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 29, 1996 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, 1996 - 2,713,354 shares
Class B Common Stock, par value $.01 per share, outstanding as
of May 1, 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
<PAGE>
PART I
ITEM 1. Financial Statements PAGE
Consolidated Balance Sheets
As of March 29, 1996 (unaudited) and
September 29, 1995 4 - 5
Consolidated Statements of Operations (unaudited)
Three months and six months ended
March 29, 1996 and March 31, 1995 6
Consolidated Statements of Cash Flows (unaudited)
Six months ended March 29, 1996
and March 31, 1995 7
Notes to Consolidated Financial Statements (unaudited)
Three months and six months ended
March 29, 1996 and March 31, 1995 8
3
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 29, September 29,
1996 1995
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 1,047 $ 1,320
Accounts receivable, net ....................... 893 881
Inventories .................................... 55,015 61,891
Prepaid expenses ............................... 643 529
Prepaid income taxes ........................... 1,276 1,142
Deferred income tax benefit .................... 970 970
------ ------
Total current assets ............................. 59,844 66,733
------ ------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment .............. 12,072 11,410
Leasehold improvements ......................... 5,238 4,932
Leased property - capitalized .................. 1,670 1,670
------ ------
18,980 18,012
Accumulated depreciation and amortization ...... 8,495 7,211
------ ------
10,485 10,801
------ ------
DEPOSITS AND OTHER ASSETS ........................ 351 307
------ ------
DEFERRED INCOME TAX BENEFIT ...................... 126 126
------ ------
TOTAL ASSETS ..................................... $70,806 $77,967
====== ======
See notes to consolidated financial statements.
4
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 29, September 29,
1996 1995
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 13,207 $ 17,309
Note payable - bank .............................. 10,245 11,985
Accrued expenses ................................. 3,022 3,628
Income taxes payable ............................. 196 430
Current portion of obligation under
capital leases 301 291
------ ------
Total current liabilities ........................ 26,971 33,643
OBLIGATION UNDER CAPITAL LEASES .................... 267 420
DEFERRED RENT ...................................... 1,327 1,339
OTHER LIABILITIES .................................. 489 624
------ ------
TOTAL LIABILITIES .................................. 29,054 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 ................................ 20,323 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 ......................... 41,752 41,941
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 70,806 $ 77,967
====== ======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 29, March 31, March 29, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales .......................... $ 29,263 $ 29,419 $ 70,843 $ 71,278
----------- ----------- ---------- -----------
Cost of sales including buying,
occupancy and distribution ....... 23,007 23,506 55,427 56,739
Selling, general and
administrative expenses .......... 7,621 6,127 15,267 12,421
----------- ----------- ---------- -----------
Total operating expenses ........... 30,628 29,633 70,694 69,160
----------- ----------- ---------- -----------
Income (loss) from operations ...... (1,365) (214) 149 2,118
Other income, net .................. 22 38 51 67
Interest expense ................... (202) (152) (518) (279)
----------- ----------- ---------- -----------
Earnings (loss) before income taxes (1,545) (328) (318) 1,906
Income taxes ....................... (626) (133) (129) 772
----------- ----------- ---------- -----------
Net earnings (loss) ................ $ (919) $ (195) $ (189 $ 1,134
=========== =========== ========== ===========
Net earnings (loss) per common share
Primary ........................... $ (0.21) $ (0.04) $ (0.04) $ 0.26
=========== =========== ========== ===========
Fully Diluted ..................... $ (0.21) $ (0.04) $ (0.04) $ 0.26
=========== =========== ========== ===========
Weighted average shares outstanding
Primary ........................... 4,308,280 4,340,562 4,313,218 4,371,937
=========== =========== ========== ===========
Fully Diluted ..................... 4,308,280 4,340,562 4,313,218 4,371,937
=========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 29, March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) .................................... $ (189) $ 1,134
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization ........................ 1,384 1,183
Change in assets and liabilities:
Accounts receivable, net ........................... (12) 455
Inventories ........................................ 6,876 (4,177
Prepaid expenses ................................... (214) (1,154
Prepaid income taxes ............................... (134) 63
Deposits and other assets .......................... (44) (19
Accounts payable ................................... (4,102) 1,859
Accrued expenses ................................... (606) (488)
Deferred rent ...................................... (12) 131
Other liabilities .................................. (135) --
Income taxes payable ............................... (234) --
Net cash provided (used) by operating activities ... 2,578 (1,013)
Cash flows from investing activities:
Capital expenditures, net .............................. (968) (2,352)
Net cash used by investing activities .............. (968) (2,352)
Cash flows from financing activities:
Net (payments) borrowings under line-of-credit agreement (1,740) 3,665
Repayments of capital lease obligations ................ (143) (134)
Net cash (used) provided by financing activities ... (1,883) 3,531
Net increase in cash and cash equivalents ................ (273) 166
Cash and cash equivalents at beginning of period ......... 1,320 1,382
Cash and cash equivalents at end of period ............... $ 1,047 $ 1,548
Supplemental Disclosures of Cash Flow Information and
Non Cash Activities:
Cash payments for interest .............................. $ 533 $ 246
Cash payments for income taxes .......................... 239 708
Treasury stock received in exchange of options exercised 214 --
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
THE COSMETIC CENTER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED
March 29, 1996 and March 31, 1995
(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 March 29, 1996 and
March 31, 1995 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 29, 1995.
The results for the three and six month periods ended March 29, 1996 and
March 31, 1995 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.
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 March 29, 1996, the Company operated 76
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/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.
Results of Operations
Consolidated net sales for the six months ended March 29, 1996 were
$70,843,000, a decrease of $435,000, or 0.6%, from the $71,278,000 in
consolidated net sales for the six months ended March 31, 1995. Consolidated net
sales for the three months ended March 29, 1996 were $29,263,000, a decrease of
$156,000, or 0.5%, from the $29,419,000 in consolidated net sales for the three
months ended March 31, 1995.
Retail sales for the six months ended March 29, 1996 were $69,943,000, an
increase of $245,000, or 0.4%, from the $69,698,000 in sales for the six months
ended March 31, 1995. Comparable store retail sales for the period decreased by
$4,345,000, or 6.3%. Retail sales for the three months ended March 29, 1996 were
$28,855,000, an increase of $118,000, or 0.4%, from the $28,737,000 in sales for
the three months ended March 31, 1995. Comparable store retail sales for the
period decreased by $1,489,000, or 5.2%. The decrease in comparable store retail
sales for the three months ended March 29, 1996 is primarily attributable to
lost sales as a result of the severe winter weather on the East Coast during the
quarter ended March 29, 1996, weak retail sales in men's and women's fragrances
and the loss of professional hair care product sales, the later resulting from
the Company's change in methods of purchasing professional hair care products
(See Hair Salon Strategy). The Company operated 76 stores at March 29, 1996 and
68 stores at March 31, 1995.
Wholesale sales for the six months ended March 29, 1996 were $900,000, an
decrease of $680,000, or 43.0%, from the $1,580,000 in sales for the six months
ended March 31, 1995. Wholesale sales for the three months ended March 29, 1996
were $408,000, an decrease of $274,000, or 40.1%, from the $682,000 in sales for
the three months ended March 31, 1995. 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
$55,427,000 (78.2% of sales) for the six months ended March 29, 1996 versus
$56,739,000 (79.6% of sales) for the six months ended March 31, 1995. Cost of
sales, including buying, occupancy and distribution expenses, was $23,007,000
(78.6% of sales) for the three months ended March 29, 1996 versus $23,506,000
(79.9% of sales) for the three months ended March 31, 1995. The dollar decrease
for the three months and six months ended March 29, 1996 is primarily
attributable to lost comparable store sales volume which was only partially
offset by the eight additional stores in operation at March 29, 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 purchases 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.
Selling, general and administrative expenses ("S G & A") were $15,267,000
(21.6% of sales) for the six months ended March 29, 1996 versus $12,421,000
(17.4% of sales) for the six months ended March 31, 1995. Selling, general and
administrative expenses were $7,621,000 (26.0% of sales) for the three months
ended March 29, 1996 versus $6,127,000 (20.8% of sales) for the three months
ended March 31, 1995. S G & A expenses increased $2,846,000 for the six months
ended March 29, 1996 over the comparable period of last year. Of this increase
approximately $1,300,000 is associated with stores not in operation last year
and approximately $1,125,000 is associated with operating expenses of hair
salons in stores opened longer than one year. S G & A expenses increased
$1,494,000 for the three months ended March 29, 1996 over the comparable period
of last year. Of this increase approximately $650,000 is associated with stores
not in operation last year and approximately $625,000 is associated with
operating expenses of hair salons in stores opened longer than one year. The
remaining increase in S G & A expenses for the three months and six months ended
March 29, 1996 is attributable to increased advertising expenses and marginal
increases at comparable stores and corporate overhead levels. S G & A expenses
as a percentage of sales were impacted for two reasons: 1) S G & A percentage of
comparable stores was negatively impacted by reduced comparable stores sales
volume during both the three months and six months ended March 29, 1996 and 2)
new stores generally have a higher S G & A percentage because their sales volume
has not matured.
Interest expense was $518,000 (0.7% of sales) for the six months ended
March 29, 1996 versus $279,000 (0.4% of sales) for the six months ended March
31, 1995. Interest expense was $202,000 (0.7% of sales) for the three months
ended March 29, 1996 versus $152,000 (0.5% of sales) for the three months ended
March 31, 1995. The increase in interest expense is primarily attributable to
borrowings under the credit facility to support working capital requirements and
the opening of four stores during the six months ended March 29, 1996.
Liquidity and Capital Resources
The Company's working capital was $32,873,000 at March 29, 1996 compared to
$33,090,000 at September 29, 1995. The ratio of current assets to current
liabilities was 2.2 at March 29, 1996 compared to 2.0 at September 29, 1995.
Net cash provided by operating activities amounted to $2,578,000 for the
six months ended March 29, 1996. Inventories decreased $6,827,000 during the
quarter ended December 29, 1995 and $49,000 during the quarter ended March 29,
1996. The Company typically builds its inventories during September and October
for the upcoming Christmas holiday season. As the holiday season sales build,
inventories are thereby reduced providing the cash to reduce its accounts
payable balances which decreased by $4,102,000 during the six months ended March
29, 1996. The balance of the funds provided from the decrease in inventories
were primarily used to fund investing and financing activities.
Net cash used by investing activities amounted to $968,000 for the six
months ended March 29, 1996. This investment is primarily attributable to the
four new stores opened during the period and completion of the hair salon
retrofit construction.
Net cash used by financing activities amounted to $1,883,000 for the six
months ended March 29, 1996. During the period ended March 29, 1996. the Company
reduced its credit facility by $1,740,000 and repaid capital lease obligations
in the amount of $143,000.
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, 1997, is subject to repayment on demand and bears interest, payable monthly,
at an annual rate equal to the bank's prime rate or at LIBOR plus 200 basis
points. The Facility requires compliance with certain restrictive covenants
including maintenance of minimum tangible net worth. At March 29, 1996, the
outstanding balance under the Facility was $ 10,245,000.
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 has opened four stores in
fiscal 1996 and to date there is one additional store lease signed for a store
to open in June or July 1996. The Company may open additional stores during the
fiscal year, however, this would be dependent upon locating the property,
negotiating the economics of the lease, and time. 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 March 29, 1996
(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
<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 3, 1996 By /s/ Ben S. Kovalsky
BEN S. KOVALSKY
President and Chief Operating Officer
Date: May 3, 1996 By /s/ Bruce E. Strohl
BRUCE E. STROHL
Vice President - Finance
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1996
<PERIOD-END> MAR-29-1996
<CASH> 1,047
<SECURITIES> 0
<RECEIVABLES> 893
<ALLOWANCES> 22
<INVENTORY> 55,015
<CURRENT-ASSETS> 59,844
<PP&E> 18,980
<DEPRECIATION> 8,495
<TOTAL-ASSETS> 70,806
<CURRENT-LIABILITIES> 26,971
<BONDS> 267
0
0
<COMMON> 44
<OTHER-SE> 41,708
<TOTAL-LIABILITY-AND-EQUITY> 70,806
<SALES> 70,843
<TOTAL-REVENUES> 70,843
<CGS> 55,427
<TOTAL-COSTS> 70,694
<OTHER-EXPENSES> (51)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 518
<INCOME-PRETAX> (318)
<INCOME-TAX> (129)
<INCOME-CONTINUING> (189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (189)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
