SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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 1-3339
MERCANTILE STORES COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0032941
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
9450 Seward Road Fairfield, Ohio 45014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 881-8000
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 of each of the issuer's classes of
common stock, as of the latest practicable date.
36,748,550 shares of Common Stock at $.14 2/3 par value
as of December 15, 1997
Total number of sequentially numbered pages in this filing, including
exhibits thereto: 12
- 1 -
<PAGE>
MERCANTILE STORES COMPANY, INC.
AND SUBSIDIARY COMPANIES
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets -
November 1, 1997 and February 1, 1997 3
Consolidated Condensed Statements of
Income - For the thirteen and thirty-nine
weeks ended November 1, 1997 and
November 2, 1996 4
Consolidated Condensed Statements of
Cash Flows - For the thirty-nine weeks
ended November 1, 1997 and November 2, 1996 5
Notes to Consolidated Condensed Financial
Statements 6 - 8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial
Condition 9 - 11
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of
Security Holders 12
Item 6 - Exhibits and Reports on Form 8-K 12
- 2 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
November 1, February 1,
1997 1997
Assets
Current Assets:
Cash and cash equivalents $ 52,177 $ 128,115
Receivables:
Customer, net 536,172 571,336
Other 12,542 16,851
Inventories 744,124 560,666
Other current assets 29,008 26,334
----------- -----------
Total Current Assets 1,374,023 1,303,302
Prepaid Pension & Other
Noncurrent Assets 111,933 100,994
Property and Equipment, net 780,793 738,207
----------- -----------
Total Assets $ 2,266,749 $ 2,142,503
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 214,441 $ 112,485
Current maturities of long-term debt 22,116 25,017
Notes payable 42,300 -
Accrued income taxes 18,586 39,128
Taxes other than income 30,418 18,876
Accrued payroll 24,890 27,825
Other current liabilities 67,181 62,438
----------- -----------
Total Current Liabilities 419,932 285,769
Long-term Debt 206,480 229,910
Other Long-term Liabilities 65,831 61,511
Stockholders' Equity 1,574,506 1,565,313
----------- -----------
Total Liabilities & Stockholders' Equity $ 2,266,749 $ 2,142,503
=========== ===========
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share and share data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
Revenues $ 753,730 $ 727,741 $ 2,129,933 $ 2,042,677
Cost of goods sold
(including occupancy
and central buying
expenses) 527,599 495,379 1,500,590 1,416,275
----------- ----------- ---------- -----------
Gross Profit 226,131 232,362 629,343 626,402
Expenses and Other Income:
Selling, general and
administrative expenses 189,849 180,814 536,084 517,177
Interest expense, net 1,879 2,387 7,486 7,023
Other income (2,965) (2,590) (8,618) (7,659)
Impairment charge - - - 12,000
----------- ----------- ---------- ------------
188,763 180,611 534,952 528,541
----------- ----------- ---------- ------------
Income before Provision
for Income Taxes 37,368 51,751 94,391 97,861
Provision for
income taxes 14,658 20,663 37,025 39,068
----------- ----------- ---------- ------------
Net Income $ 22,710 $ 31,088 $ 57,366 $ 58,793
=========== =========== ========== ============
Net Income Per Share $ .62 $ .85 $ 1.56 $ 1.60
=========== =========== ========== ============
Dividends Declared
Per Share $ .60 $ .57 $ 1.185 $ 1.12
============ =========== ========== ============
Weighted Average
Shares Outstanding 36,748,550 36,844,050 36,788,213 36,844,050
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Thirty-Nine Weeks Ended
November 1, November 2,
1997 1996
Cash Flows From Operating Activities:
Net Income $ 57,366 $ 58,793
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 57,716 61,346
Deferred income taxes 3,496 (4,671)
Impairment charge - 12,000
Equity in unremitted earnings of
affiliated companies 124 299
Gain on sale of property (549) -
Net pension benefit (11,799) (8,856)
Change in inventories (183,458) (183,593)
Change in accounts receivable 39,473 35,433
Change in accounts payable 101,956 94,662
Net change in other working
capital items (18,597) (32,744)
----------- -----------
Net cash provided by operating activities 45,728 32,669
Cash Flows From Investing Activities:
Cash payments for property and equipment (103,229) (101,891)
Proceeds from sale of property 3,415 -
Net change in other noncurrent
assets and liabilities (673) (335)
----------- ------------
Net cash used in investing activities (100,487) (102,226)
Cash Flows From Financing Activities:
Payments of long-term debt (26,331) (4,232)
Increase in notes payable 42,300 -
Repurchase of common stock (4,599) -
Dividends paid (32,549) (30,764)
----------- -----------
Net cash used in financing activities (21,179) (34,996)
Net decrease in cash and cash equivalents (75,938) (104,553)
Beginning cash and cash equivalents 128,115 161,893
----------- -----------
Ending cash and cash equivalents $ 52,177 $ 57,340
=========== ===========
Supplemental Cash Flow Information:
Interest paid $ 18,635 $ 18,516
Income taxes paid $ 50,466 $ 62,912
The accompanying notes are an integral part of these statements.
- 5 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
1. Nature of Operations
Mercantile Stores Company, Inc. (the "Company") is a conventional department
store retailer engaged in the general merchandising business. The Company
operates 104 department stores and 17 home fashion stores under 13
different names in a total of 17 states. A subsidiary, Mercantile Credit
Corp., provides servicing for the Company's private label credit program.
The Company also maintains a partnership interest in five operating
shopping center ventures and one land ownership venture.
2. Accounting Policies
The consolidated condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission with respect to Form 10-Q. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made herein
are adequate to make the information not misleading. It is suggested that
these consolidated condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the Company's
latest annual report on Form 10-K.
Interim statements are subject to possible adjustments in connection with
the annual audit of the Company's accounts for the full 1997 fiscal year.
In the Company's opinion, all adjustments (consisting only of normal
recurring adjustments) necessary for fair statement presentation have
been included.
Because of seasonality, the results of operations for the periods presented
are not necessarily indicative of the results expected for the year ending
January 31, 1998.
3. Revenues
Revenues include sales from retail operations, leased departments and finance
charge revenue earned on customer accounts serviced by the Company under its
private label credit program. Finance charge revenue is recognized in the
period in which it is earned. Finance charge revenue for the 1997 third
quarter and nine-month period ending November 1, 1997 amounted to $21
million and $64 million, respectively, compared to $20 million and $63
million for the third quarter and nine-month period ending November 2, 1996.
4. Cash and Cash Equivalents
Cash and cash equivalents represent cash and short-term, highly liquid
investments with a maturity of ninety days or less.
(Continued)
- 6 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(Continued)
5. Customer Receivables
Customer receivables at November 1, 1997 and February 1, 1997 are net of an
allowance for doubtful accounts of $16.5 million and $16.4 million,
respectively. Concentrations of credit risk with respect to customer
receivables are limited due to the large number of customers comprising the
Company's credit card base, and their geographic dispersion across the
country.
6. Merchandise Inventories
All retail inventories are valued by the retail method and stated on the
last-in, first-out (LIFO) cost basis, which is lower than market. Since
inventories under the LIFO method are based on an annual determination of
quantities and costs, the inventories at interim periods are based on
certain estimates relating to quantities and costs as of the fiscal year-end.
7. Stockholders' Equity
During the first quarter of 1997, the Board of Directors authorized the
Company to purchase up to 1,500,000 shares of its common stock in the open
market over a time frame which may extend to ten years. These shares are
to be held as Treasury stock and are to be used solely to satisfy
requirements arising from the exercise of options granted under the Stock
Option Plan, which is discussed in Note 8 of Notes to Consolidated
Condensed Financial Statements. During the nine-month period ended
November 1, 1997, under this program, the Company purchased 95,500 shares
of its common stock at a cost of approximately $4.6 million.
The following is a summary of the changes in stockholders' equity for the
nine months ended November 1, 1997 (in thousands):
Common Stock
---------------------------------- Addt'l
Issued Treasury Paid In Retained
Shares Amount Shares Amount Capital Earnings
Balance at
February 1, 1997 36,887 $ 5,410 43 $ 7 $ 6,018 $1,553,892
Treasury stock
acquired - - 96 4,599 - -
Dividends
declared - - - - - (43,574)
Net Income - - - - - 57,366
------ ------- ----- ------- ------- -----------
Balance at
Nov. 1, 1997 36,887 $ 5,410 139 $ 4,606 $ 6,018 $1,567,684
====== ======= ===== ======= ======= ===========
(Continued)
- 7 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(Continued)
8. 1996 Stock Option Plan
On December 3, 1996, the Company adopted the Mercantile Stores Company, Inc.
1996 Stock Option Plan (the Plan), which provides for the issuance of stock
option awards, beginning in 1997, to certain employees designated by the
Company's Board of Directors. Stock options awarded under the Plan will be
granted at an exercise price equal to the fair market value of the
Company's common stock on the date of grant and will generally become
exercisable in equal increments over a four-year period. The maximum number
of shares available for awards under the Plan is 1,500,000. During the
nine-month period ended November 1, 1997, 95,500 stock options were granted
under the Plan at an exercise price of $48.06 per share.
9. Impairment Charge
During the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," which
addresses the identification and measurement of asset impairments and
requires the recognition of impairment losses on long-lived assets when
carrying values exceed expected future cash flows. The Company evaluated
its investment in long-lived assets on an individual store basis. Based
upon an assessment of historical and projected operating results, it was
determined that the carrying value of certain operating stores was impaired
under the criteria defined in SFAS No. 121. As a result, the Company
recorded a pre-tax impairment charge of $12 million (a net of tax impact
of $7.2 million, or $.20 per share) to write down the carrying value of these
assets to their estimated fair value. The fair value of these assets was
based on operating projections and discounted future cash flows.
10. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which establishes new standards for computing
and presenting earnings per share (EPS). SFAS No. 128 replaces the
presentation of primary EPS with basic EPS and requires the presentation of
diluted EPS for all entities with complex capital structures. Basic EPS
excludes all dilution, while diluted EPS reflects the potential dilution
that could occur if stock options or other contracts to issue common stock
were exercised. The provisions of SFAS No. 128 are required to be adopted
for all financial statements issued after December 15, 1997 and prior-period
EPS data must be restated to conform with the requirements of this new
standard. Under SFAS No. 128, basic EPS and diluted EPS for the quarter
and nine-month periods ended November 1, 1997 and November 2, 1996 would
have been identical to the EPS data reported.
<PAGE>
- 8 -
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Material Changes in the Results of Operations for the Third Quarter and
Nine-Month Periods of 1997 Compared to the Third Quarter and Nine-Month Periods
of 1996
Revenues increased by 3.6% to $754 million in the 1997 third quarter and by
4.3% to $2,130 million in the nine-month period. Sales from retail operations
amounted to $733 million in the 1997 third quarter, an increase of 3.6% over
the third quarter of 1996 and were $2,066 million in the first nine months of
1997, an increase of 4.3%, over last year's nine-month period. Comparable store
sales were relatively flat in the quarter and increased 1.1% in the 1997
nine-month period. Finance charge revenue increased 1.9% to $21 million in the
1997 third quarter and by 2.1% to $64 million in the nine-month period.
Cost of Goods Sold (COGS), as a percent to revenues, increased 1.9% to 70% in
the third quarter of 1997. For the nine-month period, COGS increased 1.1% to
70.4% from the comparable 1996 period. Merchandise margins decreased by 2.7%
in the third quarter and 1.7% in the nine-month period. This decline in both
the quarter and nine-month period was due to increases in the level of
markdowns as well as an intensification of other promotional activities such as
the extension of volume discounts to the Company's better customers. The
increase in these promotional costs was partially offset by a reduction in the
LIFO provision of .5% and .4%, in the quarter and nine-month period,
respectively, as well as minor reductions in occupancy expenses in both periods.
Selling, general and administrative expenses, as a percent to revenues,
increased .3% in the third quarter and declined .2% in the nine-month period.
The increase in the quarter was due to a .4% increase in marketing costs
associated with the higher promotional environment and a .1% increase
in payroll and payroll-related expenses which resulted, primarily, from the flat
comparable sales results posted for the quarter. These increases were partially
offset by a .2% decline in other operating expenses. The reduction in the
nine-month period was attributable to a decline of .1% in payroll and
payroll-related expenses and a decrease of .2% in other operating expenses,
which were partially offset by an increase of .2% in marketing costs.
During the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of," which addresses the
identification and measurement of asset impairments and requires the
recognition of impairment losses on long-lived assets when carrying values
exceed expected future cash flows. The application of this new accounting
standard resulted in a pre-tax impairment charge of $12 million to write
down the carrying value of certain operating stores to their estimated fair
value.
(Continued)
- 9 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
Material Changes in Financial Condition From February 1, 1997 to
November 1, 1997
The retail business is highly seasonal with approximately one-third of annual
sales being generated in the fourth quarter which encompasses the important
Christmas selling season. As a result, significant variations can occur when
comparing financial conditions at the above dates.
The decrease of $76 million in cash and cash equivalents during the period was
attributable primarily to the $103 million of payments for capital expenditures
and the $21 million of net cash used for financing activities. These net cash
outlays were partially funded by the $46 million of cash generated by
operations.
Net customer receivables decreased approximately $35 million due to the normal
paydown of peak year-end balances.
Inventories increased $183 million during the period primarily due to the
normal replenishment of inventory levels which are traditionally at their low
point at the fiscal year-end and approximate peak levels by the end of
the third quarter. Merchandise requirements for new stores (approximately $20
million) also contributed to this increase. The increase of $102 million in
accounts payable was significantly attributable to the increase in inventory
levels.
Accrued income taxes declined $20 million due to payments of federal and state
income taxes, partially offset by the provision for taxes on current year
income.
There have been no material changes in the Company's anticipated capital
expenditure requirements from those indicated in the 1996 Annual Report. During
the 1997 third quarter, the Company opened a 210,000-square foot Maison Blanche
store in the new Mall of Louisiana in Baton Rouge, Louisiana.
As referenced in Note 8 of Notes to Consolidated Condensed Financial Statements,
the Company adopted a Stock Option Plan under which options covering 95,500
shares were granted by the end of the 1997 first quarter. As indicated in
Note 7 of Notes to Consolidated Condensed Financial Statements, it is the
Company's intent to purchase in the open market and hold in the Treasury shares
equal to those eventually exercisable under such Stock Option Plan. At
November 1, 1997, 95,500 shares had been purchased under this program at an
approximate cost of $4.6 million.
(Continued)
- 10 -
<PAGE>
MERCANTILE STORES COMPANY, INC. AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
Material Changes in Financial Condition From February 1, 1997 to
November 1, 1997
Payments of long-term debt totaled $26 million during the 1997 nine-month
period. During the third quarter, the Company paid the 1997 mandatory sinking
fund requirement of $19 million on the 6.7% Notes due in 2002. In addition to
scheduled payment of long-term debt, the Company paid off $2 million of variable
rate Industrial Revenue Bonds when the underlining property was sold.
The Company satisfies short-term financing needs primarily through internally
generated funds. In addition, the Company has in place a committed, unsecured
$200 million revolving credit facility. This arrangement is with a consortium of
seven banks and expires in August, 2000. When used, interest rates will
be based, at the Company's option, on either the banks' best rates under a
competitive bid environment or a predefined spread over the LIBOR rate. In
addition to this committed facility, the Company has available uncommitted
ines of credit totaling $120 million. During the 1997 nine-month period,
peak borrowings under these arrangements amounted to $46 million with
$42 million remaining outstanding at the end of the quarter. The average
interest rate during the borrowing period was 5.77%.
- 11 -
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) There were no matters submitted to a vote of security holders during the
quarterly period ended November 1, 1997.
Item 6 - Exhibits and reports on form 8-K
(a) Exhibit 27 - Financial Data Schedule (filed electronically).
(b) There were no reports on Form 8-K filed for the quarterly
period ended November 1, 1997.
SIGNATURE
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.
MERCANTILE STORES COMPANY, INC.
(Registrant)
December 15, 1997
(Date)
s/James M. McVicker
(James M. McVicker, Senior Vice President,
and Chief Financial Officer)
- 12 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOILDATED CONDENSED BALANCE SHEETS, CONSOLIDATED CONDENSED STATEMENTS OF
INCOME AND CONSOLIDATED CONDENSED STATMENTS OF CASH FLOWS FOR THE PERIOD ENDED
NOVEMBER 1, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANNCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 39,883
<SECURITIES> 12,294
<RECEIVABLES> 565,237
<ALLOWANCES> 16,523
<INVENTORY> 744,124
<CURRENT-ASSETS> 29,008
<PP&E> 1,238,238
<DEPRECIATION> 456,535
<TOTAL-ASSETS> 2,266,749
<CURRENT-LIABILITIES> 419,932
<BONDS> 0
0
0
<COMMON> 5,410
<OTHER-SE> 1,569,096
<TOTAL-LIABILITY-AND-EQUITY> 2,266,749
<SALES> 2,065,852
<TOTAL-REVENUES> 2,129,933
<CGS> 1,500,590
<TOTAL-COSTS> 1,500,590
<OTHER-EXPENSES> 536,084
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,909,655
<INCOME-PRETAX> 94,391
<INCOME-TAX> 37,025
<INCOME-CONTINUING> 57,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,366
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.56
</TABLE>
