You should consider carefully the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected.
In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. Risks Related to Our Business. Our growth strategy requires us to open a significant number of new stores each year.
If we are not able to open new stores, to operate them profitably or to effectively manage our growth, it could adversely affect our ability to grow and could significantly harm our profitability. Our growth will largely depend on our ability to open and operate new stores successfully. We have increased the number of our stores from 86 at the end of fiscal year to at the end of fiscal year and at the end of fiscal year In fiscal year and fiscal year , we plan to open approximately 50 and 60 new stores, respectively, and anticipate further store openings in subsequent years. Our ability to identify and open new stores in desirable locations and operate such new stores profitably are key factors in our ability to grow successfully.
We cannot assure you as to when or whether desirable locations will become available, the number of stores that we can or will ultimately open, or whether any such new stores can be profitably operated or will achieve similar operating results to those of our existing stores.
We have not always succeeded in identifying desirable locations or in operating our stores successfully in those locations. For example, during our last five fiscal years we have closed an aggregate of eight stores. We review on a continuous basis the status of stores which we consider to be underperforming. We cannot assure you that we will not have other stores in the future that we may have to close.
Our ability to open new stores, to operate them profitably and to manage our growth also depends on our ability to, among other things:. Increased demands on our operational, managerial and administrative resources could cause us to operate our business less effectively, which in turn could cause deterioration in our profitability. We opened stores in several new markets during fiscal year and intend to open stores in additional new markets, as well as in existing markets, in fiscal years , and beyond.
The new markets we enter may have different competitive conditions, consumer trends and discretionary spending patterns than our existing markets, which may cause our stores in these new markets to be less successful than stores in our existing. Table of Contents markets. Where we add stores into our existing markets, we may not be able to attract sufficient new customers to these new stores and, in addition, these new stores may have the effect of reducing sales from our existing stores in those markets, which may have an adverse effect on our results of operations.
Preopening expenses consist of payroll, benefits and travel expenses. Our emphasis on customer service requires us to rely heavily on our store managers and associates, and, if we are unable to hire, retain or motivate qualified personnel, we may not be able to grow effectively. Our emphasis on providing customer service requires that we have store managers and associates well suited to meet the needs of our customers.
Therefore, our future success in new stores and new markets depends on our continuing ability to identify, hire, develop, motivate and retain store managers and sales associates.
A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Fingerhut Coupons. Costa Mesa, California Cash and cash equivalents. Auto World Store Coupons. Academic Superstore Coupons.
In the past, we have relied on job fairs, advertising, online listings and word of mouth to attract new store personnel. As we grow, and our need for qualified store personnel expands, we may find our recruiting efforts more challenging. The incentives to attract, retain and motivate employees provided by our bonus programs or by option grants may not be as effective as in the past. If we do not succeed in attracting capable personnel or retaining or motivating existing personnel, we may be unable to grow effectively.
We need to maintain or improve our comparable store sales growth in order to maintain or increase our current level of profitability. Our comparable store sales for fiscal years , and increased 8. Over time, the rate of comparable store sales increases may moderate further due to the opening of additional stores in markets where stores already exist. We cannot assure you that our historical increases in comparable store sales will continue.
We believe the principal factors that will affect comparable store results are the following:. As a result of these and other factors, we may not be able to maintain comparable store sales growth in the future. If we are unable to maintain comparable store sales growth, our results of operations could be significantly harmed.
Due to the seasonality of our business, our annual results would be adversely affected if our sales during the fourth quarter were substantially below expectations. Table of Contents segment of the retail industry, and we expect this pattern will continue in the future. In anticipation of our peak selling season, we substantially increase our inventory levels and hire additional part-time employees.
If for any reason our sales during the fourth quarter were substantially below expectations, our results of operations for the full year would be materially adversely affected. If we fail to offer merchandise that our customers find attractive, the demand for our products may be limited and our profitability adversely affected. In order for our business to be successful, we must identify, obtain and offer products that are appealing in design and useful to the customer, at prices lower than, or comparable to, those of other retailers. We may not be successful in offering products that meet these requirements in the future.
The retail industry is subject to changing merchandise trends and consumer preferences and our merchandise selection may not always accurately reflect the preferences of our customers. If our products become less popular with our customers, if we are unable to maintain our pricing advantage over other retailers that offer the same products or products similar to those we sell or if demand generally for household furnishings decreases or fails to grow, our sales may decline and our operating results would be affected adversely.
We rely heavily on print advertising, and especially direct mail, to promote new store openings, to increase consumer awareness of our product offerings and pricing and to drive store traffic. Our future growth and profitability will depend in large part upon the continued effectiveness and efficiency of our advertising and marketing programs. In order for our advertising and marketing programs to be successful, we must:. There are a limited number of companies capable of distributing our direct mail advertising at the volume levels we require. If any of these companies cease operations, or if their expenses e.
A decrease in the customer traffic generated by the shopping centers in which we are located, which we depend upon to attract customers to our stores, could adversely affect our financial condition and profitability. We rely to a great extent on the general customer traffic in the shopping centers in which our stores are located to drive traffic into our stores.
In order to generate increased customer traffic to our stores, we generally seek to. Table of Contents locate our stores in prominent locations within high traffic power centers and malls. We rely on the ability of the anchor tenants of these centers, generally national big box retailers and supermarkets, and on the continuing popularity of shopping centers as shopping destinations to attract customers.
We cannot control the development of new shopping centers, the addition or loss of anchor- and co-tenants, the availability or cost of appropriate locations within existing or new shopping centers or the desirability, safety or success of shopping centers, all of which are factors that may affect the flow of customer traffic to our stores. In addition, continued increases in gasoline costs or other transportation related costs may discourage our customers from visiting the shopping centers in which our stores are located.
If we are unable to generate sufficient customer traffic to our stores, our sales and results of operations would be harmed. A significant decrease in customer traffic to the shopping centers in which our stores are located could have a material adverse effect on our net sales, financial condition and profitability. A decline in general economic conditions could lead to reduced consumer demand for our products and have an adverse affect on our liquidity and profitability. We may be unable to successfully compete for the business of our core customer, which could harm our sales and market share.
The retail home furnishings market in which we operate is highly fragmented and intensely competitive. We compete with many different types of retailers, including department stores, mass merchandisers and discount stores, specialty retail stores, mail order and other retailers for the business of our core customer. Some of our competitors sell many of the same items and brands that we sell. If we lose customers to our competitors, our sales could decrease. The competitive challenges facing us include:.
Many of our competitors have significantly greater financial, marketing and other resources, and greater name recognition than we do. We cannot assure you that we will be able to compete successfully with them in the. Table of Contents future, particularly in geographic locations that represent new markets for us. If we fail to compete successfully, our market share and results of operations could be materially and adversely affected.
We may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team. The success of our business depends upon our senior management closely supervising all aspects of our business, in particular the operation of our stores and the procurement of our merchandise. Additionally, our future performance will depend upon our ability to attract and retain qualified management, merchandising and sales personnel.
We do not have long term employment agreements with any of our key personnel other than Alan Gladstone. We generally do not maintain key person insurance with respect to our executives, management or other personnel except with respect to Alan Gladstone, which we do not believe would be sufficient to completely protect us against losses we may suffer if his services were to become unavailable to us in the future. If our relationships with our vendors are disrupted, we may not be able to acquire the merchandise we require in sufficient quantities or on terms acceptable to us. Our vendors are subject to certain risks, including availability of raw materials, labor disputes, union organizing activity, inclement weather, natural disasters, and general economic and political conditions, that might limit their ability to provide us with quality merchandise on a timely basis.
Any inability to acquire suitable merchandise would have a negative effect on our business and operating results because we would be missing products from our merchandise mix unless and until alternative supply arrangements were made, resulting in deferred or lost customer sales. A significant amount of the merchandise we offer is manufactured by foreign manufacturers; therefore the availability and costs of our products may be negatively affected by risks associated with international manufacturing, trade and shipping.
Many of our vendors contract with manufacturers in foreign countries, primarily in China, for the manufacture of their products. In addition, we also plan to source some of our merchandise directly from foreign manufacturers. The flow of merchandise from our vendors could also be adversely affected by financial or political instability in any of the countries in which the goods we purchase are manufactured, especially China, if the instability affects the production or export of merchandise from those countries.
In addition, decreases in the value of the U. Table of Contents could increase the cost of products we purchase from overseas vendors. Currently the Chinese Yuan is pegged to the U. If this were to occur, any revaluation of the U. We rely on our vendors and on third party distribution companies to make timely delivery of merchandise to cross-docking facilities and our stores, making us vulnerable to product delivery delays and interruptions.
We cannot control all of the various factors that might affect the timely delivery of merchandise to our stores. Most of the products that we purchase, either domestically or overseas, are shipped by vendors to one of five cross-docking facilities in the United States. We rely upon land based third party distribution companies for merchandise shipment from these cross-docking facilities to our stores. Accordingly, we are subject to the risks, including labor disputes, union organizing activity, inclement weather and increased fuel costs, associated with the ability of vendors and distributors to meet our inbound and outbound shipping needs.
Failure to receive products at the cross-docking facilities or to deliver merchandise to our stores in a timely and effective manner could damage our reputation and adversely affect our business. In addition, any increase in distribution expenses could adversely affect our future financial performance.
Some of our leases contain various restrictions relating to change of control of our company. In such cases, a change of control of our company without the consent of the landlord may result in a violation of the terms of such leases, thereby exposing the company to potential damages or lease termination. This, in turn, could harm our growth and profitability. The presence of such provisions may also make any change in control more difficult, which could affect our stock price adversely.
We depend heavily on our communications and information systems, which are vulnerable to systems failures and security risks. Our business is highly dependent on communications and information systems. Any failure or interruption of our systems, including those associated with new systems implementations or system upgrades, could significantly harm our business, including our sales, distribution, purchasing, inventory control, merchandising and financial controls.
We cannot assure you that we will not suffer any of these systems failures or interruptions from power or telecommunication failures, natural disasters or otherwise, or that our back-up procedures and capabilities in the event of any such failure or interruption will be adequate. Table of Contents breach the security of our information systems and breach the security of customer transaction data or other customer data that we may collect.
Although we take the security of our systems very seriously, our security measures may not effectively prohibit others from obtaining improper access to our information. If a person is able to circumvent our security measures, he or she could destroy or steal valuable information or disrupt our operations. Any security breach could expose us to the risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation. Laws or regulations relating to privacy and data protection may adversely affect our marketing efforts and the growth of our online business.
We are subject to increasing regulation relating to privacy and the use of personal user information. Such regulations, along with increased governmental or private enforcement, may increase the cost of growing our business. In addition, several states have proposed legislation that would limit the uses of personal, user information gathered online or require online services to establish privacy policies.
These data protection regulations and enforcement efforts may restrict our ability to collect demographic and personal information from customers, which could be costly or harm our marketing efforts. Further, any violation of privacy or data protection laws and regulations may subject us to fines, penalties and damages and may otherwise have material adverse effect on our financial condition. Terrorist acts or acts of war may cause damage or disruption to our facilities, information systems, vendors, employees and customers, which could significantly harm our revenues and results of operations.
In the future, fears of war or additional acts of terrorism, including alerts specifically listing shopping centers as potential terrorist targets, may have a negative effect on shopping center traffic, consumer confidence or consumer discretionary spending patterns, as well as have an adverse effect on the economy in general. This impact may be particularly harmful to our business because we rely heavily on shopping center traffic, discretionary consumer spending and consumer confidence levels. Employee-related lawsuits and other proceedings that have been, or may in the future be, filed against us could, if resolved unfavorably, adversely affect our business.
Various labor laws, including federal and state laws, govern our relationship with our employees and affect our operating costs. A determination that we do not comply with these laws could harm our profitability or business reputation. In particular, as a retailer, we may from time to time be subject to challenges regarding the application of overtime and related pay regulations to our employees, which could result in additional expense and liability.
The EEOC has advised us that they intend to investigate these charges on a nationwide basis, and has requested additional information from us, and has also advised us that it may issue an administrative subpoena in this regard. The DFEH has issued right to sue letters to all charging parties, which allows any or all of the individuals to file suit. Litigation is by its nature uncertain, both as to the time and expense involved and as to the final outcome of such matters. Protracted litigation, or unfavorable resolutions, of these lawsuits and proceedings could harm our business, results of operations or financial condition, and could damage our reputation with our employees and our customers.
During fiscal year , we experienced a substantial increase in the costs of insurance. We believe that extensive commercial insurance coverage is prudent for risk management and anticipate that our insurance costs may continue to increase substantially. However, for certain types or levels of risk e.
We may continue to choose to forego or limit our purchase of relevant commercial insurance, choosing instead to self-insure one or more types or levels of risks. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could have a material adverse effect on our operating results. Risks Relating to this Offering of Common Stock. Our stock price may be volatile and you may lose all or a part of your investment.
Prior to this offering, there has been no public market for our common stock, and an active market for these shares may not develop or be sustained after this offering. The initial public offering price for our common stock will be determined by negotiations between us and the underwriters of this offering and may not be representative of the price that will prevail in the open market.
The market price of our common stock may be subject to significant fluctuations after our initial public offering, which may be exaggerated by the fact that our company will have a comparatively small initial market capitalization and public share float following the completion of this offering. It is possible that in some future periods our results of operations may be below the expectations of securities analysts, if any, who may choose to follow our common stock and investors. If this occurs, our stock price may decline.
Factors that could affect our stock price include the following:. Table of Contents In addition, the stock markets have experienced significant price and trading volume fluctuations, and the market prices of retail companies in particular, have been extremely volatile and have recently experienced sharp share price and trading volume changes. These broad market fluctuations may adversely affect the trading price of our common stock. Fluctuations in our quarterly results of operations could cause the price of our common stock to substantially decline.
Retailers generally are subject to fluctuations in quarterly results. Our operating results for one period may not be indicative of results for other periods, and may fluctuate significantly due to a variety of factors, including:. If our future quarterly results fluctuate significantly or fail to meet the expectations of research analysts, if any, then the market price of our common stock could decline substantially.
We have broad discretion in how we use the proceeds of this offering, and we may not use these proceeds effectively. We will have considerable discretion in the application of the net proceeds of this offering, and you will not have the opportunity, as part of your investment decision, to assess whether we will use the proceeds effectively.
We have not finalized yet the amount of net proceeds that we will use specifically for each of these purposes. Due to the variability of factors that will determine our use of proceeds from this offering, our actual use of those proceeds may vary substantially from our current intended uses. We may use the net proceeds for corporate purposes that do not yield a significant return or any return at all for our stockholders. As a new investor, you will incur substantial dilution as a result of this offering and future equity issuances, and as a result, our stock price could decline.
The initial public offering price will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock. Table of Contents commissions and estimated offering expenses payable by us. The exercise of outstanding options and future equity issuances, including any additional shares issued in connection with acquisitions, will result in further dilution to investors.
Our directors, executive officers and significant stockholders will continue to hold a substantial portion of our common stock after this offering, which may lead to conflicts with other stockholders over corporate transactions and other corporate matters. These directors, executive officers and significant stockholders, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other business combinations.
This control may delay, deter or prevent a third party from acquiring or merging with us, which could adversely affect the market price of our common stock. There may be sales of substantial amounts of our common stock after this offering, which could cause our stock price to fall. Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. In addition, as of May 1, , 96, shares of our common stock were subject to outstanding stock options.
A significant portion of the shares of our common stock outstanding after this offering will continue to be restricted as a result of securities laws, market stand-off provisions or lock-up agreements with the underwriters, represented by CIBC World Markets Corp. In addition, 74, shares of our common stock which are subject to outstanding options will become fully vested upon the closing of this offering. Of these shares, 28, are not subject to lock-up agreement restrictions. Sales of a substantial number of shares of our common stock within a short period of time after this offering, or after the expiration of applicable lock-up periods, could cause our stock price to fall.
In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. Investors should not expect to receive a return on their investment in our common stock by way of dividend payments. We have never declared or paid any cash dividends on our common stock and do not intend to pay dividends on our common stock for the foreseeable future.
We intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends from us on our common stock for the foreseeable future. Table of Contents We will incur increased costs as a result of being a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act of , as well as new rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the Nasdaq National Market, have required changes in corporate governance practices of public companies.
We expect these new rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, in anticipation of becoming a public company, we have created additional board committees and adopted policies regarding internal controls over financial reporting and disclosure controls and procedures.
In addition, we are in the process of evaluating our internal control structure in relation to the requirements of Section of the Sarbanes-Oxley Act of , and will incur additional costs and dedicate significant resources toward complying with these requirements. We also expect these new laws, rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.
As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
We are currently evaluating and monitoring developments with respect to these new laws, rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. The costs of compliance or our failure to comply with these laws, rules and regulations could adversely affect our reputation, financial condition, results of operation and the price of our common stock. Our failure to implement and maintain effective internal controls in our business could have a material adverse effect on our business, financial condition, results of operations and stock price.
We are in the process of documenting and testing our internal control procedures in order to satisfy the requirements of Section of the Sarbanes-Oxley Act of Section requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. We will be required to comply with Section no later than the time we file our annual report for our fiscal year ending January 28, with the SEC. During the course of our testing, we may identify deficiencies in our internal controls, which we may be unable to correct in time to meet the deadline imposed by the Sarbanes-Oxley Act of If we fail to achieve and maintain the adequacy of our internal controls in accordance with applicable standards as then in effect supplemented or amended from time to time, we may be unable to conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important in our effort to prevent financial fraud.
If we cannot produce reliable financial reports or prevent fraud, our business, financial condition and results of operations could be harmed, investors could lose confidence in our reported financial information, the market price of our stock could decline significantly and we may be unable to obtain additional financing to operate and expand our business. Anti-takeover provisions in our organizational documents and Delaware law have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of our company.
This could affect our stock price adversely. Our certificate of incorporation and bylaws as they will be in effect upon the closing of this offering, and Delaware law, contain provisions that may delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and affect adversely the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:. Forward-looking statements include, but are not limited to, statements about:. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.
Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements after we distribute this prospectus, whether as a result of any new information, future events or otherwise. Table of Contents Use of Proceeds. We will not receive any of the proceeds from the sale of shares of common stock offered by the selling stockholders. As a result, we will retain broad discretion over the use of the net proceeds from this offering.
Outstanding letters of credit reduce the borrowing capacity under such facility by the amount of such letters of credit. During fiscal year , we used amounts borrowed under our bank credit facility for working capital purposes, including for the acquisition of fixtures, equipment and inventory. We may also use a portion of the net proceeds for the acquisition of the assets of other retail businesses, particularly existing favorable leases, in the event that an attractive opportunity presents itself in the future.
We have no current agreements or commitments with respect to any acquisition. Pending application of the net proceeds, we will invest the net proceeds in short-term, investment-grade, interest-bearing securities. We have not declared or paid any dividends on our common stock since our inception and do not intend to pay any dividends on our common stock in the foreseeable future. We currently intend to retain our future earnings, if any, to finance our business and for general corporate purposes.
Our board of directors has the authority to declare and pay dividends on our common stock, in its discretion, as long as there are funds legally available to do so. Table of Contents Capitalization. The following table sets forth our cash and cash equivalents and total capitalization as of May 1, Long-term debt, net of current portion.
Convertible preferred stock:. Additional paid-in capital. Deferred stock-based compensation. Retained earnings. Total capitalization. The table above excludes the following shares:. Table of Contents Dilution. The adjustments made to determine pro forma net tangible book value per share are the following:. Assumed public offering price per share of common stock.
Net tangible book value per share of common stock as of May 1, Increase in net tangible book value per share of common stock attributable to this offering. Pro forma net tangible book value per share of common stock as of May 1, after giving effect to this offering. Dilution per share of common stock to new investors in this offering. The following table summarizes, on a pro forma basis as of May 1, , the differences between our existing stockholders and new investors with respect to the number of shares of common stock issued by us, the total consideration paid and the average price per share paid.
Per Share. Existing stockholders 1 2. New investors 3. The following table adjusts the information set forth in the table above to reflect the assumed exercise of options outstanding as of May 1, , that are described in the preceding sentence:. Option holders. New investors. Table of Contents Selected Financial Data. Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. We own and operate a specialty chain of retail stores selling quality, value priced bedding, bath products, window coverings and other home furnishings products in the United States.
We seek to offer our customers a broad selection of fashionable, quality merchandise that is tailored to their tastes and preferences in an attractive store environment, with an emphasis on customer service. In this way, we believe that we provide our customers with an appealing and convenient home furnishings shopping experience previously unavailable in their neighborhoods. We opened our first store in Los Angeles, California in fiscal year During the period from fiscal year to fiscal year , we opened 52 stores located primarily in the Southern and Northern California markets.
In fiscal year , following a confluence of extraordinary events in Southern California, we filed for bankruptcy protection under Chapter 11 and closed 29 stores. These events included a severe regional recession, a regional decline in housing values, and civil disturbances in Los Angeles. In fiscal year , we emerged from bankruptcy, and over the next five years we continued to refine our store model, merchandise mix and real estate strategy while developing a solid operating and financial base.
From fiscal year to fiscal year , our net sales have grown at a compound annual growth rate of We have achieved positive quarterly comparable store sales growth in every fiscal quarter for the past 30 consecutive quarters. Comparable store sales for fiscal year increased by 3. The continued increase in comparable store sales is reflective of our success in increasing both customer traffic and transaction size in our stores. We believe we have an attractive new store model to help drive our future growth.
Generally, we are able to recover our initial store investment in new stores within 24 months after a store opening. These average investment amounts do not include the cost of acquired leases. Table of Contents From time to time, we will consider the acquisition of leases that present an economically attractive opportunity for us to enter locations that meet our site selection criteria and new store model requirements.
In fiscal years and , we acquired an aggregate of 30 store leases from other retailers that averaged 12, square feet per store. These acquisitions were the primary reason that our average store size increased from approximately 8, square feet in fiscal year to approximately 9, square feet in fiscal year We do not expect these trends to continue in the future as we intend to open stores in what we consider to be our ideal size range of between 8, and 10, square feet per store.
We expect to increase our store base by approximately 50 stores in fiscal year and approximately 60 stores in fiscal year Petersburg, Orlando and Milwaukee. In identifying new store locations, we target sites that meet certain population density, ethnic, co-tenancy and income criteria.
We believe that the number of potential sites for new stores that meet our basic demographic qualifications is well in excess of our anticipated store growth. Our purchasing and advertising is centralized through our corporate office, and our stores utilize centralized information technology systems, which, together, provide a level of scalability that we believe is sufficient to facilitate our future growth. From a margin perspective, we have experienced a modest decrease in our gross margin from This decrease was the result of increased occupancy expense, principally related to larger, acquired stores and increased freight costs.
Our product margin increased from fiscal year to fiscal year At the same time, as our total net sales grow, we also expect our selling, general and administrative expenses to decrease as a percentage of net sales, by leveraging our corporate expenses over an increased revenue base. During the audit of our fiscal year financial statements, our independent registered public accounting firm issued a letter to our audit committee noting a significant deficiency in the design and operation of certain internal controls that they deemed to constitute a reportable condition.
Our independent registered public accounting firm recommended that we implement a formal policy to evaluate and monitor excess and obsolete merchandise inventories and establish appropriate write-downs. This policy has been implemented starting with the first fiscal quarter of fiscal year Table of Contents In preparation for this filing, we commenced a review of our existing internal controls.
In , we engaged a consulting firm to assist us in the planning and implementation of improvements to our internal controls, including documenting and testing our internal controls in advance of our requirement to comply with Section of the Sarbanes-Oxley Act of , which we anticipate will occur in January of While we believe that such measures will improve our internal controls, we recognize that the process of designing, implementing and maintaining effective internal controls is a continuous process that requires us to anticipate and react to changes in our business and the economic and regulatory environment.
We anticipate expending significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. Basis of Presentation. Net sales consist of both our in-store sales and online sales. Cost of sales consists of the cost of the products we sell, including shipping and distribution costs, buying costs and store occupancy costs. Selling, general and administrative expenses consist of corporate expenses, advertising, store salaries, other store expenses and depreciation and amortization.
We operate on a or week fiscal year ending on the Sunday closest to January 31 in each year. Each fiscal year consists of four week quarters, with an extra week added onto the fourth quarter every five to six years. Each fiscal quarter ends on the Sunday closest to the last day of the third, sixth and ninth month, respectively, of each fiscal year.
Our fiscal year ended on February 2, , our fiscal year ended on February 1, , and our fiscal year ended on January 30, Each of fiscal years and consisted of 52 weeks and fiscal year consisted of 53 weeks. The fiscal quarters ended May 2, and May 1, each consisted of 13 weeks. Results of Operations. The following table sets forth information for fiscal years , and and the fiscal quarters ended May 2, and May 1, , both in dollars and as a percentage of net sales. Income taxes. Table of Contents The following table provides information for fiscal years , and about the number of stores open at the end of each fiscal period and the percentage increase in comparable store sales.
Number of net stores added during fiscal period. Total square footage end of period. The remaining increase is a result of the growth in comparable store sales during the first quarter of fiscal year , partially offset by the loss in sales for the three stores closed in the fourth quarter of fiscal year The increase in comparable store sales of 1. The dollar increase in cost of sales was primarily attributable to the As a percentage of net sales, cost of sales decreased 0.
The decrease in cost of sales as a percentage of net sales was due to a larger proportion of the products sold being higher margin items and lower product costs related to increased volumes of merchandise purchased. As a percentage of net sales, selling, general and administrative expenses decreased by 0. Table of Contents Income taxes. Our effective tax rate was The increase in the effective tax rate was primarily a result of the application of a higher Federal tax rate.
As a result of the foregoing factors, net income increased The increase in the number of transactions was a result of targeted advertising, new products within existing categories and the introduction of complementary product categories in our stores. The increase in average transaction amounts resulted primarily from the introduction into our product range of higher price point items including luxury bedding and new products such as dinnerware and housewares.
The dollar increase in cost of sales in fiscal year was primarily attributable to the As a percentage of net sales, cost of sales was substantially unchanged at As a percentage of net sales, selling, general and administrative expenses increased to The decrease in our effective tax rate for fiscal year was due to the change in the aggregate state income tax rate arising from the mix of stores which we opened in different states during these two fiscal years. The remaining increase was due to the inclusion in our net sales of a full year of.
Table of Contents operations from the 20 stores opened during fiscal year and growth in comparable store sales during fiscal year The increase in average transaction amounts resulted primarily from the addition of decorative accessories and impulse purchase items such as candles, potpourri and silk florals. The increase in the number of customer transactions resulted primarily from aggressive advertising during key holidays.
Fiscal year had one more week than fiscal year This extra week was included in our fourth fiscal quarter of fiscal year As a percentage of net sales, cost of sales increased to The increase in cost of sales as a percentage of net sales in fiscal year compared to fiscal year was primarily the result of higher occupancy cost of 0. Other factors include lower product costs due to increased volumes of merchandise we purchased, offset by higher freight costs in new markets we entered. As a percentage of net sales, general, administrative and store expenses decreased to The decrease in these expenses as a percentage of net sales resulted from leveraging our corporate overhead expenses over increased net sales across a greater number of stores, partially offset by increases in costs associated with our stores as the number of stores has increased.
The dollar increase in these expenses resulted primarily from the expenses associated with opening and operating new stores. Our net interest expense in fiscal year was negligible, as our bank credit facility was not used during most of the year, and the interest that was paid was offset by the interest earned on our cash and cash equivalents balances.
The effective tax rate was The decrease in the effective tax rate for fiscal year compared to fiscal year was due to the change in the aggregate state income tax rates arising from the mix of stores which we opened in different states during these two fiscal years. Table of Contents Quarterly Results of Operations. The following table sets forth our unaudited quarterly results of operations for fiscal years and and the fiscal quarter ended May 1, Each quarterly period presented below consisted of 13 weeks. The information for each of these periods has been prepared on the same basis as the audited financial statements included elsewhere in this prospectus.
This information includes all adjustments, consisting only of normal and recurring adjustments, that management considers necessary for the fair presentation of such data. This data should be read in conjunction with the audited financial statements included elsewhere in this prospectus.
The results of operations for historical periods are not necessarily indicative of results for any future period. Due to the holiday selling season, the fourth quarter of each fiscal year has historically contributed, and we expect it will continue to contribute, a disproportionately large percentage of our net sales for the entire fiscal year.
We expect our quarterly results of operations to fluctuate, based upon such factors as the number and timing of store openings and related preopening store expenses, the amount of net sales contributed by new and existing stores, the mix of products sold, the timing and level of markdowns, store closings, refurbishments or relocations, seasonal trends, competitive factors, weather conditions and general economic conditions.
May 4,. May 2,. Statement of Operations Data. Operating Data. Number of stores open at the end of the quarter. Liquidity and Capital Resources. Our cash requirements are primarily for working capital and for the opening of new stores.
Historically, we have funded our operations primarily through cash flows from operations, short-term borrowings under our bank credit facility and the private placement of equity securities. Discussion of Cash Flows. This increase is primarily due to increased borrowings under our bank credit facility. Net cash provided by operating activities increased in fiscal year compared to fiscal year primarily because of the growth in net sales achieved by our business, partially offset by expenditures associated with opening 49 new stores during fiscal year , including increased inventory levels to support the new stores.
Net cash provided by operating activities increased in fiscal year compared to fiscal year because of the growth in net sales achieved by our business, partially offset by expenditures associated with opening 37 new stores during fiscal year , including increased inventory levels to support the new stores. Net cash provided by operating activities was less in the first quarter of fiscal year than in the first quarter of fiscal year primarily because of an increase in inventories, net of accounts payable and due to a net increase of 50 stores.
This was partially offset by an increase in accrued sales taxes payable related to increased sales volumes and increased accrued advertising costs related to the timing of advertising events. Net cash provided by financing activities for fiscal year and the first quarter of fiscal year was primarily attributable to borrowings under our bank credit facility. Net cash provided by financing activities during fiscal year resulted primarily from the sale of our common stock.
Until required for other purposes, our cash and cash equivalents are maintained in deposit accounts or highly liquid investments with original maturities of 90 days or less at the time of purchase. Historically, our principal liquidity requirements have been to meet our working capital and capital expenditure needs.
We expect to be able to finance our expansion program using cash we generate from operations and from the proceeds of this offering. We intend to finance any such future acquisitions by using the net proceeds of this offering and draws on our line of credit facility as needed to supplement available cash generated from operations. We do not currently have any agreements or commitments with respect to any acquisitions. We believe that our sources of cash, together with the proceeds of this offering, will be sufficient to fund our operations and anticipated capital expenditures including our store expansion program for at least the next 18 to 24 months.
Our ability to fund these requirements and comply with the financial covenants under our bank credit agreement will depend on our future operations, performance and cash flow and is subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control. Our growth strategy is substantially dependent on growing the number of stores we have, which will require additional capital. We cannot assure you that additional funds will be available when needed, on terms acceptable to us or at all. The following table summarizes our future contractual obligations as of January 30, Contractual Obligations.
Bank credit facility. Operating lease obligations 1. Capital lease obligations. Compensation obligations 2. Amounts borrowed under our bank credit facility are secured by our accounts receivable, inventory and equipment. Our bank credit facility also sets forth a number of affirmative and negative covenants to which we must adhere, including financial covenants that require us to maintain a certain level of tangible net worth, to achieve positive quarterly net earnings and to maintain a certain fixed charge coverage ratio.
We are currently in compliance with all covenants under our bank credit facility. We have borrowed funds under our bank credit facility from time to time and periodically have repaid such borrowings with available cash. Off Balance Sheet Arrangements. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to interest rate risks primarily through borrowings under our bank credit facility. Interest on all of our borrowings under that facility is based upon variable interest rates as specified in our bank credit facility. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term.
The fair value of our investment portfolio or related income would not be significantly impacted by either a basis point increase or decrease in interest rates due mainly to the short-term nature of our investment portfolio. We do not engage in financial transactions for trading or speculative purposes. All of our sales, expenses, assets, liabilities and cash holdings are denominated in U. We do not hedge against foreign currency risks and we believe that our foreign currency exchange risk is immaterial. Table of Contents Critical Accounting Policies.
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including those related to allowances for sales returns, inventories, income taxes, and contingencies and litigation. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our accounting policies are more fully described in Note 2 to our financial statements, which appear elsewhere in this prospectus. We have identified certain critical accounting policies which are set forth below. Revenue Recognition. We recognize revenue on the date of purchase by customers at our retail store locations or upon delivery of orders placed through our website.
We record the sale of gift cards as a current liability and recognize a sale when a customer redeems a gift card. Significant management judgments and estimates must be made and used in connection with determining sales recognized in any accounting period. Our management must make estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of the sales returns and other allowances in any accounting period.
Although our actual returns historically have not differed materially from estimated returns, in the future, actual returns may differ materially from our reserves. As a result, our operating results and financial condition could be affected adversely. Our merchandise inventories are valued at the lower of cost or market. Cost has been determined using the first in, first out method. Management regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on current retail prices, the age of inventory and forecasts of future product demand.
A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory and further inventory write-downs may be required.
Product demand is impacted by promotional incentives offered by us, such as advertised specials, point of sale promotions and markdowns, and customer preferences, among other things. The cost of any inventory write-down must be recognized in our costs of goods sold at the time of such write-down. Therefore, any significant unanticipated changes in demand could have a significant impact on the value of inventory and our reported operating results.
Although our actual inventory write-downs historically have not differed materially from estimated inventory write-downs, in the future, actual inventory write-downs may differ materially from our reserves. Insurance Coverage. We record a liability for the actuarially estimated cost of claims both reported and incurred but not reported based upon our historical experience. The estimated costs include the estimated future cost of open claims. We will continue to adjust the estimates as our actual experience dictates.
A significant change in the number or dollar amount of claims could cause us to revise our estimate of potential losses and affect our reported results. Stock-Based Compensation. We account for employee and director stock options and restricted stock using the intrinsic-value method in accordance with Accounting Principles Board APB Opinion No.
Table of Contents Stock compensation expense, which is a noncash charge, results from stock option grants made to employees at exercise prices below the deemed fair value of the underlying common stock. Stock compensation expense is amortized to expense over the vesting period of the options in accordance with FASB Interpretation No. We have recorded deferred stock-based compensation representing the difference between the option exercise price and the fair value of our common stock on the grant date for financial reporting purposes.
We determined the deemed fair value of our common stock based upon several factors, including operating performance, liquidation preferences of the preferred stock, an independent valuation analysis, the market capitalization of peer companies and the expected valuation we would obtain in an initial public offering. Had different assumptions or criteria been used to determine the deemed fair value of our common stock, different amounts of stock-based compensation could have been reported. We currently are not required to record stock-based compensation charges if the employee stock option exercise price equals or exceeds the deemed fair value of our common stock at the date of grant.
This statement requires that the estimated fair value resulting from all share-based payment transactions be recognized as compensation expense in the financial statements, effective from the beginning of our first fiscal year commencing after June 15, The fair value of common stock for options granted from February 1, through January 30, was estimated contemporaneously by our board of directors, with input from management.
Using the most recent sale of our common stock, in an arms length transaction in December between Rosewood Capital and Wedbush Securities as a benchmark, our board of directors and management estimated the fair market value of our common stock on the option grant dates. Factors considered were our revenue and earnings growth, the value of comparable publicly traded companies and data received from our investment advisors. We did not obtain contemporaneous valuations by an unrelated valuation specialist because our efforts were primarily focused upon executing our strategic operating plan.
This independent valuation was based primarily on the use of the market approach. The market approach estimates value based on indicators resulting from market transactions. The approach consists of collecting data on the valuation of similar companies whose securities are traded in the public markets and, where available, for similar companies which have been acquired recently. Table of Contents adjustments were made for comparability differences in order to derive value indications for us. The market approach also encompasses the analysis of past transactions in our securities.
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