SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended November 1, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to __________
Commission File Number: 1-1594
CROWLEY, MILNER AND COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-0454910
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
2301 West Lafayette Boulevard, Detroit, Michigan 48216
(Address of principal executive offices)(Zip Code)
(313) 962-2400
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
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, and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of Registrant's common stock, as of
December 12, 1997, was 1,544,462
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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NINE MONTHS ENDED QUARTER ENDED
----------------- -------------
November 1 November 2 November 1 November 2
1997 1996 1997 1996
---- ---- ---- ----
Revenues
Net sales--owned departments $121,887,917 $76,281,197 $45,423,791 $37,346,433
Net sales--leased departments 12,855,347 9,741,100 4,116,822 3,908,715
----------- ---------- ---------- ----------
Total net sales 134,743,264 86,022,297 49,540,613 41,255,148
Investment income 79,071 112,077 24,980 60,158
Other income 336,175 429,857 18,153 427,969
----------- ---------- ---------- ----------
135,158,510 86,564,231 49,583,746 41,743,275
Costs and Expenses
Cost of merchandise and services sold 91,852,634 57,545,476 1,651,408 26,706,592
Operating expenses 45,456,624 30,505,417 16,155,830 14,496,766
Interest 2,354,251 1,541,412 1,036,213 668,994
Operating (income) loss and costs related to
integration of Steinbach Stores, Inc. - (837,213) - 556,704
----------- ---------- ---------- ----------
139,663,509 88,755,092 48,843,451 42,429,056
Earnings (Loss) Before Income Taxes (4,504,999) (2,190,861) 740,295 (685,781)
Federal income taxes - - - -
----------- ---------- ---------- ----------
Net Earnings (Loss) $ (4,504,999) $(2,190,861) $ 740,295 $ (685,781)
=========== ========== ========== ==========
Per Share Data:
Net earnings (loss) $ (2.93) $ (2.03) $ 0.48 $ (0.52)
Average number of common and common equivalent
shares outstanding for earnings per share 1,535,834 1,077,016 1,544,344 1,320,895
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CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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November 1 February 1 November 2
1997 1997 1996
---- ---- ----
Assets
Current Assets
Cash and cash equivalents
(cash equivalents of $513,196 at 11/1/97, $176,728 at 2/1/97,
and $351,312 at 11/2/96) $ 697,917 $ 215,316 $ 441,811
Accounts receivable, less allowances
($66,558 at 11/1/97, $66,258 at 2/1/97, and $66,558 at 11/2/96) 1,906,036 2,813,759 6,267,116
Inventories at FIFO cost 56,753,197 46,555,769 61,316,683
Deferred property taxes 231,881 1,396,848 789,370
Other current assets 893,957 1,950,510 2,842,676
---------- ---------- ----------
Total Current Assets 60,482,988 52,932,202 71,657,656
Other Assets
Deposits under EDC financing arrangements 634,308 634,308 634,308
Deferred tax asset 1,580,000 1,580,000 -
Miscellaneous 2,909,703 2,922,660 2,774,748
---------- ---------- ----------
5,124,011 5,136,968 3,409,056
Properties
Land 321,150 315,000 315,000
Buildings 13,311,168 13,274,001 13,270,672
Leasehold improvements 7,965,237 6,757,605 5,374,618
Furniture, fixtures and equipment 7,992,611 7,359,066 8,054,412
---------- ---------- ----------
29,590,166 27,705,672 27,014,702
Less: Allowance for depreciation and amortization 16,315,210 15,086,513 15,603,763
---------- ---------- ----------
13,274,956 12,619,159 11,410,939
---------- ---------- ----------
Total Assets $78,881,955 $70,688,329 $86,477,651
========== ========== ==========
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CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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November 1 February 1 November 2
1997 1997 1996
---- ---- ----
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 19,554,591 $ 17,587,798 $ 35,458,276
Notes payable short term 30,752,215 18,092,794 20,513,622
Compensation and amounts withheld therefrom 1,067,949 1,424,667 1,054,198
Property taxes 162,120 1,353,131 782,563
Income taxes 34,972 34,972 109,972
Other taxes 337,880 670,062 781,879
Current maturities of long-term debt 575,000 575,000 525,000
Current maturities of capital lease obligations 263,977 263,869 284,199
---------- ---------- ----------
Total Current Liabilities 52,748,704 40,002,293 59,509,709
Long-Term Liabilities
Long-term debt 4,750,000 4,750,000 5,325,000
Capital lease obligations 6,139,902 6,307,565 6,424,225
Other 1,977,372 1,982,053 1,976,157
---------- ---------- ----------
12,867,274 13,039,618 13,725,382
Shareholders' Equity
Common stock, (authorized 4,000,000 shares,
outstanding 1,544,462 shares at 11/1/97,
1,507,387 shares at 2/1/97 and 1,501,378
shares at 11/2/96) 1,544,462 1,507,387 1,501,378
Other capital 3,371,043 3,283,560 3,204,069
Retained earnings 8,350,472 12,855,471 8,537,113
---------- ---------- ----------
13,265,977 17,646,418 13,242,560
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $78,881,955 $70,688,329 $86,477,651
========== ========== ==========
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CROWLEY, MILNER AND COMPANY AND CONSOLIDATED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
November 1 November 2
1997 1996
---- ----
Operating Activities
Net earnings (loss) $ (4,504,999) $ (2,190,861)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities
Depreciation and amortization 1,224,794 976,152
Amortization of restricted stock award - 57,193
Changes in operating assets and liabilities
Gain on termination of capital lease - (372,514)
(Increase) decrease in net accounts
receivable 907,723 (2,118,667)
(Increase) decrease in inventories (10,197,428) (19,135,556)
(Increase) decrease in prepaid expense
and other assets 2,234,477 (949,188)
Increase (decrease) in accounts payable 2,482,609 10,971,666
Increase (decrease) in accrued compensation
and other liabilities (2,400,408) 1,599,249
---------- ----------
Net Cash Provided By (Used In) Operating
Activities (10,253,232) (11,162,526)
Investment Activities
Purchase of properties (1,880,591) (327,933)
---------- ----------
Steinbach Acquisition - (486,122)
Net Cash Used in Investment Activities (1,880,591) (814,055)
Financing Activities
Proceeds from revolving line of credit 156,640,179 106,056,568
Principal payments on revolving line of
credit (143,980,758) (94,042,338)
Principal payments on capital lease
obligations (167,555) (323,415)
Proceeds from sale of common stock 124,558 186,964
----------- ----------
Net Cash Provided By (Used In) Financing
Activities 12,616,424 11,877,779
----------- ----------
Increase (Decrease) in Cash and Cash
Equivalents 482,601 (98,802)
Cash and Cash Equivalents at beginning
of year 215,316 540,613
----------- ----------
Cash and Cash Equivalents at End of Period $ 697,917 $ 441,811
=========== ==========
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
November 1, 1997
Note A - Basis of Presentation
The accompanying condensed, consolidated, and unaudited financial statements
for the Company have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. As a result,
the financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments necessary for a
fair presentation of quarterly operating results are reflected herein, and
are of a normal, recurring nature. For purposes of this report the
"Company" refers to Crowley, Milner and Company ("Crowley's") and its
wholly-owned subsidiary, Steinbach Stores, Inc. ("Steinbach"), collectively.
Given the seasonal nature of the specialty department store business,
operating results for the nine months ended November 1, 1997 are not
necessarily indicative of the results that may be expected for the year
ending January 31, 1998.
It is suggested that these condensed, consolidated and unaudited financial
statements be read in conjunction with the financial statements and notes to
financial statements included in the Company's Annual Report on Form 10-K
for the year ended February 1, 1997.
Note B - Acquisition of Steinbach Stores, Inc. and Presentation of Financial
Information
As previously reported by the Company in its Annual Report on Form 10-K
filed for the year ended February 1, 1997, effective August 31, 1996,
Crowley's acquired from the shareholders of Steinbach (the "Steinbach
Shareholders") all of the issued and outstanding shares of the capital stock
of Steinbach in exchange for 514,800 shares of Common Stock of Crowley's
pursuant to the terms of an Agreement and Plan of Reorganization, dated
November 17, 1995, as amended, between Crowley's and the Steinbach
Shareholders. As a result of the acquisition, Steinbach, with 15 retail
department stores in Connecticut, New Hampshire, New York, New Jersey and
Vermont, became a wholly-owned subsidiary of Crowley's. The Steinbach
acquisition was accounted for as a purchase for financial reporting
purposes. Under purchase accounting, Crowley's allocated the total cost of
acquiring the Steinbach common stock to the assets and liabilities of
Steinbach.
In connection with the Steinbach acquisition, Crowley's entered into a
separate Interim Operating Agreement with the Steinbach Shareholders, which
provided that, during the period from December 31, 1995 through August 31,
1996, the 15 acquired Steinbach stores would be operated under the
management and supervision of Crowley's with all revenues, costs and
expenses relating to the stores being the responsibility of Crowley's. The
operating results of Steinbach through August 31, 1996 were reflected as a
separate line item on the Company's consolidated condensed statements of
income. Since August 31, 1996, the Company's operating results have been
reported on a consolidated basis.
Notwithstanding the purchase accounting treatment, inasmuch as the Company
acquired only 15 of 27 stores and did not acquire the corporate office or
distribution center of Steinbach, the Company views the Steinbach
acquisition, from an accounting perspective, as an asset purchase of those
stores that were actually acquired. Pro forma financial information for the
acquired stores (exclusive of the Steinbach store located in North Utica,
New York, which was closed in December 1996) for the quarter and nine months
ended November 1, 1997, and for the comparable periods last year, was as
follows:
Nine Months Ended Quarter Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---- ---- ---- ----
Comparable store sales $61,075,935 $53,266,788 $21,373,497 $20,007,944
Gross Profit 18,828,155 22,320,137 7,953,481 7,932,807
Operating Expenses 23,149,393 21,806,877 8,122,675 8,322,365
Interest Expense
(related to Line of
Credit) 961,056 528,321 409,018 276,071
Net Income (Loss) (5,400,707) 737,422 (717,066) (656,495)
Note C - Anticipated Effect of Pronouncement
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS"), and
attempts to simplify the approach for computing EPS previously required in
APB Opinion No. 15. SFAS No. 128 is effective for financial statements
issued for periods ending after December 15, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note on Forward-Looking Statements
This report includes various "forward-looking statements" within the meaning
of the Private Securities Reform Act of 1995 that represent the Company's
expectations or beliefs concerning future events and involve risks and
uncertainties. Expressions such as "believes", "anticipates" or "expects"
are intended to identify these forward-looking statements. Although the
Company believes its expectations are based upon reasonable assumptions, the
Company cautions that such forward-looking statements are subject to
important factors that could cause actual results to differ materially from
those anticipated. These factors include, but are not limited to,
increasing competition in existing markets; adverse economic conditions
either nationally or in existing markets; unexpected or severe weather
conditions, and possible unavailability of merchandise from existing
vendors. The Company is under no obligation to update such forward-looking
statements to reflect events or circumstances after the date hereof.
Results of Operations
As detailed in Note A of the Notes To Consolidated Condensed Financial
Statements ("Notes"), for purposes of this report the "Company" refers to
Crowley, Milner and Company ("Crowley's") and its wholly-owned subsidiary,
Steinbach Stores, Inc. ("Steinbach"), collectively.
As detailed in Note B of the Notes, Crowley's acquired Steinbach effective
August 31, 1996, and Steinbach became a wholly-owned subsidiary of Crowley's
as of that date. During the period from December 31, 1995 through August
31, 1996, the 15 acquired Steinbach stores were operated by Crowley's with
all revenues, costs and expenses relating to the stores being the
responsibility of Crowley's. The operating results of Steinbach through
August 31, 1996 were reflected as a separate line item on the Company's
consolidated condensed statements of income. Since August 31, 1996, the
Company's operating results are reported on a consolidated basis. To assist
the reader in the review of this report, the Steinbach operating results for
the quarter and nine months ended November 2, 1996 were combined with the
Crowley's operating results for those reporting periods, on a pro forma
basis as if Steinbach had been owned by Crowley's throughout the period.
Quarter Ended November 1, 1997 Compared To Quarter Ended November 2, 1996
Quarter Ended
Nov 1 Nov 2 Percentage
Comparable 1997 1996 Increase
Store ----- ----- ----------
Sales Crowley's $27,337,682 $24,836,609 10.1%
Steinbach 21,373,497 20,007,944 6.8%
---------- ---------- ----
Consolidated for 1997 48,711,179
Combined/Pro forma for 1996 44,844,553 8.6%
For Crowley's, the sales increase for the quarter occurred during the months
of August and October. Management believes that a successful "back to
school" sales promotion bolstered August's performance and that October
sales were enhanced by the initiation of a deferred billing credit card
program, together with a novel Halloween promotional mailer. As was the
case during the second quarter, a promotional campaign to aggressively
market the Crowley's proprietary credit card also contributed to the sales
performance.
For Steinbach, the majority of the sales increase for the quarter occurred
in October. As was the case with Crowley's stores, October sales were
augmented by the initiation of a deferred billing credit card program,
together with the novel Halloween promotional mailer. Also, a promotional
campaign to aggressively market the Steinbach proprietary credit card
contributed to the sales performance.
Quarter Ended
Nov 1 Nov 2 Percentage
1997 1996 Increase
---- ---- -------
Gross Crowley's $9,935,724 $8,401,108 18.3%
Profit Steinbach 7,953,481 7,932,807 0.7%
--------- --------- -----
Consolidated for 1997 17,889,205
Combined/Pro forma for 1996 16,333,915 9.5%
For the third quarter, as a percentage of net sales, Crowley's gross profit
was 36.3% compared to last year's third quarter performance of 33.7%.
Management attributes the improvement in large part to an effort which
attempted to accelerate promotional markdowns into the second quarter of the
year. By taking markdowns earlier, the extent of the markdowns for the
third quarter was be lessened.
Steinbach's gross profit as a percentage of sales was 35.9% compared to last
year's third quarter performance of 37.3%. As noted in the Form 10-Q filed
for the quarter ended November 2, 1996, Steinbach's gross profit percentage
was enhanced by positive adjustments to both merchandise ($250,000) and gift
certificate redemptions ($225,000). Absent these positive adjustments in
1996, Steinbach's gross profit as a percentage of sales would have been
35.0%. Thus, Steinbach's gross profit percentage for the quarter improved
to 35.9% from 35.0%, and is comparable to Crowley's gross profit percentage
for the quarter. As was the case with Crowley's, management attributes the
improvement in large part to an effort which accelerated promotional
markdowns into the second quarter of the year.
Quarter Ended
Nov 1 Nov 2 Percentage
1997 1996 Decrease
---- ---- --------
Operating Crowley's $8,033,155 $8,427,445 (4.7%)
Expenses Steinbach 8,122,675 8,322,365 (2.4%)
--------- --------- ----
Consolidated for 1997 16,155,830
Combined/Pro forma for 1996 16,749,810 (3.5%)
The Company's consolidated operating expenses for the quarter ended November
1, 1997 expressed as a percentage of net sales were 32.6% compared to 35.1%
for the comparable period last year. Management attributes this improvement
to the 8.6% sales increase, together with cost efficiencies that the Company
has effected since the Steinbach acquisition. Areas in which the Company
has realized cost efficiencies include general liability, worker's
compensation and unemployment insurance, pension administration and
contribution, and previously outsourced contract services, such as cleaning,
rubbish removal and security.
For Crowley's, operating expenses as a percentage of net sales decreased to
29.4% for the quarter ended November 1, 1997, from 32.0% for the comparable
period in 1996. Together with the sales increase and the cost efficiencies
detailed above, the decrease was attributable to the allocation of a pro
rata share of corporate overhead expense to Steinbach during the quarter
ended November 1, 1997. No corporate overhead was allocated to Steinbach
prior to August 31, 1996, the effective date of the Steinbach acquisition by
Crowley's. For Steinbach, operating expenses expressed as a percentage of
net sales remained relatively constant at 36.6%. This percentage remained
constant because the increase in Steinbach's sales base and the savings
effected by the cost efficiencies detailed above were offset by the
allocation of corporate overhead from Crowley's.
Quarter Ended
Interest Nov 1 Nov 2 Percentage
Expense 1997 1996 Increase
Line of ---- ---- --------
Credit Crowley's $262,202 $250,128 4.8%
Steinbach 409,018 276,071 48.2%
------- ------- ----
Consolidated for 1997 671,220
Combined/Pro forma for 1996 526,199 27.6%
The Company's consolidated interest expense related to its line of credit
was 1.4% as a percentage of net sales in the third quarter of 1997 compared
to 1.1% on a combined basis for the comparable period last year. The
increase in consolidated interest expense was attributable to higher
inventory levels that were funded by the revolving line of credit,
notwithstanding a decrease in the Company's borrowing rate as a result of
amending the terms of its credit facility in September 1996 from prime plus
1.00% to prime plus 0.25%. Although higher inventory levels contributed to
the majority of the increase in interest expense, a refinement in the method
by which interest expense was calculated and allocated to the Steinbach
stores during the current year also contributed to the increase for
Steinbach.
For accounting purposes, both Crowley's and Steinbach are required to
capitalize a portion of lease expense related to certain store locations,
and to reclassify a portion of this lease expense as interest expense. On a
consolidated basis, for the quarters ended November 1, 1997 and November 2,
1996, the amount of lease payments reclassified as interest expense and
other non-revolver interest was approximately $365,000, and $143,000,
respectively.
Quarter Ended
Nov 1 Nov 2 Percentage
Net Income 1997 1996 Increase
(Loss) ---- ---- --------
Crowley's $ 1,457,361 $(29,286) nm
Steinbach (717,066) (656,495) 9.2%
--------- ------- ----
Consolidated for 1997 740,295
Combined/Pro forma for 1996 (685,781) nm
- ------------
nm= not meaningful
On a consolidated basis, the Company reported earnings of $0.48 per share
for the third quarter of 1997 compared to a combined net loss of $0.52 per
share for the third quarter of 1996.
As detailed above, the improvement in Crowley's performance for the third
quarter can be attributed to enhanced gross margin results and to a
reduction in operating expenses. For Steinbach, the third quarters of 1996
and 1997 were very comparable. Absent the one-time adjustments to gross
margin effected in 1996, gross margin performance improved in 1997, and the
reduction in operating expenses was offset by the allocation of corporate
overhead.
The Company is in a net operating loss carryforward position, and as a
result, pre-tax and after-tax results were the same.
Nine Months Ended November 1, 1997 Compared To Nine Months Ended November 2,
1996
Nine Months Ended
Nov 1 Nov 2 Percentage
Comparable 1997 1996 Increase
Store ---- ---- --------
Sales Crowley's $71,428,282 $67,082,282 6.5%
Steinbach 61,075,935 53,266,788 14.7%
---------- ---------- -----
Consolidated for 1997 132,504,217
Combined/Pro forma for 1996 120,349,070 10.1%
For Crowley's, the sales increase was attributable to an extensive and
aggressive sales promotion effort in March to move fall and winter clearance
merchandise, a promotional campaign in the second and third quarter to
market Crowley's proprietary credit card, a successful "back to school"
sales promotion, the initiation of a deferred billing credit card program,
and a novel Halloween promotional mailer. Also note that Crowley's closed
its Birmingham store on March 23, 1997. Sales for the Birmingham store for
1997 and for the first nine months of 1996 were approximately $1.4 million
and $4.0 million, respectively.
Much of the sales improvement for the Steinbach stores was driven by an
extensive and aggressive sales promotion to move out fall and winter
clearance merchandise during the first two quarters of the year. As was the
case with Crowley's stores, October sales were augmented with the initiation
of a deferred billing credit card program, together with the novel Halloween
promotional mailer.
Nine Months Ended
Nov 1 Nov 2 Percentage
Gross 1997 1996 Increase/(Decrease)
Profit ---- ---- ------------------
Crowley's $24,062,475 $22,329,373 7.8%
Steinbach 18,828,155 22,320,137 (15.6%)
---------- ---------- ----
Consolidated for 1997 42,890,630
Combined/Pro forma for 1996 44,649,510 (3.9%)
Notwithstanding Crowley's aggressive sales promotion effort to move out fall
and winter clearance items during the first quarter of 1997, Crowley's gross
profit percentage improved to 33% from 31.4% for the first nine months of
1997 and 1996. Management's continued efforts to reduce inventory
shrinkage, particularly in the area of credit card fraud, contributed to the
improvement in gross profit percentage.
Steinbach's gross profit percentage dropped from 39.9% for the first nine
months of 1996 to 30.4% for the first nine months of 1997. The gross profit
percentage for 1996 of 39.9%, however, includes a one-time reversal of a
$3.3 million markdown reserve. Absent this one-time reversal, the gross
profit percentage for the first nine months of 1996 would have been 33.9%.
Steinbach's gross profit percentage for the first nine months of 1997 was
impacted significantly by the extensive sales promotion effort that was
required to move the fall and winter clearance merchandise, particularly in
the first and second quarters. As a result of the extensive markdowns taken
in the Steinbach stores for the first two quarters of 1997, markdowns for
the third quarter were more in line with management's expectations.
However, Steinbach's markdown problems in the first two quarters continue to
hamper year-to-date performance.
Nine Months Ended
Nov 1 Nov 2 Percentage
Operating 1997 1996 Increase/(Decrease)
Expenses ---- ---- -----------------
Crowley's $22,307,231 $24,436,096 (8.7%)
Steinbach 23,149,393 21,806,877 6.2%
Consolidated for 1997 45,456,624
Combined/Pro forma for 1996 46,242,973 (1.7%)
On a consolidated basis, operating expenses as a percentage of net sales
decreased significantly to 33.7% for the first nine months of 1997 from
36.4% for the comparable period last year. As noted earlier, management
attributes this improvement to the 8.6% sales increase, together with the
cost efficiencies that the Company has experienced since the Steinbach
acquisition. Areas in which the Company has realized cost efficiencies
include general liability, worker's compensation and unemployment insurance,
pension administration and contribution, and previously outsourced contract
services, such as cleaning, rubbish removal and security.
For the nine months ended November 1, 1997, Crowley's operating expenses,
expressed as a percentage of net sales, decreased to 30.6% from 34.4% for
the comparable period last year. Together with the sales increase and the
cost efficiencies detailed above, the decrease was attributable to the
allocation of a pro rata share of corporate overhead expense to Steinbach.
For Steinbach, operating expenses expressed as a percentage of net sales
dropped to 37.4% for the first nine months of 1997 from 38.9% for the
comparable period last year. Management attributes this positive trend to
the 14.7% improvement in the Steinbach comparable stores sales performance
for the first nine months of the year and the cost efficiencies detailed
above. However, the impact of the increased sales and cost efficiencies
were mitigated somewhat by the allocation of corporate overhead from
Crowley's.
Nine Months Ended
Interest Nov 1 Nov 2 Percentage
Expense 1997 1996 Increase/(Decrease)
Line of ---- --- -----------------
Credit Crowley's $639,591 $672,119 (4.8%)
Steinbach 961,056 528,321 81.9%
Consolidated for 1997 1,600,647
Combined/Pro forma for 1996 1,200,440 33.3%
The Company's consolidated interest expense expressed as a percentage of net
sales increased to 1.1% for the first nine months of 1997 from 0.94% for the
comparable period a year ago. The increase in consolidated interest expense
was attributable to the higher inventory levels that were funded by the
revolving line of credit, notwithstanding a decrease in the Company's
borrowing rate as a result of amending the terms of its credit facility in
September 1996 from prime plus 1.00% to prime plus 0.25%. Although higher
inventory levels contributed to the majority of the increase in interest
expense, a refinement in the method by which interest was calculated and
allocated to the Steinbach stores during the current year contributed to the
increase for Steinbach.
For Crowley's, interest expense expressed as a percentage of net sales
decreased to 0.9% for the nine months ended November 1, 1997 from 1.0% for
the comparable period in 1996, and for Steinbach, interest expense expressed
as a percentage of net sales increased significantly to 1.6% for the nine
months ended November 1, 1997 from 0.9% for the comparable period in 1996.
For accounting purposes, both Crowley's and Steinbach are required to
capitalize a portion of the lease expense related to certain of their
respective store locations, and to reclassify a portion of the lease expense
as interest expense. On a consolidated basis, for the nine month periods
ended November 1, 1997 and November 2, 1996, the amount of lease payments
reclassified as interest and interest other than interest incurred on the
revolver was approximately $754,000, and $679,000, respectively.
Nine Months Ended
Nov 1 Nov 2 Percentage
Net Income 1997 1996 Increase/(Decrease)
(Loss) ---- ---- ------------------
Crowley's $ 895,708 $(2,928,562) nm
Steinbach (5,400,707) 737,701 nm
--------- --------- --
Consolidated for 1997 (4,504,999)
Combined/Proforma for 1996 (2,190,861) nm
- --------------
nm= not meaningful
On a consolidated basis, for the nine months ended November 1, 1997 the
Company reported a net loss of $2.93 per share, compared to a combined net
loss of $2.03 per share for the comparable period last year.
For Crowley's, the improvement in earnings performance was attributable to
an increase in gross profit dollars of approximately $1.3 million, and the
allocation of approximately $2.9 million of corporate overhead to Steinbach.
For Steinbach, the change in earnings performance can be attributed to a
$3.5 million decline in gross profit (from $22.3 million to $18.8 million)
arising from an aggressive promotion to clear out fall and winter clearance
merchandise(as indicated previously, the gross profit for the first nine
months of 1996 includes a reversal of a $3.3 million markdown reserve),
together with the allocation of $2.9 million of corporate overhead expenses
during the first nine months of 1997; an increase to interest expense of
$600,000 as a result of the increased inventory levels required to
adequately stock the stores during the nine months; and the one-time
reversal of a price reduction reserve in the first quarter of 1996 of
$700,000.
The merchandising for the Crowley's and Steinbach stores is virtually
identical, yet the difference in the first nine month's gross profit
performance between the two companies was significant. Management believes
that the difference can be primarily attributed to the poor performance in
menswear at the Steinbach stores during the first nine months, principally
the first two quarters. Traditionally, Steinbach's men's department has
been very promotional and the Company attempted to upgrade the merchandise
during the year. However, the new merchandising approach did not move goods
in the manner projected by management. This exacerbated the level of
markdowns required to reduce the inventory to acceptable levels during the
first and second quarters of this fiscal year. In light of the performance
of the menswear area in the first quarter, the Company hired a new Vice
President - General Merchandise Manager of the menswear area.
Management believes that with this addition, and with a more dedicated focus
to controlling inventory levels, particularly in Steinbach's men's division,
and as a result of the extensive promotional efforts, at the end of the
third quarter the inventory levels in the men's area were within an
acceptable range of their planned levels, and that it has taken the
appropriate steps to address the performance issue of Steinbach's men's
division.
The Company is in a net operating loss carryforward position, and as a
result, pre-tax and after-tax results were the same.
Financial Condition
Cash and cash equivalents for the Company increased to $698,000 from
$215,000 at February 1, 1997. The cash and cash equivalents balance at
November 2, 1996 was $442,000.
Net cash used in operating activities was $10.3 million for the first nine
months of 1997, compared with net cash used in operating activities of $11.2
million reported during the first nine months of 1996. The detail
supporting the net cash used in operating activities evidences that the
Company has made significant strides in controlling its inventory levels.
The increase in inventories dropped to $10.2 million for the first nine
months of 1997, from $19.1 million in 1996, with a comparable showing in
accounts payable balances (an increase of $2.5 million in 1997 from $11.0
million in 1996). However, this improvement was overshadowed by the
increase in the net loss for the first nine months of 1997 over 1996 ($4.5
million compared to $2.1 million).
Investing activities used cash of $1.9 million during the first nine months
of 1997, compared to $814,000 of cash used in investing activities for the
first nine months of 1996. Investing activities included capital
expenditures for the modernization and refixturing of existing stores,
expenditures related to the fixturing of two new Steinbach stores which
opened in October 1997, and upgrades to the Company's information systems.
Financing activities provided cash of $12.6 million during the first nine
months of 1997, compared to $11.9 million of cash provided last year. This
increase was attributable to increased borrowings on the Company's revolving
line of credit to fund merchandise purchases and the losses incurred during
the first nine months. On July 3, 1997, the Company amended its revolving
line of credit to increase its borrowing capacity from $24 million to $35
million, with an additional borrowing capacity up to $42 million during the
peak borrowing periods.
At November 1, 1997, the Company's working capital decreased to $7.7 million
from the $12.2 million of working capital available at November 2, 1996. At
November 1, 1997, the Company's working capital ratio was 1.14, down
slightly from 1.18 reported at November 2, 1996. The reduction in working
capital and the change in the working capital ratio evidence the Company's
efforts to reduce its inventory levels ($56.7 million in 1997 compared to
$61.3 million in 1996) and better manage its vendor relationships (accounts
payable to vendors dropped to $19.6 million in 1997 from $35.5 million in
1996, and receivables due from vendors fell to $1.9 million from $6.3
million in 1996).
During the nine month periods ended November 1, 1997, and November 2, 1996,
the Company did not pay or declare any cash dividends with respect to its
stock.
Other Developments
The Company opened new Steinbach stores in Mohegan (Westchester County),
New York (42,000 square feet) and Trumbull (Fairfield County), Connecticut
(54,000 square feet) as scheduled in late October 1997. Both stores are
leased, the Mohegan store for an initial term of 10 years (with two renewal
options) and the Trumbull store for an initial term of five years (also with
two renewal options).
With respect to the Company's "Year 2000" solution, in the fourth quarter of
1997, the Company will commence, for all of its systems, a year 2000 date
conversion project to address all necessary code changes, testing, and
implementation. Based on an extensive study, the Company expects to spend
approximately $2.5 million during the period of fiscal year 1998 through
fiscal year 1999 to modify its computer information systems enabling proper
processing of transactions relating to the year 2000 and beyond. The
estimated funding needs of $2.5 million anticipate a "total solution" to the
"Year 2000" issue, which includes hardware, software, and all related
collateral support. The timetable for the Company to convert from its
current management information system to one which is "Year 2000" compliant
anticipates a "go live" date of July 1998. To finance the "Year 2000"
solution, the Company has entered into a lease agreement with IBM Credit
Corporation ("IBM"). IBM has agreed to finance the total solution,
including hardware, software and related collateral support. The term of
the lease is 36 months, commencing February 1, 1998. There can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter.
SIGNATURES
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.
CROWLEY, MILNER AND COMPANY
(Registrant)
DATE: December 11, 1997 By: /S/ JOHN R. DALLACQUA
John R. Dallacqua
Vice President-Finance and
Chief Financial Officer
(principal financial and chief accounting
officer and a duly authorized officer of
the registrant).
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