SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: MARCH 31, 1995 Commission File No.: 0-14756
THE COSMETIC CENTER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1266697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8839 GREENWOOD PLACE
SAVAGE, MARYLAND 20763
(Address of principal executive offices)
(301) 497-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days:
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Class A Common Stock, par value $.01 per share, outstanding as
of May 1, 1995 - 2,681,292 shares
Class B Common Stock, par value $.01 per share, outstanding as
of May 1, 1995 - 1,554,742 shares
<PAGE>
THE COSMETIC CENTER, INC.
Table of Contents
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis 9 -10
of Financial Condition and Results
of Operations
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
PART I
ITEM 1. Financial Statements PAGE
Consolidated Balance Sheets
As of March 31, 1995 (unaudited) and
September 30, 1994 4 - 5
Consolidated Statements of Operations (unaudited)
Three months and six months ended
March 31, 1995 and March 25, 1994 6
Consolidated Statements of Cash Flows (unaudited)
Six months ended March 31, 1995
and March 25, 1994 7
Notes to Consolidated Financial Statements (unaudited)
Three months and six months ended
March 31, 1995 and March 25, 1994 8
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
1995 1994
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . $1,548 $1,382
Accounts receivable, net. . . . . . . . . . . 1,102 1,557
Inventories . . . . . . . . . . . . . . . 54,599 50,422
Prepaid expenses . . . . . . . . . . . . . .1,489 552
Prepaid income taxes. . . . . . . . . . . . . 96 159
Deferred income tax benefit . . . . . . . . . . 521 521
Total current assets. . . . . . . . . . . . . 59,355 54,593
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment . . . . . . . .10,086 8,705
Leasehold improvements. . . . . . . . . . . . 3,651 2,680
Leased property - capitalized . . . . . . . . . 1,670 1,670
15,407 13,055
Accumulated depreciation and amortization . . . . . 6,906 5,940
8,501 7,115
DEPOSITS AND OTHER ASSETS . . . . . . . . . . . 273 254
DEFERRED INCOME TAX BENEFIT. . . . . . . . . . . 172 172
TOTAL ASSETS. . . . . . . . . . . . . . . $68,301 $62,134
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
1995 1994
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . $11,781 $9,922
Notes payable - bank . . . . . . . . . . . 8,690 5,025
Accrued expenses . . . . . . . . . . . . 2,847 3,335
Current portion of obligation under capital leases . 281 272
Total current liabilities . . . . . . . . . 23,599 18,554
OBLIGATION UNDER CAPITAL LEASES . . . . . . . . 568 711
DEFERRED RENT . . . . . . . . . . . . . . 1,338 1,207
TOTAL LIABILITIES. . . . . . . . . . . . . 25,505 20,472
SHAREHOLDERS' EQUITY:
Class A Common stock, $.01 par value; authorized
5,000,000 shares; issued and outstanding
2,681,292 shares . . . . . . . . . . . 27 27
Class B Common stock, $.01 par value; authorized
5,000,000 shares; issued and outstanding
1,554,742 shares . . . . . . . . . . . 15 15
Additional paid-in capital . . . . . . . . . 21,387 21,387
Retained earnings . . . . . . . . . . . . 21,367 20,233
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . 42,796 41,662
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . $68,301 $62,134
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
March 31, March 25, March 31, March 25,
1995 1994 1995 1994
Net sales. . . . . . . $ 29,419 $ 24,792 $ 71,278 $ 64,289
Cost of sales including
buying, occupancy and
distribution . . . . . 23,506 19,592 56,739 50,571
Selling, general and
administrative expenses . 6,127 4,555 12,421 9,414
Total operating expenses . 29,633 24,147 69,160 59,985
Income (loss) from
operations. . . . . . (214) 645 2,118 4,304
Other income, net . . . . 38 33 67 61
Interest expense . . . . (152) (19) (279) (84)
Earnings (loss) before
income taxes . . . . . (328) 659 1,906 4,281
Income taxes. . . . . . (133) 267 772 1,734
Net earnings (loss) . . . $ (195) $ 392 $ 1,134 $ 2,547
Net earnings (loss) per
common share
Primary . . . . . . . $ (.04) $ 0.09 $ 0.26 $ 0.58
Fully Diluted . . . . . $ (.04) $ 0.09 $ 0.26 $ 0.58
Weighted average shares
outstanding
Primary . . . . . . . 4,340,562 4,430,859 4,371,937 4,416,391
Fully Diluted . . . . . 4,348,824 4,427,725 4,348,824 4,427,070
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
March 31, March 25,
1995 1994
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . $1,134 $ 2,547
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation and amortization . . . . . . . . 1,183 773
Change in assets and liabilities:
Accounts receivable, net . . . . . . . . . 455 219
Inventories. . . . . . . . . . . . . . (4,177) 1,377
Prepaid expenses . . . . . . . . . . . . (1,154) (180)
Prepaid income taxes. . . . . . . . . . . 63 305
Deferred income tax benefit . . . . . . . . - (24)
Deposits and other assets . . . . . . . . . (19) 4
Accounts payable . . . . . . . . . . . . 1,859 (3,974)
Accrued expenses . . . . . . . . . . . . (488) 178
Income taxes payable. . . . . . . . . . . - 123
Deferred rent . . . . . . . . . . . . . 131 -
Net cash (used) provided by operating activities . (1,013) 1,348
Cash flows from investing activities:
Capital expenditures, net . . . . . . . . . . (2,352) (678)
Net cash used by investing activities . . . . . (2,352) (678)
Cash flows from financing activities:
Net borrowings (payments) under line-of-credit
agreement . . . . . . . . . . . . . . . 3,665 -
Repayments of capital lease obligations . . . . . (134) (116)
Exercise of incentive stock options . . . . . . . - 38
Net cash provided (used) by financing activities . 3,531 (78)
Net increase in cash and cash equivalents . . . . . 166 592
Cash and cash equivalents at beginning of period . . . 1,382 1,767
Cash and cash equivalents at end of period . . . . . $1,548 $2,359
Supplemental Disclosures of Cash Flow Information and
Non Cash Activities:
Cash payments for interest . . . . . . . . . . $ 246 $ 84
Cash payments for income taxes . . . . . . . . . 708 1,330
Capital lease obligations incurred. . . . . . . . - 89
See notes to consolidated financial statements.
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED
March 31, 1995 and March 25, 1994
(Unaudited)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements contained herein should be read
in conjunction with the consolidated financial statements of The Cosmetic
Center, Inc., (the "Company") for the year ended September 30, 1994.
The accompanying consolidated financial statements are unaudited, but
include all adjustments (consisting only of normal recurring adjustments)
which management considers necessary for a fair presentation at March 31,
1995 and March 25, 1994 and for the three and six month periods then ended.
The accounting policies applied in the consolidated financial statements
are consistent with the accounting policies applied in the consolidated
financial statements of the Company for the year ended September 30, 1994.
The results for the three and six month periods ended March 31, 1995
and March 25, 1994 are not necessarily indicative of results expected for
the entire year.
Merchandise Inventories
The Company's inventories, consisting primarily of cosmetic, fragrance,
beauty aid, and related items, are valued at the lower of cost or market.
Cost is determined using the weighted average cost method.
Rental Expenses
Certain store leases provide for minimum rentals plus additional
rentals computed as a percentage of sales in excess of amounts specified in
the lease as minimum rentals. The Company accrues percentage rent expense
during interim periods based on actual sales in excess of the prorated
annual amounts specified in the related lease.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company was founded in 1957, with its initial operations consisting
of the sales of cosmetic products to wholesale customers. The Company
opened its first retail store in 1973 and grew to nine stores in 1986,
prior to its initial public offering. In September 1990, the Company
relocated its distribution center to Savage, Maryland, a facility which the
Company believes has the capacity to service approximately 100 specialty
retail stores as well as the Company's wholesale operations. Currently,
the Company operates 68 stores under the name "The Cosmetic Center "
located in the greater metropolitan market areas of Washington, D.C.;
Richmond, Virginia; Baltimore, Maryland; Chicago, Illinois;
Charlotte/Raleigh, North Carolina; Philadelphia, Pennsylvania; and Atlanta,
Georgia. The Company sells approximately 25,000 brand name prestige and
mass-merchandised cosmetic products.
Results of Operations
Consolidated net sales for the six months ended March 31, 1995 were
$71,278,000, an increase of $6,989,000, or 10.9%, from the $64,289,000 in
consolidated net sales for the six months ended March 25, 1994.
Consolidated net sales for the three months ended March 31, 1995 were
$29,419,000, an increase of $4,627,000, or 18.7%, from the $24,792,000 in
consolidated net sales for the three months ended March 25, 1994.
Retail sales for the six months ended March 31, 1995 were $69,698,000,
an increase of $7,405,000, or 11.9%, from the $62,293,000 in sales for the
six months ended March 25, 1994. Comparable store retail sales for the
period decreased by $3,221,000, or 5.2%. Retail sales for the three months
ended March 31, 1995 were $28,737,000, an increase of $4,644,000, or
19.3%, from the $24,093,000 in sales for the three months ended March 25,
1994. Comparable store retail sales for the period increased by $356,000,
or 1.5%. Comparable store retail sales for the three months ended March
31, 1995 rebounded somewhat from the December 30, 1994 quarter decline of
9.4%, however, they were impacted by a general softening in fragrance
sales, cannibalization of store sales by some new stores opened in the
Company's more established market and the fact that the Easter holiday
sales fell in April this year versus March last year. The Company operated
68 stores at March 31, 1995 and 51 stores at March 25, 1994.
Wholesale sales for the six months ended March 31, 1995 were
$1,580,000, an decrease of $416,000, or 20.8%, from the $1,996,000 in
sales for the six months ended March 25, 1994. Wholesale sales for the
three months ended March 31, 1995 were $682,000, an decrease of $17,000, or
2.4%, from the $699,000 in sales for the three months ended March 25, 1994.
The Company has focused greater attention to its retail business but
continues to serve its remaining market of independent drug and merchandise
stores. Management continues to evaluate the viability of the wholesale
division.
Cost of sales, including buying, occupancy and distribution expenses,
was $56,739,000 (79.6% of sales) for the six months ended March 31, 1995
versus $50,571,000 (78.7% of sales) for the six months ended March 25,
1994. Cost of sales, including buying, occupancy and distribution
expenses, was $23,506,000 (79.9% of sales) for the three months ended March
31, 1995 versus $19,592,000 (79.0% of sales) for the three months ended
March 25, 1994. The dollar increase for the three months and six months
ended March 31, 1995 is primarily attributable to cost of sales and
occupancy costs associated with the ten stores opened in the later half of
fiscal 1994 and the seven stores opened during the first half of fiscal
1995. Cost of sales, including buying, occupancy and distribution expenses
as a percentage of sales increased for the first three months and six
months ended March 31, 1995 because of increased buying, occupancy and
distribution expenses associated with the aforementioned seventeen stores
opened less than one year, who's sales base has not yet grown to maturity.
Selling, general and administrative expenses ("S G & A") were
$12,421,000 (17.4% of sales) for the six months ended March 31, 1995 versus
<PAGE>
$9,414,000 (14.6% of sales) for the six months ended March 25, 1994.
Selling, general and administrative expenses were $6,127,000 (20.8% of
sales) for the three months ended March 31, 1995 versus $4,555,000 (18.4%
of sales) for the three months ended March 25, 1994. S G & A expenses
increased $3,007,000 for the six months ended March 31, 1995 over the
comparable period of last year. Of this increase approximately $2,592,000
is associated with the seventeen stores opened less than one year. S G & A
expenses increased $1,572,000 for the three months ended March 31, 1995
over the comparable period of last year. Of this increase approximately
$1,358,000 is associated with the seventeen stores opened less than one
year. The remaining increase in S G & A expenses for the three months and
six months ended March 31, 1995 is attributable to marginal increases at
comparable stores and corporate overhead levels. S G & A expenses as a
percentage of sales were impacted for two reasons: 1) new stores generally
have a higher S G & A percentage because their sales volume has not matured
and 2) although comparable store and corporate S G & A increased
marginally, the S G & A percentage was negatively impacted by reduced
comparable stores sales volume in the first quarter.
Interest expense was $279,000 (0.4% of sales) for the six months ended
March 31, 1995 versus $84,000 (0.1% of sales) for the six months ended
March 25, 1994. Interest expense was $152,000 (0.5% of sales) for the
three months ended March 31, 1995 versus $19,000 (0.1% of sales) for the
three months ended March 25, 1994. The increase in interest expense is
primarily attributable to borrowings under the credit facility to support
the fixed asset and working capital requirements associated with new stores
and the retrofit construction of hair salons in existing stores.
Liquidity and Capital Resources
The Company's working capital was $35,736,000 at March 31, 1995
compared to $36,039,000 at September 30, 1994. The ratio of current assets
to current liabilities was 2.5 at March 31, 1995 compared to 2.9 at
September 30, 1994.
Net cash used by operating activities amounted to $1,013,000 for the
six months ended March 31, 1995. The principal use of cash was the
purchase of inventory, not financed through account payable, for new store
openings.
Net cash used by investing activities amounted to $2,352,000 for the
six months ended March 31, 1995. This investment is primarily attributable
to the seven new store openings, the retrofit construction of hair salons
and assets purchased for future stores.
Net cash provided by financing activities amounted to $3,531,000 for
the six months ended March 31, 1995 which represented net borrowings under
the Company's credit facility to finance the inventory and fixed asset
costs of new stores opened during the period. The Company also repaid
capital lease obligations in the amount of $134,000.
The Company has an unsecured credit facility (the "Facility") with a
bank for maximum borrowings of $15,000,000. The Facility, which expires on
February 28, 1996, is subject to repayment on demand and bears interest at
an annual rate equal to three-quarters of one percent (3/4 of 1%) below the
bank's prime rate, payable monthly. The Facility requires compliance with
certain restrictive covenants including maintenance of minimum tangible net
worth. At March 31, 1995, the outstanding balance under the Facility was
$8,690,000.
The Company's future capital needs primarily result from its plan to
open additional new stores and the installation of hair salons in existing
stores. The Company's estimated cost of opening a new store is
approximately $725,000, including $550,000 for initial inventory and
$175,000 for leasehold improvements, furnishings and fixtures, point-of-
sale equipment, hair salon equipment, and other items. The Company plans
to open fifteen stores during each of the fiscal years 1995 and 1996. The
Company plans to retrofit all existing stores with hair salons, where the
leases will permit. The anticipated cost of this project is approximately
$1,200,000. The Company believes that funds available from the Facility and
internally generated funds will provide sufficient capital to meet the
Company's needs for the foreseeable future.
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders on March 9, 1995, the
stockholders voted on and approved the following proposal:
1) To consider and act upon a proposal to add 300,000 shares of Class
A Common Stock to the Company's 1991 Stock Option Plan.
AFFIRMATIVE 1,121,511 NEGATIVE 112,427 ABSTAINED 2,785
ITEM 6. (A) EXHIBITS
EXHIBIT 27 - Financial Data Schedule as of March 31, 1995
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter for which this report is filed.
<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.
THE COSMETIC CENTER, INC.
(Registrant)
Date: May 5, 1995 By /s/ Ben S. Kovalsky
BEN S. KOVALSKY
President and Chief Operating Officer
Date: May 5, 1995 By /s/ Bruce E. Strohl
BRUCE E. STROHL
Vice President - Finance
and Chief Financial Officer
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<FISCAL-YEAR-END> MAR-03-1995
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<RECEIVABLES> 1,102
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<INVENTORY> 54,599
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<PP&E> 15,407
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42
<OTHER-SE> 42,754
<TOTAL-LIABILITY-AND-EQUITY> 68,301
<SALES> 71,278
<TOTAL-REVENUES> 71,278
<CGS> 56,739
<TOTAL-COSTS> 69,160
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