Vince.(VNCE) - 2021 Q4 - Annual Report

Part I Business Vince Holding Corp. operates three brands (Vince, Rebecca Taylor, Parker) through wholesale and direct-to-consumer channels, significantly impacted by the COVID-19 pandemic in fiscal 2020, leading to revenue decline and impairment charges - The company operates three main brands: Vince, Rebecca Taylor, and Parker, with the latter two acquired on November 3, 2019[16] - Nordstrom Inc. accounted for 21% of net sales in fiscal 2020 and 22% in fiscal 2019, highlighting significant wholesale partner dependency[17] - Significant non-cash impairment charges in fiscal 2020 included $13.0 million for property, equipment, and ROU assets and $13.8 million for goodwill and intangible assets, driven by the COVID-19 pandemic[21][22] - The company implemented various liquidity management actions in response to the pandemic, such as furloughs, salary reductions, and credit facility amendments[29] Our Brands and Segments The company operates three reportable segments: Vince Wholesale, Vince Direct-to-consumer, and Rebecca Taylor and Parker - The company operates three reportable segments: Vince Wholesale, Vince Direct-to-consumer, and Rebecca Taylor and Parker[35] Net Sales by Segment (Fiscal 2020 vs. 2019) | Segment | 2020 Net Sales ($ thousands) | % of Total | 2019 Net Sales ($ thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Vince Wholesale | $105,737 | 48.1% | $166,805 | 44.4% | | Vince Direct-to-consumer | $86,326 | 39.3% | $133,412 | 35.6% | | Rebecca Taylor and Parker | $27,807 | 12.6% | $74,970 | 20.0% | | Total Net Sales | $219,870 | 100.0% | $375,187 | 100.0% | - As of January 30, 2021, the company operated 62 Vince stores and 9 Rebecca Taylor stores[27][31] - New product creation for the Parker brand was paused in fiscal 2020 to reallocate resources to Vince and Rebecca Taylor and conserve liquidity[33] Sourcing, Manufacturing, and Distribution The company relies on over 50 third-party manufacturers, primarily in China, and operates through seven third-party distribution centers globally - The company contracts with over 50 manufacturers across nine countries, without owning any manufacturing facilities[50] - In fiscal 2020, 88% of products were produced in China[50] - Operations utilize seven third-party distribution centers located across the U.S., Hong Kong, Canada, the United Kingdom, and Belgium[52] Human Capital As of January 30, 2021, the company employed 497 individuals, with nearly half working in its retail stores - As of January 30, 2021, the company employed 497 individuals, with 230 in retail stores[58] Risk Factors The company faces significant risks from the COVID-19 pandemic, dependence on key wholesale partners, potential goodwill impairment, supply chain reliance on foreign manufacturing, IT control weaknesses, and its "controlled company" status Risks Related to Business and Industry Key business risks include the ongoing impact of COVID-19, high dependence on a few wholesale partners, potential further goodwill impairment, and an un-remediated material weakness in internal controls - The COVID-19 pandemic continues to adversely affect business, financial condition, and operations through store closures, reduced demand, and supply chain disruptions[64][65] - A significant portion of revenue depends on a few large wholesale partners, with the largest accounting for 21% of total revenue in fiscal 2020, posing a substantial revenue risk if lost[86] - Goodwill and indefinite-lived intangible assets face further impairment risk, following $13.8 million in impairment charges in fiscal 2020 due to COVID-19[75] - A material weakness in internal control over financial reporting, first identified in fiscal 2016, remains un-remediated[94] Risks Related to Supply Chain Supply chain risks include reliance on third-party logistics, extensive foreign sourcing (especially China), and concentration with a few key manufacturers - Reliance on third-party logistics providers for distribution facilities, especially in California, poses operational disruption risks[113] - Extensive foreign sourcing, with 88% of products from China in fiscal 2020, exposes the company to political instability, trade restrictions, tariffs, and supply chain disruptions[116][117] - Concentration risk exists with independent manufacturers, as the top five accounted for approximately 59% of finished products in fiscal 2020[121] Risks Related to Structure and Ownership Structural risks include being a "controlled company" by Sun Capital, which holds significant influence, and obligations under a Tax Receivable Agreement - The company is a "controlled company", with Sun Capital Partners, Inc. affiliates owning approximately 72% of common stock, granting them significant influence[130] - A Tax Receivable Agreement obligates the company to pay Pre-IPO Stockholders 85% of certain tax benefits, with an estimated potential payment of approximately $32.6 million plus accrued interest, contingent on future taxable income[124] Properties The company leases all corporate and retail properties, operating 71 stores (62 Vince, 9 Rebecca Taylor) totaling 174,439 gross square feet as of January 30, 2021 - All corporate offices and showrooms in New York, Los Angeles, and Paris are leased[135] Company-Operated Retail Store Count as of Jan 30, 2021 | Brand | Type | Count | | :--- | :--- | :--- | | Vince | Full-Price | 47 | | Vince | Outlet | 15 | | Vince Total | | 62 | | Rebecca Taylor | Full-Price | 6 | | Rebecca Taylor | Outlet | 3 | | Rebecca Taylor Total | | 9 | | Grand Total | | 71 | Legal Proceedings A stockholder lawsuit from 2018, alleging misleading statements about an ERP system transition, was dismissed in September 2020, but the plaintiff's appeal is pending - A stockholder lawsuit from 2018 concerning ERP system transition statements was dismissed in September 2020, with a plaintiff's appeal currently pending[140] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "VNCE", has never paid cash dividends, and does not anticipate doing so due to growth plans and debt covenants - The company's common stock trades on the NYSE under the symbol 'VNCE'[144] - The company has never paid cash dividends and does not plan to in the foreseeable future, restricted by debt covenants[146] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2020 saw a 41.4% net sales decrease to $219.9 million and a $65.6 million net loss due to COVID-19, leading to lower gross margin, significant impairment charges, and liquidity management actions Results of Operations Fiscal 2020 saw net sales decline by 41.4% to $219.9 million, gross profit decrease by 50.3%, and a net loss of $65.6 million, driven by pandemic impacts and impairment charges Fiscal 2020 vs. Fiscal 2019 Financial Performance (in thousands) | Metric | Fiscal 2020 | Fiscal 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $219,870 | $375,187 | (41.4)% | | Gross Profit | $88,597 | $178,430 | (50.3)% | | Gross Margin | 40.3% | 47.6% | -7.3 p.p. | | Loss from Operations | ($61,080) | ($20,390) | 199.6% | | Net (Loss) Income | ($65,649) | $30,396 | N/M | | Diluted (Loss) EPS | ($5.58) | $2.55 | N/M | - The gross margin rate decreased primarily due to increased promotional activity (-550 bps), inventory reserve adjustments (-160 bps), and deleverage of supply chain costs (-150 bps)[170][176] - Significant impairment charges in fiscal 2020 included $13.8 million for goodwill and intangible assets and $13.0 million for long-lived assets[171][172] Performance by Segment All segments experienced significant sales declines in fiscal 2020, with Rebecca Taylor and Parker seeing the largest drop, while Vince Direct-to-consumer's e-commerce grew Segment Performance (Fiscal 2020, in thousands) | Segment | Net Sales | Change vs. 2019 (%) | Income (Loss) from Operations | | :--- | :--- | :--- | :--- | | Vince Wholesale | $105,737 | (36.6)% | $30,059 | | Vince Direct-to-consumer | $86,326 | (35.3)% | ($20,734) | | Rebecca Taylor and Parker | $27,807 | (62.9)% | ($16,112) | - Vince Wholesale sales declined due to delayed/canceled orders from wholesale partner store closures and lower off-price shipments[179] - Vince Direct-to-consumer sales decline from store closures was partially mitigated by over 25% e-commerce growth[181] Liquidity and Capital Resources Net cash used in operating activities was $25.1 million in fiscal 2020, with the company securing a new $20 million subordinated term loan and amending credit facilities to enhance liquidity Cash Flow Summary (Fiscal 2020 vs. 2019, in thousands) | Cash Flow Activity | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($25,071) | $16,819 | | Net cash used in investing activities | ($3,497) | ($4,523) | | Net cash provided by (used in) financing activities | $31,787 | ($11,991) | - In December 2020, the company secured a new $20 million subordinated term loan (Third Lien Credit Facility) from a Sun Capital affiliate to enhance liquidity[191] - Multiple amendments were made to the 2018 Term Loan and Revolving Credit Facilities in 2020 to provide liquidity and adjust financial covenants due to the pandemic[187][188] - As of January 30, 2021, $24.75 million was outstanding under the 2018 Term Loan Facility and $40.4 million under the 2018 Revolving Credit Facility[208][223] Critical Accounting Policies Key accounting estimates involve revenue recognition reserves, inventory valuation, goodwill and intangible asset fair value, and the Tax Receivable Agreement liability - Key estimates include revenue recognition reserves for allowances, inventory valuation for obsolescence, and fair value assessments for goodwill and intangible assets[239][243][246] - A Q1 2020 triggering event (COVID-19) resulted in a $9.5 million goodwill impairment for Vince Wholesale and a $4.4 million impairment for Vince and Rebecca Taylor tradenames[250][251][252] - The Tax Receivable Agreement obligation was reduced to $0 as of January 30, 2021, after a $2.3 million downward adjustment in fiscal 2020 due to revised income projections[267] - A full valuation allowance was maintained on all definite-lived deferred tax assets as of January 30, 2021, due to uncertainty of recognition[269] Controls and Procedures Management concluded that disclosure controls were ineffective as of January 30, 2021, due to an un-remediated material weakness in IT general controls, specifically user access and segregation of duties - The CEO and CFO concluded disclosure controls and procedures were not effective as of January 30, 2021[276] - A material weakness in internal control over financial reporting, identified in fiscal 2016, persists due to inadequate IT general controls, specifically user access and segregation of duties[94][282] - A remediation plan is underway, involving system access modifications and user access recertifications, but the material weakness remains un-remediated until all controls are effectively implemented and tested[285][286] Part III Items 10 through 14, covering governance and compensation, are incorporated by reference from the definitive proxy statement for the 2021 annual meeting Part IV Exhibits, Financial Statement Schedules This section provides an index to the financial statements, schedules, and all exhibits filed with the Form 10-K, including governance documents and material contracts - This section provides the index to Audited Consolidated Financial Statements and a comprehensive list of all exhibits filed with the Form 10-K[297] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements, highlighting critical audit matters related to impairment assessments for the Vince tradename, Vince Wholesale goodwill, and Right-of-Use assets - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements[312] - Critical Audit Matters identified include impairment assessments for the Vince Tradename, Vince Wholesale Reporting Unit goodwill, and Retail Store Asset Groups' Right-of-Use assets[317][318][322][325] Consolidated Financial Statements Fiscal 2020 consolidated financial statements show a significant decline, with total assets decreasing to $332.9 million, stockholders' equity to $66.2 million, a $65.6 million net loss, and $25.1 million cash used in operations Consolidated Balance Sheet Data (in thousands) | Account | Jan 30, 2021 | Feb 1, 2020 | | :--- | :--- | :--- | | Total Current Assets | $110,584 | $114,244 | | Total Assets | $332,944 | $362,302 | | Total Current Liabilities | $82,220 | $90,277 | | Total Liabilities | $266,737 | $231,522 | | Total Stockholders' Equity | $66,207 | $130,780 | Consolidated Statement of Operations Data (in thousands) | Account | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | | Net Sales | $219,870 | $375,187 | | Gross Profit | $88,597 | $178,430 | | Loss from Operations | ($61,080) | ($20,390) | | Net (Loss) Income | ($65,649) | $30,396 | | Diluted (Loss) EPS | ($5.58) | $2.55 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial results, including COVID-19's impact, impairment charges, the Rebecca Taylor and Parker acquisition, debt modifications, and the Tax Receivable Agreement liability reduction to zero - Note 2: The acquisition of Rebecca Taylor and Parker was accounted for as a transaction between commonly controlled entities, requiring retrospective financial statement combination[407] - Note 3: Fiscal 2020 saw a $9.5 million goodwill impairment for Vince Wholesale and a $4.4 million impairment for Vince and Rebecca Taylor tradenames due to COVID-19[410][412][414] - Note 5: The company amended its 2018 Term Loan and Revolving Credit facilities multiple times in 2020 and secured a new $20 million Third Lien Credit Facility with a Sun Capital affiliate for liquidity and flexibility[431][435][453] - Note 14: The Tax Receivable Agreement liability was reduced to $0 as of January 30, 2021, resulting in a $2.3 million gain in fiscal 2020 due to revised income projections[521][522]