SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended June 1, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8252
FREDERICK'S OF HOLLYWOOD, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2666265
(State or other jurisdiction of (IRS Employers Identification No.)
incorporation or organization)
6608 Hollywood Boulevard
Los Angeles, California 90028
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (213) 466-5151
Former name, former address and former fiscal year, if change since last
report: Not Applicable.
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 _____.
Indicate the number of shares outstanding for each of the registrant's
classes of Common stock, as of the latest practicable date. 2,955,309
shares of Class A Capital Stock ($1 par value) and 5,903,118 shares of
Class B Capital Stock ($1 par value) at July 8, 1996.
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
INDEX
Title Page
Index
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets-
June 1, 1996 and September 2, 1995
Consolidated condensed statements of
income (loss) - Three and nine months ended
June 1, 1996 and June 3, 1995
Consolidated condensed statements of
cash flows - Nine months ended
June 1, 1996 and June 3, 1995
Notes to consolidated condensed
financial statements
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
SIGNATURES
<TABLE>
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
ASSETS
June 1, September 2,
1996 1995
<S> <C> <C>
Current assets:
Cash and equivalents $ 10,809 $ 11,441
Accounts receivable 597 658
Income taxes receivable 323 213
Merchandise inventories 19,108 19,862
Deferred income taxes 765 765
Prepaid expenses 2,122 2,615
Total current assets 33,724 35,554
Property and equipment, net 17,807 18,225
Deferred catalog costs 980 2,107
Other assets 39 39
$ 52,550 $ 55,925
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,458 $ 11,617
Dividends payable 221 221
Current portion:
Capital lease obligations 209 200
ESOP loan guarantee 240 240
Accrued payroll 334 526
Accrued insurance 939 1,018
Other accrued expenses 383 469
Total current liabilities 10,784 14,291
Capital lease obligations 726 884
ESOP loan guarantee 480 480
Deferred rent 779 669
Deferred income taxes 3,002 3,002
Stockholders' equity:
Capital stock $1 par value 8,858 8,858
Additional paid-in capital 729 738
Reduction for ESOP loan guarantee (517) (701)
Treasury stock (7) (5)
Retained earnings 27,716 27,709
Total stockholders' equity 36,779 36,599
$ 52,550 $ 55,925
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data - UNAUDITED)
Three Months Ended Nine Months Ended
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $35,282 33,312 116,489 110,787
Cost of goods sold,
buying and occupancy costs 21,045 19,484 67,978 63,567
Gross profit 14,237 13,828 48,511 47,220
Selling, general and
administrative expenses 15,438 13,194 47,534 41,221
Operating profit (1,201) 634 977 5,999
Other income and
(expense), net 27 117 157 243
Earnings (loss) before
income taxes (1,174) 751 1,134 6,242
Income taxes (488) 311 470 2,590
Net earnings (loss) $ (686) 440 664 3,652
Earnings (loss) per share
Primary -
Class A & Class B $ (.08) .05 .08 .42
Fully diluted -
Class A & Class B (.08) .05 .08 .42
Weighted average shares
outstanding
Primary - Class A & Class B 8,730 8,628 8,731 8,627
Fully diluted -
Class A & Class B 8,730 8,630 8,731 8,631
Cash dividend per share -
Class A & Class B $ .025 -- .075 .025
</TABLE>
See accompanying notes to the consolidated financial statements.
<TABLE>
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
Nine Months Ended
June 1, June 3,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 664 $ 3,652
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for store closings -- (2,001)
Depreciation and amortization 3,112 3,081
ESOP compensation 187 153
Loss on sale of fixed assets 23 717
Changes in assets and liabilities
Accounts receivable 61 11
Income tax receivable (110) 881
Merchandise inventories 754 (807)
Prepaid expenses 493 (61)
Deferred catalog costs 1,127 (235)
Other assets -- --
Accounts payable and accrued expenses (3,516) (2,768)
Deferred rent 110 142
Deferred income taxes -- 784
Income tax payable -- 593
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,905 4,142
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 5 160
Capital expenditures (2,722) (1,755)
NET CASH USED FOR INVESTING ACTIVITIES (2,717) (1,595)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (149) (366)
Payment of dividends (652) (216)
Payment of dividends on unearned ESOP shares (12) (6)
Purchase of FOH Class A Capital Stock (7) (26)
Stock split -- (1)
NET CASH USED FOR FINANCING ACTIVITIES (820) (615)
Net increase (decrease) in cash
and cash equivalents (632) 1,932
Cash and cash equivalents at beginning
of year 11,441 10,556
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 10,809 $ 12,488
Supplemental cash flow disclosures:
Interest paid $ 50 $ 41
Income taxes paid $ 589 $ 782
</TABLE>
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED
June 1, 1996 and June 3, 1995
NOTE 1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position as of June 1,
1996 and June 3, 1995, and the results of operations and cash
flows for the nine months ended June 1, 1996 and June 3, 1995.
These financial statements should be read in conjunction with the
Company's 1995 annual report on Form 10-K405.
NOTE 2. EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average
number of shares of both Class A and Class B capital stock
outstanding during each period plus capital stock equivalents.
Capital stock equivalents reflect the assumed exercise of
dilutive employees' stock options less the number of treasury
shares assumed to be purchased from the proceeds using the
average market price or, for fully diluted earnings per share,
the greater of the average market price or period end market
price of the Company's common stock. ESOP shares that have not
been committed to be released are not considered outstanding (See
Note 4).
<TABLE>
Three Months Ended Nine Months Ended
(In thousands
except per share data) June 1, June 3, June 1, June 3,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net earnings (loss) $ (686) 440 664 3,652
Earnings per common
and equivalent share
Primary (.08) .05 .08 .42
Fully diluted (.08) .05 .08 .42
Weighted average
Primary 8,858 8,858 8,858 8,858
Fully diluted 8,858 8,858 8,858 8,858
Dilutive effect of
stock options
Primary -- 1 1 --
Fully diluted -- 3 1 4
Unallocated ESOP shares (121) (227) (121) (227)
Treasury stock (7) (4) (7) (4)
Weighted average used to
calculate earnings per share
Primary 8,730 8,628 8,731 8,627
Fully diluted 8,730 8,630 8,731 8,631
</TABLE>
NOTE 3. PROVISON FOR STORE CLOSING
In the fourth quarter of Fiscal 1994, the Company recorded a
provision for closing twelve stores and the write down of certain
display fixtures of $3,442,000. The provision reflects
anticipated costs associated with lease buyouts of $1,703,000,
the non-recoverable investment in property, equipment and
inventory of $1,651,000, and other expenses directly related to
the store closings of $88,000.
The consolidated statement of income includes sales and operating
losses for ten stores designated in the provision for store
closing that were actually closed. A summary for the three and
six months is as follows:
<TABLE>
Three Months Ended Nine Months Ended
June 1, June 3, June 1, June 3,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales -- $98,000 -- $1,034,000
Operating loss -- $47,000 -- $ 162,000
</TABLE>
NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN
Effective September 4, 1994, the Company adopted Statement of
Position (SOP) 93-6 (Employers' Accounting for Employee Stock
Ownership Plans). Under SOP 93-6 the debt of the ESOP is
recorded as debt of the Company and the shares pledged as
collateral are reported as unearned ESOP shares in the statement
of financial position. As shares are released from collateral,
the company reports compensation expense equal to the current
market price of the shares, and the shares become outstanding for
earnings-per-share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as compensation
expense. ESOP compensation expense was $67,000 and $187,000
respectively for the three and nine months ended June 1, 1996.
The ESOP shares as of June 1, 1996 were as follows:
Allocated shares 221,000
Shares released for allocation 15,000
Unreleased shares 121,000
Total ESOP shares 357,000
Fair value of unreleased
shares as of July 1, 1996 $666,000
NOTE 5. INCOME TAXES
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 2, 1995 are presented below (000's
Omitted):
Deferred tax assets:
Inventories, principally due to
additional cost inventories
for tax purposes pursuant to
the Tax Reform Act of 1986 $ 705
Accrued expense 60
Total deferred tax assets 765
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation (3,002)
Net deferred tax liability $(2,237)
The Company has not provided for a valuation allowance against
its deferred tax assets as realization of such assets is
considered to be more likely than not.
NOTE 6. - SUBSEQUENT EVENT
Subsequent to the close of the third quarter, the Company, along with
the founding family shareholders' trusts, retained the investment
banking firm Janney Montgomery Scott Inc. as financial advisor in an
exclusive agreement for the purpose of presenting to our Board of
Directors and the trusts, a program to enhance the value of the
Company's shares.
The program could include the sale of Frederick's shares owned by the
trusts, which aggregates approximately 50.2 percent of the total shares
outstanding, or possibly the sale of all shares or assets, merger or
other consolidation, share repurchase or by recapitalization, joint
venture, or otherwise.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The most significant changes in the Company's balance sheet from
September 2, 1995, the end of the preceding fiscal year, to June
1, 1996 are as follows:
Cash and cash equivalents decreased $632,000 to $10,809,000 at
June 1, 1996 from $11,441,000 at September 2, 1995.
Accounts receivable decreased $61,000 to $597,000 from
$658,000. The decrease is primarily attributable to decreased
list rental receivables which is caused by the timing of the
required accounting entries as they relate to two different
points in time; the end of the fiscal year and the end of the
third quarter.
Inventory decreased $754,000 to $19,108,000 from $19,862,000.
The decrease was caused by the delivery of some May
merchandise in June. The Company continues to closely monitor
its inventories and believes its inventory position is
substantially on plan relative to the anticipated sales.
Prepaid expenses decreased $493,000. The decrease is mainly
attributed to the timing differences of catalog mailings.
Deferred catalog costs decreased $1,127,000. The decrease is
attributable to the timing differences of catalog mailings.
The accounts payable decrease of $3,159,000 is mainly
attributable to the offsetting factors of increased customer
deposits ($418,000), increased payroll taxes payable
($109,000), and decreased trade payables ($3,929,000). These
fluctuations are caused by the timing of the required
accounting entries as they relate to two different points in
time; the end of the fiscal year, and the end of the third
quarter; as well as the difference caused by the timing of the
required accruals and the corresponding payments.
Accrued payroll decreased $192,000. This decrease is
attributable to the difference in the length of time between
the end of the pay period (accrual of estimated payroll) and
the payment of that payroll as it relates to two different
points in time; the end of the fiscal year and the end of the
third quarter.
The fluctuation in accrued insurance and other accrued
expenses is caused by the timing of the required accruals and
the corresponding payments.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $22,940,000 at June 1, 1996
and net cash provided by operating activities of $2,905,000 for
the nine months ended June 1, 1996.
The Company expects to remodel 24 existing stores and open nine
new stores by the end of Fiscal 1997. Management estimates that
the Company's cash requirement will be approximately $300,000
(excluding inventory) for each store. Accordingly, the Company
expects to use approximately $10,000,000 for store openings and
remodels during this period.
RESULTS OF OPERATIONS
The following table summarizes the Company's net sales and
operating profit (loss) by business segment for the three and nine
month periods ending June 1, 1996 and June 3, 1995:
<TABLE>
Net Sales
Three Months Nine Months
(In Thousands)
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Retail Stores $17,424 $16,129 $ 60,509 $ 59,344
Mail Order 17,858 17,183 55,980 51,443
Total $35,282 $33,312 $116,489 $110,787
******************************************************************
Operating Profit (loss)
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Retail Stores $(2,007) $(1,003) $ (592) $1,661
Mail Order 806 1,637 1,569 4,338
Total $(1,201) $ 634 $ 977 $5,999
</TABLE>
The results of the interim period are not necessarily indicative
of results for the entire year.
Net sales increased $1,970,000 (5.9%) for the three months and
$5,702,000 (5.1%) for the nine months ended June 1, 1996 as compared
with the prior year. The factors contributing to the increase in each
segment were as follows:
Retail store sales volume increased $1,295,000 (8.0%) and
$1,165,000 (2.0%) for the three and nine months ended June 1,
1996 as compared with the similar periods last year.
Comparable store sales volume increased 6.3% and 1.1%
respectively for the three and nine months ended June 1, 1996
as compared with the similar periods last year. One store was
opened and none were closed during the quarter for a total of
205 stores in 39 states.
The increased sales volume for the third quarter is
attributable to increased promotional activity, which included
increased markdowns (14.0% of sales during the third quarter as
compared with 13.1% last year) and almost $400,000 in
additional promotional/advertising expenses. Despite achieving
higher sales for the quarter, the rate of sales growth was not
sufficient to offset the increased costs.
Mail Order sales volume increased $675,000 (3.9%) and
$4,537,000 (8.8%) for the three and nine months ended June 1,
1996 as compared with the similar periods last year. The gain
is attributable to an increase in the number of catalogs
distributed.
Gross profit amounted to $14,237,000 (40.4% of sales) and
$48,511,000 (41.6% of sales) for the three and nine months ended
June 1, 1996. This compared with $13,826,000 (41.5% of sales)
and $47,220,000 (42.6% of sales) for the same periods in the
prior year. The decrease in gross profit percentage is mainly
attributable to additional markdowns in retail stores to
liquidate slow selling merchandise and to stimulate sales. The
increase in gross profit dollars for both the three and nine
months is attributable to increased sales.
Selling, general and administrative expenses increased $2,244,000
(17.0%) and $6,313,000 (15.3%) for the three and nine months
ended June 1, 1996. The increases for both the three and nine
month periods are mainly attributable to increased payroll,
advertising, paper and postage costs, and increased costs for our
catalog toll-free telephone line, due to the implementation of
telephone operators having access to inventory availability while
speaking with the customer. Mail order was also impacted during
the quarter and nine month periods due to costs associated with a
test mailing of a new swimwear catalog. While initial test
results were disappointing, we are continuing to evaluate this
concept.
The decrease in other income (expense) for the three and nine
months was caused by a reduction in the gain on the sale of fixed
assets.
The Company's business is seasonal in nature with the Holiday
Season and Valentine's Day (which both fall within the second
quarter) historically accounting for the largest percentage of
sales volume. In the Company's three most recent fiscal years,
the second quarter accounted for approximately 30% of the
Company's annual sales.
Income taxes are provided on the basis of estimated federal and
state taxes for each year. The rate used for the nine months
ended June 1, 1996 and June 3, 1995 was 41.5%.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The preceding Management's Discussion and Analysis contains
various forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Exchange Act, which represent the
Company's expectations or beliefs concerning future events. The
Company cautions that these statements are further qualified by
important factors that could cause actual results to differ
materially from those in the forward looking statements,
including, the sufficiency of the Company's working capital and
cash flows from operating activities. In addition, these
statements are further qualified by important factors that could
cause actual results to differ materially from those in the
forward looking statements, including , without limitation, a
decline in demand for the merchandise offered by the Company, the
ability of the Company to locate and obtain acceptable store
sites and lease terms or renew existing leases, the ability of
the company to gauge the fashion tastes of its customers and
provide merchandise that satisfied customer demand, management's
ability to manage the Company's expansion, the effect of economic
conditions, the effect of severe weather or natural disasters and
the effect of competitive pressures from other retailers.
PART II - OTHER INFORMATION
Items 1 - 5
Items 1 - 5 are omitted because they are not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) No reports on Form 8-K were filed for this quarter.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FREDERICK'S OF HOLLYWOOD, INC.
(Registrant)
Date: July 10, 1995 By:/s/ George W. Townson
George W. Townson
Chairman of the Board, President
and Chief Executive Officer
Date: July 10, 1995 By: John B. Hatfield
John B. Hatfield
Executive Vice President,
Secretary, Treasurer,
Chief Financial, Accounting
and Administrative Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> JUN-01-1996
<CASH> 10,809
<SECURITIES> 0
<RECEIVABLES> 920
<ALLOWANCES> 0
<INVENTORY> 19,108
<CURRENT-ASSETS> 33,724
<PP&E> 36,740
<DEPRECIATION> 18,933
<TOTAL-ASSETS> 52,550
<CURRENT-LIABILITIES> 10,784
<BONDS> 1,206
0
0
<COMMON> 8,858
<OTHER-SE> 27,921
<TOTAL-LIABILITY-AND-EQUITY> 52,550
<SALES> 116,489
<TOTAL-REVENUES> 116,489
<CGS> 67,978
<TOTAL-COSTS> 67,978
<OTHER-EXPENSES> 47,458
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81
<INCOME-PRETAX> 1,134
<INCOME-TAX> 470
<INCOME-CONTINUING> 470
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 470
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
