UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 2, 1994 (thirteen weeks)
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-10252
SMITH'S FOOD & DRUG CENTERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0258768
(State of Incorporation) (I.R.S. Employer Identification No.)
1550 South Redwood Road, Salt Lake City, UT 84104
(Address of principal executive offices) (Zip Code)
(801) 974-1400
(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
Number of shares outstanding of each class of common stock as of July 2,
1994:
Class A 12,357,094
Class B 15,267,623
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Income for the
thirteen weeks ended July 2, 1994 and July
3, 1993 and the twenty-six weeks ended July
2, 1994 and July 3, 1993 3
Consolidated Balance Sheets as of
July 2, 1994 and January 1, 1994 4
Consolidated Statements of Cash Flows for
the twenty-six weeks ended July 2, 1994 and
July 3, 1993 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Securities Holders 9
Item 6. Exhibits and Reports on Form 8K 9
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 2, July 3, July 2, July 3,
1994 1993 1994 1993
Net sales $748,328 $705,520 $1,502,108 $1,393,759
Cost of goods sold 583,628 542,982 1,174,691 1,070,871
-------- -------- ---------- ----------
164,700 162,538 327,417 322,888
Expenses:
Operating, selling and
administrative 110,641 109,740 223,889 218,213
Depreciation and
amortization 21,745 18,962 42,457 36,987
Interest 12,727 10,837 25,930 21,582
-------- -------- ---------- ----------
145,113 139,539 292,276 276,782
INCOME BEFORE
INCOME TAXES 19,587 22,999 35,141 46,106
-------- -------- ---------- ----------
Income taxes 7,700 9,000 13,900 18,100
-------- -------- ---------- ----------
NET INCOME $ 11,887 $ 13,999 $ 21,241 $ 28,006
======== ======== ========== ==========
Net income per share of
Common Stock $ .41 $ .46 $ .72 $ .92
======== ======== ========== ==========
Dividends paid per share
of Common Stock $ .13 $ .13 $ .26 $ .26
======== ======== ========== ==========
Average number of common
shares outstanding
(In thousands) 28,650 30,318 29,271 30,379
======== ======== ========== ==========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollar amounts in thousands)
July 2, January 1,
1994 1994
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,337 $ 61,921
Rebates and accounts receivable 17,125 20,838
Inventories 365,312 377,939
Prepaid expenses and deposits 35,266 19,634
----------- -----------
TOTAL CURRENT ASSETS 440,040 480,332
PROPERTY AND EQUIPMENT
Land 303,749 282,469
Buildings 590,416 582,775
Leasehold improvements 37,552 38,866
Fixtures and equipment 553,836 538,882
----------- -----------
1,485,553 1,442,992
Less allowances for depreciation
and amortization 315,621 284,363
----------- -----------
1,169,932 1,158,629
OTHER ASSETS 18,374 15,347
----------- -----------
$1,628,346 $1,654,308
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 202,000 $ 185,225
Accrued sales and other taxes 47,228 38,763
Accrued payroll and related benefits 72,314 73,467
Current maturities of long-term debt 18,215 21,473
Current maturities of
Redeemable Preferred Stock 629 1,046
----------- -----------
TOTAL CURRENT LIABILITIES 340,386 319,974
LONG-TERM DEBT, less current maturities 682,176 704,014
DEFERRED INCOME TAXES 86,800 82,700
REDEEMABLE PREFERRED STOCK, less
current maturities 5,423 5,423
COMMON STOCKHOLDERS' EQUITY
Convertible Class A Common Stock, par value
$.01 per share: Authorized 20,000,000 shares;
issued and outstanding, 12,357,094 shares
in 1994 and 12,617,445 shares in 1993 123 126
Class B Common Stock, par value $.01 per share:
Authorized 100,000,000 shares; issued
17,604,917 shares in 1994 and 17,344,566
shares in 1993 176 173
Additional paid-in capital 285,210 285,482
Retained earnings 272,997 259,399
----------- -----------
558,506 545,180
Less Treasury Shares at cost (2,337,294
shares in 1994 and 95,718 shares in 1993) 44,945 2,983
----------- -----------
513,561 542,197
----------- -----------
$1,628,346 $1,654,308
=========== ===========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Twenty-Six Twenty-Six
Weeks Ended Weeks Ended
July 2, July 3,
1994 1993
OPERATING ACTIVITIES:
Net income $21,241 $ 28,006
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (including
amounts charged to cost of goods sold) 45,396 39,421
Deferred income taxes 4,300 6,300
Other 289 342
Changes in operating assets and
liabilities:
Rebates and accounts receivable 3,713 (868)
Inventories 12,627 8,283
Prepaid expenses and deposits (15,832) (25,071)
Trade accounts payable 16,775 (27,437)
Accrued sales and other taxes 8,465 13,515
Accrued payroll and related benefits (1,153) (2,864)
------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 95,821 39,627
INVESTING ACTIVITIES:
Additions to property and equipment (77,206) (153,601)
Sale/leaseback arrangements and
other property sales 20,507 2,114
Other (3,027) 527
------- --------
CASH USED IN INVESTING ACTIVITIES (59,726) (150,960)
FINANCING ACTIVITIES:
Additions to long-term debt 130,000
Payments on long-term debt (25,096) (9,473)
Redemptions of Preferred Stock (417) (414)
Purchases of Treasury Stock (46,058) (8,408)
Proceeds from sale of Treasury Stock 3,535 4,843
Payment of dividends (7,643) (7,764)
------- --------
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (75,679) 108,784
------- --------
NET DECREASE IN
CASH AND CASH EQUIVALENTS (39,584) (2,549)
Cash and cash equivalents at beginning of year 61,921 15,526
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $22,337 $ 12,977
======== =========
See notes to consolidated financial statements
<PAGE>
SMITH'S FOOD & DRUG CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
thirteen and twenty-six week periods ended July 2, 1994 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1994. For further information, refer to the consolidated financial
statements and notes thereto incorporated by reference in the Company's
annual report on Form 10-K for the year ended January 1, 1994.
NOTE B -- SIGNIFICANT ACCOUNTING POLICIES
Net Income per Share of Common Stock: Net income per share of Common Stock
is computed by dividing net income by the weighted average number of shares
of Common Stock outstanding. The weighted average number of common shares
includes Common Stock equivalents in the form of stock options.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales increased 6.1% in the second quarter of 1994 to $748 million
compared to $706 million for the same period last year. For the first
twenty-six weeks of 1994 net sales increased to $1.50 billion from $1.39
billion for the first half of last year, an increase of 7.8%. Same store
sales decreased 3.1% compared with the prior year's second quarter.
However, the second quarter of 1993 included Easter sales. In 1994 Easter
fell in the first quarter. Adjusting for Easter, the decrease in same store
sales was estimated at 1.9%. Same store sales decreased 1.8% compared to
the first six months of the prior year. The decrease in same store sales
was mainly caused by weakened sales in Southern California due to the
continuing recession and intense price competition in this new market, new
store openings by competitors in many of the Company's major markets and
heavy price competition in Utah resulting from the Company's very
aggressive pricing program. To the extent these conditions persist, the
weakness in same store sales may continue.
The Company opened four large combination food and drug centers in
Palmdale, Paramount, Redondo Beach and Santee, California in the first
quarter and one large combination food and drug center in Cerritos,
California in the second quarter of 1994. At July 2, 1994, the Company
operated 134 stores totaling 8.9 million square feet compared to 121 stores
totaling 7.8 million square feet at the end of the prior year's second
quarter. In the remainder of 1994, the Company currently expects to open
up to seven stores in the fourth quarter totaling approximately 434,000
square feet, including three stores in Southern California and three stores
in New Mexico.
Gross margins decreased to 22.0% during the second quarter of 1994 from
23.0% during the same period last year. For the first twenty-six weeks of
1994 gross margins decreased to 21.8% compared to 23.2% for the same period
last year. These decreases were caused primarily by the Company's
aggressive Utah pricing program, which commenced in July 1993. The Company
anticipates that new stores recently opened and planned to open, as in the
past, will apply pressure on its gross margins until the stores become
established in their respective markets. The pretax LIFO charge was $1.5
million for the second quarter of 1994 compared to $750,000 for the same
period last year and $3.0 million for the first six months of 1994 compared
to $1.5 million for the same period last year.
Operating, selling and administrative expenses as a percentage of net sales
decreased to 14.8% during the second quarter of 1994 from 15.6% during the
second quarter of 1993. For the first half of the year compared to last
year, operating, selling and administrative expenses decreased to 14.9%
from 15.7%. These decreases, resulting primarily from the Company's
program to reduce operating costs, are somewhat offset by the higher
operating costs associated with continued expansion into Southern
California.
Depreciation and amortization expenses increased 14.7% for the second
quarter and 14.8% for the first half of 1994 compared to the same
respective period last year due to the increase in the number of new and
larger combination stores and the new distribution center completed at the
end of 1993, in Riverside, California.
Interest expense increased 17.4% in the second quarter and 20.1% for the
first half of 1994 compared to the same respective periods last year due to
an increase in the average interest rate caused by the refinancing in 1993
of revolving credit indebtedness with long-term unsecured debt and a net
increase in the weighted average borrowings for the period.
The Omnibus Budget Reconciliation Act of 1993 enacted during the third
quarter of 1993 increased the Company's Federal Tax rate. As a result of
the increased tax rate, net income for the second quarter of 1994 was
reduced by $220,000 or $.01 per common share and $410,000 or $.01 for the
first six months of 1994. The effective tax rate, including state income
taxes, for the remainder of 1994 is expected to approximate 40%.
Net income decreased in the second quarter of 1994 to $11.9 million or $.41
per common share compared to $14.0 million or $.46 per common share
reported for the same period last year. For the first half of 1994, net
income decreased to $21.2 million or $.72 per common share compared to
$28.0 million or $.92 for this same period last year. The reduction in net
income can be attributed primarily to continuing pressure from opening new
stores in the depressed and competitive Southern California market, the
effect of new store openings by competitors and the Company's very
aggressive pricing program in the Utah market. These pressures may
continue to depress earnings in the future. The Company currently operates
31 large combination food & drug stores in Southern California.
Net income may also be affected by the relatively higher real estate,
operating and selling expenses (including preopening, startup and
advertising expenses) typically associated with stores in the Southern
California market. The resulting effect on net income, however, may be
partially offset, depending upon competitive conditions, by the generally
higher gross profit margins expected in that market as stores mature.
Liquidity and Capital Resources
Cash and cash equivalents decreased $39.6 million during the first half of
1994. Working capital was $99.7 million at July 2, 1994, a decrease of
$60.7 million compared to January 1, 1994.
During the first half of 1994, cash provided by operating activities was
affected by a prepayment of health and medical expenses, a decrease in
inventories and a decrease in accounts payable, resulting in net cash
provided by operations of $95.8 million.
Cash used by investing activities was $59.7 million for the first half of
1994 reflecting the Company's ongoing expansion program. The Company
anticipates investing approximately $80 million during the remainder of
1994 for the development and construction of new food and drug centers,
remodeling of existing stores and replacing equipment. However, the actual
timing and amount of capital expenditures will depend upon a number of
factors.
Cash used in financing activities totaled $75.7 million for the first half
of 1994 as a result of open market repurchases of the Company's Common
Stock and payments on long-term debt . At the end of 1993, the Company
completed a sale/leaseback transaction which increased cash and cash
equivalents at the end of the year. The proceeds from the sale/leaseback
will be used to finance 1994 store expansion and general working capital
purposes.
Management believes that the financial resources available to it, including
proceeds from sale/leaseback transactions, amounts available under existing
and future bank lines of credit, additional long-term financings, and
internally generated funds, will be sufficient to meet planned capital
expansion and working capital requirements for the foreseeable future,
including debt and lease servicing requirements. The Company may, however,
use additional sources of funds for such purposes, including the issuance
of debt or equity securities and leasing rather than owning buildings and
equipment.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
At the Company's Annual Meeting of Stockholders held on April 26, 1994, the
stockholders elected as directors the following:
VOTES VOTES BROKER
NAME FOR WITHHELD NON-VOTES
Jeffrey P. Smith 309,280,097 39,855 -0-
Richard D. Smith 309,280,097 39,855 -0-
Robert D. Bolinder 309,280,397 39,555 -0-
Kenneth A. White 309,280,397 39,555 -0-
DeLonne Anderson 309,241,397 78,555 -0-
Rodney H. Brady 309,280,397 39,555 -0-
Alan R. Hoefer 309,280,297 39,655 -0-
Allen P. Martindale 309,280,397 39,555 -0-
Duane V. Peters 309,280,397 39,555 -0-
Ray V. Rose 309,280,397 39,555 -0-
Fred L. Smith 309,279,997 39,955 -0-
Sean D. Smith 309,239,397 80,555 -0-
Douglas J. Tigert 309,280,297 39,655 -0-
In addition, the stockholders approved the Corporation's bonus program with
respect to the Corporation's executive officers which provides for the
payment of cash bonuses based upon certain financial performance measures
(with 302,266,696 affirmative votes, 605,718 negative votes, 6,447,538
abstentions and zero broker non-votes).
The stockholders also, ratified the appointment of Ernst & Young as the
Corporation's independent auditors for 1994 (with 302,761,467 affirmative
votes, 85,430 negative votes, 6,473,055 abstentions and zero broker non-
votes).
Item 6. Exhibits and Reports on Form 8-K
(b) There were no reports on Form 8-K filed during the second quarter.
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.
SMITH'S FOOD & DRUG CENTERS, INC.
(Registrant)
Date: 8/3/94 /s/Matthew G. Tezak
Matthew G. Tezak, Senior Vice
President and Chief Financial
Officer (Principal Accounting
Officer)
