4,280   

Sales of property and equipment pursuant to sale-leaseback accounting

     10,352         14,825         13,042   

Dividends declared but not yet paid

     248         —           —     

Other cash flow information:

        

Cash paid for interest

     1,991         161         397   

Cash paid for income taxes, net

     6,672         9,634         4,426   

Sales of property and equipment pursuant to sale-leaseback accounting represents the amount of structural assets sold to the landlord at the completion of construction for which the Company was deemed the owner during the construction period, pursuant to sale-leaseback accounting, and for which no cash was received upon transfer of ownership.

B. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following:

 

     February 1,
2014
     February 2,
2013
 

Prepaid rent – real estate

   $ 3,929       $ 3,480   

Other prepaid expenses and current assets

     4,432         3,072   
  

 

 

    

 

 

 
   $ 8,361       $ 6,552   
  

 

 

    

 

 

 

 

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C. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

 

     February 1,
2014
    February 2,
2013
 

Leasehold improvements

     $    9,317      $ 6,716   

Furniture, fixtures and equipment

     47,876        35,526   

Computer software

     17,398        15,075   

Capitalized leases

     1,740        1,740   

Construction in progress

     25,209        2,331   
  

 

 

   

 

 

 
     101,540        61,388   

Less accumulated depreciation and amortization

     (25,147     (15,422
  

 

 

   

 

 

 
     $    76,393      $ 45,966   
  

 

 

   

 

 

 

Depreciation and amortization expense on property and equipment was $9.8 million, $6.9 million and $4.2 million for fiscal years 2013, 2012 and 2011, respectively, and is included in “Selling, general and administrative expenses” in the consolidated statements of operations. Accumulated amortization on capital leases was $1.4 million and $1.1 million as of February 1, 2014 and February 2, 2013, respectively.

D. INTANGIBLE ASSETS

Intangible assets consist of the following:

 

            February 1, 2014     February 2, 2013  
     Useful
Life
     Gross
Amount
     Accumulated
Amortization
    Gross
Amount
     Accumulated
Amortization
 

Amortized intangible assets:

             

Footwear license fee agreement

     6.3 years       $ 522       $ (439   $ 522       $ (357

Maternity license fee agreement

     2.4 years         24         (24     24         (24

Favorable lease rights, net

     6.0 years         24         (21     24         (17
     

 

 

    

 

 

   

 

 

    

 

 

 
        570         (484     570         (398

Intangible assets not subject to amortization:

             

Trade name

        1,820         N/A        1,820         N/A   
     

 

 

    

 

 

   

 

 

    

 

 

 

Total

      $ 2,390       $ (484   $ 2,390       $ (398
     

 

 

    

 

 

   

 

 

    

 

 

 

Amortization expense on intangible assets was $0.1 million in each of fiscal years 2013, 2012 and 2011, respectively. Remaining amortization expense on intangible assets is $0.1 million in fiscal year 2014.

E. ACCRUED EXPENSES

Accrued expenses consist of the following:

 

     February 1,
2014
     February 2,
2013
 

Store, distribution center and corporate accruals

   $ 17,418       $ 11,460   

Associate compensation

     3,972         3,911   

Gift card and certificate liability

     3,462         2,944   

Accrued real estate taxes

     2,127         2,214   

Other taxes accrued

     1,719         2,202   

Interest

     50         58   
  

 

 

    

 

 

 
   $ 28,748       $ 22,789   
  

 

 

    

 

 

 

 

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F. DEFERRED RENT

The Company records a deferred rent liability to account for tenant improvement allowances and to record rent on a straight-line basis for operating leases. Deferred rent consists of the following:

 

     February 1,
2014
     February 2,
2013
 

Tenant improvement allowances

   $ 23,483       $ 15,727   

Straight-line rent expense

     8,108         6,270   
  

 

 

    

 

 

 
   $ 31,591       $ 21,997   
  

 

 

    

 

 

 

G. DEBT OBLIGATIONS

Revolving Line of Credit Facility – The Company has an $80.0 million revolving line of credit facility dated February 20, 2009, as amended effective August 27, 2013, with Wells Fargo Bank, N.A. (successor in merger with Wells Fargo Retail Finance, LLC) and PNC Bank (“WF LOC”). The credit facility expires on August 27, 2018. The amendment to the WF LOC amends certain terms of the revolving line of credit facility, including an increase in the maximum available borrowings from $60.0 million to $80.0 million, a 0.25% reduction in the interest rate for base rate advances and LIBOR rate advances both during seasonal and non-seasonal periods, a decrease in the unused line fee from 0.375% to 0.25%, and the removal of the limitation on annual capital expenditures. The WF LOC allows the Company to increase the maximum available borrowings under the facility to $100.0 million. Deferred financing fees of $0.2 million related to the amendment of the WF LOC were capitalized and are included in other assets, net and are being amortized on a straight-line basis over the remaining term of the revolving line of credit facility. As a result of the amendment of the WF LOC, deferred financing fees of $0.1 million were written off to interest expense, net in the consolidated statements of operations related to a former member of the line-of-credit syndicate who is no longer a member of the line-of-credit syndicate as a result of the amendment. The Company had $7.3 million of borrowings outstanding under the WF LOC as of February 1, 2014, which are included in the current portion of long-term debt at February 1, 2014 as the Company intends to repay the outstanding borrowings within the next twelve months. The Company had no borrowings outstanding under the WF LOC as of February 2, 2013. Average borrowings during fiscal year 2013 and 2012 were $4.0 million and $0, respectively.

Borrowings under this facility bear interest at various rates based on the excess availability and time of year, with two rate options at the discretion of management as follows: (1) For base rate advances, borrowings bear interest at the prime rate plus 0.75% during the non-seasonal period and the prime rate plus 1.50% during the seasonal period. When excess availability is $40.0 million or greater, borrowings for base rate advances bear interest at the prime rate plus 0.50% during the non-seasonal period and the prime rate plus 1.25% during the seasonal period; (2) For LIBOR rate advances, borrowings bear interest at the LIBOR rate plus 1.75% during the non-seasonal period and the LIBOR rate plus 2.50% during the seasonal period. When excess availability is $40.0 million or greater, borrowings for LIBOR rate advances bear interest at the LIBOR rate plus 1.50% during the non-seasonal period and the LIBOR rate plus 2.25% during the seasonal period. Borrowings available under the WF LOC may not exceed the borrowing base (consisting of specified percentages of credit card receivables and eligible inventory, less applicable reserves). The Company must maintain minimum excess availability equal to at least 10% of the borrowing base. The Company had $53.8 million and $51.0 million available to borrow at February 1, 2014 and February 2, 2013, respectively. Borrowings under this facility bore an interest rate of 3.75% under the base rate option at February 1, 2014 and would have borne an interest rate of 4.00% under the base rate option at February 2, 2013. The Company had outstanding letters of credit included in the borrowing base totaling approximately $0.8 million and $0.2 million as of February 1, 2014 and February 2, 2013, respectively.

An unused line fee is payable quarterly in an amount equal to 0.25% of the sum of the average daily unused revolving commitment plus the average daily unused letter of credit commitment. A customary fee is also payable to the administrative agent under the facility on an annual basis.

 

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Borrowings are secured by the Company’s inventory, accounts receivable and all other personal property, except as specifically excluded in the agreement.

Among other provisions, the loan, guaranty and security agreement relating to the Company’s revolving line of credit facility contains customary affirmative and negative covenants, including a negative covenant that restricts the level and form of indebtedness entered into by the Company or its wholly owned subsidiaries. Exceptions to this covenant include borrowings under the $45.0 million Loan, Guaranty and Security Agreement by and among the Borrower, each of the other credit parties signatory thereto, and lenders party thereto and Cerberus Business Finance, LLC, as the administrative agent for the lenders (the “senior term loan”), and indebtedness not to exceed $11,000,000 in any fiscal year and $30,000,000 in the aggregate to finance the acquisition, construction or installation of equipment or fixtures at the Company’s retail store locations, distribution centers or corporate office. The revolving line of credit facility also includes a negative covenant that restricts dividends and other upstream distributions by the Company and its subsidiaries to the extent the Company does not meet minimum excess availability thresholds. Exceptions to this covenant include dividends or other upstream distributions: (i) by subsidiaries of Gordmans, Inc. to Gordmans, Inc. and its other subsidiaries, (ii) that consist of repurchases of stock of employees in an amount not to exceed $500,000 in any fiscal year, (iii) that consist of the payment of taxes on behalf of any employee, officer or director of the Company for vested restricted stock of the Company owned by such employee, officer or director, (iv) to the Company to pay federal, state and local income taxes and franchise taxes solely arising out of the consolidated operations of the Company and its subsidiaries and (v) to the Company to pay certain reasonable directors’ fees and out-of-pocket expenses, reasonable and customary indemnities to directors, officers and employees and other expenses in connection with ordinary corporate governance, overhead, legal and accounting and maintenance. The loan, guaranty and security agreement also includes a negative covenant that restricts subsidiaries of the Company from making any loans to the Company. Should the Company default on any of its covenants, Wells Fargo Bank, N.A. may make any outstanding amounts on the WF LOC immediately due and payable. As of February 1, 2014, the Company was in compliance with all of its debt covenants.

Senior Term Loan – On August 26, 2013, the Company declared a special cash dividend of $3.60 per share, or $69.9 million, of which $69.7 million was paid in the third quarter of fiscal 2013 and the remaining $0.2 million will be paid as non-vested restricted stock eligible to receive the dividend becomes vested. To finance a portion of the special cash dividend, Gordmans, Inc. (the “Borrower”), a wholly owned subsidiary of the Company, entered into a $45.0 million senior term loan on August 27, 2013. The senior term loan has a maturity date of August 27, 2018, with payments of $0.3 million due on a quarterly basis beginning in October 2014 through October 2015 and payments of $0.4 million due on a quarterly basis beginning in January 2016 through the maturity date, with the remaining principal due on the maturity date. The Company may repay at any time all or a portion of the outstanding principal amount, subject to a prepayment premium equal to 2% in the first year and 1% in the second year (there is no prepayment premium after the second year). The senior term loan carries an interest rate equal to the prime rate plus 5.25% with a floor of 3.25% or the LIBOR rate plus 7.0% with a floor of 1.5%, as selected by the Company. The interest rate at February 1, 2014 was 8.5%. Deferred financing fees of $1.9 million related to the senior term loan were capitalized and are included in other assets, net and are being amortized over the five year term of the senior term loan using the effective interest method.

The senior term loan is secured on a second lien basis by the Company’s inventory, accounts receivable and all other personal property, except as specifically excluded in the agreement.

The senior term loan contains customary affirmative and negative covenants, including a negative covenant that restricts the level and form of indebtedness entered into by the Company or its wholly owned subsidiaries. Exceptions to this covenant include indebtedness not to exceed $7,500,000 at any time to finance the acquisition of fixed assets, including capital lease obligations, borrowings under the revolving line of credit facility and other indebtedness not to exceed $15,000,000 in any fiscal year and $30,000,000 in the aggregate to finance the acquisition, construction or installation of equipment or fixtures at the Company’s retail store locations, distribution centers or corporate office. The senior term loan also includes a negative covenant that restricts dividends and other upstream distributions by the Company and its subsidiaries. The exceptions to this covenant

 

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are substantially similar to the exceptions under the revolving line of credit facility. The senior term loan also contains financial covenants requiring the Company to maintain compliance with a minimum fixed charge coverage ratio and a maximum leverage ratio, as well as limitations on the annual amount of capital expenditures. Should the Company default on any of its covenants, the lenders may demand that the outstanding balance of the senior term loan be immediately due and payable. As of February 1, 2014, the Company was in compliance with all of its debt covenants.

Long-term Debt – Long-term debt consists of the following:

 

     February 1,
2014
    February 2,
2013
 

Revolving line of credit facility

   $ 7,250      $   

Senior term loan

     45,000          

Capital lease obligations

           189   
  

 

 

   

 

 

 

Total long-term debt

     52,250        189   

Less current portion of long-term debt

     (7,813     (189
  

 

 

   

 

 

 

Long-term debt, less current portion

   $ 44,437      $   
  

 

 

   

 

 

 

At February 1, 2014, annual maturities of long-term debt during the next five fiscal years and thereafter were as follows:

 

2014

   $ 563   

2015

     1,265   

2016

     1,688   

2017

     1,688   

2018

     47,046   
  

 

 

 

Total long-term debt

   $ 52,250   
  

 

 

 

During 2010, the Company entered into two financing arrangements to purchase software. During fiscal year 2012, the Company paid off the remaining obligation of $0.2 million outstanding at January 28, 2012. Payments of $0.2 million, including fixed interest at 2.6%, were due quarterly through March 2012 and payments of $41 thousand, including fixed interest at 4.9%, were due quarterly through April 2012.

H. LEASES

The Company has entered into short and long term operating lease agreements. These leases relate to retail store locations, the distribution centers and the corporate headquarters. The leases expire on various dates through the year 2029 with most of the leases containing renewal options. Leases for retail store locations typically have base lease terms of 10 years with one or more renewal periods, usually for five years. Certain retail store leases contain provisions for additional rent based on varying percentages of net sales.

Total rental expense related to all operating leases (including related party leases and those with terms less than one year) was $48.8 million, $43.7 million and $39.4 million in fiscal years 2013, 2012 and 2011, respectively. Included in total rental expense in each of the fiscal years 2013, 2012 and 2011 is contingent rent of $0.1 million. Contingent rent is calculated as a percent of sales over a specified amount, which varies by lease. Future minimum lease payments, by fiscal year, under operating leases as of February 1, 2014 are as follows:

 

2014

   $ 51,043   

2015

     50,343   

2016

     43,034   

2017

     39,595   

2018

     34,438   

After 2018

     146,059   
  

 

 

 

Total minimum lease payments

   $ 364,512   
  

 

 

 

 

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I. INCOME TAXES

The provision for income taxes consists of the following:

 

     Year
Ended
February 1,
2014
     Year
Ended
February 2,
2013
     Year
Ended
January 28,
2012
 

Current:

        

Federal

   $ 3,678       $ 10,172       $ 7,653   

State

     501         968         916   
  

 

 

    

 

 

    

 

 

 
     4,179         11,140         8,569   

Deferred:

        

Federal

     93         2,456         5,639   

State

     26         523         904   
  

 

 

    

 

 

    

 

 

 
     119         2,979         6,543   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,298       $ 14,119       $ 15,112   
  

 

 

    

 

 

    

 

 

 

The tax effects of significant items comprising the Company’s deferred income tax assets and liabilities as of February 1, 2014 and February 2, 2013 are as follows:

 

     February 1,
2014
    February 2,
2013
 

Deferred income tax assets:

    

Leases

     $     3,081      $ 2,383   

Merchandise inventories

     1,594        1,330   

Accrued compensation

     1,534        1,195   

Prepaid expenses and other assets

     344        371   

Gift cards and certificates

     163        226   

Accrued expenses

     278        197   

State net operating loss carryforwards

     49        71   
  

 

 

   

 

 

 
     7,043        5,773   
  

 

 

   

 

 

 

Deferred income tax liabilities:

    

Property and equipment

     (7,190     (6,601

Software

     (5,867     (5,034

Intangibles

     (724     (757
  

 

 

   

 

 

 
     (13,781     (12,392
  

 

 

   

 

 

 

Net deferred income tax liability

     (6,738     (6,619

Less: Current deferred income tax asset

     (2,815     (2,617
  

 

 

   

 

 

 

Long-term deferred income tax liability

     $    (9,553   $ (9,236
  

 

 

   

 

 

 

 

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The reconciliation of income tax computed at the U.S. statutory rate to income tax expense is as follows:

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 

U.S. Federal statutory tax rate

     35.0     35.0     35.0

State income tax expense, net of federal tax effect

     3.0        2.7        2.9   

Nondeductible expenses

     0.7        0.3        0.2   

Federal tax credits

     (2.4     (0.8     (0.5

Effect of graduated federal tax rates

     (0.8     —          —     

Other

     (0.6     0.3        (0.1
  

 

 

   

 

 

   

 

 

 

Total income tax expense

     34.9     37.5     37.5
  

 

 

   

 

 

   

 

 

 

As of February 1, 2014, the Company had state net operating loss carryovers of $1.6 million. These carryovers will expire by 2031 if not utilized by then. The tax effect of these carryovers is recorded as a deferred income tax asset in the consolidated balance sheets.

The Company recognized income tax benefits related to the deductibility of share-based compensation of $5.6 million in fiscal 2011, which was recorded as an increase in additional paid-in capital and a reduction of income taxes payable. $5.5 million relates to restricted stock issued and $0.1 million relates to stock options exercised, both in fiscal 2011.

The Company determined no unrecognized tax benefits for the fiscal years ended February 1, 2014 and February 2, 2013, including interest and penalties, were necessary to be recorded in the consolidated financial statements. As such, the Company does not expect there to be an impact on the effective tax rate.

The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions in which a statute of limitations period exists. After the statute period expires, the tax authorities may no longer assess additional income taxes for the expired period. Additionally, once the statute period expires, the Company is no longer eligible to file claims for refund for any taxes that may have been overpaid.

As of February 1, 2014, four tax periods are subject to audit by the United States Internal Revenue Service (IRS), covering the tax years ended February 1, 2014; February 2, 2013; January 28, 2012; and January 29, 2011. Various state jurisdiction tax years remain open to examination as well.

The Company believes there will be no change in its reserves for certain unrecognized tax benefits during the next 12 months.

J. EMPLOYEE BENEFITS

The Company offers a 401(k) savings plan that allows associates to defer a percentage of their income by making pretax contributions to the savings plan. The Company provided a matching contribution equal to 50% of associate deferrals up to a maximum of 4% of associate compensation for fiscal years 2012 and 2011. The Company suspended matching contributions to the plan in fiscal year 2013. The Company’s matching contribution equal to 50% of associate deferrals up to a maximum of 4% of associate compensation has been reinstated for fiscal year 2014. During both fiscal years 2012 and 2011, the Company contributed $0.4 million to the plan. The Company’s contributions vest immediately.

In June 2010, the Company authorized the termination of the Executive Deferred Compensation Plan (the “Plan”), which covered the Company’s executive officers. Unfunded existing Plan liabilities of $0.7 million were paid to participants during fiscal year 2011.

 

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K. EARNINGS PER SHARE

The following is a reconciliation of the outstanding shares utilized in the computation of earnings per common share:

 

     Year
Ended
February 1,
2014
     Year
Ended
February 2,
2013
     Year
Ended
January 28,
2012
 

Basic weighted average shares outstanding

     19,288,623         19,165,260         19,098,377   

Dilutive effect of non-vested stock and stock options

     56,685         239,958         271,913   
  

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     19,345,308         19,405,218         19,370,290   
  

 

 

    

 

 

    

 

 

 

The anti-dilutive effect of 307,887, 126,229 and 86,116 stock options has been excluded from diluted weighted average shares outstanding for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012, respectively.

L. SHARE-BASED COMPENSATION

The Gordmans Stores, Inc. 2010 Omnibus Incentive Compensation Plan (the “2010 Plan”) provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents and other share-based awards. Directors, officers and other associates of the Company and its subsidiaries, as well as others performing consulting or advisory services, are eligible for grants under the 2010 Plan. An aggregate of 2,573,086 shares of the Company’s common stock are available under the 2010 Plan, subject to adjustments for stock splits and other actions affecting the Company’s common stock. The exercise price of an option granted under the 2010 Plan will not be less than 100% of the fair value of a share of the Company’s common stock on the date of grant, provided the exercise price of an incentive stock option granted to a person holding greater than 10% of the Company’s voting power may not be less than 110% of such fair value on such date. The term of each option may not exceed ten years or, in the case of an incentive stock option granted to a ten percent stockholder, five years. Under the 2010 Plan, in the event of a dividend or other distribution other than regular cash dividends, recapitalization, or other transactions or events affecting the Company’s common stock, the Company must equitably adjust the number of shares of common stock subject to outstanding stock options and restricted stock and must adjust the exercise price of any outstanding stock options. During fiscal years 2013 and 2012, 147,495 and 343,600 options, respectively, were granted pursuant to the 2010 Plan.

In connection with the Company’s initial public offering, all existing options outstanding (1,285,570 shares issuable at a weighted average exercise price of $2.66 per share) under the 2009 Stock Option Plan were terminated. In exchange, each participant received the following awards under the 2010 Plan: (1) 12 months from the date of the option termination agreement, vested restricted stock to replace the intrinsic value of the participant’s vested options under the 2009 Stock Option Plan and (2) unvested restricted stock to replace the intrinsic value of the participant’s unvested options under the 2009 Stock Option Plan, with a similar vesting schedule as that of the existing options. The termination and exchange of options did not result in any additional compensation expense. In addition, each participant received options in an amount determined by the Compensation Committee of the Company’s Board of Directors, with an exercise price equal to the Company’s initial public offering price, subject to time vesting at a rate of 20% per year over five years. In exchange for 1,285,570 stock options outstanding at the time of the initial public offering, 977,547 shares of restricted stock were awarded on August 11, 2011, which was 12 months from the date of the option termination agreements. Similar to other shares of common stock outstanding, restricted stock, upon vesting, entitles the holder to vote the shares and to receive any dividends or dividend equivalents paid by the Company.

On August 26, 2013, the Company declared a special cash dividend of $69.9 million, or $3.60 per share of common stock, of which $69.7 million was paid during fiscal 2013. The remaining $0.2 million will be paid as the non-vested restricted stock eligible to receive the dividend becomes vested. Pursuant to the anti-dilution

 

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provisions of the 2010 Plan, the Company modified the exercise price of all outstanding stock options on the dividend date by reducing the exercise price of each non-qualified stock option by the dividend per share of $3.60 and the incentive stock options by $2.82 per share. In addition, pursuant to the 2010 Plan, the Company granted 77,195 shares of additional incentive stock options on September 24, 2013 to the existing holders of the incentive stock options to maintain the same intrinsic value of the awards both before and after the dividend payment, with the additional incentive stock options adopting the same vesting schedule as the original incentive stock options awarded. The Company compared the fair value of the original stock options immediately before the modifications to the fair value of the modified stock options immediately after the modifications to the awards and, as a result, no additional share-based compensation expense is required to be recognized over the remaining vesting periods of the stock options. There were no modifications to the restricted stock awards outstanding on the dividend date.

As of February 1, 2014, there were 500,830 shares of common stock available for future grants under the 2010 Plan.

A summary of restricted stock activity during fiscal year 2013 is set forth in the table below:

 

     Shares of
Restricted
Stock
    Weighted
Average
Grant Date
Fair Value
 

Non-vested, February 2, 2013

     168,262      $ 8.58   

Granted

     8,400        12.81   

Repurchased

     (4,632     11.24   

Vested

     (102,972     4.08   
  

 

 

   

Non-vested, February 1, 2014

     69,058      $ 15.63   
  

 

 

   

Restricted stock vests at varying rates of 25% per year over four years and 20% per year over five years as applicable. Unrecognized compensation expense on the restricted stock was $0.9 million at February 1, 2014, which is expected to be recognized over a period of 1.5 years. The total fair value of shares vested during the fiscal years ended February 1, 2014 and February 2, 2013 was $1.4 million and $1.9 million, respectively. The Company repurchased 4,632 and 399,780 shares from participants on September 30, 2013 and August 11, 2011, respectively, pursuant to the restricted stock agreements at a fair value of $11.24 per share and $17.21 per share, respectively. Such repurchases of restricted stock are reflected as financing cash outflows in the consolidated statement of cash flows for fiscal years 2013 and 2011, respectively. The Company recorded an excess tax benefit of $5.5 million related to the restricted stock repurchased from participants in fiscal year 2011, which is reflected as a financing cash inflow in the consolidated statement of cash flows for fiscal year 2011.

 

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A summary of stock option activity during fiscal year 2013 is set forth in the table below and reflects the exercise price reductions noted above for all stock options resulting from the special cash dividend paid in September 2013:

 

     Number     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(in Years)
     Aggregate
Intrinsic
Value (1)
 

Outstanding, February 2, 2013

     947,592      $ 12.07         

Granted

     147,495        8.62         

Exercised

     (12,354     11.00         

Forfeited

     (92,380     13.14         
  

 

 

         

Outstanding, February 1, 2014

     990,353        11.50         7.6       $  —     

Exercisable, February 1, 2014

     380,300        10.72         7.2         —     

Vested or expected to vest at February 1, 2014

     968,663        11.48         7.6         —     

 

(1) The aggregate intrinsic value for stock options is the difference between the current market value of the Company’s stock as of February 1, 2014 and the option strike price. The stock price at February 1, 2014 was $7.22, which was below the weighted average exercise price for options outstanding, exercisable, and vested or expected to vest at February 1, 2014.

The stock options outstanding and exercisable as of February 1, 2014 were in the following exercise price ranges (exercise prices reflect the reductions noted above for all stock options resulting from the special cash dividend paid in September 2013):

 

Options Outstanding

     Options Exercisable  

Exercise Price

   Number      Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(in Years)
     Number      Weighted
Average
Exercise
Price
 

$8.18 to $9.21

     411,293       $ 8.39         7.1         203,580       $ 8.28   

$10.38 to $11.02

     22,000         10.58         8.9         3,380         10.66   

$13.04 to $16.11

     557,060         13.83         8.0         173,340         13.59   
  

 

 

          

 

 

    
     990,353         11.50         7.6         380,300         10.72   
  

 

 

          

 

 

    

The following table summarizes information regarding non-vested outstanding stock options for fiscal year 2013 (exercise prices reflect the reductions noted above for all stock options resulting from the special cash dividend paid in September 2013):

 

     Number
of Stock
Options
    Weighted
Average Fair
Value at Grant
Date
 

Non-vested at February 2, 2013

     801,967      $ 12.07   

Granted

     147,495        8.62   

Vested

     (199,941     10.72   

Forfeited

     (92,380     13.14   
  

 

 

   

Non-vested at February 1, 2014

     657,141        11.56   
  

 

 

   

 

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The Company received $0.1 million and $0.4 million of proceeds from the exercise of stock options in fiscal years 2013 and 2011, respectively, and realized a $0.1 million tax benefit related to the stock options exercised in fiscal 2011, all of which are reflected as financing cash inflows in the consolidated statement of cash flows for fiscal years 2013 and 2011. The aggregate intrinsic value of stock options exercised in fiscal years 2013 and 2011 were $35 thousand and $0.3 million, respectively. There were no stock options exercised in fiscal 2012. Options forfeited are immediately available for grant under the 2010 Plan. There were no changes in the estimated forfeiture rate in fiscal years 2013 or 2012. Additional share-based compensation expense of $0.2 million was recorded in fiscal 2011 resulting from changes in the forfeiture rate.

The Company used the Black-Scholes option valuation model to estimate fair value of the options. This model required an estimate of the volatility of the Company’s share price; however, because the Company’s shares or options have not been publicly traded for a period equal to the option term, it determined that it was not practical for it to estimate the expected volatility of its share price. Thus, the Company accounted for equity share options based on a value calculated using the historical volatility of an appropriate industry sector index instead of the expected volatility of the entity’s share price. The historical volatility was calculated using comparisons to peers in the Company’s market sector, which was chosen due to the proximity of size and industry to the Company over the expected term of the option.

In determining the expense to be recorded for options, the significant assumptions utilized in applying the Black-Scholes option valuation model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the assumption in the model. Beginning in 2011, for stock option grants, the expected term of the option awards is estimated using the simplified method, or the average of the vesting period and the original contractual term, as it is not practical for the Company to use its historical experience to estimate the expected term because the Company’s shares have not been publicly traded for a significant period of time. In fiscal year 2010, the expected term of the option awards was based on historical experience of similar awards.

The weighted average assumptions used by the Company in applying the Black-Scholes valuation model for option grants during fiscal years 2013, 2012 and 2011 are illustrated in the following table:

 

     Year
Ended
February 1,
2014
  Year
Ended
February 2,
2013
  Year
Ended
January 28,
2012

Risk-free interest rate

   1.25 to 2.00%   1.00 to 1.50%   1.50 to 2.00%

Dividend yield

   2.0%   2.0%   2.0%

Expected volatility

   35.0% - 36.0%   34.0%   34.0%

Expected life (years)

   6.25   6.25 to 6.50   6.50

Weighted average fair value of options granted

   $3.43   $5.01   $4.67

Stock options have ten-year contractual terms and vest at varying rates of either 20% per year over five years or 25% per year over four years as applicable. None of the stock options outstanding at February 1, 2014 were subject to performance or market-based vesting conditions. As of February 1, 2014, the unrecognized compensation expense on stock options, net of expected forfeitures, was $2.1 million, which is expected to be recognized over a weighted average period of 2.4 years. The total fair value of options vested during the fiscal years ended February 1, 2014, February 2, 2013, and January 28, 2012 was $1.4 million, $1.6 million and $0.7 million, respectively.

Share-based compensation expense for fiscal years 2013, 2012 and 2011 was $1.3 million, $1.0 million and $1.4 million, respectively.

 

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M. RELATED PARTY DISCLOSURE

In connection with the initial public offering, the Company entered into a services agreement with Sun Capital Partners Management V, LLC (“Sun Capital Management”), an affiliate of Sun Capital, to (1) reimburse Sun Capital Management for out-of-pocket expenses incurred in providing consulting services to the Company and (2) provide Sun Capital Management with customary indemnification for any such services. During fiscal years 2013, 2012 and 2011, the Company incurred fees of $64 thousand, $56 thousand and $44 thousand, respectively, to Sun Capital Management under the terms of the services agreement.

N. COMMITMENTS AND CONTINGENCIES

From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this report, the Company was not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material effect on the Company.

O. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth unaudited selected financial information in each quarter for fiscal 2013 and 2012, respectively:

 

     Fiscal 2013  
     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

Net sales

   $ 131,434       $ 136,769       $ 151,333       $ 200,023   

Gross profit

     58,991         59,220         67,038         76,675   

Net income

     3,248         934         1,099         2,732   

Basic earnings per share (1)

     0.17         0.05         0.06         0.14   

Diluted earnings per share (1)

     0.17         0.05         0.06         0.14   
     Fiscal 2012  
     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

Net sales

   $ 133,922       $ 128,238       $ 143,072       $ 202,460   

Gross profit

     63,491         58,693         64,273         78,384   

Net income

     8,050         3,545         3,995         7,941   

Basic earnings per share (1)

     0.42         0.19         0.21         0.41   

Diluted earnings per share (1)

     0.41         0.18         0.21         0.41   

 

(1) Basic and diluted shares outstanding are computed independently for each quarter presented, and therefore, may not sum to the totals for the year.

Revenue is typically higher in the third and fourth quarters than in the first and second quarters due to seasonal back-to-school and holiday shopping patterns. The Company’s quarterly operating results may fluctuate significantly as a result of these events and a variety of other factors. Operating results for any quarter are not necessarily indicative of results for a full year. Fiscal 2013 is a 52-week fiscal year, while fiscal 2012 is a 53-week fiscal year. As a result, the fourth quarter of fiscal 2013 includes 13 weeks compared to 14 weeks in the fourth quarter of fiscal 2012.

 

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GORDMANS STORES, INC. AND SUBSIDIARIES

Schedule I – Condensed Parent Company Only Financial Statements

The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries of the Company exceed 25% of the consolidated net assets of the Company. The ability of the Company’s operating subsidiaries to pay dividends, loan funds to the parent company and make other upstream distributions may be restricted due to the terms of the subsidiaries’ revolving line of credit facility and senior term loan.

The condensed parent company financial statements have been prepared using the same accounting principles and policies described in the notes to the consolidated financial statements, with the only exception being that the parent company accounts for its subsidiaries using the equity method. Refer to the consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.

GORDMANS STORES, INC.

CONDENSED PARENT COMPANY BALANCE SHEETS

(in 000’s except share data)

 

     February 1,
2014
    February 2,
2013
 

ASSETS

    

Investment in subsidiary

   $ 41,805      $ 102,388   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 41,805      $ 102,388   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Preferred stock — $0.001 par value; 5,000,000 shares authorized, none issued and outstanding as of February 1, 2014 and February 2, 2013, respectively

   $ —       $ —    

Common stock —$0.001 par value; 50,000,000 shares authorized, 19,824,856 issued and 19,420,444 outstanding as of February 1, 2014, 19,804,102 issued and 19,404,322 outstanding as of February 2, 2013

     19        19   

Additional paid-in capital

     53,795        52,461   

Retained earnings (accumulated deficit)

     (12,009     49,908   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $   41,805      $ 102,388   
  

 

 

   

 

 

 

GORDMANS STORES, INC.

CONDENSED PARENT COMPANY STATEMENTS OF OPERATIONS

(in 000’s)

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 

Equity in earnings of subsidiary

   $ 9,263      $ 24,487      $ 26,594   

Share-based compensation expense

     (1,250     (956     (1,421
  

 

 

   

 

 

   

 

 

 

Net income

   $ 8,013      $ 23,531      $ 25,173   
  

 

 

   

 

 

   

 

 

 

 

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GORDMANS STORES, INC.

CONDENSED PARENT COMPANY STATEMENTS OF CASH FLOWS

(in 000’s)

 

     Year
Ended
February 1,
2014
    Year
Ended
February 2,
2013
    Year
Ended
January 28,
2012
 

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 8,013      $ 23,531      $ 25,173   

Adjustment to reconcile net income to net cash provided by / (used in) operating activities:

      

Share-based compensation expense

     1,250        956        1,421   

Equity in earnings of subsidiary

     (9,263