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VINCE HOLDING CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 12, 2014

This discussion summarizes our consolidated operating results, financial condition and liquidity during each of the three month periods ended May 3, 2014 and May 4, 2013, respectively. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report on Form 10-Q. OnNovember 27, 2013, Vince Holding Corp. completed an initial public offering (the "IPO") of 10,000,000 shares of common stock and completed a series of restructuring transactions which occurred immediately prior to the IPO (the "Restructuring Transactions"). As a result of the IPO and Restructuring Transactions, the non-Vince businesses were separated from the Vince business. The Vince business is now the sole operating business of Vince Holding Corp. Historical financial information for the non-Vince businesses has been included as discontinued operations until the businesses were separated on November 27, 2013. This discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. Factors that might cause such differences include those described under "Item 1A-Risk Factors," "Disclosures Regarding Forward-Looking Statements" and elsewhere in this report on Form 10-Q as well as in our 2013 Annual Report on Form 10-K. Executive Overview Vince is a leading contemporary fashion brand known for modern, effortless style and everyday luxury essentials. Founded in 2002, Vince has generated strong sales momentum over the last decade. We believe that we will achieve continued success by expanding our product assortment distributed through premier wholesale partners in the U.S. and select international markets, as well as in our own branded retail locations and on our e-commerce platform.



As of May 3, 2014, we sold our products through 2,350 doors through our wholesale partners in the U.S. and international markets and we operated 28 retail stores, including 22 full price stores and six outlet stores, throughout the United States.

The following is a summary of highlights during the three months ended May 3, 2014:

• We made a pre-payment of $20.0 million on the Term Loan Facility. As of

May 3, 2014 we had $150.0 million of debt outstanding. • Our net sales totaled $53.5 million, reflecting a 32.4% increase over

prior year net sales of $40.4 million. • Our wholesale net sales increased 28.8% to $37.3 million and our direct-to-consumer net sales increased 41.6% to $16.1 million. • Operating income increased 174% to $5.2 million, to 9.7% of net sales.



• We took possession of our new office space in New York City as part of our

plan to consolidate our New York offices into one location by the end of

fiscal 2014. 21



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We serve our customers through a variety of channels that reinforce the Vince brand image. Our diversified channel strategy allows us to introduce our products to customers through multiple distribution points that are reported in two segments: wholesale and direct-to-consumer. The following is a summary of our wholesale and direct-to-consumer net sales for the three months ended May 3, 2014 and May 4, 2013, respectively (in thousands): Three months ended May 3, 2014 May 4, 2013 Net Sales By Segment: Wholesale $ 37,322$ 28,971 Direct-to-consumer 16,130 11,392 Total Net sales $ 53,452$ 40,363 We have expanded our operations rapidly since our inception in 2002, and we have limited operating experience at our current size. Our growth in net sales has also led to increased selling, general and administrative expenses. We have made and are making investments to support our near and longer-term growth. If our operations continue to grow over the longer term, of which there can be no assurance, we will be required to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes, and to obtain more space for our expanding administrative support and other headquarters personnel. While we believe our growth strategy offers significant opportunities, it also presents risks and challenges, including among others, the risks that we may not be able to hire and train qualified associates, that our new product offerings and expanded sales channels may not maintain or enhance our brand image and that our distribution facilities and information systems may not be adequate to support our growth plans. For a more complete discussions of risks facing our business see "Item 1A-Risk Factors" of this report on Form 10-Q as well as in our 2013 Annual Report on Form 10-K. 22



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Results of Operations

Three Months ended May 3, 2014 Compared to Three Months ended May 4, 2013

The following table presents, for the periods indicated, our operating results as a percentage of net sales as well as earnings per share data (dollars in thousands, except per share data):

Three months ended May 3, 2014 May 4, 2013 Variances % of Net % of Net Amount Sales Amount Sales Amount Percent Statements of Operations: Net sales $ 53,452 100.0 % $ 40,363 100.0 % $ 13,089 32.4 % Cost of products sold 27,041 50.6 22,850 56.6 4,191 18.3 Gross profit 26,411 49.4 17,513 43.4 8,898 50.8 Selling, general and administrative expenses 21,204 39.7 15,613 38.7 5,591 35.8 Income from operations 5,207 9.7 1,900 4.7 3,307 174.1 Interest expense, net 2,850 5.3 10,624 26.3 (7,774 ) (73.2 ) Other expense, net 50 0.1 125 0.3 (75 ) (60.0 ) Income (loss) before income taxes 2,307 4.3 (8,849 ) (21.9 ) 11,156 126.1 Provision for income taxes 923 1.7 930 2.3 (7 ) (0.8 ) Net income (loss) from continuing operations 1,384 2.6 (9,779 ) (24.2 ) 11,163 114.2 Net loss from discontinued operations, net of tax - - (5,330 ) (13.2 ) 5,330 100.0 Net income (loss) $ 1,384 2.6 % $ (15,109 ) (37.4 )% $ 16,493 109.2 % Basic earnings (loss) per share: Net income (loss) from continuing operations $ 0.04$ (0.37 ) Net loss from discontinued operations, net of tax - (0.21 ) Net income (loss) $ 0.04$ (0.58 ) Diluted earnings (loss) per share: Net income (loss) from continuing operations $ 0.04$ (0.37 ) Net loss from discontinued operations, net of tax - (0.21 ) Net income (loss) $ 0.04$ (0.58 ) Other Operating and Financial Data: Total wholesale doors at end of period 2,350 2,145 Total stores at end of period 28 22 Comparable stores growth 11.1 % 34.3 % 23



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Net Sales for the three months ended May 3, 2014 were $53.5 million, increasing $13.1 million, or 32.4%, versus $40.4 million for the three months ended May 4, 2013. The increase in net sales compared to the prior year is primarily due to an increase in volume across both of our business segments. Net Sales by Segment Three Months Ended May 3, May 4, 2014 2013 (in thousands) Wholesale $ 37,322$ 28,971 Direct-to-consumer 16,130 11,392 Total Net Sales $ 53,452$ 40,363 Net sales from our wholesale segment increased $8.3 million, or 28.8%, to $37.3 million in the three months ended May 3, 2014 from $29.0 million in the three months ended May 4, 2013. We increased volume with each of our top four premier wholesale partners through increased sales productivity in existing doors, and the opening of 13 additional shop-in-shops with our domestic and international partners. Additionally, we sell our products through two international free-standing stores operated by our distribution partners, one in Tokyo that opened in the fall of 2013, and one in Istanbul that opened in the spring of 2014. Net sales from our direct-to-consumer segment increased $4.7 million, or 41.6%, to $16.1 million in the three months ended May 3, 2014 from $11.4 million in the three months ended May 4, 2013. This sales growth was due to (i) comparable retail store sales growth of 11.1% contributing $0.9 million, (ii) opening six net new stores as compared to the prior year (bringing our total retail store count to 28 as of May 3, 2014, compared to 22 as of May 4, 2013) inclusive of non-comparable sales growth contributing $3.3 million, and (iii) e-commerce sales growth contributing $0.5 million. Gross Profit/Gross Marginrate increased 600 basis points to 49.4% for the three months ended May 3, 2014 compared to 43.4% for the three months ended May 4, 2013. The total margin rate increase was driven by a higher percentage of our sales coming from the direct-to-consumer segment, in which we generally recognize higher margins, an improved mix across higher margin product assortment and increased percentage of full-price sales in our wholesale segment. For the three months ended May 4, 2013, the margin rate was unfavorably impacted by approximately 370 basis points due to the recognition of increased inventory reserves.



Selling, general and administrative expenses ("SG&A") for the three months ended May 3, 2014 were $21.2 million, increasing $5.6 million, or 35.8%, versus $15.6 million for the three months ended May 4, 2013. The increase in SG&A expenses compared to the prior year period is primarily due to:

• Increase in compensation expense of $2.6 million, including share-based

and incentive compensation, employee benefits and related increases due to

hiring and retaining additional employees to support our growth plans;



• Increase in rent and occupancy costs of $0.9 million due primarily to new

retail store openings; • Increase in marketing, advertising and promotional expenses of $0.8 million to support our brand awareness growth efforts;



• Increase in public company expenses of $0.6 million due to costs incurred

to be a stand-alone public company;



• Increase in depreciation expense of $0.5 million due to new stores and

shop-in-shop investments;



• Decrease in public company transition costs of $1.3 million incurred in

the prior year in preparation for our IPO that was completed on November 27, 2013; and 24



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• Increase in other costs of $1.5 million consisting of increases in areas

such as design & development, travel and consulting. Operating Income by Segment Three Months Ended May 3, May 4, 2014 2013 (in thousands) Wholesale $ 13,078$ 7,448 Direct-to-consumer 2,477 2,035 Subtotal 15,555 9,483 Unallocated expenses (10,348 ) (7,583 ) Total operating income $ 5,207 $ 1,900 Operating income from our wholesale segment increased $5.7 million, or 75.6%, to $13.1 million in the three months ended May 3, 2014 from $7.4 million in the three months ended May 4, 2013. This increase was driven primarily from the sales volume increase of $8.3 million as noted above. Our wholesale segment operating expenses increased slightly and, as a result, these expenses decreased as a percentage of wholesale net sales as our expenses grew at a much lower rate than our rate of sales growth. Operating income from our direct-to-consumer segment increased $0.5 million, or 21.7% to $2.5 million in the three months ended May 3, 2014 from $2.0 million in the three months ended May 4, 2013. The increase resulted primarily from the sales volume increase of $4.7 million as noted above which more than offset the additional operating expenses incurred, primarily as a result of opening new stores, during the period to support our sales growth. Interest expense for the three months ended May 3, 2014 was $2.9 million, decreasing $7.7 million, or 73.2%, versus $10.6 million for the three months ended May 4, 2013. Interest expense decreased as we had lower average debt balances period over period. The decrease in overall debt balances was primarily due to certain affiliates of Sun Capital contributing certain outstanding indebtedness to the Company in June 2013, thus eliminating interest expense on approximately $407.5 million in debt at that time. On November 27, 2013, in connection with the IPO and Restructuring Transactions, we entered into the Term Loan Facility and the Revolving Credit Facility. Annual interest expense is estimated to be $11.6 million assuming $175.0 million outstanding borrowings under the Term Loan Facility. As voluntary pre-payments are made on the Term Loan Facility there will be corresponding reductions in annualized interest expense.



Other expense, net, was $0.1 million for the three months ended May 3, 2014 and the three months ended May 4, 2013.

Provision for income taxes for the three months ended May 3, 2014 and May 4, 2013 was $0.9 million. Our effective tax rate on pretax income for the three months ended May 3, 2014 and the three months ended May 4, 2013 was 40.0% and 10.5%, respectively. The rate for the three months ended May 4, 2013 differed from the U.S. statutory rate of 35.0% primarily due to state taxes, nondeductible interest and changes in our valuation allowances.



Net loss from discontinued operations

The separation of the non-Vince businesses was completed on November 27, 2013. Accordingly, there are no results from discontinued operations reflected in the Condensed Consolidated Statement of Operations for the three months ended May 3, 2014. Net loss from discontinued operations was $5.3 million for the three months ended May 4, 2013. 25



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Net income (loss)

Net income was $1.4 million for the three months ended May 3, 2014, increasing $16.5 million from a net loss of $15.1 million for the three months ended May 4, 2013. The reduction in our net loss was primarily due to increased income from operations of $3.3 million, reduced interest expense of $7.8 million and a lower net loss from discontinued operations of $5.3 million.



Discontinued Operations

On November 27, 2013, in connection with the IPO and Restructuring Transactions, we separated the Vince and non-Vince businesses whereby the non-Vince businesses are now owned by Kellwood Holding, LLC, of which 100% of the membership interests are owned by the Pre-IPO Stockholders. As the Company and Kellwood Holding, LLC were under the common control of affiliates of Sun Capital, this separation transaction resulted in a $73.1 million adjustment to additional paid-in capital on our Condensed Consolidated Balance Sheet at February 1, 2014. As a result of the separation with the non-Vince businesses, the financial results for the non-Vince businesses, through the separation, on November 27, 2013, are now included in results from discontinued operations, including the three months ended May 4, 2013. The non-Vince businesses continue to operate as a stand-alone company. Due to differences in the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of the non-Vince businesses included within discontinued operations of the Company may not be indicative of actual financial results of the non-Vince businesses as a stand-alone company.



Net loss from discontinued operations-Three Months Ended May 3, 2014 Compared to Three Months Ended May 4, 2013

The separation of the non-Vince businesses was completed on November 27, 2013. Accordingly, there are no results from discontinued operations reflected on the Condensed Consolidated Statement of Operations for the three months ended May 3, 2014. The results of the non-Vince businesses included in discontinued operations for the three months ended May 4, 2013 are summarized in the following table (in thousands, except effective tax rates). Three months ended May 4, 2013 Net sales $ 130,714 Cost of products sold 102,548 Gross profit 28,166 Selling, general and administrative expenses



31,156

Restructuring, environmental and other charges



844

Interest expense, net



13,679

Other expense (income), net (693 ) Loss before income taxes (16,820 ) Income taxes (11,490 ) Net loss from discontinued operations, net of tax $ (5,330 ) Effective tax rate 68.3 % Liquidity and Capital Resources Vince Holding Corp.'s sources of liquidity are our cash and cash equivalents, cash flows from operations and borrowings available under the Revolving Credit Facility. Our primary cash needs are capital expenditures 26



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for new stores and related leasehold improvements for our new offices, meeting our debt service requirements, paying amounts due per the Tax Receivable Agreement, and funding working capital requirements. The most significant components of our working capital are cash and cash equivalents, accounts receivable, inventories, accounts payable and other current liabilities.

On November 27, 2013, in connection with the consummation of the IPO and Restructuring Transactions, all previously outstanding debt obligations either remained with Kellwood Company, LLC (i.e. the non-Vince businesses) or were discharged, repurchased or refinanced. In connection with the consummation of these transactions, Vince Holding Corp. entered into the Term Loan Facility and Revolving Credit Facility, which are discussed further below.


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