FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 4, 1998
Commission File Number 1-11681
FOOTSTAR, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 22-3439443
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
933 MacArthur Boulevard, Mahwah, New Jersey 07430
(Address of principal executive offices) (Zip Code)
(201) 934-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Number of shares outstanding of the issuer's Common Stock:
Class Outstanding as of April 4, 1998
----- -------------------------------
Common Stock, $.01 par value 25,248,307
1
<PAGE>
INDEX
Part I. - Financial Information Page No.
--------
Consolidated Condensed Statements of Operations -
Three Months Ended April 4, 1998 and March 29, 1997 3
Consolidated Condensed Balance Sheets -
April 4, 1998 and January 3 ,1998 4
Consolidated Condensed Statements of Cash Flows -
For Three Months Ended April 4, 1998 and March 29, 1997 5
Notes to Consolidated Condensed Financial Statements 6 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
Review by Independent Auditors 13
Exhibit 1 - Independent Auditors' Review Report 14
Part II. - Other Information
Item 6 - Exhibits and Reports on Form 8-K 15
2
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except earnings per share data)
Three Months Ended
-------------------
April 4, March 29,
1998 1997
---- ----
Net sales $400.9 $376.9
Cost of sales 286.3 270.5
------ ------
Gross profit 114.6 106.4
Store operating, selling, general
and administrative expenses 98.1 91.4
Depreciation and amortization 8.3 7.6
------ ------
Operating profit 8.2 7.4
Interest income, net 0.8 1.4
------ ------
Income before income taxes
and minority interests 9.0 8.8
Provision for income taxes 3.0 3.0
------ ------
Income before minority interests 6.0 5.8
Minority interests in net income 0.7 0.8
------ ------
Net income $ 5.3 $ 5.0
====== ======
Weighted average shares outstanding:
Basic 26.7 30.5
====== ======
Diluted 26.9 30.6
====== ======
Earnings per Share:
Basic $ 0.20 $ 0.16
====== ======
Diluted $ 0.20 $ 0.16
====== ======
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except for share amounts)
April 4, January 3,
1998 1998
(Unaudited) (Audited)
----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 26.6 $ 152.2
Accounts receivable, net 54.9 43.9
Inventories 324.1 284.5
Prepaid expenses and other 50.5 48.4
-------- --------
Total current assets 456.1 529.0
-------- --------
Property and equipment, net 212.3 201.9
Goodwill, net 27.2 27.5
Deferred charges and other 12.2 12.6
-------- --------
Total assets $ 707.8 $ 771.0
======== ========
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 111.9 $ 95.4
Accrued expenses 125.6 126.6
Income taxes payable 18.8 21.9
-------- --------
Total current liabilities 256.3 243.9
-------- --------
Other long-term liabilities 60.3 59.5
Minority interests in subsidiaries 65.8 65.1
-------- --------
Total liabilities 382.4 368.5
-------- --------
Shareholders' equity:
Common stock $.01 par value:
100,000,000 shares authorized,
30,573,807 and 30,558,107 shares issued 0.3 0.3
Additional paid-in capital 334.7 333.6
Accumulated other comprehensive income (loss) (0.2) (0.4)
Treasury Stock: 5,325,500 and
2,685,900 shares at cost (150.0) (66.3)
Unearned compensation (5.1) (5.1)
Retained earnings 145.7 140.4
-------- --------
Total shareholders' equity 325.4 402.5
-------- --------
Total liabilities and shareholders' equity $ 707.8 $ 771.0
======== ========
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Three Months Ended
-------------------------
April 4, March 29,
1998 1997
------- --------
Net cash (used in) operating activities $(24.8) $ (51.8)
------ -------
Cash flows (used in) investing activities:
Additions to property and equipment (18.4) (13.6)
------ -------
Net cash used in investing activities (18.4) (13.6)
------ -------
Cash flows provided by (used in) financing
activities:
Dividends paid to minority interests -- (35.9)
Treasury stock acquired (83.7) --
Other 1.3 (0.4)
------ -------
Net cash (used in) financing activities (82.4) (36.3)
------ -------
Net (decrease) in cash and cash equivalents (125.6) (101.7)
Cash and cash equivalents at beginning of period 152.2 164.6
------ -------
Cash and cash equivalents at end of period $ 26.6 $ 62.9
====== =======
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
1. Basis of Presentation
In the opinion of Footstar, Inc. (the "Company"), the accompanying unaudited
consolidated condensed financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the financial
position of the Company as of April 4, 1998 and the results of operations and
cash flows for the three-month periods ended April 4, 1998 and March 29, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expense during the
reporting period. Actual results could differ from those estimates. Because of
the seasonality of the specialty retailing business, operating results of the
Company on a quarterly basis may not be indicative of operating results for the
full year. The consolidated condensed financial statements of the Company should
be read in conjunction with the financial statements of the Company included in
the Company's 1997 Annual Report on Form 10-K. Certain reclassifications have
been made to the 1997 consolidated condensed financial statements to conform to
the 1998 presentation.
2. Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS No. 130") effective January 4, 1998. SFAS
No. 130 requires that items defined as other comprehensive income, such as
foreign currency translation adjustments, be separately classified in the
financial statements and that the accumulated balance of other comprehensive
income be reported separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The components of
comprehensive income for the three months ended April 4, 1998 and March 29, 1997
are as follows:
Three Months Ended
---------------------------------
April 4, 1998 March 29, 1997
------------- --------------
Comprehensive Income:
Net income $5.3 $ 5.0
Other comprehensive income (loss) - Foreign
currency adjustment 0.2 (0.2)
---- -----
Comprehensive income $5.5 $ 4.8
==== =====
6
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
3. Earnings per Share
The table below shows calculated earnings per share in accordance to SFAS No.
128.
Three Months Ended Three Months Ended
April 4, 1998 March 29, 1997
------------------ ------------------
Basic EPS Computation
Numerator:
Net income $ 5.3 $ 5.0
========== ==========
Denominator:
Shares outstanding at beginning of year 27,872,207 30,533,883
Weighted average shares repurchased 1,146,405 --
---------- ----------
Weighted average common shares
outstanding 26,725,802 30,533,883
========== ==========
Basic EPS $ 0.20 $ 0.16
========== ==========
Diluted EPS computation
Numerator:
Net income $ 5.3 $ 5.0
========== ==========
Denominator:
Shares outstanding at beginning of year 27,872,207 30,533,883
Weighted average shares repurchased 1,146,405 --
---------- ----------
Weighted average common shares
outstanding 26,725,802 30,533,883
Dilutive effect of stock options 190,565 77,503
---------- ----------
Total shares 26,916,367 30,611,386
========== ==========
Diluted EPS $ 0.20 $ 0.16
========== ==========
4. Purchase of Treasury Stock
During the first quarter, ended April 4, 1998, the Company purchased 2,639,600
shares of its stock in the open market at an average price of $31.73 per share
for an aggregate purchase amount of $83.7 million. As of April 4, 1998, the
Company had purchased a total of 5,325,500 shares at an average price of $28.17
for an aggregate purchase amount of $150.0 million. The treasury shares may be
issued upon the exercise of employee stock options or for other corporate
purposes.
7
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
($ in millions, except per share data)
5. Supplemental Cash Flow Information
Three Months Ended
-------------------------------------
April 4, 1998 March 29, 1997
------------- --------------
Cash paid for income taxes $8.9 $7.3
Cash paid for interest $0.1 $0.4
8
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements of the Company and notes thereto appearing
elsewhere in this report.
General
Footstar, Inc. (the "Company") became an independent company after the Board of
Directors of Melville Corporation ("Melville") approved the spin-off of its
footwear operations. The spin-off was completed with the distribution (the
"Distribution") on October 12, 1996 to the Melville shareholders of record on
October 2, 1996 of all the shares of the Company.
Three Months Ended
-------------------------------
April 4, 1998 March 29, 1997
($ in millions) -------------- --------------
Company:
Net Sales $400.9 $376.9
Net sales % change from prior year 6.4% 11.9%
Same store sales % change (0.7%) 5.7%
Meldisco:
Net Sales $236.3 $239.2
Net sales % change from prior year (1.2%) 5.5%
Same store sales % change (4.6%) 4.6%
% of consolidated net sales 59.0% 63.5%
Footaction:
Net Sales $164.6 $137.7
Net sales % change from prior year 19.6% 25.1%
Same store sales % change 6.9% 8.1%
% of consolidated net sales 41.0% 36.5%
Consolidated net sales for the first quarter ended April 4, 1998, increased to
$400.9 million, or 6.4% from net sales of $376.9 million for the first quarter
of 1997. Same store sales for the three month period decreased by 0.7% compared
to the same period in 1997. This decrease resulted in part from the shift in
Easter from the first quarter in 1997 to the second quarter in 1998. Footaction
posted a 19.6% sales increase over the prior year, driven by strong sales of
basketball shoes, particularly Air Jordan and Team Jordan, and sales of running
shoes and apparel. Additinally, Footaction operated 551 stores at the end of
March 1998 compared to 492 stores in 1997. Meldisco showed a 1.2% sales decrease
due in part to the lack of inclement weather and a 4.6% loss in same store sales
over last year, attributable to the Easter shift.
9
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cost of Sales and Expenses
Three Months Ended
----------------------------------
April 4, 1998 March 29, 1997
------------- --------------
(As a percent of net sales)
Cost of sales 71.4% 71.8%
Store operating, selling, general
and administrative expenses 24.5% 24.3%
Depreciation and amortization 2.1% 2.0%
Cost of Sales
Cost of sales for the first quarter of 1998 decreased 40 basis points from the
corresponding prior year period. Meldisco, as a percent of sales, experienced
higher gross margin in the first quarter of 1998 than the same 1997 period, due
to higher initial markups and lower markdowns offset in part by higher delivery
costs. Footaction's gross margin decreased due to additional markdowns to
liquidate aged product, increased warehousing expenses and higher occupancy
costs related to new store openings.
Store Operating, Selling, General and Administrative Expenses
Store operating, selling, general and administrative expenses were 20 basis
points higher, as a percent of sales, in the first quarter of 1998 as compared
to the same prior year period. Meldisco's SG&A increased 80 basis points due to
the lower leverage of fixed expenses, in light of the sales decline for the
period. Footaction's expenses decreased by 60 basis points due to significant
reductions in store selling and payroll expenses and improved leverage of fixed
costs, partially offset by increases in sales promotion costs.
10
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Profit
Three Months Ended
----------------------------------------------
($ in millions) April 4, 1998 March 29, 1997
---------------- ----------------
Meldisco $ 1.8 0.8%* $ 1.6 0.7%*
Footaction 8.9 5.4%* 8.1 5.9%*
Corporate overhead (2.5) -- (2.3) --
---- -----
Total $ 8.2 2.0%* $ 7.4 2.0%*
===== =====
* Represents percent of net sales of the respective companies.
Operating profit for the first quarter ended April 4, 1998 increased 10.8% over
the first quarter of 1997. This improvement was attributable to the Company's
increased sales and improved gross margins coupled with its ability to leverage
fixed costs.
Liquidity and Financial Condition
At April 4, 1998, the Company's cash balance was $26.6 million which reflects
the $83.7 million spent in the quarter for the share buyback program, compared
to the year end cash balance of $152.2 million. This cash balance included $12.3
million in short-term investments with maturities less than three months.
Current assets were lower at April 4, 1998 as compared to January 3, 1998 due to
the lower cash balance, offset in part by higher inventories required to support
the growth of the Footaction business and increases in the accounts receivable
balances. The increase in current liabilities for the first quarter of 1998
compared to the end of 1997 was due to an increase in accounts payable,
partially offset by decreases in income taxes and accrued expenses.
The Company's businesses are seasonal in nature. Peak selling periods coincide
with Christmas, the Easter holiday and the back-to-school selling seasons.
Working capital requirements vary with seasonal business volume and inventory
buildups occurring prior to the peak periods. The Company expects that its
current cash, together with cash generated from operations and the $300 million
unsecured revolving credit facility (the "Credit Facility"), will be adequate to
fund its operating expenses, working capital needs, capital expenditures, and
projected growth and expansion plans. The Company's current borrowing capacity
is sufficient to take advantage of growth and investment opportunities.
As of April 4, 1998, there had been no direct borrowings under the Credit
Facility, and there were no letters of credit outstanding under the Credit
Facility. The Company's Credit Facility contains various operating covenants
which, among other things, impose certain limitations on the Company's ability
to incur liens, incur indebtedness, merge, consolidate or declare and make
dividend payments. Under the Credit Facility, the Company is required to comply
with financial covenants relating to ratios of cash flow and fixed charge
coverage.
11
<PAGE>
FOOTSTAR, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company expects that it will retain all available funds for the operation
and expansion of its business as well as to fund its share repurchase program,
and does not anticipate paying any cash dividends to shareholders in the
foreseeable future. Under its arrangement with Kmart, Meldisco will distribute
annually to Kmart, a portion of profits representing Kmart's minority interest
in the Meldisco Subsidiaries. In April 1998, after the end of the fiscal
quarter, the Company distributed $36.3 million representing Kmart's normal
dividend for their minority interests on net income for fiscal year 1997.
Capital expenditures for the first quarter ended April 4, 1998 were $18.4
million and are in line with the full year capital expenditure plan of $65.0
million. These expenditures related primarily to the opening, remodeling,
relocation or expansion of Footaction stores, the investments in strategic
management information systems and equipment for our distribution systems.
Effective March 1, 1997, the Company established the Funds Transfer Program
whereby payment for merchandise can be effected by wire transfer of funds rather
than through letters of credit. Participation in the program provides vendors
with the opportunity to reduce bank fees in connection with letters of credit
and streamlines the documentation process. This program has enhanced the
Company's float and significantly reduced the size of the Company's letter of
credit commitments, thereby reducing the letter of credit fees payable by the
Company.
Forward-Looking Statements
This Report on Form 10-Q contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements appear in a number of places in this Report as well as
the documents incorporated by reference and can be identified by the use of
forward-looking terminology such as "believe," "expect," "estimate," "plans,"
"may," "will," "should" or "anticipates" or similar statements or the negative
thereof or other variations thereof. Such forward-looking statements include,
without limitation, statements made as to cost savings, improvements in
infrastructure and operating efficiencies. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Consequently, all of the forward-looking statements
made herein are qualified by these cautionary statements, and there can be no
assurance that the actual results, performance or achievement will be realized.
The information contained in this Report as well as information contained under
the caption "Risk Factors" in other company filings with the Securities and
Exchange Commission, identifies important factors that could cause such results,
performance or achievements not to be realized.
The Company undertakes no obligations to update forward-looking statements to
reflect events or circumstances after the date such statements were made.
12
<PAGE>
REVIEW BY INDEPENDENT AUDITORS
The April 4, 1998 and March 29, 1997 consolidated condensed financial statements
included in this filing on Form 10-Q have been reviewed by KPMG Peat Marwick
LLP, independent auditors in accordance with established professional standards
and procedures for such a limited review.
The report of KPMG Peat Marwick LLP, commenting on their review, is included
herein as Part I - Exhibit 1.
13
<PAGE>
Part 1 - Exhibit 1
Independent Auditors' Review Report
The Board of Directors and Shareholders
Footstar, Inc.
We have reviewed the consolidated condensed balance sheet of Footstar, Inc. and
subsidiary companies as of April 4, 1998 and the related consolidated condensed
statements of operations and cash flows for the three-month periods ended April
4, 1998 and March 29, 1997, respectively. These consolidated condensed financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Footstar, Inc. and subsidiary
companies as of January 3, 1998 and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 12, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of January 3, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/S/KPMG Peat Marwick LLP
New York, New York
April 23, 1998
14
<PAGE>
Part II. - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
a) EXHIBIT INDEX
Exhibit
15 Accountants' Acknowledgment
27 Financial Data Schedule
b) Reports on Form 8-K - None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOOTSTAR, INC.
(REGISTRANT)
/s/Carlos E. Alberini
---------------------------
Carlos E. Alberini
Senior Vice President and
Chief Financial Officer
Date: May 18, 1998
15
Accountants' Acknowledgment
Footstar, Inc.
Mahwah, New Jersey
Board of Directors:
Re: Registration Statements Number 33-20731 and 33-30011 on Form S-8
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 23, 1998 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
/s/KPMG Peat Marwick LLP
New York, New York
May 18, 1998
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<PERIOD-END> APR-04-1998
<CASH> 26,600
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<RECEIVABLES> 56,300
<ALLOWANCES> 1,400
<INVENTORY> 324,100
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<PP&E> 302,700
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