SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
Quarterly Report Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended October 31, 1998
Commission file number 33-27126
PEEBLES INC.
Virginia 54-0332635
----------- --------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
One Peebles Street
South Hill, Virginia 23970-5001 (804) 447-5200
- -------------------------------- ------------------
(Address of principal executive offices) (Telephone Number)
Indicate by check (x) 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_____.
As of October 31, 1998, 1,000 shares of Common Stock of Peebles Inc. were
outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET
PEEBLES INC. & SUBSIDIARIES
(dollars in thousands, except per share amounts)
<TABLE>
October 31, 1998 January 31,1998 November 1, 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
ASSETS (Unaudited) (Unaudited)
CURRENT ASSETS
Cash $ 623 $ 432 $ 54
Accounts receivable, net 28,746 31,581 27,725
Merchandise inventories 92,487 57,967 69,230
Prepaid expenses 2,909 1,145 1,280
Income taxes receivable -- 303 --
Other 804 773 981
--------- --------- --------
TOTAL CURRENT ASSETS 125,569 92,201 99,270
PROPERTY AND EQUIPMENT, net 51,651 38,749 38,139
OTHER ASSETS
Excess of cost over net
assets acquired, net 41,551 35,460 34,876
Deferred financing costs, net 3,637 2,442 2,171
Other 3,007 3,604 3,065
--------- -------- --------
48,195 41,506 40,112
--------- -------- --------
$ 225,415 $ 172,456 $ 177,521
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,894 $ 13,606 $ 17,464
Accrued compensation and
other expenses 5,491 5,055 2,708
Income taxes payable 319 -- 206
Deferred income taxes 4,592 4,592 2,934
Current maturities of
long-term debt 24,102 4,653 21,089
Other 208 1,406 367
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 61,606 29,312 44,768
LONG-TERM DEBT 100,100 81,507 77,788
LONG-TERM CAPITAL LEASE OBLIGATIONS 986 1,139 1,148
DEFERRED INCOME TAXES 5,025 5,025 3,235
STOCKHOLDERS' EQUITY
Preferred stock-no par value,
authorized 1,000,000 shares, none
issued and outstanding -- -- --
Common stock-- par value $.10 per
share, authorized 5,000,000 shares,
1,000 issued and outstanding 1 1 1
Additional capital 59,307 59,307 59,307
Retained earnings (deficit):
accumulated from May 27, 1995; (1,610) (3,835) (8,726)
---------- ---------- ----------
57,698 55,473 50,582
---------- ---------- ----------
$ 225,415 $ 172,456 $ 177,521
=========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
PEEBLES INC. & SUBSIDIARIES
(dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
Three-Month Period Ended Nine-Month Period Ended
----------------------------- -------------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
NET SALES $ 65,601 $ 52,411 $ 174,312 $ 147,369
COSTS AND EXPENSES
Cost of sales 40,512 32,077 105,249 89,854
Selling, general and
administrative expenses 19,812 15,365 52,092 43,685
Depreciation and amortization 2,077 1,813 5,754 4,992
---------- --------- -------- ---------
62,401 49,255 163,095 138,531
---------- -------- --------- ----------
OPERATING INCOME 3,200 3,156 11,217 8,838
OTHER INCOME 19 45 49 102
INTEREST EXPENSE 2,876 2,552 7,558 7,008
---------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 343 649 3,708 1,932
INCOME TAXES
Federal, state and deferred 137 260 1,483 773
---------- --------- -------- ---------
NET INCOME $ 206 $ 389 $ 2,225 $ 1,159
========== ======== ========== ==========
EARNINGS PER SHARE $ 206 $ 389 $ 2,225 $ 1,159
========== ========== ========== ==========
Weighted average common
stock outstanding 1,000 1,000 1,000 1,000
========== ========== ========== ===========
See notes to condensed consolidated financial statements
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
PEEBLES INC. & SUBSIDIARIES
(dollars in thousands)
(Unaudited)
</TABLE>
<TABLE>
Nine-Month Period Ended
October 31, 1998 November 1, 1997
--------------------- --------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,225 $ 1,159
Adjustments to reconcile net
income to net cash
Provided by operating activities:
Depreciation 4,152 3,584
Amortization 2,547 2,101
Provision for doubtful accounts 999 1,013
LIFO/LCM Reserve adjustment 608 600
Changes in operating assets and
liabilities:
Accounts receivable 3,321 3,324
Merchandise inventories (24,520) (15,399)
Accounts payable 12,783 6,727
Other assets and liabilities (5,022) (4,152)
------------ ----------
NET CASH USED IN OPERATING ACTIVITIES (2,907) (1,043)
INVESTING ACTIVITIES
Acquisition of the Ira A. Watson Co. (4,451) --
Purchase of property and equipment (11,713) (8,274)
Other 228 (119)
------------ ---------
NET CASH USED IN INVESTING ACTIVITIES (15,936) (8,393)
FINANCING ACTIVITIES
Proceeds from revolving line of
credit and long-term debt 311,902 228,473
Reduction in revolving line of
credit and long-term debt (297,860) (219,211)
Proceeds from 1998 Credit Agreement -
acquisition of Ira A. Watson Co. 24,000 --
Retirement of Ira A. Watson Co.
pre-acquisition bank debt &
trade liabilities (17,895) --
Financing Fees - Credit Agreement,
as amended and restated (1,113) --
------------ ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 19,034 9,262
------------ --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 191 (174)
Cash and cash equivalents
beginning of period 432 228
----------- --------
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 623 $ 54
============ ==========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
PEEBLES INC. & SUBSIDIARIES
(dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
Common Stock
------------------
Par Additional Retained
Shares Value Capital Earnings (Deficit)
-------------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Balance February 1, 1997 1,000 $ 1 $ 59,307 $ (9,885)
Net income -- -- -- 1,159
-------- ------- ----------- ----------
Balance November 1, 1997 1,000 $ 1 $ 59,307 $ (8,726)
========= ======== =========== ===========
Balance January 31, 1998 1,000 $ 1 $ 59,307 $ (3,835)
Net income -- -- -- 2,225
-------- -------- ---------- -----------
Balance October 31, 1998 1,000 $ 1 $ 59,307 $ (1,610)
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
PEEBLES INC. & SUBSIDIARIES
October 31, 1998
(dollars in thousands, except per share amounts)
NOTE A-ORGANIZATION AND BASIS OF PRESENTATION
Consolidation: The consolidated financial statements include the accounts of
Peebles Inc. and its wholly owned subsidiaries, Carlisle Retailers, Inc.
("Carlisle's") and the Ira A. Watson Co. ("Watson's"), (together "Peebles"
or the "Company"). All significant intercompany balances and transactions
have been eliminated.
Acquisition of the Ira A. Watson Co.: On June 29, 1998, a merger (the
"Watson Merger") was consummated whereby Watson's, a Delaware corporation,
became a wholly-owned subsidiary of Peebles Inc. Watson's, with its corporate
headquarters and distribution center located in Knoxville, TN, operated 24 store
locations in seven states immediately prior to the Watson Merger. In August
1998, the Company closed two of the store locations where markets
strategically overlapped with either an existing Peebles store or an existing
Watson's store. The results of operations for the Watson's stores are included
in Peebles' consolidated financial statements beginning on June 29, 1998.
The stores will continue to carry the Watson's name through the end of the
current fiscal year. The distribution center in Knoxville will remain in
operation as a component of the Peebles logistics network. The Watson's
corporate office functions were transferred to the Peebles corporate office
and the Knoxville offices were closed during August 1998. The $4,451 cash
purchase price included $1,848 to the equity holders of Watson's, $1,352 to a
financial services company for the Watson's proprietary credit card accounts
receivable, and $1,251 in acquisition expenses. Proceeds used to fund the
Watson Merger were provided by the Credit Agreement, as amended and
restated on June 29, 1998 (the "Amended and Restated Credit Agreement").
The Watson Merger has been accounted for using the purchase method of
accounting. The preliminary allocation of the purchase price is as follows:
Purchase Price $ 4,451
Tangible net assets (liabilities) acquired:
Accounts receivable, net $ 1,185
Merchandise inventory, net 10,000
Fixed assets, net 5,446
Bank debt (10,403)
Trade liabilities, net (6,290)
Other net liabilities (1,589)
-----------
Tangible net assets (liabilities) acquired (1,651)
---------------
Excess of cost over net assets acquired $ 6,102
The excess of cost over net assets acquired is being amortized over a twenty-
five year period beginning June 29, 1998.
Pro-Forma Financial Information: The following unaudited pro-forma financial
information reflects the results of operations as if the Watson Merger had
occurred at the beginning of the nine-month periods ended October 31, 1998
and November 1, 1997, respectively. These pro-forma results have been prepared
for comparison purposes only and do not purport to be indicative of what would
have occurred had the Watson Merger been completed at the beginning of either
of the nine-month periods.
Nine-Month Period Ended
---------------------------------
October 31, 1998 November 1, 1997
------------------ -----------------
Net sales $ 198,520 $ 202,845
Net loss (1,941) (1,713)
Net loss per share (1,941) (1,713)
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
PEEBLES INC. & SUBSIDIARIES
NOTE A-ORGANIZATION AND BASIS OF PRESENTATION -- Continued
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
Information and with instructions to Form 10-Q and Article 10 of Regulation S-X.
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 and
recurring accruals) considered necessary for a fair presentation have been
included. In addition, the operating results for the current fiscal periods
are not necessarily indicative of the results that may be expected for the
fiscal year ending January 30, 1999, due to the seasonal nature of the business
of Peebles. For further information, refer to the 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-ACCOUNTS RECEIVABLE
Accounts receivable are shown net of $1,700, $1,400 and $1,349 representing the
allowance for uncollectible accounts at October 31, 1998, January 31, 1998 and
November 1, 1997, respectively. As a service to its customers, the Company
offers credit through the use of its own charge card, certain major credit
cards and a layaway plan. The Peebles' customer usually resides in the local
community immediately surrounding the store location. Peebles stores serve
these local customers in 15 states: Virginia, Tennessee, North Carolina,
Maryland, Kentucky, West Virginia, Alabama, Pennsylvania, South Carolina,
Ohio, Delaware, New York, Indiana, New Jersey, and Missouri. The Company does
not require collateral from its customers.
NOTE C-MERCHANDISE INVENTORIES
Merchandise inventories are accounted for by the retail inventory method applied
on a last in, first out ("LIFO") basis. Due to an acquisition in 1995 accounted
for using the purchase method, the recorded value of merchandise inventories was
increased to fair value (the "Fair Value Adjustment"). The LIFO/market reserves
adjusts inventory to lower of LIFO cost or market.
Merchandise inventories consisted of the following:
<TABLE>
October 31, 1998 January 31, 1998 November 1, 1997
------------------- ------------------ ----------------
<S> <C> <C> <C>
Merchandise inventories at FIFO cost $ 86,362 $ 51,234 $ 62,847
Fair Value Adjustment 7,436 7,436 7,436
LIFO/ market reserve (1,311) (703) (1,053)
----------- ----------- -----------
Merchandise inventories at lower of cost
Or market $ 92,487 $ 57,967 $ 69,230
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
PEEBLES INC. & SUBSIDIARIES
NOTE D - LONG-TERM DEBT
Long -term debt consisted of the following:
</TABLE>
<TABLE>
October 31,1998 January 31, 1998 November 1, 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Senior Revolving Facility $ 49,000 $ 32,000 $ 42,000
Senior Term Note A 13,500 15,275 15,950
Senior Term Note B 59,700 37,094 37,196
Swingline Facility 2,002 1,791 3,731
------------ ----------- -----------
124,202 86,160 98,877
Less current maturities:
Senior Term Notes A & B 3,600 4,083 2,858
Senior Revolving & Swingline Facilities 20,502 570 18,231
----------- ---------- -----------
Total current maturities 24,102 4,653 21,089
=========== ========== ===========
$ 100,100 $ 81,507 $ 77,788
=========== =========== ===========
</TABLE>
The Company has a credit facility (the "Credit Agreement") which provides a
Senior Term Facility, a Senior Revolving Facility, and a Swingline Facility.
The Credit Agreement was amended and restated (the "1998 Credit Agreement") on
June 29, 1998 (the "Restatement Date") to facilitate the Watson Merger. The
1998 Credit Agreement i) provided an additional $24 million in proceeds under
the Senior Term Facility; ii) reduced the scheduled principal payments under
the Senior Term Facility; iii) extended the maturity dates of both the Senior
Term Facility and the Senior Revolving Facility; and iv) adjusted the applicable
interest rates to vary based on certain Company performance criteria, tied to
certain restrictive covenants. The Company deferred an additional $1,113 in
financing fees to amend and restate the Credit Agreement. These financing
fees are being amortized over a five-year period. The 1998 Credit Agreement
is secured by a first priority security interest in substantially all the
personal property and certain real property of Peebles. Restrictive covenants
prohibit the payment of cash dividends in any fiscal year.
The Senior Term Facility includes two notes, Senior Term Note A and Senior Term
Note B. On the Restatement Date, the outstanding principal balances of Senior
Term Note A and Senior Term Note B were increased $644 to $15,000 and $23,008
to $60,000, respectively. Under the 1998 Credit Agreement, Senior Term Note A
and Senior Term Note B accrue interest quarterly in arrears at a LIBOR based
rate which is expected to vary 25 to 50 basis points, dependent primarily on
the Company's operating performance in relation to outstanding debt at the
end of each fiscal quarter. Senior Term Note A and Senior Term Note B currently
bear interest at LIBOR plus 2.50% and LIBOR plus 3.00%, respectively. Senior
Term Note A and Senior Term Note B mature April 30, 2003 and 2004, respectively.
The amount available under the Senior Revolving Facility (the "Revolver") is
determined by a defined asset based formula with maximum borrowings limited
to $75 million less outstanding amounts under letters of credit. The Revolver
matures on April 30, 2003. The Revolver has no specific paydown provisions.
However, the Company classifies a portion of the Revolver outstanding balance
as short-term, if based on the projected operations, the Revolver outstanding
balance is expected to be less at any fiscal month end than the outstanding
balance at the end of the current fiscal period. The Company pays a fee of
1/2 of 1% per annum on any unused portion of the Senior Revolving Facility.
Under the 1998 Credit Agreement, the Revolving Facility bears interest at the
same rate as Senior Term Note A.
Loans under the Swingline Facility are drawn and repaid daily based on the
operating activity of the Company. Aggregate amounts outstanding under the
Swingline Facility cannot exceed $5 million. Excess borrowings or funding
outside these amounts revert to the Revolver. The Swingline Facility bears
interest at prime plus 1-1/2% and has no LIBOR conversion option.
Aggregate principal payments under the 1998 Credit Agreement are as follows:
three-month period ended January 30, 1999 -- $900; Fiscal Years: 1999 --
$3,600; 2000 -- $3,600; 2001 -- $3,600; 2002 -- $3,600; 2003 -- $1,350.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
PEEBLES INC. & SUBSIDIARIES
NOTE E-INCOME TAXES
Differences between the effective rate of income taxes and the statutory rate
arise principally from state income taxes and non-deductible amortization
related to certain purchase accounting adjustments.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(dollars in thousands, except per share amounts)
The following management's discussion and analysis provides information with
respect to the results of operations for the three-month period (or "Fiscal
Quarter") and the nine-month period ended October 31, 1998 in comparison with
the Fiscal Quarter and nine-month period ended November 1, 1997. With the
consummation of the Watson Merger on June 29, 1998, Watson's became a wholly
owned subsidiary of Peebles Inc. The results of consolidated operations
includes the Watson's stores beginning June 29, 1998.
Consolidated net sales and results of consolidated operations, expressed as a
percentage of net sales are presented below for the three-month and nine-month
periods ended October 31, 1998 and November 1, 1997.
<TABLE>
Three-Month Period Ended Nine-Month Period Ended
-------------------------- -------------------------
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
----------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 65,601 $ 52,411 $ 174,312 $147,369
% increase 25.2% 10.3% 18.3% 15.2%
Comparable stores % increase in sales: (2.8)% 7.0% 1.9% 6.6%
Total stores in operation at period end 111 82 111 82
Total net stores opened (closed)
during the period (1) 3 27 5
Operations as a Percentage of Net Sales:
- ----------------------------------------
Cost of sales 61.7% 61.2% 60.4% 61.0%
Selling, general & administrative expenses 30.2 29.3 29.9 29.6
Depreciation and amortization 3.2 3.5 3.3 3.4
------ ------ ------- --------
Operating Income 4.9 6.0 6.4 6.0
Interest Expense 4.4 4.8 4.3 4.7
Other income -- -- -- --
Provision for income taxes .2 .5 .8 .5
------- ------- -------- --------
Net Income .3% .7% 1.3% .8%
</TABLE>
New, or non-comparable, stores were the primary reason total net sales increased
25.2% and 18.3% for the Fiscal Quarter and nine-month period ended October 31,
1998, in comparison to the prior fiscal year periods ended November 1, 1997.
During the current Fiscal Quarter, the Company opened one new Peebles store and
closed two of the Watson's stores where markets overlapped with either an
existing Peebles or Watson's store. Through October 31, 1998, the Company
has opened 5 new Peebles stores and acquired 24 Watson's stores, 22 of which
were in operation at the period end. The Watson's stores contributed $11,986
to net sales during the current Fiscal Quarter and $16,570 during the nine-
month period ended October 31, 1998.
Net sales at comparable stores declined $1,402, or 2.8%, in the third Fiscal
Quarter ended October 31, 1998. For the nine-month period ended October 31,
1998, comparable store net sales increased $2,723, or 1.9%. A total of 76
stores are classified as comparable. These stores will have operations for the
entire twelve-month period in both the current and prior fiscal years. From
late August through September, the traditional back-to-school and late-summer
clearance period, comparable store sales suffered from weak consumer demand
for Fall apparel and lower inventory levels of summer merchandise.
Back-to-school, as a definitive selling period, continues to lose emphasis
as many school systems begin the year earlier in August or remain in session
year round, and have relaxed dress requirements to mirror summer fashions.
Further, in this current cycle, the school-age consumer is more fashion
conscious and purchases to wear immediately. Although these factors are not
new to the current fiscal year, in aggregate they accentuate seasonal weather
changes as the trigger for purchasing Fall fashions. In many of the Company's
markets, unusually warm weather prevailed until late in October.
Consumer demand for summer merchandise remained robust through September, but
the Company was not able to transform that demand into sales increases due to
lower inventory levels of clearance merchandise. During the first Fiscal
Quarter of 1998, many of the Company's markets experienced a milder than normal
winter, allowing for somewhat earlier and stronger sales of spring and summer
merchandise. As a result, net sales at comparable stores increased 6.2% in
the first Fiscal Quarter of 1998. Strong comparable store net sales continued
through May and early June, but the significant reduction in end of the season
clearance merchandise slowed comparable store sales increases to 4.5% through
July and 1.9% through October.
Cost of sales as a percentage of net sales increased to 61.7% in the third
Fiscal Quarter of the current year, up from 61.2% in the comparable prior
year period, due primarily to the operation of the new and acquired store
locations for a full fiscal quarter. New and acquired store locations typically
run a higher cost of sales percentage relative to mature stores, especially
those in markets new to the Company, due to heavier promotions and the lack
of comparable sales history. The Watson's stores, as expected, adversely
impacted cost of sales in the third Fiscal Quarter as the inventory mix is
being aligned to the Peebles merchandising strategy. This adverse impact is
expected to continue into the fourth Fiscal Quarter. Prior to the merger,
Watson's experienced liquidity problems which adversely impacted both the
inventory level and the inventory assortment. Deeper discounting has been,
and will continue to be, required to clear existing merchandise. Targeted
inventory levels and assortments necessary to meet consumer demand are not
expected to be achieved until the Spring of 1999. At comparable stores, cost of
sales as a percentage of net sales continued to benefit from the earlier
reduction in clearance merchandise described above, and declined to 60.0% for
the third Fiscal Quarter of 1998, down from 61.0% in the comparable prior year
period. New and acquired stores did not have as great an impact on the nine-
month period ended October 31, 1998, as the cost of sales percentage was 60.4%,
down from 61.0% for the nine-month period ended November 1, 1997.
Selling, general and administrative ("SG&A") expenses, exclusive of depreciation
and amortization, increased as a percentage of net sales during the third Fiscal
Quarter of 1998 relative to the comparable prior year period, primarily as a
result of operating the new and acquired store locations for the current full
Fiscal Quarter. New and acquired stores typically have higher occupancy,
payroll, and advertising expenses as a percentage of net sales as compared to
mature stores. Payroll and advertising expenses as a percentage of sales tend
to decrease over the twelve-month period following a new store opening, to
mirror more mature comparable stores. Comparing the nine-month periods ended
October 31, 1998 and November 1, 1997, SG&A as a percentage of net sales was
29.9% and 29.6%, respectively. Again, this increase came primarily from the
new and acquired store locations. The Company has been successful in controlling
expenses during growth periods, and expects to realize further efficiencies
through economies of scale in succeeding Fiscal Quarters.
The distribution center in Knoxville, TN obtained in the Watson Merger is now a
component of the Peebles logistics network, and although it serves primarily the
Watson's stores, it will begin serving Peebles and Watson's stores, principally
west of the Appalachian Mountains. The operation of this second distribution
center has created additional SG&A expense in the short term, but, as a platform
for store location growth, is expected to reduce SG&A expense as a percentage of
sales in succeeding fiscal years. The Watson's corporate office was closed in
August 1998, with the responsibilities absorbed at the Peebles corporate office.
Depreciation and amortization expense as a percentage of net sales declined in
the third Fiscal Quarter of 1998 as economies of scale began to be realized on
new sales growth. Over the nine-month period ended October 31, 1998,
depreciation and amortization expense as a percentage of net sales declined to
3.3%, from 3.4% in the comparable prior year period. Amortization expense
increased as a result of the additional goodwill from the Watson Merger and
depreciation increased due primarily to new fixturing required to upgrade the
merchandise presentation in a certain number of the Watson's stores. However,
these increases were not commensurate with sales increases.
Interest expense for the Fiscal Quarters ended October 31, 1998 and November 1,
1997 was $2,876 and $2,552, respectively, and $7,558 and $7,008, respectively
for the nine-month periods then ended. Additional debt incurred to consummate
the Watson Merger on June 29, 1998 increased interest expense, but the effect on
interest expense was partially offset by declines in the Company's effective
borrowing rate. Exclusive of the Watson Merger debt, inventory accumulation
and fixturing required by the new and acquired stores were the primary
influences on debt and interest expense. As a percentage of net sales,
interest expense declined to 4.4% in the Fiscal Quarter ended October 31, 1998,
and 4.3% for the nine-month period then ended.
<PAGE>
The income tax expense for the three-month and nine-month periods ended October
31, 1998 and November 1, 1997 was accrued at an effective tax rate of 40%. The
effective tax rate differs from the statutory rate primarily due to state income
taxes and nondeductible amortization relating to certain acquisition related
assets.
As a result of the changes discussed above, net income as a percentage of net
sales for the three-month and nine-month periods ended October 31, 1998 was
.3% and 1.3%, respectively. In the prior year comparable periods ended
November 1, 1997, net income as a percentage of net sales was .7% and .8%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for capital expenditures in
connection with both the Company's new store expansion and remodeling program
and for working capital needs. The Company's primary sources of funds are
cash flow from continuing operations, borrowings under the Credit Agreement
and trade accounts payable. The Company's inventory levels typically build
throughout the fall, peaking during the Christmas selling season, while
accounts receivable peak during December and decrease during the first Fiscal
Quarter. Capital expenditures typically occur evenly throughout the first
three quarters of each year.
The Company's operating activities used net cash of $2,907 and $1,043 in the
nine-month periods ended October 31, 1998 and November 1, 1997, respectively.
The Company had working capital of $63,963 and $54,502 at October 31, 1998 and
November 1, 1997, respectively. The Watson Merger had a significant impact
on working capital as approximately $10 million in merchandise inventory and
$1.2 million in accounts receivable were added as of June 29, 1998.
Additional operating cash was required in the current year to build inventory
levels for the Holiday season at a greater number of stores than in the prior
year. This increase in merchandise inventory levels was not completely offset
by increases in trade accounts payable. Operating cash received from the
realization of customer accounts receivable was flat in comparison to the
prior year.
Net cash used in investing activities totaled $15,936 and $8,393 for the
nine-month periods ended October 31, 1998 and November 1, 1997, respectively.
Capital expenditures increased from $8,274 to $11,713 for the nine-month
periods ended October 31, 1998 and November 1, 1997, respectively. Current
year capital expenditures were primarily furniture and fixtures for the new
and acquired stores, continuing enhancement of the Company's register systems
and distribution center handling equipment, one major store remodeling, and
several minor remodeling projects. Further, capital expenditures included
enhancements to the handling equipment at the distribution center in Knoxville.
The Watson Merger impacted cash used in investing activities and cash provided
by financing activities. An additional $24 million was added to the Senior Term
Facility as the Company's Credit Agreement was amended and restated to
facilitate the Watson Merger on June 29, 1998. These proceeds were used in
investing activities to: a) acquire the outstanding equity of Watson's for
$1,848; b) acquire the outstanding proprietary Watson's charge card receivables
from a third party financial services company for $1,352; and c) pay related
acquisition fees of $1,251, for a total impact on investing activities of
$4,451. The remaining proceeds were used to retire Watson's pre-acquisition:
a) bank debt; b) remaining liabilities under a plan of reorganization
approved by a bankruptcy court in 1995; and c) outstanding trade liabilities.
The total impact on financing activities was to use $17,895 for these
activities. To amend and restate the Credit Agreement, $1,113 in financing
fees were paid.
During the nine-month period ended October 31, 1998, the Company added
approximately 600,000 square feet to its net selling space, increasing the
total to 2.7 million square feet. During this period, five new Peebles stores
were opened, the 24 Watson's store were acquired and two of those Watson's
stores were closed as planned. In November 1998, the Company will open six
new Peebles stores, five of which were former Stone & Thomas store locations
purchased from Elder-Beerman. The six locations, adding some 171,000 net
selling square feet, are located in strategic markets, contiguous to Peebles'
existing markets, and in states in which Peebles currently operates stores.
These locations complete the Company's fiscal 1998 expansion plans. Based on
historical experience, the Company estimates that the cost of opening a new
store will include capital expenditures of approximately $425 for leasehold
improvements and fixtures and approximately $425 for initial inventory,
approximately one-third of which is normally financed through vendor credit.
Accounts receivable for new stores typically build to 15% of net sales or
approximately $300 within 24 months of the store opening. The
Company may also incur capital expenditures to acquire existing stores.
<PAGE>
The Company finances its operations, capital expenditures, and debt service
payments with funds available under the Revolver. The maximum amount available
under the Revolver is $75 million less amounts outstanding under letters of
credit. The actual amount available is determined by an asset-based formula.
The Company believes the cash flow generated from operating activities together
with funds available under the Revolver will be sufficient to fund the investing
activities and the required payments under the 1998 Credit Agreement.
SEASONALITY AND INFLATION
As a retailer offering predominately soft-apparel and selected home accessories,
the Company's business is seasonal, although less heavily weighted in the fourth
Fiscal Quarter than retailers with comparable offerings of merchandise. Over
the past three fiscal years, quarterly sales as a percentage of total sales have
been consistent at approximately 21%, 22%, 24% and 33% for the first through
fourth Fiscal Quarters, respectively. Peebles believes the positioning of
its stores in small to medium sized communities with limited competition, along
with the Company's less-promotional, every day fair value pricing strategy,
produces operations less dependent on the fourth quarter. However, the third
and fourth quarters are bolstered by the important back-to-school and
Christmas holiday selling seasons.
The Company does not believe that inflation has had a material effect on its
results of operations during the past three fiscal years. Peebles uses the
retail inventory method applied on a LIFO basis in accounting for its
inventories. Under this method, the cost of products sold reported in the
financial statements approximates current costs and thus reduces the likelihood
of a material impact that increases costs. However, there can be no assurance
that the Company's business will not be impacted by inflation in the future.
YEAR 2000 TECHNOLOGICAL ISSUES
In 1997, the Company began a comprehensive analysis of its information systems
to determine the impact of date-related processing when the year changes to 2000
and the systems do not recognize this year as greater than 1999. This analysis
was completed in the second Fiscal Quarter of 1998.
Management expects the Company's information systems to be prepared to
accurately process information after the year changes to 2000 by June 1999.
The Company's primary information systems are on two IBM AS400 mainframes,
with the majority of the software developed internally. In 1985, Peebles
implemented standards for in-house programmers to follow which considered the
year 2000 issue. As a result, many of the Company's in-house information
systems, with programs written or modified after 1985, are already year 2000
compliant. Currently, four programmers are performing a detailed review of
all in-house programming code, which for discussion purposes, is segregated
into three primary operating systems: a) point of sale ("POS") transactions;
b) cash management; and c) merchandise purchasing and management. Although this
segregation is not all-inclusive, it provides an understanding of the systems
vital to conduct business as a soft apparel retailer.
Point of Sale Transactions: The Company transacts sales with customers via IBM
4690 registers. Register systems are controlled within each store location by
an IBM PC controller which facilitates communication to the corporate office
mainframe system, an IBM AS400. IBM has certified that the 4690 registers
are year 2000 compliant. The Company has replaced all in-store IBM PC
Controllers within the past 18 months as a component of its ongoing
communications enhancements program, exclusive of any year 2000 remediation
strategy, and therefore in the Company's normal capital expenditures budget.
These recently purchased in-store PC controllers have been certified year
2000 compliant by IBM. The Company offers credit through its proprietary
charge card and through the use of major bankcards (Mastercard, Visa and
Discover). With regard to the proprietary charge card, AS400 based systems
controlling the authorization of both new accounts and individual transactions
on existing accounts have been reviewed and all necessary programming changes
related to the year 2000 have been completed. The Company uses industry
leader First Data Corp. to authorize and clear bankcard transactions. The
Company is in the process of obtaining year 2000 compliance assurance
from First Data Corp. Accordingly, management expects to be able to transact
sales with customers without significant interruption related to the date
change to the year 2000.
Cash Management - Sources: The Company's material sources of cash are a)
in-store cash transactions; b) payments on outstanding proprietary charge
card balances; and c) reimbursement for bankcard sales transactions. The
Company's AS400 based cash management system related to receipts has been
reviewed and all necessary programming changes related to the year 2000 have
been completed. The Company manages proprietary charge accounts and produces
monthly customer statements via an AS400 based system. The review of this
system is complete and programming changes related to the year 2000 are
approximately 80% complete, with an April 1999 target completion date.
The Company's material corporate cash accounts are with Fleet Bank. The
Company is in the process of obtaining year 2000 compliance assurance from Fleet
Bank that individual store accounts can be drafted and reimbursements from First
Data Corp can be received. Management does not anticipate significant
interruption to cash inflows as a result of the year 2000.
Cash Management - Disbursements: The Company's major cash disbursements are for
merchandise purchases, SG&A expenses, and payroll. The review for year 2000
compliance has been completed, and programming changes have been completed.
However, actual parallel testing will not take place until April 1999. At this
point, the risk exists that: i) due dates are not calculated correctly and
ii) associate time and attendance systems may generate incorrect information.
The most reasonable worst case scenario would require the Company to generate
merchandise and expense disbursements daily and require hourly associates to
work with regimented schedules mirroring those of salaried associates.
Merchandise Purchasing and Management: The Company purchases merchandise
inventory from over 1,200 vendors, with no individual vendor representing
more than 10% of total purchases. Purchase orders are produced, merchandise
is received, and inventory is tracked via an AS400 based purchasing management
system. The review of this in-house system is complete, and approximately 70%
of the programming required to ensure year 2000 compliance has been completed.
The system is expected to be substantially compliant, including testing, by May
1999. The Company has begun communications with its top vendors to determine
year 2000 compliance. Risks include an interruption in a portion of the
merchandise flow in the first fiscal quarter of 2000. January and February
purchases are traditionally the lowest volume month of the year, and represent
predominately Spring and early Summer season fashions. Any interruption to the
merchandise flow can impact the Company's profitability, but management believes
an interruption to a portion of the merchandise flow in January and/or February
would not result in material, adverse consequences.
The costs associated with the evaluation and modification of its information
systems are being expensed as incurred and are not material to the financial
position or results of operations of the Company. To date, the Company has not
completed a comprehensive contingency plan to address year 2000 non-compliance.
Contingency planning is being performed in conjunction with the year 2000
analysis by major information system.
FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report on Form 10-Q are forward-looking,
based on the Company's evaluation of historical information and judgments on
future events, based on the best information available at the time.
Underlying these statements are risks and uncertainties which could cause
actual results to differ materially from those forward-looking statements.
These risks and uncertainties include, but are not limited to:
i) consumer demand for the Company's soft-apparel merchandise; ii) competitive
and consumer demographic shifts within the Company's markets; iii) the Company's
access to, and cost of, capital; iv) the Company's ability to locate and open
new store locations on a timely and profitable basis; v) the Company's ability
to integrate acquired stores into Peebles' overall operations on a timely basis;
vi) the successful management of inventory levels, related costs and selling,
general and administrative costs.; and vii) the timely resolution of Year 2000
compliance issues by the Company and its vendors.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K:
1) September 11, 1998, reporting Item 7, Financial Statements and
Exhibits
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.
PEEBLES INC.
Date: December 2, 1998 By /s/ Michael F. Moorman
-------------------------------
Michael F. Moorman
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ E. Randolph Lail
--------------------------------
E. Randolph Lail
Chief Financial Officer, Senior Vice President-
Finance, Treasurer and Secretary
(Principal Financial Officer)
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<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-END> OCT-31-1998 OCT-31-1998
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<BONDS> 100100 100100
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0 0
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<CGS> 40512 105249
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