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: December 29, 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 January 26, 1996 - 2,713,354 shares
Class B Common Stock, par value $.01 per share, outstanding as
of January 26, 1996 - 1,582,780 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 - 11
of Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
2
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PART I
ITEM 1. Financial Statements PAGE
Consolidated Balance Sheets
As of December 29, 1995 (unaudited) and
September 29, 1995 4 - 5
Consolidated Statements of Earnings (unaudited)
Three months ended December 29, 1995
and December 30, 1994 6
Consolidated Statements of Cash Flows (unaudited)
Three months ended December 29, 1995
and December 30, 1994 7
Notes to Consolidated Financial Statements (unaudited)
Three months ended December 29, 1995
and December 30, 1994 8
3
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THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 29, September 29,
1995 1995
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . $ 1,544 $1,320
Accounts receivable, net. . . . . . . . 1,510 881
Inventories . . . . . . . . . . . . 55,064 61,891
Prepaid expenses . . . . . . . . . . 464 529
Prepaid income taxes . . . . . . . . . 651 1,142
Deferred income tax benefit. . . . . . . 970 970
Total current assets. . . . . . . . . . 60,203 66,733
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment . . . . . 11,927 11,410
Leasehold improvements. . . . . . . . . 5,077 4,932
Leased property - capitalized . . . . . . 1,670 1,670
18,674 18,012
Accumulated depreciation and amortization. . . 7,862 7,211
10,812 10,801
DEPOSITS AND OTHER ASSETS. . . . . . . . . 315 307
DEFERRED INCOME TAX BENEFIT . . . . . . . . 126 126
TOTAL ASSETS . . . . . . . . . . . . . $71,456 $77,967
See notes to consolidated financial statements.
4
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THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 29, September 29,
1995 1995
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . $11,784 $17,309
Note payable - bank. . . . . . . . . 8,950 11,985
Accrued expenses. . . . . . . . . . 5,333 3,628
Income taxes payable . . . . . . . . 196 430
Current portion of obligation under
capital leases . . . . . . . . . 296 291
Total current liabilities. . . . . . . 26,559 33,643
OBLIGATION UNDER CAPITAL LEASES . . 344 420
DEFERRED RENT. . . . . . . . . . . 1,335 1,339
OTHER LIABILITIES. . . . . . . . . . 547 624
TOTAL LIABILITIES . . . . . . . . . 28,785 36,026
SHAREHOLDERS' EQUITY:
Class A common stock, $.01 par value;
authorized 5,000,000 shares; issued
2,741,472 shares and 2,721,472 shares,
respectively. . . . . . . . . . 28 27
Class B common stock, $.01 par value;
authorized 5,000,000 shares; issued
1,614,924 shares and 1,594,942 shares,
respectively. . . . . . . . . . . 16 16
Additional paid-in capital . . . . . . 21,953 21,740
Retained earnings. . . . . . . . . 21,242 20,512
Treasury stock - Class A common stock,
28,118 shares at cost (214) -
Treasury stock - Class B common stock,
32,144 shares at cost (354) (354)
TOTAL SHAREHOLDERS' EQUITY . . . . . . 42,671 41,941
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . $71,456 $77,967
See notes to consolidated financial statements.
5
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THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
December 29, December 30,
1995 1994
Net sales. . . . . . . . . . . . $ 41,580 $ 41,859
Cost of sales including buying, occupancy
and distribution. . . . . . . . . . 32,420 33,233
Selling, general and administrative expenses 7,646 6,294
Total operating expenses. . . . . . . . 40,066 39,527
Income from operations. . . . . . . . 1,514 2,332
Other income, net. . . . . . . . . . 29 29
Interest expense. . . . . . . . . . . . (316) (127)
Earnings before income taxes. . . . . . 1,227 2,234
Income taxes. . . . . . . . . . . . 497 905
Net earnings. . . . . . . . . . . . $ 730 $ 1,329
Net earnings per common share
Primary. . . . . . . . . . . . . $ 0.17 $ 0.30
Fully Diluted. . . . . . . . . . . $ 0.17 $ 0.30
Weighted average shares outstanding
Primary. . . . . . . . . . . . . 4,316,010 4,393,247
Fully Diluted. . . . . . . . . . .4,316,010 4,393,247
See notes to consolidated financial statements.
6
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THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 29, December 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . $ 730 $1,329
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization. . . . . . . . . 704 574
Change in assets and liabilities:
Accounts receivable, net. . . . . . . . . . (629) (689)
Inventories. . . . . . . . . . . . . . 6,827 (2,034)
Prepaid expenses. . . . . . . . . . . . . 12 (455)
Prepaid income taxes. . . . . . . . . . . 491 159
Deposits and other assets. . . . . . . . . (8) (30)
Accounts payable. . . . . . . . . . . . (5,525) 4,261
Accrued expenses. . . . . . . . . . . . 1,705 792
Deferred rent. . . . . . . . . . . . . (4) 14
Other liabilities. . . . . . . . . . . (77) --
Income taxes payable. . . . . . . . . . . (234) 737
Net cash provided by operating activities. . . . 3,992 4,658
Cash flows from investing activities:
Capital expenditures, net. . . . . . . . (662) (1,104)
Net cash used in investing activities. . . . . (662) (1,104)
Cash flows from financing activities:
Net repayments under line-of-credit agreement . . . (3,035) (2,940)
Repayments of capital lease obligations. . . . . . (71) (67)
Net cash used in financing activities. . . . . (3,106) (3,007)
Net increase in cash and cash equivalents . . . . . 224 547
Cash and cash equivalents at beginning of period . . 1,320 1,382
Cash and cash equivalents at end of period . . . . . $1,544 $ 1,929
Supplemental Disclosures of Cash Flow Information and
Non Cash Activities:
Cash payments for interest. . . . . . . . . . $ 279 $ 108
Cash payment for income taxes. . . . . . . . . 239 8
Treasury stock. . . . . . . . . . . . . . . 214 --
</TABLE>
See notes to consolidated financial statements.
7
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THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
DECEMBER 29, 1995 and DECEMBER 30, 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 29, 1995.
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 December 29, 1995 and
December 30, 1994 and for the three month period 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 29, 1995.
The results for the three month periods ended December 29, 1995 and
December 30, 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.
8
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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. At December 29, 1995, the Company operated 77
stores under the name "The Cosmetic Center(R)" located in the greater
metropolitan market areas of Washington, D.C.; Richmond, Virginia; Baltimore,
Maryland; Chicago, Illinois; Charlotte/Raleigh/Durham, North Carolina;
Philadelphia, Pennsylvania; and Atlanta, Georgia. The Company sells
approximately 25,000 brand name prestige and mass-merchandised cosmetic
products.
Hair Salon Strategy
Traditionally, the manufacturers of professional hair care products have
allowed their products to be sold by retail hair salons only. Historically, the
Company was able to purchase professional hair care products from secondary
sources, and sales of these products generally accounted for 5% to 6 % of the
Company's annual retail sales. The Company's purchases of these products and
sale at value prices to consumers was not looked upon favorably by these
manufacturers. With the growth of the Company over the past three years
sufficient quantities of top selling professional hair care products became
increasingly difficult to purchase through secondary sources. As a result, the
Company decided to add hair salons in its existing stores as an add-on beauty
service and with the anticipation of developing a direct relationship with the
manufacturers of professional hair care products.
In the latter half of fiscal 1994, the Company opened hair salons in
twelve of the thirteen new stores in the Philadelphia, Pa., Charlotte/Raleigh,
N.C. and Atlanta, Ga. market areas. In February 1995, the Company began to
retrofit existing stores in its Washington D.C. and Chicago, IL. market areas.
The Company operates hair salons in 67 of its stores.
In the Spring of 1995, the Company obtained a verbal commitment from one
of the four major professional hair care products manufacturers to sell to the
Company on a direct basis. However, in order to receive these products on a
direct basis, the Company was asked to remove from all of its retail stores, all
professional hair care products that were purchased from a secondary source. In
order to build a relationship with this manufacturer, the Company agreed to the
manufacturer's requirements in June 1995. Approximately 30 days later, the
Company began to receive professional hair care products directly from this
manufacturer and continues to receive such products today. However, this
manufacturer represents one third of the 6% of sales volume the Company
surrendered in order to build the direct purchase relationship. The loss of
these professional hair care product sales has adversely affected retail sales
and profits. The Company is attempting to develop a similar relationship with
the other three major manufacturers, but there are no assurances this will be
achieved.
Although the Company has lost sales and profits during the transition
stages of this arrangement, the Company believes that there are future benefits
to be derived from maintaining and expanding the arrangement. The gross margin
on professional hair care products purchased on a direct basis are significantly
higher than the gross margin on professional hair care products purchased on a
secondary source basis. In addition, because of the direct relationship, the
Company is able to maintain sufficient quantities of professional hair care
products in stock, which it could not otherwise maintain.
9
<PAGE>
Results of Operations
Consolidated net sales for the three months ended December 29, 1995 were
$41,580,000, a decrease of $279,000, or 0.7%, from the $41,859,000 in
consolidated net sales for the three months ended December 30, 1994.
Retail sales for the three months ended December 29, 1995 were
$41,088,000, an increase of $127,000, or 0.3%, from the $40,961,000 in sales for
the three months ended December 30, 1994. The net dollar increase in retail
sales is attributable to the six stores opened in the later part of fiscal 1995
and the four stores opened in the first quarter of fiscal 1996 net of comparable
store sales decline. Comparable store retail sales for the period, which
decreased by $2,855,000, or 7.0%, were adversely affected by a softening in
fragrance sales and by the transition in the process of purchasing hair care
products described above. The Company operated 77 stores at December 29, 1995
and 67 stores at December 30, 1994.
Wholesale sales for the three months ended December 29, 1995 were
$492,000, a decrease of $406,000, or 45.2%, from the $898,000 in sales for the
three months ended December 30, 1994. The Company has focused greater attention
on 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
$32,420,000 (78.0% of sales) for the three months ended December 29, 1995 versus
$33,233,000 (79.4% of sales) for the three months ended December 30, 1994. The
dollar decrease is primarily attributable to the six stores opened in the later
part of fiscal 1995 and the four stores opened in the first quarter of fiscal
1996. Cost of sales, including buying, occupancy and distribution expenses, as a
percentage of sales were affected positively by gross margin increases primarily
resulting from the direct purchase of professional hair care products. This
percentage gain was partially offset by new stores, whose sales volume has not
yet grown to the level experienced by mature stores, thus having a higher cost
of sales percentage because of occupancy costs. The percentage was also
adversely affected by the decline in comparable store sales
Selling, general and administrative ("S G & A") expenses were $7,646,000
(18.4% of sales) for the three months ended December 29, 1995 versus $6,294,000
(15.0% of sales) for the three months ended December 30, 1994. S G & A expenses
increased $1,352,000 over the comparable period of last year, however
approximately $720,000 of the increase is associated with stores not in
operation last year and approximately $500,000 is associated with operating
expenses of the hair salons. S G & A expenses as percentage of sales were
impacted for two reasons: 1) new stores generally have a higher S G & A
percentage because their sales volume have not matured and 2) the S G & A
percentage of comparable stores was negatively impacted by reduced comparable
stores sales volume.
Interest expense was $316,000 (0.8% of sales) for the three months ended
December 29, 1995 versus $127,000 (0.3% of sales) for the three months ended
December 30, 1994. The increase in interest expense is primarily attributable to
borrowing under the credit facility to support working capital requirements and
the opening of four stores during the quarter.
Liquidity and Capital Resources
The Company's working capital was $33,644,000 at December 29, 1995
compared to $33,090,000 at September 29, 1995. The ratio of current assets to
current liabilities was 2.3 at December 29, 1995 compared to 2.0 at September
29, 1995.
Net cash provided by operating activities amounted to $3,992,000 for the
three months ended December 29, 1995, resulting primarily from net income,
depreciation and amortization and an decrease in accounts payable and
inventories.
Net cash used in investing activities amounted to $662,000 for the three
months ended December 29,
10
<PAGE>
1995. This investment is primarily attributable to the four stores opened during
the quarter and completion of the hair salon retrofit construction.
Net cash used by financing activities amounted to $3,106,000 for the three
months ended December 29, 1995. During the three months ended December 29, 1995
the Company reduced its credit facility by $3,035,000 and repaid capital lease
obligations in the amount of $71,000.
At December 29, 1995, the Company had an unsecured credit facility (the
"Facility") with a bank for maximum borrowing of $20,000,000. During the quarter
ended December 29, 1995, the Facility was increased from $15,000,000 to
$20,000,000 to meet additional borrowing needs. The incremental borrowing
capacity was marginally used during the quarter and expired on January 15, 1996.
The Facility, which expires on February 28, 1996, is subject to repayment on
demand and bears interest, payable monthly, at an annual rate equal to
three-quarters of one percent (3/4 of 1%) below the bank's prime rate or at
LIBOR plus 115 basis points. The Facility requires compliance with certain
restrictive covenants including maintenance of minimum tangible net worth. At
December 29, 1995, there was an outstanding balance of $8,950,000 under the
Facility. The Company is presently negotiating an extension of the Facility with
its bank.
The Company's future capital needs primarily result from its plan to open
additional new 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 five to ten
stores during the fiscal year 1996. 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 next year.
11
<PAGE>
PART II
Item 6. (A) Exhibits
EXHIBIT 27- Financial Data Schedule as of December 29, 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.
12
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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: By /s/ BEN S. KOVALSKY
BEN S. KOVALSKY
Chief Executive Officer,
Chief Operating
Officer and President
Date: By /s/ BRUCE E. STROHL
BRUCE E. STROHL
Vice President - Finance
and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-END> DEC-29-1995
<CASH> 1,544
<SECURITIES> 0
<RECEIVABLES> 1,510
<ALLOWANCES> 22
<INVENTORY> 55,064
<CURRENT-ASSETS> 60,203
<PP&E> 18,674
<DEPRECIATION> 7,862
<TOTAL-ASSETS> 71,456
<CURRENT-LIABILITIES> 26,559
<BONDS> 344
<COMMON> 44
0
0
<OTHER-SE> 42,627
<TOTAL-LIABILITY-AND-EQUITY> 71,456
<SALES> 41,580
<TOTAL-REVENUES> 41,580
<CGS> 32,420
<TOTAL-COSTS> 40,066
<OTHER-EXPENSES> (29)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316
<INCOME-PRETAX> 1,227
<INCOME-TAX> 497
<INCOME-CONTINUING> 730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 730
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
