<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999
[ ] 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 333-51027
RESTORATION HARDWARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0140361
-------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER ID NO.)
INCORPORATION OR ORGANIZATION)
15 KOCH ROAD, SUITE J, CORTE MADERA, CA 94925
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (415)924-1005
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 requirement for the past 90 days [ ] Yes [X] No
As of October 30, 1999, 16,864,089 shares of the Registrant's Common
Stock were outstanding.
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FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Balance Sheets as of October 30, 1999,
January 30, 1999 and October 31, 1998 3
Statements of Operations for the three and
nine months ended October 30, 1999 and October 31, 1998 4
Statements of Cash Flows for the nine months ended
October 30, 1999 and October 31, 1998 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURE PAGE
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
October 30, October 31,
1999 January 30, 1998
(Unaudited) 1999 (Unaudited)
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,236 $ 8,201 $ 2,561
Accounts receivable 10,850 5,176 9,049
Merchandise inventories 98,332 65,398 73,846
Prepaid expense 6,818 5,873 5,302
Deferred tax assets 6,061 -- 863
--------- --------- ---------
Total current assets 124,297 84,648 91,621
Property and equipment, net 103,707 72,680 68,130
Goodwill 4,803 4,512 4,350
Other long term assets 2,440 2,405 2,144
--------- --------- ---------
Total assets $ 235,247 $ 164,245 $ 166,245
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 62,408 $ 39,697 $ 47,053
Current portion of deferred lease incentives 3,409 2,405 2,117
Revolving line of credit and short term debt 41,984 12 8,750
Other current liabilities 6,711 8,117 3,294
--------- --------- ---------
Total current liabilities 114,512 50,231 61,214
Long-term debt 400 458 579
Long-term portion of deferred lease incentives 34,734 25,520 23,318
Deferred rent 7,075 4,281 3,618
--------- --------- ---------
Total liabilities 156,721 80,490 88,729
Stockholders' equity:
Common stock, $.0001 par value; 40,000,000, 40,000,000 and
40,000,000 shares authorized, respectively; 16,864,089
16,246,260 and 16,232,071 issued and outstanding,
respectively 93,918 92,169 92,109
Deficit (15,392) (8,414) (14,593)
--------- --------- ---------
Total stockholders' equity 78,526 83,755 77,516
Total liabilities and stockholders' equity $ 235,247 $ 164,245 $ 166,245
========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------- --------------------------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $ 64,754 $ 49,637 $ 178,729 $ 121,959
Cost of sales and occupancy 44,749 33,791 130,535 84,931
--------- --------- --------- ---------
Gross profit 20,005 15,846 48,194 37,028
Selling, general and administrative expenses 21,787 15,044 57,788 36,731
Pre-opening store expenses 787 734 1,592 1,589
--------- --------- --------- ---------
Loss from operations (2,569) 68 (11,186) (1,292)
Interest expense, net (448) (46) (716) (891)
--------- --------- --------- ---------
Loss before income taxes (3,017) 22 (11,902) (2,183)
Provision for income taxes (1,273) 9 (4,921) (895)
--------- --------- --------- ---------
Net loss (1,744) 13 (6,981) (1,288)
Accretion of manditorily redeemable
preferred stock -- -- -- (999)
--------- --------- --------- ---------
Loss available to common stockholders $ (1,744) $ 13 $ (6,981) $ (2,287)
========= ========= ========= =========
Loss per share:
Basic ($ 0.10) $ 0.00 ($ 0.42) ($ 0.23)
Diluted ($ 0.10) $ 0.00 ($ 0.42) ($ 0.23)
Weighted average shares outstanding:
Basic 16,840 16,221 16,635 10,081
Diluted 16,840 17,714 16,635 10,081
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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RESTORATION HARDWARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------
October 30, 1999 October 31, 1998
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,981) $ (1,288)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,249 4,266
Changes in assets and liabilities:
Accounts receivable (5,673) (2,475)
Merchandise inventories (32,934) (31,276)
Prepaid expenses and other assets (980) (4,134)
Accounts payable and accrued expenses 22,715 21,528
Taxes payable (9,387) (2,573)
Other current liabilities 2,083 862
Deferred rent 2,794 1,708
Deferred lease incentives and other
long-term liabilities 10,219 8,390
-------- --------
Net cash used in
operating activities (10,895) (4,992)
Cash flows from investing activities:
Capital expenditures (38,134) (31,909)
Purchase of subsidiary (434) (5,841)
Cash collected on shareholder advance -- 508
-------- --------
Net cash used in
investing activities (38,568) (37,242)
Cash flows from financing activities:
Borrowings under revolving line of
credit - net 41,982 (3,136)
Principal payments - capital lease obligations (215) (191)
Borrowings (repayments) on long term debt, net (17) (313)
Issuance of common stock 1,748 47,523
-------- --------
Net cash provided by financing
activities 43,498 43,883
Net increase (decrease) in cash and cash equivalents (5,965) 1,649
Cash and cash equivalents:
Beginning of period 8,201 912
-------- --------
End of period $ 2,236 $ 2,561
======== ========
Additional cash flow information:
Cash paid for interest (net of amount
capitalized) $ 728 $ 1,036
======== ========
Cash paid for taxes $ 4,234 $ 1,693
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED OCTOBER 30, 1999 AND OCTOBER 31, 1998
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements have been
prepared from our records without audit and, in management's opinion, include
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position at October 30, 1999 and October 31, 1998;
results of operations for the three and nine months ended October 30, 1999 and
October 31, 1998; and changes in cash flows for the nine months then ended. The
balance sheet at January 30, 1999, as presented, has been derived from our
audited financial statements for the year then ended. Certain reclassifications
have been made to the 1998 presentation to conform to the 1999 presentation.
Our accounting policies are described in Note 1 to the audited consolidated
financial statements for the year ended January 30, 1999. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted for purposes of the interim condensed consolidated
financial statements. The interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, including notes thereto, for the year ended January 30, 1999.
The results of operations for the three and nine month periods presented herein
are not necessarily indicative of the results to be expected for the full year.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires all derivatives to
be recognized in the balance sheet as either assets or liabilities and measured
at fair value. In addition, all hedging relationships must be
<PAGE> 7
reassessed and documented pursuant to the provisions of FAS No. 133. FAS No.
133, as amended by FAS No. 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. We are currently evaluating what
impact, if any, FAS 133 may have on our financial statements.
2. REVOLVING LINE OF CREDIT
We have a revolving line of credit agreement with a commercial bank which allows
for cash borrowings and letters of credit up to $70.0 million through June 2000.
Interest is paid monthly at the bank's reference rate (8.25% at October 30,
1999) or LIBOR plus a margin depending on the nature of the borrowings and our
debt to tangible net worth position. At October 30, 1999, the margin over the
LIBOR rate was 1.50%. The agreement has certain financial covenants, including a
maximum debt to tangible net worth and minimum earnings before income tax
requirements. On August 19, 1999, we amended our revolving line of credit
agreement by changing the financial covenants, retroactive to July 31, 1999, to
accommodate our projected financial position and results of operations for the
next two quarters. At October 30, 1999, we were in compliance with all amended
covenants and had $42.0 million outstanding on the line of credit and $1.4
million outstanding under letters of credit.
3. EARNINGS PER SHARE
Basic earnings per share is computed as net income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur from common shares to be issued through stock options, warrants and
other convertible securities. The potential dilutive effects of stock options
are excluded from the diluted earnings per share for the quarter to date period
ending October 30, 1999 and year to date periods ending October 30, 1999 and
October 31, 1998 because their inclusion in net loss periods would be
anti-dilutive to earnings per share. The dilutive effects of stock options are
included in the diluted earnings per share for the quarter to date period ending
October 31, 1998.
4. SEGMENT REPORTING
We classify our business interests into three identifiable segments: retail,
furniture and other. The retail segment includes revenue and expense associated
with our retail locations (85 and 60 at October 30, 1999 and October 31, 1998,
respectively). The furniture segment includes all revenue and expense associated
with The Michaels Furniture Company, Inc., a wholly owned subsidiary
("Michaels"). Other includes all revenue and expense associated with the catalog
and other operations. We evaluate performance and allocate resources based on
income from operations which excludes unallocated corporate general and
administrative costs. Certain segment information, including segment assets,
asset expenditures and related depreciation expense, is not presented as all
assets of the Company are commingled and are not available by segment.
Financial information for our business segments is as follows:
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<TABLE>
<CAPTION>
(dollars in thousands)
Three Months Ended Nine Months Ended
-------------------------------------- ---------------------------------------
October 30, 1999 October 31, 1998 October 30, 1999 October 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales
Retail $ 61,465 $ 43,903 $ 167,664 $ 108,224
Furniture 7,197 6,730 20,604 17,540
Other 2,120 817 5,848 818
Intersegment sales (6,028) (1,813) (15,387) (4,623)
--------- --------- --------- ---------
Consolidated net sales 64,754 49,637 178,729 121,959
========= ========= ========= =========
Income/(Loss) from operations
Retail 4,448 4,758 8,978 11,328
Furniture 1,032 669 2,267 2,306
Unallocated (7,145) (5,087) (20,123) (14,366)
Intersegment loss from operations (904) (272) (2,308) (560)
--------- --------- --------- ---------
Consolidated loss from operations $ (2,569) $ 68 $ (11,186) $ (1,292)
========= ========= ========= =========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS (YEAR-TO-DATE) ENDED OCTOBER
30, 1999 AS COMPARED TO THE THREE MONTHS (THIRD QUARTER) AND NINE MONTHS
(YEAR-TO-DATE) ENDED OCTOBER 31, 1998
NET SALES. Net sales increased $15.2 million, or 30.6%, to $64.8 million in the
third quarter of 1999 from $49.6 million in the third quarter of the prior year.
Year-to-date net sales increased $56.7 million, or 46.5%, to $178.7 million from
$122.0 million in the prior year. At October 30, 1999, we operated 85 stores as
compared to 60 stores at October 31, 1998. These additional 25 stores
contributed $14.5 million of the sales increase for the third quarter and $27.8
million of the sales increase year to date. Comparable store sales decreased
0.2% in the third quarter of 1999 and increased 5.5% year to date. The flat
quarterly comparable store sales resulted from the distribution strategy changes
we began implementing during the second quarter. Our move to a central
distribution strategy for furniture products contributed to lower than planned
merchandise inventory levels which hampered our ability to meet customer demand
during the first two months of the quarter.
GROSS PROFIT. Gross profit increased $4.2 million, or 26.6%, to $20.0 million in
the third quarter of 1999 from $15.8 million in the third quarter of the prior
year. As a percentage of net sales, third quarter gross profit was 30.9% in 1999
compared to 31.9% in the prior year. As in the previous quarter, the decrease in
gross profit for the third quarter, as a percentage of net sales over the third
quarter of the prior year, resulted from transitioning our distribution strategy
from maintaining furniture and lighting inventories at third party warehouse
locations near stores to more centralized locations whereby furniture and
lighting are stored at Company operated regional distribution centers. The
additional expense associated with the third party warehouse storage and related
distribution costs impacted our gross profit during the third quarter.
Furthermore, we were unable to obtain leverage on store occupancy costs due to
the shortfall in sales. Year-to-date gross profit increased $11.2 million, or
30.1%, to $48.2 million from $37.0 million in the prior year. As a percentage of
net sales, year-to-date gross profit was 27.0% compared to 30.4% in the prior
year. Again, the decrease in gross profit over the prior year, as a percentage
of sales, resulted primarily from the changes in our distribution strategy. We
are also transitioning our vendor direct store shipments to the regional
distribution centers. While we anticipate that these changes will result in
improvements in gross margin over time, we were challenged during the last two
quarters in managing our warehousing and distribution costs.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A expense increased $6.8
million, or 45.3%, to $21.8 million in the third quarter of 1999 from $15.0
million in the third quarter of the prior year. As a percentage of net sales,
SG&A expenses increased to 33.6% in the third quarter of 1999 compared to 30.3%
in the third quarter of the prior year. The increase in SG&A expense for the
third quarter, as a percentage of net sales, is due to the lower than
anticipated third quarter sales based on the reasons outlined above.
Year-to-date SG&A expense increased $21.1 million, or 57.3% to $57.8 million
from $36.7 million in the prior year. As a percentage of net sales, year-to-date
SG&A expense was 32.3% compared to 30.1% in the prior year. On a year over year
comparative basis, we are spending more dollars on store expenses as a
percentage of net sales.
PREOPENING STORE EXPENSE. Pre-opening store expense increased $53,000, or 7.2%,
to $787,000 in the third quarter of 1999 from $734,000 in the third quarter of
the prior year. As a percentage of net sales, pre-opening expense decreased to
1.2% in the third quarter of 1999 compared to 1.5% in the third quarter of the
prior year. The decrease in pre-opening expense as a percentage of sales is due
to our sales growth over prior year. During the quarter we opened 11 stores
compared to nine stores in the third quarter of 1998. Pre-opening store expenses
include all costs associated with the start-up of the store prior to opening
including recruiting, payroll, travel, supplies, occupancy related and
advertising, and are expensed as incurred. Year-to-date pre-opening store
expense of $1.6 million to open 20 stores was flat to the $1.6 million spent in
the prior year to
<PAGE> 10
also open 20 stores. As a percentage of net sales, year-to-date pre-opening
store expense was 0.9% compared to 1.3% in the prior year. As a percentage of
sales, we anticipate this expense to decrease over time.
NET INTEREST EXPENSE. Interest expense, net of interest income, which includes
capital lease interest and interest expense on borrowings under our line of
credit facility, increased $402,000, or 873.9%, to $448,000 in the third quarter
of 1999 from $46,000 in the third quarter of the prior year. Year-to-date net
interest expense decreased $175,000, or 19.6% to $716,000 in 1999 compared to
$891,000 in the prior year. The decrease year to date was due to lower
borrowings in 1999 compared to the prior year, primarily attributable to our
initial public offering in June of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our main sources of liquidity and capital resources have been cash flows from
operations, borrowings under our credit facilities and proceeds from equity
financings and our initial public offering. Our primary capital requirements
have been for new store development, working capital and general corporate
needs.
Net cash used in operating activities year to date for 1999 was $10.9 million,
an increase of $5.9 million over net cash used of $5.0 million in the prior
year. This increase resulted primarily from the increase in net loss of $7.0
million in 1999 from $1.3 million in the prior year.
Net cash used in investing activities year to date for 1999 was $38.6 million,
an increase of $1.4 million over net cash used in investing activities of $37.2
million in the prior year. Historically, cash used in investing activities has
been related to capital expenditures for new store expansion. Such expenditures
totaled $38.1 million year to date for 1999 compared to $31.9 million in the
prior year. Additionally, we used $5.4 million to purchase Michaels in the first
quarter of 1998.
Net cash provided by financing activities year to date for 1999 was $43.5
million, a decrease of $0.4 million over net cash provided by investing
activities of $43.9 million in the prior year. Net cash provided by borrowings
under our line of credit totalled $42.0 million year to date, compared to net
cash used by repayments on our line of credit of $3.1 million for the same
period in the prior year. Year to date we issued $1.7 million in common stock
due to the exercise of stock options and purchases under our Employee Stock
Purchase Plan compared to net issuance of common stock of $47.5 million in the
prior year as a result of our initial public offering in June 1998.
We have a revolving line of credit agreement with a commercial bank which allows
for cash borrowings and letters of credit up to $70.0 million through June 2000.
Interest is paid monthly at the bank's reference rate (8.25% at October 30,
1999) or LIBOR plus a margin depending on the nature of the borrowings and our
debt to tangible net worth position. At October 30, 1999, the margin over the
LIBOR rate was 1.50%. The agreement has certain financial covenants, including a
maximum debt to tangible net worth and minimum earnings before income tax
requirements. On August 19, 1999, we amended our revolving line of credit
agreement by changing the financial covenants, retroactive to July 31, 1999, to
accommodate our projected financial position and results of operations for the
next two quarters. At October 30, 1999, we were in compliance with all amended
covenants and had $42.0 million outstanding on the line of credit and $1.4
million outstanding under letters of credit.
We believe that cash flow from operations and funds available under our credit
facilities will satisfy our capital requirements for the next 12 months.
However, should we be unable to comply with the financial covenants of our
credit facility during the year, and are unable to obtain an amendment or waiver
of compliance from our lender, we would seek additional sources of debt or
equity financing or
<PAGE> 11
adjust the planned level of capital and other expenditures as needed including
reducing the number of new store openings. Such financing may not be available
or, if available, may be on terms that are not favorable to us or our
stockholders.
In connection with the acquisition of our furniture subsidiary, we are required
to pay the former owner contingent cash consideration equal to 25% of Michaels'
EBITDA for fiscal years ending 2000 and 2001. In addition, we are required to
transfer shares of Michaels to the former owner of Michaels equal to 3.3% of
such shares of Michaels if Michaels' EBITDA for the fiscal year ending 2000
equals or exceeds $3.6 million and an additional 3.4% of such shares of Michaels
if Michaels' EBITDA for the fiscal year ending 2001 equals or exceeds $4.0
million. An EBITDA based payment of $647,000 was paid in March 1999 to the
President of Michaels and no shares of Michaels were transferred to the
President.
YEAR 2000
We have formed a Year 2000 (Y2K) Task Force to address the Y2K issue, including
efforts to assess issues we face if third parties we do business with are not
prepared to fully address their Y2K issues, and contingency planning. The
primary goal of this Task Force is to ensure an uninterrupted transition into
the new Millennium. The Task Force, which utilized the expertise of outside
consultants, has prepared a plan that will identify, prioritize and address Y2K
issues, both internal and those of significant third parties. Our Y2K Readiness
Project (the "Project") includes all Restoration Hardware locations, software,
hardware, interfaces with third party systems, and manufacturing, as well as
non-information technology ("IT") components such as environmental and safety
systems, facilities, utilities and supplier readiness.
The Project is divided into four main phases. Phase 1 (Project Scope) included
defining the project scope, providing for Company-wide awareness and generating
a preliminary estimate of expense or a project budget and is 100% complete.
Phase 2 (Inventory) included identification and inventorying of IT resources and
significant dependence on third parties. Phase 3 (Assessment) included
assessment of Y2K compliance on both internal and third party IT components and
the impact of compliance on current business operations. Phase 4 (Remediation
and Testing) includes rectification and remediation planning and implementation
and development of a contingency plan for critical business operations should
non-compliance potentially disrupt normal business functions.
Phase 2 of the Project is 100% complete. Tasks of this phase included
identification and prioritization of approximately 4,000 vendors and merchandise
suppliers with whom we do business and a physical inventory and Y2K compliance
testing of all personal computer (PC's). Also inventoried were assets that may
contain date dependent embedded processors, such as HVAC controls and alarm
systems.
Phase 3 of the Project is also 100% complete. This phase consisted of assessing
the Y2K compliance of all date dependent assets and business relationships
through a combination of direct contact and independent research. A critical
task within this phase was the Y2K compliance assessment of our business
partners, including merchandise suppliers. A Y2K compliance inquiry letter has
been sent to all identified business partners, and the Task Force has reviewed
and tracked all responses. Those partners considered "high priorities" were also
contacted via telephone in the event of non-response to our inquiry letter. The
Company currently is using Y2K compliant versions of the majority of its third
party software. One of the tasks for Phase 4 is to ensure that all PC's
utilizing these applications are upgraded to the Y2K compliant versions.
Phase 4 involves remediation of non-compliant assets and development of
contingency plans for all business-critical assets and processes. Contingency
plans have been developed using a combination
<PAGE> 12
of existing business continuity plans, existing emergency procedures and new Y2K
preparedness checklists, unique to each Company location. The checklist consists
of contacts, both within the Company and external vendors, whom the locations
will need to inform should a failure resulting from the Y2K date change occur.
The contacts are indexed by each asset inventoried in Phase 2 of the Project,
and also by any processes that rely on those assets. Rollout of the checklist to
each location is scheduled to be completed by late-December 1999.
The replacement of the manufacturing system at Michaels was completed in October
1999. The previous system had been identified as non-Y2K compliant and it was
determined that replacement software would be purchased and installed, rather
than upgrade the existing software to a Y2K compliant version. In addition, we
have retrofitted all retail store point-of-sale systems and their software as of
November 1999. Other than as noted herein, no significant IT system
modifications or replacements have been identified.
As of October 30, 1999, we had incurred approximately $700,000 of costs to
implement our Y2K Project. All of these costs have been expensed as incurred,
and have been funded from our operating cash flows. We estimate that
expenditures necessary to complete the Project will be approximately $85,000.
Anticipated costs not yet incurred include retail stores' point-of-sale
retrofits not yet invoiced and other software application upgrades, as
necessary. This estimate, based on management's best estimates, was derived
using numerous assumptions about future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that this estimate will be achieved,
and actual results could differ materially from this estimate. Specific factors
that might cause such material differences include, but are not limited to, the
ability to locate and correct all relevant computer codes, the success achieved
by our suppliers in reaching Y2K readiness, the timely availability of necessary
replacement items and similar uncertainties.
We intend and expect to implement the changes necessary to address the Y2K issue
for our internal IT systems. Because we have no "in-house" applications, that
is, all software has been purchased from third party vendors and no software has
been programmed or coded within the Company, we believe that with modifications
to existing software and/or conversions to new software, the Y2K issue is not
reasonably likely to pose significant operational problems for our IT systems as
modified and converted.
We are presently unable to assess the likelihood that we will experience
significant operational problems due to unresolved Y2K compliance issues from
third parties. This not only applies to software and hardware vendors, but also
to vendors of non-IT components. Although we are continuing to follow up with
third party vendors to address any issues, there can be no assurance that we can
timely mitigate our risks related to a third party's failure to resolve its Y2K
issues. If such mitigation is not achievable, unresolved Y2K compliance issues
could have a material impact on our operations.
We currently believe that the most reasonably likely worst-case scenario that we
may confront may relate to a possible failure in one or more geographic regions
of third party systems over which we have no control, such as, but not limited
to, electrical, communication and delivery services. For example, if such
services were to cease we may have to temporarily close stores or the furniture
factory in the affected areas. Given such a scenario, our focus in developing a
contingency plan will be related to keeping stores open and obtaining
replenishment inventories, maintaining communication and data transfer between
the home office and store locations and ultimately of ensuring that payments are
made to both employees and vendors.
FACTORS THAT MAY AFFECT FUTURE RESULTS
<PAGE> 13
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our business is highly seasonal, reflecting the general pattern associated with
the retail industry of peak sales and earnings during the holiday season. Due to
the importance of the holiday selling season, the fourth quarter of each year
has historically contributed, and we expect it will continue to contribute, a
disproportionate percentage of our net sales and most of our net income for the
entire year. In anticipation of increased sales activity during the fourth
quarter we incur significant additional expenses. If, for any reason, our sales
were to fall below our expectations in November and December, our business,
financial condition and annual operating results would be materially adversely
affected. In addition, we make decisions regarding merchandise well in advance
of the season in which it will be sold, particularly for the holiday selling
season. Significant deviations from projected demand for products could have a
material adverse effect on our financial condition and results of operations.
Our quarterly results of operations may also fluctuate based upon a variety of
other factors, including, among other things, the number and timing of store
openings and related pre-opening store expenses, the amount of net sales
contributed by new and existing stores, the mix of products sold, the timing and
level of markdowns, promotional events, store closings, refurbishments or
relocations, the mix of Michaels sales to third parties, adverse weather
conditions, shifts in the timing of holidays, timing of catalog releases or
catalog sales, competitive factors and general economic conditions. We have
experienced, and expect to continue to experience, substantial seasonal
fluctuations in our sales and operating results, which is typical of many
retailers. Historically, a disproportionate amount of our retail sales,
approximately half of our annual net sales, and nearly all of our profits have
been realized during the fourth quarter. We expect this pattern to continue
during the current year and anticipate that in subsequent years the fourth
quarter will continue to contribute disproportionately to our operating results,
particularly during November and December.
IMPLEMENTATION AND MANAGEMENT OF AGGRESSIVE GROWTH STRATEGY
Our net sales and net income have grown significantly during the past several
years, primarily as a result of the opening of new stores. We intend to continue
to pursue an aggressive growth strategy for the foreseeable future, and our
future operating results will depend largely upon our ability to open and
operate stores and manage a larger business successfully. We opened 28 new
stores in 1999 (20 of which were opened as of October 30, 1999 and the remaining
8 have opened since the third quarter ended). We intend to open 15 new stores in
2000. Our ability to open stores on a timely basis and the performance of such
stores will depend upon many factors, including, among others, our ability to
identify and enter new markets, locate suitable store sites, negotiate
acceptable lease terms, acquire merchandise, hire and train store managers and
sales associates and obtain adequate capital resources on acceptable terms. Any
restrictions on our ability to expand would have a material adverse effect on
our business, results of operations and financial condition. As a result, there
can be no assurance that we will be able to achieve our targets for opening new
stores. Moreover, there can be no assurance that our new stores will be
successful or achieve operating results comparable to our existing stores.
We plan to continue to enter new markets in various regions of the United States
in 2000. Operation of a greater number of new stores and expansion into new
markets may present competitive, distribution and merchandising challenges that
are different from those currently encountered by us in our existing stores and
markets. In addition, there can be no assurance that our expansion within our
existing markets will not adversely affect the individual financial performance
of our existing stores or our overall results of operations. Specifically, we
cannot determine the impact on current profitability as we expand our
distribution of catalogs and increase our mail order and e-commerce businesses.
<PAGE> 14
We will need to continually evaluate the adequacy of our store management and
management information and distribution systems to manage our planned expansion.
There can be no assurance that we will anticipate all of the changing demands
that our expanding operations will impose on such systems, and the failure to
adapt our systems and procedures to such changing demands could have a material
adverse effect on our business, results of operations and financial condition.
There can be no assurance that we will successfully achieve our expansion
targets or, if achieved, that planned expansion will not have an adverse impact
on results of operations.
We will need to increase our production capacity and improve the manufacturing
process at Michaels to meet our store and product growth demands. Additionally,
Michaels currently supplies product to a few third party dealers. There can be
no assurance that sales to third party dealers will continue or that a change in
the mix of sales within the Company and to third party dealers will not
adversely impact the results of operations. There can be no assurance that we
will be able to adequately supply the retail stores or third party dealers and
operate Michaels at the historical levels of profitability.
We anticipate that we will need to expand our current distribution network to
accommodate our planned expansion in the future including the change we are
currently undergoing in distribution strategy from maintaining furniture and
lighting inventories at third party warehouse locations near stores to more
centralized locations whereby furniture and lighting would be stored at Company
operated regional distribution centers. We are also transitioning our vendor
direct shipments to the regional distribution centers. We implemented a new
Warehouse Management System during the quarter at our West coast facility to aid
us in our distribution administration. There can be no assurance that such
changes will not cause disruptions that could materially adversely affect our
business, results of operations and financial condition. We currently continue
to rely on third party warehouses to handle our products during this transition
and the expense related to this fluctuates with inventory levels and there can
be no assurance that we can reduce this expense as inventory levels increase.
Further, we rely upon third party carriers and warehouses for our product
shipments, including shipments to and from all of our stores, and accordingly
are subject to the risks, including employee strikes and inclement weather,
associated with such carriers' ability to provide warehousing and delivery
services to meet our needs. In addition, distribution, warehousing and freight
costs also fluctuate as a result of sales activity and there is no assurance
that we can generate sufficient merchandise margins to offset these additional
costs. We are also dependent upon temporary employees to adequately staff our
distribution facility, particularly during busy periods such as the Christmas
season and while stores are opening. There can be no assurance that we will
continue to receive adequate assistance from our temporary employees, or that
there will continue to be sufficient sources of temporary employees.
Historically, cash flow from operations has been insufficient to finance our
growth and we have relied upon our line of credit and the proceeds from our
initial public offering in June 1998 to finance working capital requirements.
There can be no assurance that our operations will generate sufficient cash flow
or that adequate financing will be available to support our continued growth.
SMALL STORE BASE
We operated 85 stores at October 30, 1999. The results achieved to date by our
relatively small store base may not be indicative of the results that may be
achieved from a larger number of stores. In addition, should any new store be
unprofitable or should any existing store experience a decline in profitability,
the effect on our results of operations could be more significant than would be
the case if we had a larger store base.
FLUCTUATIONS IN COMPARABLE STORE SALES
<PAGE> 15
A variety of factors affect our comparable store sales including, among others,
the general retail sales environment, our ability to efficiently source and
distribute products, changes in our merchandise mix, promotional events, the
impact of competition and our ability to execute our business strategy
efficiently. Our comparable store sales results have fluctuated significantly in
the past and we believe that such fluctuations may continue. Past comparable
store sales results are no indication of future results, and we expect that our
comparable store sales results will decrease in the future.
DEPENDENCE ON KEY PERSONNEL
Our performance depends largely on the efforts and abilities of our executive
and senior management team, particularly Stephen Gordon, our Chief Executive
Officer and founder, Thomas Christopher, our President and Chief Operating
Officer, Walter Parks, our Executive Vice President and Chief Administrative
Officer, Thomas Low, our Senior Vice President and Chief Financial Officer and
Cory Hunter, our Executive Vice President, Merchandising. The loss of Mr.
Gordon's services or the services of other members of the management team could
have a material adverse effect on our business, results of operations and
financial condition. We do not have employment agreements with any of the
members of our executive management team. In addition, our performance will
depend upon our ability to attract and retain qualified management,
merchandising and sales personnel. There can be no assurance that Mr. Gordon and
the existing management team will be able to manage the Company or our growth or
that we will be able to attract and retain additional qualified personnel as
needed in the future.
DEPENDENCE ON KEY VENDORS
Our performance depends on our ability to purchase our merchandise in sufficient
quantities at competitive prices. Although we have many sources of merchandise,
two of our vendors (Mitchell Gold, a manufacturer of upholstered furniture and
Robert Abbey Inc., a manufacturer of table and floor lamps) together accounted
for approximately 15% of our aggregate merchandise purchases in fiscal year
1998. In addition, our smaller vendors generally have limited resources,
production capacities and operating histories, and some of our vendors have
limited the distribution of their merchandise in the past. We have no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to new products and any vendor or distributor could discontinue
selling to us at any time. There can be no assurance that we will be able to
acquire desired merchandise in sufficient quantities on terms acceptable to us
in the future, or be able to develop relationships with new vendors or that any
inability to acquire suitable merchandise or the loss of one or more key vendors
will not have a material adverse effect on our business, results of operations
and financial condition. In addition, a single vendor supports our merchandise
management information systems and we have generally employed a single general
contractor to oversee the construction of our new stores. A failure by such
vendor to support these systems or by such contractor to continue such services
adequately could have a material adverse effect on the Company.
DEPENDENCE ON IMPORTS AND VULNERABILITY TO IMPORT RESTRICTIONS
Historically we have purchased approximately 15% of our merchandise directly
from vendors located abroad, primarily in India, and expect that such purchases
will increase slightly as a percentage of total merchandise purchases in 1999.
These arrangements are subject to the risks of relying on products manufactured
abroad, including import duties and quotas, loss of "most favored nation"
trading status, currency fluctuations, work stoppages, economic uncertainties
including inflation, foreign government regulations, political unrest and trade
restrictions, including United States retaliation against foreign trade
practices. While we believe that we could find alternative sources of supply, an
interruption or delay in supply from India or our other foreign sources, or the
imposition of additional duties, taxes or other charges on these imports could
have a material adverse effect on our
<PAGE> 16
business, financial condition and results of operations unless and until
alternative supply arrangements are secured. Moreover, products from alternative
sources may be of lesser quality or more expensive than those we currently
purchase.
CHANGES IN CONSUMER TRENDS
Our success depends on our ability to anticipate and respond to changing
merchandise trends and consumer demands in a timely manner. We believe we are
benefiting from a lifestyle trend toward increased interest in home renovation,
gardening and interior decorating. Any change in such trend could adversely
affect consumer interest in our major product lines. Moreover, our products must
appeal to a broad range of consumers whose preferences cannot always be
predicted with certainty and may change between sales seasons. If we misjudge
either the market for our merchandise or our customers' purchasing habits, we
may experience a material decline in sales or be required to sell inventory at
reduced margins. We could also suffer a loss of customer goodwill if our stores
or newly acquired furniture making operations do not adhere to our quality
control or service procedures or otherwise fail to ensure satisfactory quality
of our products. These outcomes may have a material adverse effect on our
business, operating results and financial condition.
GENERAL ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on merchandise
that we offer, including, among others, general business conditions, interest
rates, taxation and consumer confidence in future economic conditions. Adverse
economic conditions and any related decrease in consumer demand for
discretionary items such as those offered by us could have a material adverse
effect on our business, results of operations and financial condition.
GOVERNMENT REGULATION
Many of our imported products are subject to existing or potential duties,
tariffs or quotas that may limit the quantity of certain types of goods which
may be imported into the United States and other countries. In addition, we are
subject to currency fluctuations, work stoppages, economic uncertainties
including inflation, foreign government regulations, political unrest and trade
restrictions, including United States retaliation against foreign practices.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report on this quarterly Form 10-Q contains "forward looking
statements," within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve known and unknown risks. Such forward-looking statements
include statements as to our plans to open additional stores, the results of
strategic initiatives, the anticipated performance of new stores, the impact of
competition and other statements containing words such as "believes,"
"anticipates," "estimates," "expects," "may," "intends," and words of similar
import or statements of management's opinion. These forward-looking statements
and assumptions involve known and unknown risks, uncertainties and other factors
that may cause the actual results, market performance or our achievements to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Important factors that could
cause such differences include, but are not limited to, changes in economic or
business conditions in general, changes in product supply, changes in our
distribution strategy, changes in the competitive environment in which we
operate, competition for and the availability of sites for new stores, changes
in our management information needs, changes in customer needs and expectations
and governmental actions. We undertake no obligation to update any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this report.
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to our market risk as disclosed in our report on
Form 10-K filed for the fiscal year ended January 30, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings against us. We are, however,
involved in routine litigation arising in the ordinary course of our business,
and, while the results of the proceedings cannot be predicted with certainty, we
believe that the final outcome of such matters will not have a material adverse
effect on our consolidated financial position or results of operations.
In June 1999, in cooperation with the U.S. Consumer Product Safety Commission,
Restoration Hardware recalled approximately 13,000 Sock Monkey stuffed animals
sold since mid-1997. Sewing needles or pins were found in the stuffing of a
significant number of monkeys after a small child in Utah received a minor
injury to his neck and a Restoration Hardware employee in Portland, Oregon found
a needle in a sock monkey on display. All merchandise has been removed from
sale. The monkeys were manufactured by third parties in the United States and in
China. Needles have been found in both domestic and overseas production. We are
refunding all customer returns and offering a small discount on a future
purchase as a customer accommodation. Costs expected to be incurred in
association with the recall are approximately $50,000. For further information
regarding the recall, a toll free number was established (1-877-747-4671) and
information is posted on our website at www.restorationhardware.com.
ITEM 5. OTHER INFORMATION
We issued a press release on December 2, 1999 announcing Cory Hunter as
Executive Vice President, Merchandising.
Michael Lazarus of Weston Presidio Capital, LLC, resigned from our Board of
Directors during the third quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
*10.18 Fourth Amendment to the Fourth Amended and Restated Loan
and Security Agreement dated October 15, 1999
*27.1 Financial Data Schedule
* Filed herewith.
</TABLE>
(b) Reports on Form 8-K
We filed no reports on Form 8-K during the nine month period ended October 30,
1999.
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
RESTORATION HARDWARE, INC.
Date: December 14, 1999 /s/ Stephen Gordon
By: Stephen Gordon
Chief Executive Officer and Chairman
RESTORATION HARDWARE, INC.
Date: December 14, 1999 /s/ Thomas Low
By: Thomas Low
Senior Vice President and
Chief Financial Officer
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
*10.18 Fourth Amendment to the Fourth Amended and Restated Loan
and Security Agreement dated October 15, 1999
*27.1 Financial Data Schedule
</TABLE>
* Filed herewith.
<PAGE> 1
EXHIBIT 10.18
AMENDMENT NUMBER FOUR
This AMENDMENT TO LOAN AGREEMENT ("Amendment") dated as of this
14th day of October, 1999, among FLEET CAPITAL CORPORATION, as Agent, the
financial institutions party to the Loan Agreement (as defined below) as
Lenders, and RESTORATION HARDWARE, INC. and THE MICHAELS FURNITURE COMPANY, INC.
(each a "Borrower" and collectively "Borrowers"), is made in reference to the
following facts:
A. Agent, Lenders and Borrowers have previously entered into that
certain Fourth Amended and Restated Loan and Security Agreement dated as of
April 30, 1998 (as amended, the "Loan Agreement") and various agreements and
instruments collateral thereto (collectively with the Loan Agreement, the "Loan
Documents"). All capitalized terms used herein, unless otherwise defined herein,
shall have the meanings set forth in the Loan Documents.
B. Without waiving any of Agent's or Lenders' rights and
remedies, Agent and Lenders are willing to amend the Loan Agreement on the terms
and subject to the conditions set forth in this Amendment. Borrowers are
entering into this Amendment with the understanding and agreement that, except
as specifically provided herein, none of Agent's or Lenders' rights or remedies
as set forth in the Loan Documents is being waived or modified by the terms of
this Amendment.
NOW THEREFORE, in consideration of the foregoing agreed upon
recitals and the terms and conditions hereof, the parties do hereby agree as
follows:
1. Section 1.4 of the Loan Agreement is amended as follows:
a) clause (b) is deleted in its entirety; and
b) the phrases "and Acquisition Line Loans" and "and, in
accordance with their respective Acquisition Line Commitments, to make
Acquisition Line Loans available" are deleted therefrom.
2. Subsection 2.1.1 of the Loan Agreement is amended by deleting
"Acquisition Line loans and" from the heading of the third column in such
subsection.
3. Subsection 3.1.3 of the Loan Agreement is amended by deleting
"and Acquisition Line loans requested pursuant to Section 1.4" therefrom.
4. Subsection 3.2.1 of the Loan Agreement is amended by deleting
"and the Acquisition Line loans" therefrom.
5. Certain definitions set forth in Appendix A - General
Definitions of the Loan Agreement are deleted or amended as set forth below:
(a) The definition of "Acquisition Line" is deleted.
(b) The definition of "Acquisition Line Commitment" is
deleted.
<PAGE> 2
(c) The definition of "Commitment" is amended in full to
read as follows:
"Commitment - collectively, the Restoration Commitment and
the Michael's Revolving Credit Commitment."
(d) The respective definitions of "Base Rate Loans",
"LIBOR Loans", "LIBOR Option", and "Restoration Commitment" are
amended by deleting "and Acquisition Line loans" therefrom.
(e) The definition of "Commitment" is amended by deleting
"or Acquisition Line loans" therefrom.
(f) The definition of "Restoration Borrowing Base" is
amended in full to read as follows:
"(j) Restoration Borrowing Base - as at any date of
determination thereof, an amount equal to the lesser of:
(i) $70,000,000; and
(ii) an amount equal to the sum of
(a) $35,000,000,
PLUS
(b) 65% of the value of
Restoration's Eligible Inventory at such date
in excess of $46,000,000, measured on the basis
of the weighted average cost method;
provided, that at no time may the aggregate outstanding
Revolving Credit Loans and Convertible Term Loans exceed
$70,000,000."
6. Annex 1 to the Loan Agreement is replaced with Annex 1
attached to this Amendment.
7. Except as amended by the terms herein, the Loan Documents
remain in full force and effect in accordance with their terms. If there is any
conflict between the terms and provisions of this Amendment and the Loan
Documents, the terms and provisions of this Amendment shall govern.
8. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
9. This Amendment shall be governed by and construed according to
the laws of the State of California.
2
<PAGE> 3
10. The Loan Documents, subject to the foregoing terms and
conditions provided by this Amendment, constitute the complete agreement of the
parties hereto with respect to the subject matters referred to herein and
supersede all prior or contemporaneous negotiations, promises, agreements, or
representations, all of which have become merged and finally integrated into the
Loan Documents and this Amendment.
11. Borrower agrees to pay, on demand, all attorneys' fees and
costs incurred in connection with the negotiation, documentation and execution
of this Amendment. If any legal action or proceeding shall be commenced at any
time by any party to this Amendment in connection with its interpretation or
enforcement, the prevailing party or parties in such action or proceeding shall
be entitled to reimbursement of its reasonable attorneys' fees and costs in
connection therewith, in addition to all other relief to which the prevailing
party or parties may be entitled.
[This space intentionally left blank]
3
<PAGE> 4
12. Except for the fee letter of even date herewith between Agent
and Borrower, and as provided in the preceding paragraph hereof, there shall be
no closing fees or charges payable by Borrower in connection with this
Amendment.
FLEET CAPITAL CORPORATION,
as Agent and Lender
By: MATT VAN STEENHUYSE
-------------------------------
Its: SENIOR VICE PRESIDENT
-----------------------------
BANKBOSTON, N.A.,
as Lender
By: PETER GRISWOLD
-------------------------------
Its: MANAGING DIRECTOR
-----------------------------
RESTORATION HARDWARE, INC.
By: THOMAS LOW
-------------------------------
Its: SENIOR VICE PRESIDENT & CFO
-----------------------------
THE MICHAELS FURNITURE COMPANY, INC.
By: THOMAS LOW
-------------------------------
Its: VICE PRESIDENT & CFO
-----------------------------
4
<PAGE> 5
Annex 1
Addresses for Notices, Payment Accounts and Commitments of Lenders
<TABLE>
<CAPTION>
COMMITMENT
----------
<S> <C>
FLEET CAPITAL CORPORATION $50,000,000 Revolving Credit Loans
(Restoration)
$2,142,858 Revolving Credit Loans*
(Michael's)
$7,142,858 Convertible Term
Loan*
BANKBOSTON, N.A. $20,000,000 Revolving Credit Loans
(Restoration)
$857,142 Revolving Credit Loans*
(Michael's)
$2,857,142 Convertible Term
Loan*
</TABLE>
Address for Notices
<TABLE>
<S> <C>
Fleet Capital Corporation BankBoston, N.A.
15260 Ventura Boulevard 100 Federal Street
Suite 400 Mail Stop 01-09-05
Sherman Oaks, California 91403 Boston, Massachusetts 02110
Attention: Loan Administration Manager Attention: Peter Griswold
Facsimile No.: (818) 382-4291 Facsimile No.: _______________
</TABLE>
Payment Account
<TABLE>
<S> <C>
Fleet National Bank, N.A. BankBoston, N.A.
777 Main Street Boston, MA.
Hartford, Connecticut 06115-2000 ABA: 011000390
ABA: 011900445 Attn: Commercial Loan Services -
Account: 937-001-4304 Admin. 57
Re: Restoration Hardware, Inc. Re: Restoration Hardware, Inc.
</TABLE>
- ----------
* NOTE: The aggregate Michael's Revolving Credit Commitment and aggregate
Convertible Term Loan Commitment are sublines of the aggregate $70,000,000
Restoration Revolving Credit Commitment.
1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 2,236
<SECURITIES> 0
<RECEIVABLES> 10,850
<ALLOWANCES> 0
<INVENTORY> 98,332
<CURRENT-ASSETS> 124,297
<PP&E> 123,524
<DEPRECIATION> 19,817
<TOTAL-ASSETS> 235,247
<CURRENT-LIABILITIES> 114,512
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 78,524
<TOTAL-LIABILITY-AND-EQUITY> 235,247
<SALES> 178,729
<TOTAL-REVENUES> 178,729
<CGS> 130,535
<TOTAL-COSTS> 130,535
<OTHER-EXPENSES> 59,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 716
<INCOME-PRETAX> (11,902)
<INCOME-TAX> (4,921)
<INCOME-CONTINUING> (6,981)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,981)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
