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4-Traders Homepage  >  Equities  >  Nasdaq  >  Bon-Ton Stores Inc    BONT

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BON TON STORES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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12/07/2016 | 07:51pm CET

For purposes of the following discussion, references to the "third quarter of 2016" and the "third quarter of 2015" are to the 13 weeks ended October 29, 2016 and October 31, 2015, respectively. References to "2016" and "2015" are to the 39 weeks ended October 29, 2016 and October 31, 2015, respectively. References to "fiscal 2016" are to the 52-week period ending January 28, 2017; references to "fiscal 2015" are to the 52-week period ended January 30, 2016. References to the "Company," "we," "us," and "our" refer to The Bon-Ton Stores, Inc. and its subsidiaries.



Overview



General


The Company, a Pennsylvania corporation, is one of the largest regional department store operators in the United States, offering a broad assortment of brand-name fashion apparel and accessories for women, men and children. Our merchandise offerings also include cosmetics, home furnishings and other goods. We currently operate 267 stores, including nine furniture galleries and five clearance centers, in 26 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner's, Boston Store, Carson's, Elder-Beerman, Herberger's and Younkers nameplates, encompassing a total of approximately 25 million square feet.

We operate in the department store segment of the U.S. retail industry, a highly competitive environment. The department store industry continues to evolve in response to competitive retail formats-mass merchandisers, national chain retailers, specialty retailers and online retailers-and the expansion of mobile technology and social media.

Performance Summary and Fiscal 2016 Guidance

During the third quarter of 2016, we made progress on a number of our strategic initiatives:

† Delivered sales gains in several key categories and brands as well as double digit growth in our omnichannel business and accelerated growth on our mobile site;

† Maintained careful inventory controls, as we reduced inventory by 4.9% as compared to the third quarter of 2015, with fewer markdowns;

† Increased our gross margin rate by 167 basis points as a result of improved merchandise margin and reduced delivery costs; and



†          Continued to make progress on our cost savings initiatives.


Comparable store sales decreased 4.9% in the third quarter of 2016, primarily as a result of the impact that unseasonably warm weather had on cold weather-related sales and continued soft mall traffic trends. However, our omnichannel business, which reflects sales via our website, mobile site, and our Buy Online Pick Up In-Store initiatives, grew significantly, and we expect that it will continue to deliver strong performance. We also launched our Love Style Rewards loyalty program, which provides our non-private label credit card customers the opportunity to pay "their" way and earn loyalty rewards. In addition, we rolled out a new and enhanced mobile site, expanded new brands and categories and opened furniture departments in additional stores.

On August 15, 2016, we completed a closing of a new $150 million revolving commitment that replaced the existing $100 million A-1 Tranche of our Second Amended and Restated Loan and Security Agreement (the "Second Amended Revolving Credit Facility") and increased the total commitments under the facility to $880 million (see "Liquidity and Capital Resources," for further discussion).

On November 29, 2016, we redeemed all of our outstanding 10.625% Second Lien Senior Secured Notes due July 15, 2017 (see "Liquidity and Capital Resources," for further discussion).




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As a result of unseasonably warm weather in our regions and prevailing soft mall traffic trends, on November 17, 2016, we revised our fiscal 2016 guidance. We expect loss per diluted share in a range of $2.04 to $2.54.

Assumptions reflected in our full-year guidance include the following:



†          A comparable store sales decrease ranging from 2.5% to 3.5%;

† A gross margin rate ranging from a 80- to 90-basis-point increase from the fiscal 2015 rate of 34.7%;

† Selling, general and administrative ("SG&A") expense between $885 million and $888 million, or an expense rate ranging from a 50- to 70-basis-point increase from the fiscal 2015 rate of 33.3%;

† Capital expenditures not to exceed $40 million, net of external contributions; and

† An estimated 20 million weighted average diluted shares outstanding.



Results of Operations


The following table summarizes changes in selected operating indicators of the Company, illustrating the relationship of various income and expense items to net sales for the respective periods presented (components may not add or subtract to totals due to rounding):



                                            THIRTEEN                    THIRTY-NINE
                                          WEEKS ENDED                   WEEKS ENDED
                                   October 29,    October 31,    October 29,    October 31,
                                      2016           2015           2016           2015
Net sales                                100.0 %        100.0 %        100.0 %        100.0 %
Other income                               2.9            2.8            3.0            2.8
                                         102.9          102.8          103.0          102.8
Costs and expenses:
Costs of merchandise sold                 64.9           66.6           64.9           65.4
Selling, general and
administrative                            36.2           35.3           37.3           36.5
Gain on insurance recovery                   -              -              -              -
Depreciation and amortization              3.8            3.7            4.1            3.9
Amortization of lease-related
interests                                  0.2            0.2            0.2            0.2
Impairment charges                           -              -              -              -
Loss from operations                      (2.2 )         (2.9 )         (3.5 )         (3.2 )
Interest expense, net                      3.1            2.5            2.8            2.6
Loss on extinguishment of debt             0.1              -              -            0.3
Loss before income taxes                  (5.4 )         (5.5 )         (6.3 )         (6.0 )
Income tax benefit                           -              -              -              -
Net loss                                  (5.4 )%        (5.5 )%        (6.3 )%        (6.0 )%



Third Quarter of 2016 Compared with Third Quarter of 2015

Net sales: Net sales in the third quarter of 2016 were $589.9 million, compared with $623.4 million in the third quarter of 2015, reflecting a decrease of 5.4%. Comparable store sales decreased 4.9% in the period due to continued soft mall traffic trends and unseasonably warm weather.

The best performing merchandise categories in the third quarter of 2016 were Furniture (included in Home), Dresses and Active Sportswear (both included in Women's Apparel). Sales in Furniture increased through the expansion of merchandise to additional doors and sales increases in mattresses. Dresses benefited primarily from a large shift in product assortment in key items and brands. Active Sportswear benefited from sales increases in key items and brands.




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Merchandise categories that were challenged in the period included Coats and Petites' Sportswear (both included in Women's Apparel) and Accessories. Coats were adversely impacted by slow sales in certain merchandise categories and unseasonable weather patterns. Petites' Sportswear was adversely impacted by unfavorable sales in certain brands. Accessories were adversely affected by warmer temperatures and slow sales in certain brands. We are directing inventory investment to brands that are performing better.

Other income: Other income, which includes income from revenues received under our credit card program agreement, miscellaneous revenue departments and gift and merchandise return card breakage, was $17.3 million in the third quarter of 2016 as compared with $17.5 million in the third quarter of 2015.

Costs and expenses: Gross margin in the third quarter of 2016 decreased $1.3 million to $207.1 million as compared with $208.4 million in the comparable prior year period, primarily due to the decreased sales volume in the current period, partially offset by improved merchandise margin rate and favorable delivery costs. Gross margin as a percentage of net sales increased 167 basis points to 35.1% in the third quarter of 2016 from 33.4% in the comparable prior year period, primarily due to reduced markdowns.

SG&A expense in the third quarter of 2016 decreased $6.4 million to $213.8 million as compared with $220.2 million in the third quarter of 2015. This reduction was largely due to a benefit from expense control measures, primarily related to non-customer facing expenses, partially offset by higher medical claims as well as severance costs and consulting expenses associated with our cost reduction initiative. The current period expense rate, 36.2% of net sales, increased 92 basis points from that of the prior year period as a result of the decreased sales volume in the period.

Depreciation and amortization expense and amortization of lease-related interests decreased $0.5 million to $23.3 million in the third quarter of 2016 from $23.8 million in the third quarter of 2015.

Interest expense, net: Net interest expense was $18.2 million in the third quarter of 2016 as compared with $15.8 million in the third quarter of 2015. The $2.4 million increase primarily reflects an increased weighted average interest rate, partially offset by lower debt levels.

Loss on extinguishment of debt: In the third quarter of 2016, we recorded charges totaling $0.7 million due to the write-off of certain deferred financing fees in connection with the Second Amended Revolving Credit Facility amendment.

Income tax benefit: The effective income tax rate in the third quarter in each of 2016 and 2015 largely reflects our valuation allowance position against all net deferred tax assets. The $0.2 million income tax benefit in the third quarter in each of 2016 and 2015 includes a $0.6 million benefit from the loss on continuing operations which was partially offset by the recognition of deferred tax liabilities associated with indefinite-lived assets.



2016 Compared with 2015


Net sales: Net sales in 2016 were $1,723.3 million, compared with $1,789.8 million in 2015, reflecting a decrease of 3.7%. Comparable store sales decreased 3.3% in the period due to continued soft mall traffic trends and unseasonable weather.

The best performing merchandise categories in 2016 were Furniture (included in Home), Men's Sportswear (included in Men's Apparel) and Active Sportswear (included in Women's Apparel). Sales in Furniture increased through the expansion of merchandise to additional doors and sales increases in mattresses. Men's Sportswear benefited from increased inventory investment in key items and growth in our activewear business. Active Sportswear benefited from sales increases in key items and brands.

Merchandise categories that were challenged in the period included Coats and Better Sportswear (both included in Women's Apparel) and Accessories. Coats were adversely impacted by slow sales in certain merchandise categories and unseasonable weather patterns. Better Sportswear was adversely impacted by unfavorable sales in certain brands. Accessories were adversely affected by warmer temperatures and slow sales in certain brands.




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Other income: Other income, which includes income from revenues received under our credit card program agreement, miscellaneous revenue departments and gift and merchandise return card breakage, was $51.0 million in 2016 as compared with $49.4 million in 2015. The increase primarily reflects increased revenues from our proprietary credit card operations.

Costs and expenses: Gross margin in 2016 decreased $14.2 million to $605.2 million as compared with $619.5 million in 2015, primarily due to the decreased sales volume in 2016, partially offset by improved merchandise margin rate and favorable delivery costs. Gross margin as a percentage of net sales increased 51 basis points to 35.1% in 2016 from 34.6% in 2015, due to reduced markdowns.

SG&A expense in 2016 decreased $12.2 million to $641.9 million as compared with $654.1 million in 2015. This reduction was largely driven by expense control measures, primarily related to non-customer facing expenses, partially offset by higher medical claims as well as severance costs and consulting expenses associated with our cost reduction initiative. The current period expense rate, 37.3% of net sales, increased 70 basis points from that of the prior year as a result of the decreased sales volume in the period.

Gain on insurance recovery of $0.7 million was due to an insurance settlement in the second quarter of 2015, a residual of claims associated with one store that experienced fire damage in the fourth quarter of fiscal 2014.

Depreciation and amortization expense and amortization of lease-related interests increased $1.3 million to $73.5 million in 2016 from $72.2 million in 2015.

Interest expense, net: Net interest expense was $48.4 million in 2016 as compared with $46.2 million in 2015. The increase primarily reflects higher average debt levels.

Loss on extinguishment of debt: In 2016, we recorded charges totaling $0.7 million due to the write-off of certain deferred financing fees in connection with the Second Amended Revolving Credit Facility amendment. In 2015, we recorded charges totaling $4.9 million due to the early termination of one of our mortgage facilities. As a result of the prepayment, we paid an early termination fee of $4.7 million. Additionally, unamortized deferred financing fees were accelerated on the date of termination.

Income tax benefit: The effective income tax rate in each of 2016 and 2015 largely reflects our valuation allowance position against all net deferred tax assets. The $0.4 million income tax benefit in 2016 includes a $1.8 million benefit from the loss on continuing operations which was partially offset by the recognition of deferred tax liabilities associated with indefinite-lived assets. The $0.6 million income tax benefit in 2015 includes a $1.9 million benefit from the loss on continuing operations which was partially offset by the recognition of deferred tax liabilities associated with indefinite-lived assets.



Seasonality


Our business, like that of most retailers, is subject to seasonal fluctuations, with the major portion of sales and income realized during the second half of each fiscal year, which includes the holiday season. Due to the fixed nature of certain costs, SG&A expense is typically higher as a percentage of net sales during the first half of each fiscal year. We typically finance working capital increases in the second half of each fiscal year through additional borrowings under our $880.0 million Second Amended Revolving Credit Facility that expires on December 12, 2018 (see "Liquidity and Capital Resources," below, for further discussion).

Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.

Liquidity and Capital Resources

At October 29, 2016, we had $7.0 million in cash and cash equivalents and $302.7 million available under our Second Amended Revolving Credit Facility (before taking into account the minimum borrowing




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availability covenant under such facility). Excess availability was $250.2 million as of the comparable prior year period.

On August 15, 2016, The Bon-Ton Department Stores, Inc. and certain subsidiaries as borrowers and certain other subsidiaries as obligors entered into a Fourth Amendment (the "Fourth Amendment") to the Second Amended Revolving Credit Facility which, among other changes, increased lender commitments under the A-1 Tranche of the Second Amended Revolving Credit Facility to $150.0 million from the previous $100.0 million. This amendment brings total commitments under the Second Amended Revolving Credit Facility to $880.0 million ($730.0 million under Tranche A and $150.0 million under Tranche A-1).

Borrowings under the Second Amended Revolving Credit Facility bear interest at either (1) Adjusted LIBOR (equal to the London Interbank Offered Rate for an interest period selected by the borrowers) plus an applicable margin or (2) a base rate (based on the highest of (a) the Federal Funds Rate plus 0.5%, (b) the Bank of America prime rate, and (c) Adjusted LIBOR based on an interest period of one month plus 1.0%) plus the applicable margin. Following the Fourth Amendment, the applicable margins in respect of the Tranche A-1 facility are 9.5% for LIBOR loans and 8.5% for base rate loans; there is also a 1% LIBOR floor utilized when determining Adjusted LIBOR for that Tranche. The applicable margins in respect of the Tranche A facility continue to be based upon the excess availability under the Second Amended Revolving Credit Facility.

A financial covenant contained in the Second Amended Revolving Credit Facility requires that the minimum excess availability be an amount greater than or equal to the greater of (1) 10% of the lesser of: (a) the aggregate commitments at such time and (b) the aggregate borrowing base at such time, and (2) by virtue of the Fourth Amendment, $75.0 million. In addition, the Fourth Amendment requires that, if at any time on or after January 29, 2017 and for so long as excess availability under the Second Amended Revolving Credit Facility is less than 20% of the lesser of (a) the aggregate commitments at such time and (b) the aggregate borrowing base at such time, the fixed charge coverage ratio shall be at least 1.00 to 1.00.

The proceeds of the loans under the Tranche A-1 facility were used to repay existing Tranche A-1 loans and a portion of Tranche A loans as well as to pay fees and expenses incurred in connection with the Fourth Amendment.

On November 29, 2016, we redeemed all of our outstanding 10.625% Second Lien Senior Secured Notes due July 15, 2017, with borrowings under our Second Amended Revolving Credit Facility. These notes, which had a balance of $57.3 million, were redeemed at a redemption price of 100%, plus accrued and unpaid interest.

Typically, cash flows from operations are impacted by the effect on sales of (1) consumer confidence, (2) weather in the geographic markets served by the Company, (3) general economic conditions and (4) competitive conditions existing in the retail industry. A downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate our business. While the current economic uncertainty affects our assessment of short-term liquidity, we consider our resources (including, but not limited to, cash flows from operations supplemented by borrowings under the Second Amended Revolving Credit Facility) adequate to satisfy our cash needs for at least the next 12 months.

Our primary sources of working capital are cash flows from operations and borrowings under our Second Amended Revolving Credit Facility, which provides for up to $880.0 million in borrowings (limited by amounts available pursuant to a borrowing base calculation and the minimum borrowing availability covenant). Our business follows a seasonal pattern; working capital fluctuates with seasonal variations, reaching its highest level in October or November to fund the purchase of merchandise inventories prior to the holiday season. The seasonality of our business historically provides greatest cash flow from operations during the holiday season, with fiscal fourth quarter net sales generating the strongest profits of our fiscal year. As holiday sales significantly reduce inventory levels, this reduction, combined with net income, historically provides us with strong cash flow from operations at the end of our fiscal year.




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Cash (used in) provided by our operating, investing and financing activities is
summarized as follows:



                                 THIRTY-NINE
                                 WEEKS ENDED
                         October 29,     October 31,
(Dollars in millions)       2016            2015

Operating activities    $       (81.0 ) $      (140.7 )
Investing activities            (43.9 )          16.3
Financing activities            125.0           137.3



Net cash used in operating activities was $81.0 million and $140.7 million in 2016 and 2015, respectively. The decrease in cash outflow primarily reflects a $56.0 million favorable change in cash flow from working capital. The improvement in cash flow from working capital was largely due to favorable fluctuations of $25.3 million in cash flows from merchandise inventories, $12.4 million in cash flows from accrued payroll and benefits and accrued expenses and $9.5 million in cash flows from accounts payable.

Net cash used in investing activities was $43.9 million in 2016 and net cash provided by investing activities was $16.3 million in 2015. In 2015, the inflow of cash included $84.0 million of proceeds from the sale of assets associated with a sale-leaseback transaction. Capital expenditures totaled $43.9 million and $70.5 million in 2016 and 2015, respectively, reflecting a planned decrease in capital expenditures. These expenditures do not reflect reductions for external contributions (primarily leasehold improvement and fixture allowances received from landlords or vendors) of $20.9 million and $8.6 million in 2016 and 2015, respectively. We anticipate that our fiscal 2016 capital expenditures will not exceed $63.1 million (excluding external contributions of $23.1 million, reducing anticipated net capital investments to $40.0 million).

Net cash provided by financing activities was $125.0 million and $137.3 million in 2016 and 2015, respectively. The reduced net financing requirements were primarily due to the favorable change in working capital partially offset by planned capital expenditures.

Aside from planned capital expenditures, the Company's primary cash requirements will be to service debt and finance working capital increases during peak selling seasons.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts and disclosure of contingent assets and liabilities. There have been no significant changes in the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended January 30, 2016.

Recently Adopted and Issued Accounting Standards

Recently adopted and issued accounting standards are discussed in Note 1 to the Consolidated Financial Statements.



Forward-Looking Statements


Certain information included in this report (as well as other communications made or to be made by the Company) and other materials filed or to be filed by the Company with the Securities and Exchange Commission contain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which may be identified by words or phrases such as "may," "could," "would," "will," "plan," "expect," "believe," "anticipate," "estimate," "project," "intend," "look forward to" or other similar expressions, including the Company's fiscal 2016 guidance and statements regarding enhancements to our online and mobile platforms, anticipated expense savings, future cash flows, inventory management initiatives and projected capital expenditures, involve important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed




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in any forward-looking statements made by or on behalf of the Company. Factors that could cause such differences include, but are not limited to, risks related to retail businesses generally; a significant and prolonged deterioration of general economic conditions which could negatively impact the Company, including the potential write-down of the current valuation of intangible assets and deferred taxes; risks related to the Company's proprietary credit card program; potential increases in pension obligations; consumer spending patterns, debt levels, and the availability and cost of consumer credit; additional competition from existing and new competitors or changes in the competitive environment; inflation; deflation; changes in the costs of fuel and other energy and transportation costs; weather conditions that could negatively impact sales; uncertainties associated with expanding or remodeling existing stores; the ability to attract and retain qualified management; the dependence upon relationships with vendors and their factors; a data security breach or system failure; the ability to reduce or control SG&A expenses, including initiatives to reduce expenses and improve efficiency; operational disruptions; unsuccessful marketing initiatives; the ability to expand capacity and improve efficiency through the Company's new eCommerce fulfillment center; changes in, or the failure to successfully implement, our key strategies, including initiatives to improve our merchandising, marketing and operations; adverse outcomes in litigation; the incurrence of unplanned capital expenditures; the ability to obtain financing for working capital, capital expenditures and general corporate purposes; the impact of regulatory requirements including the Health Care Reform Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act; the inability or limitations on the Company's ability to favorably adjust the valuation allowance on deferred tax assets; and the financial condition of mall operators. Additional factors that could cause the Company's actual results to differ from those contained in these forward-looking statements are discussed in greater detail under Item 1A of the Company's Annual Report on Form 10-K for fiscal 2015 filed with the Securities and Exchange Commission.




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© Edgar Online, source Glimpses

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Financials ($)
Sales 2017 2 690 M
EBIT 2017 20,5 M
Net income 2017 -42,4 M
Debt 2017 -
Yield 2017 -
P/E ratio 2017 -
P/E ratio 2018
Capi. / Sales 2017 0,02x
Capi. / Sales 2018 0,02x
Capitalization 40,4 M
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Buy
Mean consensus HOLD
Number of Analysts 1
Average target price -
Spread / Average Target -100%
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NameTitle
Kathryn Bufano President, Chief Executive Officer & Director
M. Thomas Grumbacher Chairman & Strategic Initiatives Officer
William Tracy Chief Operating Officer
Nancy A. Walsh Chief Financial Officer & Executive Vice President
Dennis R. Clouser Executive VP-Information Systems & Administration
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