<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-12188
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DEB SHOPS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1913593
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9401 Blue Grass Road, Philadelphia, Pennsylvania 19114
- - ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 676-6000
------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(Former name and 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 l934 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.
Common Stock, Par Value $.01 13,099,680
- - ---------------------------- -------------------------------------
(Class) (Outstanding at July 31, 1998)
<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
I N D E X
Page
PART I. Financial Information:
Consolidated Balance Sheets - 1
July 31, 1998 and January 31, 1998
Consolidated Statements of Operations Six Months and 2
Three Months Ended July 31, 1998 and July 31, 1997
Consolidated Statements of Cash Flows - 3
Six Months Ended July 31, 1998 and July 31, 1997
Notes to Consolidated Financial Statements - 4-5
July 31, 1998
Management's Discussion and Analysis of Financial
Condition and Results of Operations - July 31, 1998 6-11
PART II. Other Information 12
<PAGE>
DEB SHOPS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
------------ ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 60,289,593 $ 57,912,689
Merchandise inventories 30,472,421 22,107,228
Prepaid expenses and other 2,154,699 1,488,748
Current deferred income taxes 1,354,100 1,307,600
------------ ------------
Total Current Assets 94,270,813 82,816,265
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land 150,000 150,000
Buildings 4,338,863 4,338,863
Leasehold improvements 29,107,769 29,068,033
Furniture and equipment 16,206,519 15,399,733
------------ ------------
49,803,151 48,956,629
Less accumulated depreciation
and amortization 34,923,637 34,168,084
------------ ------------
Total Property, Plant and Equipment 14,879,514 14,788,545
------------ ------------
OTHER ASSETS
Goodwill, net of accumulated amortization
of $607,002 and $499,884, respectively 2,611,403 2,718,521
Long term deferred income taxes 2,887,240 2,003,740
Other 1,712,223 1,167,514
------------ ------------
Total Other Assets 7,210,866 5,889,775
------------ ------------
116,361,193 103,494,585
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 23,706,915 $ 16,098,296
Accrued expenses 6,441,683 5,879,551
Income taxes payable 2,954,000 1,858,379
------------ ------------
Total Current Liabilities 33,102,598 23,836,226
------------
Capital Lease Obligation 1,511,859 1,631,463
------------ ------------
Shareholders' Equity
Series A Preferred Stock, par value $1.00 a share: Authorized - 5,000,000
shares Issued and outstanding - 460 shares,
liquidation value $460,000 460 460
Common Stock, par value $.01 a share:
Authorized - 25,000,000 shares
Issued Shares - July 31, 1998: 15,688,290;
January 31, 1998: 15,688,290 156,883 156,883
Additional paid in capital 5,541,944 5,541,944
Retained earnings 92,047,717 89,904,032
------------ ------------
97,747,004 95,603,319
Less common treasury shares, at cost -
July 31, 1998: 2,588,610;
January 31, 1998: 2,843,610 16,000,268 17,576,423
------------ ------------
Total Shareholders' Equity 81,746,736 78,026,896
------------ ------------
$116,361,193 $103,494,585
============ ============
</TABLE>
The notes to consolidated financial statements are an integral part of these
financial statements.
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<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31, Three Months Ended July 31,
----------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Net Sales $108,246,822 $ 92,509,129 $ 58,487,659 $ 48,580,451
------------ ------------ ------------ ------------
Costs and Expenses
Cost of Sales, including
buying and occupancy costs 79,407,581 71,936,582 41,033,746 35,993,390
Selling and administrative 22,039,011 19,808,473 11,528,698 10,170,551
Depreciation and amortization 1,874,657 2,118,441 940,188 1,064,577
------------ ------------ ------------ ------------
103,321,249 93,863,496 53,502,632 47,228,518
------------ ------------ ------------ ------------
Operating Income (Loss) 4,925,573 (1,354,367) 4,985,027 1,351,933
Other income, principally interest 1,560,590 949,820 881,856 509,144
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 6,486,163 (404,547) 5,866,883 1,861,077
Income Taxes (Benefit) 2,270,000 (131,000) 2,053,000 605,000
------------ ------------ ------------ ------------
Net Income (Loss) $ 4,216,163 $ (273,547) $ 3,813,883 $ 1,256,077
============ ============ ============ ============
Net Income (Loss) Per Common Share
Basic $ 0.32 $ (0.02) $ 0.29 $ 0.10
============ ============ ============ ============
Diluted $ 0.32 $ (0.02) $ 0.29 $ 0.10
============ ============ ============ ============
Cash Dividend Declared
Per Common Share $ 0.10 $ 0.10 $ 0.05 $ 0.05
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding
Basic 12,979,736 12,844,680 13,044,748 12,844,680
============ ============ ============ ============
Diluted 13,193,110 12,844,680 13,228,123 12,924,110
============ ============ ============ ============
</TABLE>
The notes to consolidated financial statements are an
integral part of these financial statements.
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<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows provided by operating activities:
Net Income (Loss) $ 4,216,163 ($ 273,547)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,874,657 2,118,441
Deferred income tax (benefit) (930,000)
Loss on retirement of property, plant and equipment 146,282 274,922
Change in assets and liabilities:
(Increase) in merchandise inventories (8,365,193) (7,594,971)
(Increase) in prepaid expenses and other (665 951 (200,312)
Increase in trade accounts payable 7,608,619 7,395,164
Increase in accrued expenses 562.132 738,582
Increase in income taxes payable 1,095,621 --
------------ ------------
Net cash provided by operating activities 5,542,330 2,458,279
------------ ------------
Cash flows (used in) investing activities:
Purchase of property, plant and equipment, net (2,004 790 (989,049)
------------ ------------
Net cash (used in) investing activities (2,004,790) (989,049)
------------ ------------
Cash flows (used in) financing activities:
Preferred Stock cash dividends paid (27,600) (27,600)
Common Stock cash dividends paid (1,306,223) (1,284,468)
Proceeds from stock options exercised 837,500 --
Principal payment under capital lease obligations (119,604) (97,662)
Other investing activities (544,709) --
------------ ------------
Net cash (used in) financing activities (1,160,636) (1,409,730)
------------ ------------
Increase in cash and cash equivalents 2,376,904 59,500
Cash and cash equivalents at beginning of period 57,912,689 44,850,895
------------ ------------
Cash and cash equivalents at end of period $ 60,289,593 $ 44,910,395
============ ============
Supplemental disclosures of cash flow information: Cash paid during the
period for:
Interest on capital lease obligation $ 155,000 $ 177,000
Income taxes, net $ 2,281,482 $ 170,106
</TABLE>
The notes to consolidated financial statements are an
integral part of these financial statements.
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<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they 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 (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended July 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1998.
NOTE B - INCOME TAXES
The liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that are expected to be in effect when the
differences reverse. Deferred income taxes result principally from differences
in the time of recognition of overhead in inventory, deductibility of certain
liabilities and depreciation expense.
NOTE C - NET INCOME (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This statement established new standards for computing and presenting
earnings per share and requires the restatement of prior years amounts. The
Company adopted SFAS No. 128 effective January 31, 1998. Basic net income (loss)
per common share was computed by dividing net income (loss) applicable to common
shareholders by the weighted average number of shares of common stock
outstanding during the periods presented. Diluted net income (loss) per common
share has been presented based upon the weighted average common shares
outstanding during each period including the dilutive effect of stock options
and restricted incentive stock, if any.
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<PAGE>
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income (loss) per common share
computations. As required by SFAS No. 128 all prior-period per share data has
been restated to conform with the provisions of this statement.
<TABLE>
<CAPTION>
Six Months Ended July 31,
---------------------------------------------------------------------------------------------
1998 1997
---- ----
-------------------------------------------- ------------------------------------------------
Net Per Share Net Per Share
Income Shares Amount (Loss) Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $4,216,163 ($273,547)
Dividends on preferred stock (27,600) (27,600)
---------- ----------
Basic income (loss)
available to common
shareholders 4,188,563 12,979,736 $.32 (301,147) 12,844,680 ($.02)
Effect of dilutive securities - 213,374 - - - -
---------- ---------- ------- --------- ---------- -----
Dilutive income (loss)
available to common
shareholders $4,188,563 13,193,110 $.32 ($301,147) 12,844,680 ($.02)
========== ========== ======= ========= ========== =====
Three Months Ended July 31,
---------------------------------------------------------------------------------------------
1998 1997
---- ----
-------------------------------------------- ------------------------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
Net income $3,813,883 $ 1,256,077
Dividends on preferred stock (13,800) (13,800)
---------- ---------
Basic income
available to common
shareholders 3,800,083 13,044,748 $.29 $1,242,277 12,844,680 $.10
Effect of dilutive securities - 183,375 - - 79,430 -
---------- ---------- ------- --------- ---------- -----
Dilutive income
available to common
shareholders $3,800,083 13,228,123 $.29 $1,242,277 12,924,110 $.10
========== ========== ======= ========== ========== =======
</TABLE>
For the six months ended of July 31, 1997, 390,000 common stock options
were outstanding but were not included in the computation of diluted net (loss)
per common share because their effect would be anti-dilutive as a result of the
Company's losses incurred during the period.
NOTE D - REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive Income."
This statement requires companies to classify items of other comprehensive
income by their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of financial
position. SFAS No. 130 is effective for financial statements issued for fiscal
years beginning after December 15, 1997. The Company believes that SFAS No. 130
does not have a material effect on its financial statements.
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<PAGE>
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Company has made in this report, and from time to time may
otherwise make, "forward-looking statements" (as that term is defined under
Federal Securities Laws) concerning the Company's future operations,
performance, profitability, revenues, expenses and financial condition. This
report includes, in particular, forward-looking statements regarding store
openings, closings and other matters. Such forward-looking statements are
subject to various risks and uncertainties. Actual results could differ
materially from those currently anticipated due to a number of factors. Such
factors may include, but are not limited to, the Company's ability to improve
margins, respond to changes in fashion, and the Company's ability to attract and
retain key management personnel. Such factors may also include other risks and
uncertainties detailed in the Company's filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1998.
Overview
As of July 31, 1998, Deb Shops, Inc. (the "Company") operates 269
women's specialty apparel retail stores offering moderately priced, fashionable,
coordinated sportswear, dresses, coats, lingerie, accessories and shoes for
junior and plus sized women. The Company also operates nine Tops `N Bottoms
stores which sell moderately priced men's and women's apparel.
The Company also operates 17 Atlantic book stores. The book division
includes 11 "Atlantic Book Shops", which are small limited selection book
stores, generally open seasonally in Delaware, Maryland, Pennsylvania and New
Jersey shore resort towns. Atlantic Books also operates six much larger
"Atlantic Book Warehouses" which carry a full line of best sellers, new titles
and magazines in addition to remainder books. The Atlantic Book Warehouse stores
are located in Delaware, Maryland, Minnesota, New Jersey and Pennsylvania.
Results of operations for the Company for the six and three months
ended July 31, 1998 and 1997, are presented on a consolidated basis and are
discussed here on a segmented basis to provide relevant information concerning
the Company's retail apparel store business, which is the Company's principal
line of business, and the retail book business.
Results of Operations - Consolidated
Consolidated net sales increased $15,738,000 (17.0%) and $9,907,000
(20.4%), respectively, for the six and three months ended July 31, 1998, as
compared to an increase of $6,010,000 (7.0%) and $120,000 (0.3%) for the six and
three months ended July 31, 1997. The increase during the six months ended July
31, 1998, and 1997, and for the three months ended July 31, 1998 is primarily
the result of increased sales in the apparel business and, to a lesser extent,
an increase in the number of book stores. The increase during the three months
ended July 31, 1997 is primarily the result of an increase in the number of book
stores offset by a decrease in apparel sales.
The change in net sales, cost of sales, selling and administrative
expense and net income (loss) are more fully described in the sections on
"Apparel Business" and "Book Business" that follow.
-6-
<PAGE>
Other income, principally interest, increased $611,000 (64.3%) and
$373,000 (73.2%), respectively, for the six and three months ended July 31, 1998
as compared to a decrease of ($277,000) (22.6%) and ($102,000) (16.7%),
respectively, for the six and three months ended July 31, 1997. Interest income
is offset by losses on the disposition of fixed assets. The increase during the
six and three months ended July 31, 1998 is primarily the result of earnings on
higher cash balances and decreased write-offs from the disposition of fixed
assets. The decreases in the six and three months ended July 31, 1997 is
primarily attributable to an increase in the losses incurred by the Company on
disposition of fixed assets incurred in connection with store closings.
Income before income taxes increased $6,891,000 (1703.3%) and
$4,006,000 (215.2%), respectively, for the six and three months ended July 31,
1998. (Loss) before income taxes decreased $4,916,000 (92.4%) and $4,308,000
(176.1%) , respectively, for the six and three months ended July 31, 1997. The
improvement for the six and three months ended July 31, 1997 to 1998 is
primarily comprised of an increase in apparel business sales and apparel
business margins. The improvement for the six months ended July 31, 1996 to 1997
is primarily comprised of an increase in apparel business sales and apparel
business margins.
Results of Operations - Apparel Business
Net sales increased to $100,691,000 from $86,075,000 or $14,615,000
(17.0%) in the six months ended July 31, 1998 and 1997, respectively, and
increased to $86,075,000 from $81,920,000 or $4,156,000 (5.1%) in the six months
ended July 31, 1997 and 1996 respectively. Net sales increased to $53,915,000
from $44,658,000 or $9,257,000 (20.7%) in the three months ended July 31, 1998
and 1997, respectively, and decreased to $44,658,000 from $45,592,000 or
($934,000) (2.0%) in the three months ended July 31, 1997 and 1996,
respectively. The increase in net sales for the six and three months ended July
31, 1998 and for the six months ended July 31, 1997, was principally
attributable to a return of fashion direction in the woman's specialty apparel
industry, the Company's new focus on a younger customer, and improved visual
merchandising in the stores. The decrease in net sales for the three months
ended July 31, 1997 was principally attributable to the increase in average
sales per store being insufficient to offset the reduction in average number of
stores in operation.
The following table sets forth certain per store information.
<TABLE>
<CAPTION>
Per Store Data1 Per Store Data1
Six Months Ended July 31, Three Months Ended July 31,
--------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Stores open at end of the period 278 277 278 277
Average number in operation during the period 280 279 277 279
Average net sales per store (in thousands) $ 360 $309 $ 195 $160
Average operating (loss) income per store
(in thousands) $ 15 ($ 7) $ 17 $ 4
Comparable Store Sales2 - Percent Change 13.7% 10.1% 16.3% 1.9%
</TABLE>
Cost of sales, including buying and occupancy costs, increased to
$74,194,000 from $67,492,000 or $6,702,000 (9.9%) in the six months ended July
31, 1998 and 1997, respectively, and decreased to $67,492,000 from $68,988,000
or ($1,496,000) (2.2%) in the six months ended July 31, 1997 and 1996,
respectively. Cost of
- - --------
1 Includes Tops `N Bottoms stores
2 Comparable store sales include stores open for both periods in the current
location. A store is added to the comparable store base in its 13th month
of operation.
-7-
<PAGE>
sales, including buying and occupancy costs, increased to $37,843,000 from
$33,225,000 or $4,618,000 (13.9%) in the three months ended July 31, 1998 and
1997, respectively and decreased to $33,225,000 from $38,631,000 or $5,406,000
(14.0%) in the three months ended July 31, 1997 and 1996, respectively. The
increase in cost of sales, including buying and occupancy costs, in the six and
three months ended July 31, 1998 was principally due to the increase in net
sales during the period, offset by the result of selling merchandise at higher
margins. The decrease in cost of sales, including buying and occupancy costs, in
the six months ended July 31, 1997 was primarily the result of selling
merchandise at higher margins in the three months ended July 31, 1997 and the
increase in net sales during the period. As a percentage of net sales, cost of
sales, including buying and occupancy costs, were 73.7% and 78.4% in the six
months ended July 31, 1998 and 1997, respectively, and 70.2% and 74.4% in the
three months ended July 31, 1998 and 1997, respectively. As a percentage of net
sales, buying and occupancy costs were 18.0% and 19.3% in the six months ended
July 31, 1998 and 1997, respectively, and 17.2% and 18.8% in the three months
ended July 31, 1998 and 1997, respectively.
Selling and administrative expenses increased to $20,540,000 from
$18,571,000 or $1,969,000 (10.6%) in the six months ended July 31, 1998 and
1997, respectively, and increased to $18,571,000 from $18,327,000 or $244,000
(1.3%) in the six months ended July 31, 1997 and 1996, respectively. Selling and
administrative expenses increased to $10,663,000 from $9,454,000 or $1,209,000
(12.8%) in the three months ended July 31, 1998 and 1997, respectively, and
decreased to $9,454,000 from $9,500,000 or ($46,000) (0.5%) in the three months
ended July 31, 1997 and 1996, respectively. The increase in selling and
administrative expenses for the six and three months ended July 31, 1998 was
mainly due to an increase in store operating costs. The increase in selling and
administrative expenses for the six months ended July 31, 1997 was mainly due to
higher insurance costs. As a percentage of net sales, selling and administrative
expenses were 20.4% and 21.6% in the six months ended July 31, 1998 and 1997,
respectively, and 19.8% and 21.2% in the three months ended July 31, 1997 and
1996, respectively.
Depreciation expenses decreased ($274,000) and ($133,000) in the six
and three months ended July 31, 1998, respectively. Depreciation expenses
increased $309,000 and $147,000 in the six and three months ended July 31, 1997,
respectively. The decrease for the six and three months ended July 31, 1998, is
principally attributable to a reduction in the number of stores to be closed and
the write-offs associated with them. The increase for the six and three months
ended July 31, 1997, is principally attributable to the accelerated write-off of
leasehold improvements.
Operating income increased to $4,330,000 from an operating loss of
($1,888,000) or $6,218,000 (329.4%) in the six months ended July 31, 1998 and
1997, respectively and the operating loss decreased to ($1,888,000) from
($6,986,000) or ($5,098,000) (73.0%) in the six months ended July 31, 1997 and
1996, respectively. The operating income increased to $4,592,000 from $1,030,000
or $3,562,000 (345.7%) in the three months ended July 31, 1998 and 1997,
respectively and the operating income increased to $1,030,000 from an operating
loss of ($3,340,000) or $4,370,000 (130.8%) in the three months ended July 31,
1997 and 1996, respectively. As a percentage of net sales, the operating income
(loss) was 4.3% and (2.2%) in the six months ended July 31, 1998 and 1997,
respectively, and 8.5% and 2.3% in the three months ended July 31, 1998 and
1997, respectively. The increase in the operating income for the six and three
months ended July 31, 1998 was primarily attributed to an increase in sales and
an increase in margins, partially offset by an increase in selling and
administrative expenses. The decrease in the operating (loss) for the six months
ended July 31, 1997 was primarily attributed to an increase in net sales and an
increase in margins. During the six months ended July 31, 1997 the Company
decreased the number of "Plus Size" selling units by almost 50%. This reduction
did not result in a commensurate reduction in sales and did result in an
improvement in "Plus Size" margins.
Results of Operations - Book Business
Net sales increased to $7,556,000 from $6,434,000 or $1,123,000 (17.4%)
in the six months ended July 1998 and 1997, respectively, and increased to
$6,434,000 from $4,579,000 or $1,855,000 (40.5%) in the six months ended July
31, 1997 and 1996, respectively. Net sales increased to $4,573,000 from
$3,922,000 or $651,000 (16.6%) in the three months ended July 1998 and 1997,
respectively and increased to $3,922,000 from $2,868,000 or $1,054,000 (36.8%)
in the three months ended July 1997 and 1996, respectively. The increase in
-8-
<PAGE>
net sales in the six and three months ended July 31, 1998 resulted primarily
from the addition of one warehouse store. The increase in net sales in the six
and three months ended July 31, 1997 resulted primarily from the addition of two
warehouse stores.
The following table sets forth certain per store information:
<TABLE>
<CAPTION>
Per Store Data Per Store Data
Six Months Ended July 31, Three Months Ended July 31,
------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Stores open at end of period-Resort Stores 11 10 11 10
Average number in operation during the period 11 10 11 10
Average net sales per Resort store (in thousands) $209 $ 181 $ 172 $ 163
Stores open at end of period - Warehouse Stores 6 5 6 5
Average number in operation during the period 6 5 6 5
Average net sales per Warehouse Store (in thousands) 1 $856 $916 $ 441 $ 449
Comparable Store Sales2 - Percent Change1 (1.4%) 3.5% 1.2% 4.1%
</TABLE>
Cost of sales, including buying and occupancy costs, increased to
$5,304,000 from $4,534,000 or $770,000 (17.0%) in the six months ended July 31,
1998 and 1997, respectively, and increased to $4,534,000 from $3,082,000 or
$1,452,000 (47.1%) in the six months ended July 31, 1997 and 1996, respectively.
Cost of sales, including buying and occupancy costs, increased to $3,235,000
from $2,813,000 or $422,000 (15.0%) in the three months ended July 31, 1998 and
1997, respectively, and increased to $2,813,000 from $1, 967,000 or $846,000
(43.0%) in the three months ended July 31, 1997 and 1996, respectively. As a
percentage of net sales, cost of sales, including buying and occupancy costs,
were 70.2% and 70.5% in the six months ended July 31, 1998 and 1997,
respectively, and 70.8% and 71.7% in the three months ended July 31, 1998 and
1997, respectively. The increase in cost of sales, including buying and
occupancy costs, in the six and three months ended July 31, 1998 and 1997, is
primarily the result of increased sales, as the result of an additional
warehouse store. The increase in cost of sales, including buying and occupancy
costs in the six and three months ended July 31, 1997 and 1996, is primarily the
result of increased sales, as the result of two additional warehouse stores. As
a percentage of net sales, buying and occupancy costs were 16.1% and 15.9% in
the six months ended July 31, 1998 and 1997, respectively, and 16.4% and 16.7%
in the three months ended July 31, 1998 and 1997, respectively.
Selling and administrative expenses increased to $1,494,000 from
$1,233,000 or $261,000 (21.2%) in the six months ended July 31, 1998 and 1997,
respectively, and increased to $1,233,000 from $898,000 or $335,000 (37.4%) in
the six months ended July 31, 1997 and 1996, respectively. Selling and
administrative expenses increased to $860,000 from $713,000 or $147,000 (20.7%)
in the three months ended July 31, 1998 and 1997, respectively and increased to
$713,000 from $538,000 or $175,000 (32.5%) in the three months ended July 31,
1997 and 1996, respectively. The increase in the six and three months ended July
31, 1998 and 1997, and 1997 and 1996 is primarily the result of additional
stores. As a percentage of net sales, selling and administrative expenses were
19.8% and 19.2% in the six months ended July 31, 1998 and 1997, respectively.
Depreciation expense increased $30,000 in the six months ended July 31,
1998 and $8,000 in the three months ended July 31, 1998.
- - --------------------------------------------------------------------------------
1 The decrease in average net sales per Warehouse Store declined as a result
of the Montgomeryville location being disproportionately larger than the
other Warehouse Stores
2 Comparable store sales include stores open for both periods in the current
location. A store is added to the comparable store base in its 13th month
of operation
-9-
<PAGE>
Operating income increased to $540,000 from $478,000 or $62,000 (13.1%)
in the six months ended July 31, 1998 and 1997, respectively, and increased to
$478,000 from $447,000 or $31,000 (6.9%) in the six months ended July 31, 1997
and 1996, respectively. Operating income increased to $368,000 from $295,000 or
$73,000 (24.7%) in the three months ended July 31, 1998 and 1997, respectively,
and increased to $295,000 from $286,000 or $9,000 (3.1%) in the three months
ended July 31, 1997 and 1996, respectively. The changes in operating income for
the six and three months ended July 31, 1998 and 1997, which the Company
believes are not material, are primarily the result of the factors described
above. As a percentage of net sales, operating income was 7.1% and 7.4% in the
six months ended July 31, 1998 and 1997, respectively and 8.0% and 7.5% in the
three months ended July 31, 1998 and 1997, respectively.
Liquidity and Capital Resources
During the three months and six months ended July 31, 1998 and 1997,
the Company funded internally all of its operating needs, including capital
expenditures for the opening of new apparel stores and for the remodeling of
existing apparel and book stores. Total cash provided by operating activities
for the six months ended July 31, 1998 and 1997 was $5,542,000 and $2,458,000,
respectively. For the six months ended July 31, 1998, cash provided by
operations was the result of the net income, increases in trade accounts
payable, income taxes payable, and non-cash charges for depreciation and
amortization partially offset by the deferred income tax benefit, and an
increase in merchandise inventories. For the six months ended July 31, 1997,
cash provided by operations was the result of increases in trade accounts
payable, accrued expenses and non-cash charges for depreciation and amortization
partially offset by the net loss and an increase in merchandise inventories. The
inventory turn-over rate for the apparel business was approximately 1.6 times
during the six months ended July 31, 1998 and 1.5 times during the six months
ended July 31, 1997. The inventory turn-over rate for the book business was
approximately 0.7 times during the six months ended July 31, 1998 and 0.7 times
during the six months ended July 31, 1997.
Net cash (used in) investing activities was $2,005,000 and $989,000 for
the six months ended July 31, 1998 and 1997, respectively. The increase in net
cash used in investing activities was principally due to the remodeling of
existing stores and the opening of new stores.
Net cash (used in) financing activities was $1,161,000 and $1,410,000
for the six months ended July 31, 1998 and 1997, respectively. For the six
months ended July 31, 1998, these funds were principally used for the payment of
dividends on preferred and common stock and other investing activities partially
offset by the proceeds from incentive stock options exercised. For the six
months ended July 31, 1997, these funds were principally used for the payment of
dividends on preferred and common stock.
As of July 31, 1998, the Company had cash and cash equivalents
of $60,290,000 compared with $44,910,000 at July 31, 1997. In February 1998, the
Company purchased nine stores from Petrie Retail, Inc. and subsidiaries, for
$720,000. These locations were made available as a result of Petrie's ongoing
bankruptcy proceedings. The stores are located in regional malls and were opened
during the quarter ended April 30, 1998. At the end of the first quarter of
fiscal 1998, the Company reduced the size of the plus sized operation by
approximately 50%.
The operation of the Company's business is dependent, in part, on its
computer software programs and operating systems (collectively, "Programs and
Systems"). The Programs and Systems are used in several key areas of the
Company's business, including merchandising, inventory management, pricing,
sales, distribution, financial reporting, as well as in various administrative
functions. The Company has been evaluating its Programs and Systems to identify
potential Year 2000 compliance issues. These actions are necessary to ensure
that the Programs and Systems will recognize and process in the Year 2000 and
beyond. It is anticipated that remediation of some of the Company's Programs and
Systems and replacement of some of the Company's Programs and Systems will be
necessary to make such Programs and Systems Year 2000 compliant.
-10-
<PAGE>
Based on present information, the Company believes that it will be able
to achieve such Year 2000 compliance through the remediation of some Programs
and Systems and through the replacement of some Programs and Systems. However,
no assurance can be given that these efforts will be successful. The Company
estimates that the expenses and capital expenditures associated with achieving
Year 2000 compliance will be approximately $2,000,000, all of which will be paid
from internally generated funds. Although the Company is not currently aware of
material Year 2000 compliance issues relating to systems of other companies with
which the Company does business, there is no assurance that the Company will not
be adversely affected by such issues affecting the systems of such other
companies.
The Company's intention is to expand the book store business. Opening a
warehouse book store is capital intensive, because of the leasehold improvements
and initial inventory required. It is anticipated that the funds to finance
expansion will come from the cash and cash equivalents on hand. As of the
balance sheet date, there were no commitments for the opening of any additional
warehouse stores; however, the opening of one resort store is planned. Other
than these items, there are no known trends or commitments, events or other
uncertainties that are reasonably likely to result in the Company's liquidity
increasing or decreasing in any material way. The Company believes that
internally generated funds will be sufficient to meet its anticipated capital
expenditures, none of which are material, and current operating needs.
SEASONAL NATURE OF OPERATIONS
The following table shows the Company's net sales and net earnings per quarter
for the fiscal year ended January 31, 1998 on an unaudited basis.
<TABLE>
<CAPTION>
Net Sales Net Income(Loss)
--------------------------- --------------------------
Amount % Amount %
----------- ------ --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1st Quarter $ 43,929 21.4% ($1,530) ( 23.0%)
2nd Quarter 48,580 23.7% 1,256 18.9%
3rd Quarter 52,409 25.6% 978 14.7%
4th Quarter 60,148 29.3% 5,933 89.4%
----------- ------ --------- -------
TOTAL $205,066 100.0% $6,637 100.0%
=========== ====== ======== =======
</TABLE>
Approximately 55% and 104% of the Company's net sales and net income,
respectively, for fiscal 1998 occurred during the last six months, which
includes the Back-to-School and Christmas selling seasons.
-11-
<PAGE>
PART II. OTHER INFORMATION
Items 1 - 3. NOT APPLICABLE
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The annual meeting of the company was held on Wednesday, May
27, 1998. Total votes present either in person or by proxy were 12,490,717. The
votes were cast as follows for the election of directors:
FOR WITHHELD
--- --------
Marvin Rounick 12,478,897 11,820
Warren Weiner 12,479,077 11,640
Jack A. Rounick 12,480,377 10,340
Paul S. Bachow 12,479,467 11,250
Barry H. Feinberg 12,480,377 10,340
Barry H. Frank 12,480,377 10,340
There were no other matters voted on at the meeting.
Item 5. NOT APPLICABLE
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description of Document
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K was filed on June 12, 1998 and a Report
on Form 8-K/A was filed on June 18, 1998. Both reported, under Item 4, a change
of Certifying Accountant.
-12-
<PAGE>
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.
DEB SHOPS, INC.
DATE: September 14, 1998 By /s/ Marvin Rounick
------------------------------
Marvin Rounick
President
DATE: September 14, 1998 By /s/ Lewis Lyons
-------------------------------
Lewis Lyons
Vice President, Finance
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JUL-31-1998
<CASH> 60,289,593
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 30,472,421
<CURRENT-ASSETS> 94,270,813
<PP&E> 49,803,151
<DEPRECIATION> 34,923,637
<TOTAL-ASSETS> 116,361,193
<CURRENT-LIABILITIES> 33,102,598
<BONDS> 0
460
0
<COMMON> 156,883
<OTHER-SE> 81,589,393
<TOTAL-LIABILITY-AND-EQUITY> 116,361,193
<SALES> 108,246,822
<TOTAL-REVENUES> 109,807,412
<CGS> 31,074,865
<TOTAL-COSTS> 103,321,249
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,486,163
<INCOME-TAX> 2,270,000
<INCOME-CONTINUING> 4,216,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,216,163
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
