UNITED STATES
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 the quarter ended July 30, 1995 Commission File No. 1-10952
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DUTY FREE INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Maryland 52-1292246
--------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
63 Copps Hill Road, Ridgefield, Connecticut
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(Address of principal executive offices)
06877
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(Zip Code)
Registrant's telephone number, including area code: 203-431-6057
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Indicate by checkmark 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
------ ------
At August 30, 1995, 27,243,550 shares of $.01 par value common stock of
the registrant were outstanding.
Page 1 of 18
Exhibit is on Page 18
<PAGE>
DUTY FREE INTERNATIONAL, INC.
July 30, 1995
INDEX
Part I. Financial Information Page
------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
July 30, 1995 (unaudited) and
January 29, 1995
Consolidated Statements of Earnings 4
(unaudited) for the three and six months
ended July 30, 1995 and July 31, 1994
Consolidated Statement of Stockholders' 5
Equity (unaudited) for the six months
ended July 30, 1995
Consolidated Statements of Cash Flows 6
(unaudited) for the six months
ended July 30, 1995 and July 31, 1994
Notes to Consolidated Financial 7-8
Statements (unaudited)
Item 2. Management's Discussion and Analysis 9-15
of Financial Condition and Results of
Operations
Part II. Other Information
----------------------------
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
<PAGE>
Form 10-Q
Page 3
<TABLE>
<CAPTION
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<S> <C> <C>
July 30, January 29,
1995 1995
---------- -----------
Assets (unaudited) (note 1)
------
Current assets:
Cash and cash equivalents $ 37,377 $ 31,353
Short-term investments (fair value of
$8,300 and $13,010, respectively) 8,255 13,086
Receivables:
Trade receivables, less allowance for
doubtful accounts of $1,065 and $795 21,429 20,183
Other 12,850 11,400
--------- ---------
34,279 31,583
--------- ---------
Merchandise inventories 102,890 95,112
Prepaid expenses and other current assets 10,069 9,962
--------- ---------
Total current assets 192,870 181,096
Long-term investments (fair value of
$1,694 and $9,500, respectively) 1,708 9,653
Property and equipment, net 91,673 82,533
Excess of cost over net assets of
subsidiaries acquired, net 64,075 64,682
Other intangible assets, net 27,733 25,571
Other assets, net 21,681 23,607
--------- ---------
$ 399,740 $ 387,142
--------- ---------
Liabilities and Stockholders' Equity --------- ---------
------------------------------------
Current liabilities:
Current maturities of long-term debt $ 3,339 $ 2,611
Accounts payable, trade 39,390 30,964
Other current liabilities 30,465 33,525
-------- --------
Total current liabilities 73,194 67,100
Long-term debt, excluding current
maturities 118,462 115,798
Other liabilities 3,070 3,093
-------- --------
Total liabilities 194,726 185,991
-------- --------
Stockholders' equity:
Common stock, par value $.01 per
per share. Authorized 75,000,000
shares; issued and outstanding
27,243,550 shares in both periods 272 272
Additional paid-in capital 80,121 80,121
Foreign currency translation
adjustments -- (603)
Retained earnings 124,621 121,361
--------- ---------
Total stockholders' equity 205,014 201,151
-------- ---------
$ 399,740 $ 387,142
--------- ---------
--------- ---------
See accompanying notes to the consolidated financial statements.
/TABLE
<PAGE>
Form 10-Q
Page 4
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ------------------------------
July 30,1995 July 31, 1994 July 30, 1995 July 31, 1994
------------- ------------- -------------- -------------
(in thousands, except
earnings per share)
<S> <C> <C> <C> <C>
Net Sales $130,359 $137,241 $239,707 $220,484
Cost of sales 74,018 81,369 137,205 134,164
-------- -------- -------- --------
Gross profit 56,341 55,872 102,502 86,320
Advertising, storage and other
operating income 1,141 968 2,401 2,400
-------- -------- ------- ---------
57,482 56,840 104,903 88,720
Selling, general and
administrative expenses 48,925 48,619 92,650 77,151
-------- -------- ------- --------
Operating income 8,557 8,221 12,253 11,569
Other income (expense):
Interest income 590 701 1,242 1,972
Interest expense (2,167) (2,361) (4,351) (4,380)
Other, net 189 (129) 351 716
-------- --------- --------- ---------
(1,388) (1,789) (2,758) (1,692)
-------- --------- --------- ----------
Earnings before income
taxes 7,169 6,432 9,495 9,877
Income taxes 2,653 2,379 3,513 3,654
-------- -------- --------- --------
Net earnings $ 4,516 $ 4,053 $ 5,982 $ 6,223
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share $ 0.17 $ 0.15 $ 0.22 $ 0.23
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number
of shares outstanding 27,244 27,211 27,244 27,225
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q
Page 5
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended July 30, 1995
(in thousands, unaudited)
Foreign
Common stock Additional currency Total
------------------- paid-in translation Retained stockholders'
Shares Amount capital adjustments earnings equity
-------- ------ ---------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 29, 1995 27,244 $272 $80,121 $(603) $121,361 $201,151
Dividends ($0.10 per share) -- -- -- -- (2,722) (2,722)
Change in foreign currency
translation adjustment (note 5) -- -- -- 603 -- 603
Net earnings -- -- -- -- 5,982 5,982
-------- -------- -------- ------- --------- ---------
Balance at July 30, 1995 27,244 $272 $80,121 $ 0 $124,621 $205,014
-------- -------- -------- ------- --------- ---------
-------- -------- -------- ------- --------- ---------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q
Page 6
<TABLE>
<CAPTION>
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
------------------------------
July 30, 1995 July 31, 1994
------------- -------------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,982 $ 6,223
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization of
property and equipment 3,993 3,090
Other amortization 2,836 3,935
Provision for deferred income taxes 1,550 ---
Changes in operating assets and
liabilities:
Accounts receivable (2,695) (1,007)
Merchandise inventories (6,451) (76)
Prepaid expenses and other current
assets (899) 106
Accrued restructuring expenses (1,624) ---
Accounts payable, trade 8,429 8,634
Other current liabilities (280) 2,393
Other (35) (916)
--------- ----------
Net cash provided by operating
activities 10,806 22,382
--------- ----------
Cash flows from investing activities:
Purchases of investments (4,700) (25,565)
Maturities of investments 17,375 24,005
Additions to property and equipment (6,449) (18,668)
Acquisitions of businesses, net of
cash acquired (5,050) (58,421)
Investments in and advances to
affiliates (649) (2,431)
Other (581) 514
--------- ----------
Net cash used in investing
activities (54) (80,566)
--------- ----------
Cash flows from financing activities:
Payment of borrowings (2,407) (11,524)
Dividends paid (2,722) (2,724)
Other 401 (585)
--------- ----------
Net cash used in financing
activities (4,728) (14,833)
--------- ----------
Net increase (decrease) in cash and
cash equivalents 6,024 (73,017)
Cash and cash equivalents at beginning
of period 31,353 99,669
--------- ----------
Cash and cash equivalents at end of
period $ 37,377 $ 26,652
--------- ----------
--------- ----------
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
Form 10-Q
Page 7
DUTY FREE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Consolidated Financial Statements
The consolidated financial statements included herein do not include
all information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. For further information, such as the significant accounting
policies followed by the Company, refer to the notes to consolidated
financial statements set forth in the Company's annual report for the year
ended January 29, 1995.
In the opinion of management, the consolidated financial statements
include all necessary adjustments (consisting of normal recurring
accruals) for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented.
The results of operations for the periods ended July 30, 1995 are not
necessarily indicative of the operating results to be expected for the
full year.
The balance sheet at January 29, 1995 has been derived from the
audited financial statements of the Company at that date.
(2) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Long-term investments in
affiliates in which the Company does not have a majority interest or
control are accounted for by the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(3) Earnings Per Share
Earnings per share are based on the weighted average number of shares
of common stock outstanding during each period.
(4) Foreign Exchange Forward Contracts
The only financial derivatives used by the Company are foreign
exchange forward contracts. The Company had approximately $19,021,000 of
foreign exchange forward contracts outstanding at July 30, 1995 to
purchase British pounds, French francs, deutschmarks and Swiss francs.
The contracts outstanding at July 30, 1995 mature at various dates in
fiscal 1996. The fair values of these contracts were $19,428,000 as of
July 30, 1995. Fair values were estimated by obtaining quotes from banks
assuming all contracts were purchased on July 30, 1995.
<PAGE>
Form 10-Q
Page 8
(5) Restructuring
During the first half of fiscal 1996, the Company closed all five of
its Airport Division retail locations in Toronto, Canada, two small
speciality stores at airports in Bangor, Maine and Burlington, Vermont,
and sold its wholesale operations in Carson, California. The Company's
wholesale operations in Seattle, Washington, the only location scheduled
to be closed under the restructuring plan that has not been closed as of
July 30, 1995, is expected to be sold in the third or fourth quarter of
the current fiscal year. There were no material adjustments to
restructuring costs during the six months ended July 30, 1995.
The Company paid approximately $1,624,000 relating to restructuring
obligations during the six months ended July 30, 1995 which consisted of
$827,000 for employee severance and other arrangements, $670,000 to
terminate property leases and rent for closed stores, and $127,000 for
miscellaneous other expenses. As of July 30, 1995, remaining payments of
$2,909,000 are expected to be paid for obligations incurred pursuant to
the restructuring plan. As of July 30, 1995, 190 store and administrative
employees have been terminated under the restructuring plan. Approximately
210 store and administrative employees in total will have been terminated
when the restructuring is completed.
Net sales and operating income/(losses) of the stores and business
locations closed or scheduled to be closed under the restructuring plan
were as follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
July 30, 1995 July 31, 1994 July 30, 1995 July 31, 1994
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Net Sales $1,751,000 $4,353,000 $3,066,000 $ 7,312,000
Operating Income/
(losses) $ 87,000 $ (452,000) $ (27,000) $(1,230,000)
</TABLE>
(6) Line of Credit and Letter of Credit Facility
On May 26, 1995, the Company signed a fully committed $75,000,000
revolving line of credit and letter of credit facility expiring in May
1998. Borrowings under the agreement bear interest at a rate selected by
the Company based on the prime rate, federal funds rate or the London
Interbank Offered Rate. The credit facility contains covenants which
require, among other things, maintenance of minimum tangible net worth, as
defined, and certain financial ratios. There were no borrowings under the
facility as of July 30, 1995. Currently, the Company has no plans to
make any borrowings under the facility.
<PAGE>
Form 10-Q
Page 9
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
RESULTS OF OPERATIONS
---------------------
Operating income was $8,557,000 for the quarter ended July 30, 1995,
an increase of $336,000 or 4.1% from $8,221,000 for the quarter ended July
31, 1994. Operating income was $12,253,000 for the six months ended July
30, 1995, an increase of $684,000 or 5.9% from $11,569,000 for the six
months ended July 31, 1994. The Inflight Division's operating income for
the quarter ended July 30, 1995 almost doubled when compared to the same
period in the prior year due primarily to a 12.4% increase in sales
resulting from increases in the number of foreign travelers to the United
States and in the average amount of duty free merchandise purchased from
the Company by travelers on-board international airlines. The Division's
gross profit percentage increased by approximately three percentage points
when compared to the prior year due primarily to a significant increase,
in absolute dollars and as a percentage of the Division's total sales, in
duty free sales made on-board international airlines, which sales
generally have higher profit margins than sales of amenity kit and
wholesale sales to airlines. There was also a decrease in inventory
shortages, freight and other costs of sales expenses due to internal
control procedures and expense reduction programs instituted by the
Company. The Northern Border and Airport Divisions' operating income
increased significantly for the quarter and six months ended July 30, 1995
when compared to the prior year due primarily to expense reductions
resulting from the restructuring plan and a decrease in amortization
expense resulting from the intangible asset revaluation in fiscal 1995.
The above was partially offset by a substantial decrease in the
Southern Border Division's operating income during both periods as a
result of the significant devaluation of the Mexican pesos versus the U.S.
dollar in December 1994. The drop in the value of the peso destabilized
the Mexican economy and increased the costs of the Company's products for
Mexican customers. The Southern Border Division reduced its selling,
general and administrative expenses by approximately $2,680,000 during the
first half of fiscal 1996 versus the comparable period in the prior year.
However, these expense reductions were more than offset by a $23,873,000
or 35.7% decrease in the Southern Border Division's net sales during the
first half of fiscal 1996 versus the same period in the prior year. The
expense reductions related primarily to lower employee and other operating
expenses resulting from employee terminations and a decrease in the number
of hours stores are open, and reductions of advertising and promotional
expenses. The decrease in advertising and promotional expenses is not
expected to impact sales due to the significant reduction in the number of
customers in the Southern Border market resulting from the peso
devaluation. The devaluation is expected to have a continuing,
significant negative impact on the Division's sales and earnings during
the remainder of fiscal 1996. The Company will consider closing stores
and further reductions of store hours if current sales trends continue
during the remainder of fiscal 1996.
<PAGE>
Form 10-Q
Page 10
Net earnings for the quarter ended July 30, 1995 were $4,516,000, or
$0.17 per share, an increase of $463,000 or 11.4% from $4,053,000, or
$0.15 per share, for the quarter ended July 31, 1994. As discussed above,
operating income increased by $336,000 for the quarter when compared to
the prior year. Interest income decreased by $111,000 for the quarter
when compared to the prior year due primarily to a decrease in funds
available for investment. Interest expense decreased by $194,000 for the
quarter when compared to the prior year due to a decrease in the average
amount of debt outstanding in the current year. Other non-operating
income increased by $318,000 due primarily to customs penalties and legal
expenses in the second quarter of last year relating to the U.S. Customs
Service's investigation of the operations of the Company's bonded
warehouse in Seattle, Washington. (See Item 3 in the Company's January
29, 1995 Annual Report on Form 10-K). The Company's income tax rate was
37.0% in the second quarter of this year and last year.
Net earnings for the six months ended July 30, 1995 were $5,982,000,
or $0.22 per share, a decrease of $241,000 or 3.9% from $6,223,000, or
$0.23 per share, for the six months ended July 31, 1994. As discussed
above, operating income increased by $684,000 when compared to the prior
year. Interest income decreased by $730,000 when compared to the same
period in the prior year due primarily to the $73,300,000 purchase price
paid for Inflight Sales Group Limited during fiscal 1995 which
significantly reduced funds available for investment. Other non-operating
income decreased by $365,000 when compared to the prior year due primarily
to a $900,000 gain on the sale of the Company's 15% interest in Natural
Energy Unlimited in the first quarter of the prior year partially offset
by the customs penalties and legal fees incurred in the prior year
relating to the Company's Seattle, Washington operations. The income tax
rate was 37.0% for the six months ended July 30, 1995 and July 31, 1994.
Net Sales
---------
The following table sets forth, for the periods indicated, the net
sales and the percentage of total net sales for each of the Company's
divisions and the period to period change in such sales:
<TABLE>
Three Months Ended
-------------------------------------
(in thousands, except for percentages)
Increase/(Decrease)
Divisional Three Months Ended
Net Sales July 30, 1995 July 31, 1994 7/30/95 vs. 7/31/94
----------- -------------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Border:
Southern $ 22,707 17.4% $ 34,661 25.3% $(11,954) (34.5)%
Northern 22,560 17.3 22,104 16.1 456 2.1 %
Inflight 44,924 34.5 39,983 29.1 4,941 12.4 %
Airport 26,307 20.2 23,715 17.3 2,592 10.9 %
Diplomatic
and Wholesale 13,861 10.6 16,778 12.2 (2,917) (17.4)%
------- ------ -------- ------ ----------
$130,359 100.0% $137,241 100.0% $ (6,882) (5.0)%
--------- ------ -------- ------ ----------
--------- ------ -------- ------ ----------
</TABLE>
<PAGE>
Form 10-Q
Page 11
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------------
(in thousands, except for percentages)
Increase/(Decrease)
Divisional Six Months Ended
Net Sales July 30, 1995 July 31, 1994 7/30/95 vs. 7/31/94
----------- -------------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Border:
Southern $ 42,976 17.9% $ 66,849 30.3% $(23,873) (35.7)%
Northern 36,984 15.4 36,974 16.8 10 0.0 %
Inflight 82,739 34.6 39,983 18.1 42,756 106.9%
Airport 49,590 20.7 44,079 20.0 5,511 12.5 %
Diplomatic
and Wholesale 27,418 11.4 32,599 14.8 (5,181) (15.9)%
--------- ------ -------- ------ ----------
$239,707 100.0% $220,484 100.0% $ 19,223 8.7 %
--------- ------ -------- ------ ----------
--------- ------ -------- ------ ----------
</TABLE>
The Company's net sales for the quarter ended July 30, 1995 decreased
by 3.3% versus the same period in the prior year when the sales of the
stores closed under the restructuring plan are excluded from both periods.
The Company's net sales for the six months ended July 30, 1995 decreased
by 11.1% versus the six months ended July 31, 1994 when the sales of the
Inflight Division (purchased May 1, 1994) and the stores closed under the
restructuring plan are excluded from both periods. The decreases for the
quarter and six months were due primarily to significant decreases in the
Southern Border Division's sales. The decreases in the Southern Border
Division's sales were due to the devaluation of the Mexican peso versus
the U.S. dollar in December 1994 which destabilized the Mexican economy
and increased the costs of the Company's products for Mexican customers.
The devaluation is expected to have a continuing, significant negative
impact on the Division's sales and earnings during the remainder of fiscal
1996. Inflight Division's sales were $44,924,000 for the quarter ended
July 30, 1995, an increase of $4,941,000 or 12.4% from $39,983,000 for the
quarter ended July 31, 1994. The increase was due primarily to increases
in the number of foreign travelers to the United States and in the average
amount of duty free merchandise purchased from the Company by travelers
on-board international airlines. The Northern Border Division's sales for
the quarter and six months ended July 30, 1995 were virtually unchanged
from the prior year. The improvement in sales trends for the Northern
Border Division from fiscal 1995 is due primarily to the anniversary of
the decrease in Canadian tobacco taxes which occurred in the first quarter
of fiscal 1995 and increases in average transaction spend amounts by
customers resulting from the Division's marketing and promotion programs.
The above was offset by the continued negative trend in Canadian traffic
across the United States/Canada border. The Airport Division's sales,
excluding sales of the stores closed under the restructuring plan,
increased by 14.9% and 15.7% for the quarter and six months ended July 30,
1995, respectively, when compared to the same periods in the prior year.
The increases were due primarily to increases in the number of foreign
travelers to the United States, and store openings at the new Denver
International Airport, Boston's Logan International Airport and San Juan
International Airport in Puerto Rico during fiscal 1996. The Diplomatic
<PAGE>
Form 10-Q
Page 12
and Wholesale Division's sales decreased by 17.4% and 15.9% for the
quarter and six months ended July 30, 1995, respectively, when compared to
the same periods in the prior year due primarily to the Company continuing
to de-emphasize what would have been relatively low gross margin sales in
this Division. Net sales of the stores and businesses closed or scheduled
to be closed under the restructuring plan were $1,751,000 and $3,066,000
for the quarter and six months ended July 30, 1995, respectively, and
$4,353,000 and $7,312,000 for the quarter and six months ended July 31,
1994, respectively.
Cost of Sales and Gross Profit
------------------------------
Cost of sales includes the cost of merchandise purchased from
suppliers and the cost of distribution to store locations. Gross profit,
as a percentage of net sales, increased to 43.2% in the second quarter of
fiscal 1996 from 40.7% in the second quarter of last year. For the six
months ended July 30, 1995, gross profit, as a percentage of net sales,
increased to 42.8% from 39.2% for the same period in the prior year. The
increases for the quarter and six months were due primarily to significant
increases in the Inflight and Airport Divisions' net sales, and
significant decreases in the Southern Border and Diplomatic and Wholesale
Divisions' net sales in the current year versus the same periods in the
prior year. The Inflight and Airport Divisions have significantly higher
gross profit margins than the Southern Border and Diplomatic and Wholesale
Divisions. The Inflight Division increased its gross profit percentage
approximately three percentage points during the second quarter of fiscal
1996 when compared to the same period in the prior year. The increase was
due primarily to a significant increase, in absolute dollars and as a
percentage of the Division's total sales, in duty free sales made on-board
international airlines, which generally have higher gross profit margins
than amenity kit and wholesale sales to airlines, and a decrease in
inventory shortages, freight and other cost of sales expenses due to
internal control procedures and expense reduction programs instituted by
the Company.
The restructuring plan, implemented in fiscal 1995, did not and will not
have a material effect on the Company's gross profit.
Selling, General, and Administrative Expenses
---------------------------------------------
Selling, general and administrative expenses, as a percentage of net
sales, increased to 37.5% in the second quarter of fiscal 1996 from 35.4%
in the second quarter of fiscal 1995. For the six months ended July 30,
1995, selling, general and administrative expenses, as a percentage of net
sales, increased to 38.7% from 35.0% for the six months ended July 31,
1994. The increases were due primarily to the following factors:
* A significant increase in the Inflight Division's net sales in the
current year, as a percentage of the Company's total sales, when
compared to the prior year. (Inflight was purchased May 1, 1994).
The Inflight Division has selling, general and administrative
expenses, as a percentage of net sales, higher than the Company
average due primarily to commission expenses paid to airlines and the
amortization of intangible assets related to the purchase.
* A significant increase in the Airport Division's net sales in the
current year, as a percentage of the Company's total sales, when
compared to the prior year. The Airport Division's operating
expenses, as a percentage of net sales, are higher than the Company's
other Divisions due to rents based on sales and other variable
expenses.
<PAGE>
Form 10-Q
Page 13
* Decreases in the Southern Border Division's net sales in the
current year versus the prior year. The Southern Border Division has
selling, general and administrative expenses, as a percentage of net
sales, significantly lower than the Company average. The Company
reduced the Southern Border Division's selling, general and
administrative expenses by approximately $1,430,000 during the second
quarter of fiscal 1996 and $2,680,000 for the six months ended July
30, 1995 when compared to the same periods in the prior year.
However, these expense reductions were more than offset by a
$11,954,000 and $23,873,000 decrease in the Division's net sales
during the quarter and six months ended July 30, 1995, respectively,
when compared to the same periods in the prior year. The expense
reductions related primarily to lower employee and other operating
expenses resulting from employee terminations and a reduction in the
number of hours stores are open, and reductions of advertising and
promotion expenses. The decrease in advertising and promotion
expenses is not expected to impact sales in view of the significant
reduction in the number of customers in the Southern Border market.
The Company will consider closing stores and further reductions of
store hours if current sales trends continue during the remainder of
fiscal 1996.
The restructuring plan and the revaluation of intangible assets in
the third quarter of fiscal 1995 reduced the Company's selling, general
and administrative expenses by approximately $2,600,000 in the second
quarter of fiscal 1996 and $4,800,000 for the six months ended July 30,
1995 when compared to the same periods in the prior year.
Other Income (Expense)
----------------------
Interest income decreased by $111,000 and $730,000 for the quarter
and six months ended July 30, 1995, respectively, when compared to the
same periods in the prior year. The decreases were due primarily to a
decrease in funds available for investments in the current year. Inflight
was purchased in fiscal 1995 for approximately $73,300,000. Interest
expense decreased by $194,000 for the quarter when compared to the prior
year due primarily to a decrease in the average amount of debt outstanding
in the current year when compared to the second quarter of last year.
Interest expense for the six months ended July 30, 1995 was virtually the
same as the comparable period in the prior year. Other non-operating
income increased by $318,000 for the quarter ended July 30, 1995 when
compared to the same period in the prior year due primarily to custom
penalties and legal fees incurred in the second quarter of last year
relating to the U.S. Customs Service's investigation of the operations of
the Company's bonded warehouse in Seattle, Washington. Other non-
operating income decreased by $365,000 for the six months ended July 30,
1995 when compared to the same period in the prior year due primarily to
a $900,000 gain in the sale of the Company's 15% interest in Natural
Energy Unlimited in the first quarter of last year partially offset by the
customs penalties and legal fees incurred in the prior year relating to
the Company's Seattle, Washington operations.
Income Taxes
------------
Income taxes, as a percentage of earnings before income taxes, was
unchanged from the prior year for both the quarter and six months ended
July 30, 1995.
<PAGE>
Form 10-Q
Page 14
RESTRUCTURING
-------------
During the first half of fiscal 1996, the Company closed all five of
its Airport Division retail locations in Toronto, Canada, two small
speciality stores at airports in Bangor, Maine and Burlington, Vermont,
and closed its wholesale operations in Carson, California. The Company's
wholesale operations in Seattle, Washington, the only location scheduled
to be closed under the restructuring plan that has not been closed as of
July 30, 1995, is expected to be closed in the third or fourth quarter of
the current fiscal year. There were no material adjustments to
restructuring costs during the six months ended July 30, 1995.
The Company paid approximately $1,624,000 relating to restructuring
obligations during the six months ended July 30, 1995 which consisted of
$827,000 for employee severance and other arrangements, $670,000 to
terminate property leases and rent for sold stores, and $127,000 for
miscellaneous other expenses. As of July 30, 1995, remaining payments of
$2,950,000 are expected to be paid for obligations incurred pursuant to
the restructuring plan. As of July 30, 1995, 190 store and administrative
employees have been terminated under the restructuring plan. Approximately
210 store and administrative employees in total will have been terminated
when the restructuring is completed in the current year.
Net sales and operating income/(losses) of the stores and business
locations closed or scheduled to be closed under the restructuring plan
were as follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
July 30, 1995 July 31, 1994 July 30, 1995 July 31, 1994
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Net Sales $1,751,000 $4,353,000 $3,066,000 $ 7,312,000
Operating Income/
(losses) $ 87,000 $ (452,000) $ (27,000) $(1,230,000)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
On May 26, 1995, the Company signed a fully committed $75,000,000
revolving line of credit and letter of credit facility expiring in May
1998. Borrowings under the agreement bear interest at a rate selected by
the Company based on the prime rate, federal funds rate or the London
Interbank Offered Rate. The credit facility contains covenants which
require, among other things, maintenance of minimum tangible net worth, as
defined, and certain financial ratios. There were no borrowings under the
facility as of July 30, 1995. Currently, the Company has no plans to
make any borrowings under the facility.
<PAGE>
Form 10-Q
Page 15
In March 1995, Standard and Poor's downgraded its rating of the
Company's $115,000,000 senior notes from BBB to BBB-, and in July 1995,
Moody's Investor Services downgraded its rating of the Company's
$115,000,000 senior notes from Bal to Ba2, primarily in response to the
devaluation of the Mexican peso. The downgrades will not affect the
Company's current borrowing costs under the senior notes, and the
Company's senior notes remain investment grade according to Standard and
Poor's. However, the downgrades will increase the costs of any borrowings
pursuant to the provisions of the $75,000,000 revolving line of credit and
letter of credit facility.
Net cash provided by operating activities was $10,806,000 for the
six months ended July 30, 1995. Working capital was $119,676,000 as of
July 30, 1995, an increase of $5,680,000 from $113,996,000 as of January
29, 1995. The Company believes its existing funds, cash provided by
operating activities and available borrowings will be sufficient to meet
its current liquidity and capital requirements.
REGULATION AND ECONOMIC FACTORS AFFECTING THE DUTY FREE INDUSTRY
----------------------------------------------------------------
The Company's sales and gross profit margins are affected by factors
specifically related to the duty free industry. Most countries have
allowances on the import of duty free goods. Decreases in the duty free
allowances of foreign countries or stricter eligibility requirements for
duty free purchases, as well as decreases in tax and duty rates imposed by
foreign jurisdictions (particularly in Canada and Mexico) could have a
negative effect on the Company's sales and gross profit margins.
Conversely, increases could have a positive effect on the Company's sales
and gross profit.
The principal customers of the Company are residents of foreign
countries whose purchases of duty free merchandise may be affected by
trends in the economies of foreign countries and changes in the value of
the U.S. dollar relative to their own currencies. Any significant
increase in the value of the U.S. dollar relative to the currencies of
foreign countries, particularly Canada, Mexico and Japan, could have an
adverse impact on the number of travelers visiting the United States and
the dollar amount of duty free purchases made by them from the Company.
A significant increase in gasoline prices or a shortage of fuel may also
reduce the number of international travelers and thereby adversely affect
the Company's sales. In addition, the Company imports a significant
portion of its products from Western Europe and Canada at prices
negotiated either in U.S. dollars or foreign currencies. As a result, the
Company's costs are affected by fluctuations in the value of the U.S.
dollar in relation to major Western European and Canadian currencies. A
decrease in the purchasing power of the U.S. dollar relative to other
currencies causes a corresponding increase in the purchase price of
products. The Company enters into foreign exchange forward contracts as
a hedge against a portion of its exposure to currency fluctuations on
commitments to purchase merchandise.
<PAGE>
Form 10-Q
Page 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a vote of Security Holders.
At the annual meeting of the Company's shareholders held on May 19,
1995, Alfred Carfora and Susan Stackhouse were elected to three-year terms
on the Company's Board of Directors. Alfred Carfora received 18,568,919
affirmative votes for and 29,675 abstentions and Susan Stackhouse received
18,568,639 affirmative votes for and 29,955 abstentions. The remaining
Directors of the Company, whose terms expire in 1996 and 1997, are David
H. Bernstein, John A. Couri, Heribert Diehl, Jack Africk and Carl
Reimerdes. The shareholders also approved the appointment of KPMG Peat
Marwick LLP as the Company's Independent Auditors for the fiscal year
ending January 28, 1996 casting 18,598,594 affirmative votes for, 89,023
negative votes cast against and 6,050 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) The Company did not file a report on Form 8-K for the quarter
ended July 30, 1995.
<PAGE>
Form 10-Q
Page 17
SIGNATURE
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.
DUTY FREE INTERNATIONAL, INC.
Date: 9/11/95 /s/ Gerald F. Egan
------------------- -----------------------------
Gerald F. Egan
Vice President-Finance and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000820756
<NAME> DUTY FREE INTERNATIONAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-28-1996
<PERIOD-END> JUL-30-1995
<CASH> 37,377
<SECURITIES> 8,255
<RECEIVABLES> 22,494
<ALLOWANCES> 1,065
<INVENTORY> 102,890
<CURRENT-ASSETS> 192,870
<PP&E> 128,372
<DEPRECIATION> 36,699
<TOTAL-ASSETS> 399,740
<CURRENT-LIABILITIES> 73,194
<BONDS> 118,462
<COMMON> 272
0
0
<OTHER-SE> 204,742
<TOTAL-LIABILITY-AND-EQUITY> 399,740
<SALES> 239,707
<TOTAL-REVENUES> 242,108
<CGS> 137,205
<TOTAL-COSTS> 137,205
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 357
<INTEREST-EXPENSE> 4,351
<INCOME-PRETAX> 9,495
<INCOME-TAX> 3,513
<INCOME-CONTINUING> 5,982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,982
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
</TABLE>
