UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

Form 10-Q

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share data) 

Consolidated Statements of Operations

(Unaudited)

(in thousands, except share and per share data) 

Consolidated Statement of Shareholders’ Equity

(Unaudited)

(in thousands, except share data)

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

The consolidated balance sheets as of April 30, 2016 and May 2, 2015, and May 3, 2014, the consolidated statements of operations for the thirteen weeks ended April 30, 2016 and May 2, 2015, and May 3, 2014, the consolidated statement of shareholders’ equity for the thirteen weeks ended May 2, 2015April 30, 2016 and the consolidated statements of cash flows for the thirteen weeks ended April 30, 2016 and May 2, 2015 and May 3, 2014 have been prepared by the Company in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim reporting and are unaudited. In the opinion of management, the aforementioned financial statements include all known adjustments (which consist primarily of normal, recurring accruals, estimates and assumptions that impact the financial statements) necessary to present fairly the financial position at the balance sheet dates and the results of operations and cash flows for the periods ended April 30, 2016 and May 2, 2015 and May 3, 2014.2015. The balance sheet as of January 31, 2015,30, 2016, presented herein, has been derived from the audited balance sheet included in the Company's Annual Report on Form 10-K for fiscal 20142015 as filed with the Securities and Exchange Commission on March 26, 201524, 2016 and referred to herein as the “Annual Report,” but does not include all annual disclosures required by U.S. GAAP. These consolidated financial statements should be read in conjunction with the financial statements for the fiscal year ended January 31, 201530, 2016 and footnotes thereto included in the Annual Report. The consolidated results of operations for the thirteen weeks ended April 30, 2016 and May 2, 2015 and May 3, 2014 are not necessarily indicative of the consolidated operating results for the year ending January 30, 201628, 2017 or any other period. The Company's business is seasonal and as a result, the Company's net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation at the measurement date:

The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.

The Company’s financial instruments consist primarily of cash equivalents, short-term investment securities, accounts payable, and borrowings, if any, under a line of credit. The Company believes that: (1) the carrying value of cash equivalents and accounts payable are representative of their respective fair value due to the short-term nature of these instruments; and (2) the carrying value of the borrowings, if any, under the line of credit approximates fair value because the line of credit’s interest rates vary with market interest rates. The Company considers the inputs utilized to determineUnder the fair value of anyhierarchy, the fair market values of the borrowings, if any, undershort-term investments in corporate bonds are level 1 while the lineshort-term in certificates of credit to be Leveldeposits and municipals bonds are level 2. The fair market values of level 2 inputs. instruments are determined by management with the assistance of a third party pricing service. Since quoted prices in active markets for identical assets are not available, these prices are determined by the third party pricing service using observable market information such as quotes from less active markets and quoted prices of similar securities.

As of April 30, 2016, January 30, 2016, and May 2, 2015, January 31, 2015, and May 3, 2014, the Company had cash equivalents of $43.9$6.6 million, $43.1$22.6 million and $3.1$43.9 million, respectively. The Company’s cash equivalents consist of credit and debit card receivables, and money market funds.funds, certificates of deposit, and short-term municipal bonds. Fair value for cash equivalents was determined based on Level 1 inputs.

Basic income per common share amounts are calculated using the weighted-average number of common shares outstanding for the period. Diluted income per common share amounts are calculated using the weighted-average number of common shares outstanding for the period and include the dilutive impact of exercise of stock options as well as assumed lapse of restrictions on restricted stock awards and shares currently available for purchase under the Company's Employee Stock Purchase Plan, using the treasury stock method. Performance-based restricted stock units are considered contingently issuable shares for diluted income per common share purposes and the dilutive impact, if any, is not included in the weighted-average shares until the performance conditions are met.

The two-class method was used to calculate basic and diluted income per common share for the thirteen weeks ended May 3, 2014 since certain of the Company's restricted stock were participating securities. The two-class method is an earnings allocation formula that determines income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic income per common share is computed by dividing net income attributable to common shares after allocation of income to participating securities by the weighted-average number of common shares outstanding during the year. Diluted income per common share is computed using the more dilutive of the two-class method or the if-converted method. In periods of net loss, no effect is given to participating securities since they do not contractually participate in the losses of the Company. The two-class method is the more dilutive method for the thirteen weeks ended May 3, 2014. For the thirteen weeks ended May 2, 2015, the Company did not have any outstanding participating securities.

ForThe effects of the assumed exercise of stock options for 459,387 shares of common stock for the thirteen weeks ended May 2, 2015 thereApril 30, 2016 were no participating securities. Forexcluded from the thirteen weeks ended May 3, 2014, $20.0 thousandcalculation of diluted net income was attributable to participating securities,per share as the two-class method was more dilutive, and the remainder was attributable to common shareholders.

The aforementioned excluded shares do not reflect the impact of any incremental repurchases under the treasury stock method.

Effective July 26, 2002,Pursuant to the Company adopted theCompany's 2002 Equity Incentive Plan (the “Plan”) pursuant to which, the Company’s board of directors may grant stock options, restricted shares, and restricted stock units to officers, directors, key employees and professional service providers. The Plan, as amended, allows for the issuance of up to a total of 7,600,000 shares under the Plan. As of May 2, 2015, 3,787,175April 30, 2016, 3,591,495 stock options, restricted shares, or restricted stock units were available for grant.

All stock options have a term not greater than ten years. Stock options vest and become exercisable in whole or in part, in accordance with vesting conditions set by the compensation committee of the Company’s board of directors. Options granted to date generally vest over four years from the date of grant.

Stock option activity under the Plan was as follows:

The fair value of each option award granted to employees, including outside directors, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

The per-share weighted average grant-date fair value of stock options granted to employees, including outside directors, for the thirteen weeks ended April 30, 2016 and May 2, 2015 was $18.89 and May 3, 2014 was $13.67, and $18.82, respectively.

All restricted stock units ("RSU") and performance-based restricted stock units ("PSU") vest in accordance with vesting conditions set by the compensation committee of the Company’s board of directors. RSU's granted to date have vesting periods ranging from less than one year to five years from the date of grant. PSU's granted to date vest 100% athave vesting periods ranging from one year to five years from the enddate of grant, including grants that have a cumulative three year performance period, subject to satisfaction of the applicable performance goals established for the respective grant. The Company periodically assesses the probability of achievement of the performance criteria and adjusts the amount of compensation expense accordingly. Compensation is recognized over the vesting period and adjusted for the probability of achievement of the performance criteria.

RSU and PSU activity during the thirteen weeks ended May 2, 2015April 30, 2016 was as follows:

As of May 2, 2015,April 30, 2016, there was $30.4$27.0 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements (including stock options, restricted stock units and performance-based restricted stock units) granted under the Plan. That cost is expected to be recognized over a weighted average vesting period of 3.22.7 years.

The following table summarizes the Company’s income tax expense and effective tax rates for the thirteen weeks ended April 30, 2016 and May 2, 2015 and May 3, 2014 (in thousands):

Net sales constitute gross sales net of merchandise returns for damaged or defective goods. Net sales consist of sales from comparable stores and non-comparable stores. Revenue from the sale of gift cards is deferred and not included in net sales until the gift cards are redeemed to purchase merchandise.

Our business is seasonal and as a result, our net sales fluctuate from quarter to quarter. Net sales are usually highest in the fourth fiscal quarter due to the year-end holiday season.

Comparable store sales include net sales from stores that have been open for at least 15 full months from their opening date. Comparable stores include the following:

For stores that are relocated or expanded, the following periods are excluded when calculating comparable store sales:

There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this Quarterly Report on Form 10-Q regarding our comparable store sales may not be comparable to similar data made available by other retailers. Non-comparable store sales are comprised of new store sales, sales for stores not open for a full 15 months, and sales from existing store relocation and expansion projects that were temporarily closed (or not receiving deliveries) and not included in comparable store sales.

Measuring the change in fiscal year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

Gross profit is equal to our net sales less our cost of goods sold. Gross margin is gross profit as a percentage of our net sales. Cost of goods sold reflects the direct costs of purchased merchandise and inbound freight, as well as store occupancy, distribution and buying expenses. Store occupancy costs include rent, common area maintenance, utilities and property taxes for all store locations. Distribution costs include costs for receiving, processing, warehousing and shipping of merchandise to or from our distribution centers and between store locations. Buying costs include compensation expense and other costs for our internal buying organization, including our merchandising and product development team and our planning and allocation group. These costs are significant and can be expected to continue to increase as our company grows.

The components of our cost of goods sold may not be comparable to the components of cost of goods sold or similar measures of our competitors and other retailers. As a result, data in this Quarterly Report on Form 10-Q regarding our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

The variable component of our cost of goods sold is higher in higher volume quarters because the variable component of our cost of goods sold generally increases as net sales increase. We regularly analyze the components of gross profit as well as gross margin. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns, and a significant increase in inventory shrinkage or inability to generate sufficient sales leverage on the store occupancy, distribution and buying components of costs of goods sold could have an adverse impact on our gross profit and results of operations. Changes in the mix of our products may also impact our overall cost of goods sold.

Selling, general and administrative, or SG&A, expenses are composed of payroll and other compensation, marketing and advertising expense, depreciation and amortization expense and other selling and administrative expenses. SG&A expenses as a percentage of net sales are usually higher in lower sales volume quarters and lower in higher sales volume quarters.

The components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth. In addition, any increase in future share-based grants or modifications will increase our share-based compensation expense included in SG&A.

Operating income equals gross profit less SG&A expenses. Operating income excludes interest expense or income, loss on debt extinguishment and income tax expense or benefit. We use operating income as an indicator of the productivity of our business and our ability to manage SG&A expenses. Operating income percentage measures operating income as a percentage of our net sales.

Comparable store sales increased 1.7%4.9% for the thirteen weeks ended May 2, 2015April 30, 2016 compared to the thirteen weeks ended May 3, 2014.2, 2015. This increase resulted from an increase of approximately 2.6%3.2% in the average dollar value of transactions partially offset by a decreaseand an increase of approximately 0.9%1.7% in the number of transactions in our stores.

Net cash used in operating activities for the thirteen weeks ended May 2, 2015April 30, 2016 was $0.8$10.5 million, a decreasean increase of $3.3$9.7 million compared to the thirteen weeks ended May 3, 2014.2, 2015. The decreaseincrease was primarily due to changes in overall working capital partially offset by an increase in operating cash flows from store performance offset by an increase in income taxes paid.performance.

Net cash used in investing activities for the thirteen weeks ended May 2, 2015April 30, 2016 was $10.7$17.1 million, an increase of $0.6$6.3 million compared to the thirteen weeks ended May 3, 2014 related solely2, 2015. The increase was primarily due to an increase in net investment securities partially offset by a decrease in capital expenditures. The increasedecrease in capital expenditures was primarily fordue to cash outflows related to our new store construction, our distribution facilities, and our corporate infrastructure.center in Pedricktown, New Jersey during the thirteen weeks ended May 2, 2015.

Net cash provided by financing activities for the thirteen weeks ended May 2, 2015April 30, 2016 was $0.7$0.2 million, an increasea decrease of $18.8$0.5 million compared to net cash used in financing activities of $18.1 million in the thirteen weeks ended May 3, 2014.2, 2015. The increase in net cash provided by financing activitiesdecrease was primarily the result of an increase in common shares withheld for taxes partially offset by an increase in the $19.5 million principal repayment onproceeds from the Term Loan Facility during the thirteen weeks ended May 3, 2014.exercise of options.

On August 18, 2006, we entered intoThe Company has a loan and security agreement (the “Loan and Security Agreement”) that included a revolving line of credit with advances tied to a borrowing base. The Loan and Security Agreement has been amended and/or restated several times, the latest on June 12, 2013 (as amended and restated, the “Revolving Credit Facility”).

For the quarterly period ended May 2, 2015April 30, 2016, except for operating leases entered into in the normal course of business, we were not party to any material off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, net sales, expenses, results of operations, liquidity, capital expenditures or capital resources.

Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates will reduce our net income or net assets. We have short-term investment securities that are interest-bearing securities and if there are changes in interest rates, those changes would affect the interest income we earn on these investments and, therefore, impact our cash flows and results of operations. However, due to the short term nature of our investment portfolio, we do not believe an immediate 100 basis point increase or decrease in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

We also have a Revolving Credit Facility which includes a revolving line of credit with advances tied to a borrowing base, which bears interest at a variable rate. Because our Revolving Credit Facility bears interest at a variable rate, we will be exposed to market risks relating to changes in interest rates.

As of May 2, 2015April 30, 2016, we had no borrowings outstanding under the Revolving Credit Facility. The Revolving Credit Facility provides for interest on borrowings, at the Company's option, at (a) a prime rate plus a margin of (i) 0.75% if excess availability is greater than or equal to 75%, (ii) 1.0% if excess availability is less than 75% but greater than or equal to 33% or (iii) 1.25% if excess availability is less than 33% or (b) a LIBOR-based rate plus a margin of (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. The Revolving Credit Facility further provides for a letter of credit fee equal to the LIBOR-based rate plus (i) 1.75% if excess availability is greater than or equal to 75%, (ii) 2.00% if excess availability is less than 75% but greater than or equal to 33% or (iii) 2.25% if excess availability is less than 33%. We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our adoption of specific hedging strategies in the future.

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 historical results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our

PART II - OTHER INFORMATION

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