<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10767
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VALUE CITY DEPARTMENT STORES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1322832
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 471-4722
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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
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Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at February 27, 1998
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Common Stock, Without Par Value 31,955,695 Shares
<PAGE> 2
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
January 31, 1998 and August 2, 1997 3
Consolidated Statements of Income
Three months and six months ended
January 31, 1998 and February 1, 1997 4
Consolidated Statements of Cash Flows
Six months ended January 31, 1998
and February 1, 1997 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Signatures 12
Item 6. Exhibits and Reports on Form 8-K
Part A: Exhibit 27 Financial Data Schedule for Second Quarter Form 10-Q 13
Part B: Reports on Form 8-K N/A
</TABLE>
page 2
<PAGE> 3
VALUE CITY DEPARTMENT STORES, INC.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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JANUARY 31, AUGUST 2,
1998 1997
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ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $68,968 $11,614
Accounts receivable, net 4,212 5,683
Receivables from affiliates 1,304 1,084
Inventories 199,888 236,784
Prepaid expenses and other assets 2,761 12,137
Assets held for sale - 20,776
Deferred income taxes 7,695 9,208
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Total current assets 284,828 297,286
Property and equipment, at cost:
Furniture, fixtures and equipment 144,784 141,588
Leasehold improvements 99,332 97,798
Capital leases 15,303 15,213
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259,419 254,599
Accumulated depreciation and amortization (111,738) (101,148)
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Property and equipment, net 147,681 153,451
Investment in joint venture 8,855 --
Other assets 8,345 7,236
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Total assets $449,709 $457,973
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $66,731 $69,649
Accounts payable to affiliates 5,181 11,344
Demand note payable - 12,000
Accrued expenses:
Compensation 5,857 8,882
Taxes 15,541 11,753
Other 21,895 22,901
Current maturities of long-term obligations 2,202 2,281
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Total current liabilities 117,407 138,810
Long-term obligations, net of current maturities 55,706 57,763
Deferred income taxes and other noncurrent liabilities 4,213 4,960
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized;
issued, including Treasury shares, 32,271,045 shares and
32,259,045 shares, respectively 110,161 110,068
Contributed capital 10,735 10,728
Retained earnings 155,198 139,455
Less deferred compensation expense, net (882) (982)
Treasury shares at cost, 368,600 shares (2,829) (2,829)
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Total shareholders' equity 272,383 256,440
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Total liabilities and shareholders' equity $449,709 $457,973
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 3
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VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
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JANUARY 31, FEBRUARY 1, JANUARY 31, FEBRUARY 1,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Total sales $385,184 $370,170 $709,967 $682,664
Less licensed departments sales (71,957) (47,175) (132,355) (93,593)
---------- ---------- -------- ---------
Net owned sales 313,227 322,995 577,612 589,071
Cost of sales (200,486) (204,706) (367,441) (372,325)
-------- --------- -------- ---------
Gross profit 112,741 118,289 210,171 216,746
Selling, general and administrative expenses (101,232) (102,085) (198,996) (195,676)
License fees from affiliates,
and other operating income 8,232 5,541 15,321 10,842
---------- ---------- --------- ---------
Operating profit 19,741 21,745 26,496 31,912
Interest expense, net (391) (1,147) (1,440) (2,341)
Gain (loss) on disposal of assets, net 748 (19) 1,600 134
Amortization of excess net assets over cost -- 347 -- 695
----------- ---------- --------- --------
Income before equity in earnings (loss) of
joint venture and provision for
income taxes 20,098 20,926 26,656 30,400
Equity in earnings (loss) of joint venture 327 -- (782) --
----------- ---------- --------- ----------
Income before provision
for income taxes 20,425 20,926 25,874 30,400
Provision for income taxes (7,960) (7,987) (10,131) (11,759)
----------- ---------- ---------- ---------
Net income $12,465 $12,939 $15,743 $18,641
======== ======== ========= ========
Earnings per share $0.39 $0.41 $0.49 $0.59
========== ========== =========== ==========
Earnings per share - assuming dilution $0.39 $0.40 $0.49 $0.58
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 4
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VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
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JANUARY 31, FEBRUARY 1,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $15,743 $18,641
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,060 14,532
Amortization of excess net assets over cost -- (695)
Deferred income taxes and other noncurrent liabilities 766 322
Loss of joint venture 782 --
Gain on disposal of assets (1,600) (134)
Change in working capital, assets and liabilities:
Receivables (655) (963)
Inventories 36,896 21,493
Prepaid expenses and other assets 8,163 (969)
Accounts payable (9,081) (9,942)
Accrued expenses 567 819
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Net cash provided by operating activities 64,641 43,104
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,581) (29,046)
Proceeds from sale of assets 22,352 38
Investment in joint venture (9,637) --
Other assets (194) (765)
Notes receivable 1,906 103
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Net cash provided by (used in) investing activities 6,846 (29,670)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under demand note facility (12,000) (33,000)
Principal payments of long-term obligations (2,226) (10,185)
Net proceeds from issuance of common shares 93 383
Proceeds from issuance of long-term obligations -- 50,000
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Net cash (used in) provided by financing activities (14,133) 7,198
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Net increase in cash and equivalents 57,354 20,632
Cash and equivalents, beginning of period 11,614 10,484
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Cash and equivalents, end of period $68,968 $31,116
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 5
<PAGE> 6
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
(UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Value City Department Stores, Inc. ("VCDS") and its wholly owned
subsidiaries. These entities are herein referred to collectively as the
"Company." The Company operates a chain of full-line off-price department
stores, principally under the name "Value City."
The balance sheet for August 2, 1997 is condensed information taken from
the audited financial statements. The interim financial statements are
unaudited and are presented pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the consolidated
financial statements should be read in conjunction with the financial
statement disclosures contained in the Company's 1997 Annual Report. In
the opinion of management, the accompanying consolidated financial
statements reflect all adjustments necessary (which are of a normal
recurring nature) to present fairly the financial position and results
of operations and cash flows for the interim periods presented, but are
not necessarily indicative of the results of operations for a full
fiscal year.
To facilitate comparisons with the current period, certain amounts in
prior year financial statements have been reclassified to conform to the
current year presentation.
2. INVESTMENT IN JOINT VENTURE
In July 1997, the Company entered into agreements with Mazel Stores, Inc.
to create VCM, Ltd. ("VCM"), a 50/50 joint venture. In August 1997, VCM
purchased 100% of the capital stock of the company which previously
operated the Company's health and beauty care departments as licensed
departments and purchased the assets of the Company's toys and sporting
goods departments. VCM now operates the health and beauty care and toys
and sporting goods departments in all of the Company's stores under
license and operating agreements that provide for fees based on a
percentage of sales, as defined, for license fees, advertising fees and
credit and administrative charges. The Company provides certain
personnel, administrative and service functions for which it receives a
monthly fee from VCM to cover the related costs. The license and
operating agreements are for a term of ten years ending on the last day
of fiscal 2007 and contain certain provisions whereby either business
partner can initiate renegotiation of terms if certain minimum
requirements are not met. The Company accounts for its fifty percent
interest in the joint venture under the equity method. In addition, the
Company has guaranteed 50% of VCM's $25,000,000 demand note facility. At
January 31, 1998, VCM had $1.0 million of total borrowings and
$0.9 million of issued and outstanding letters of credit under this
facility.
page 6
<PAGE> 7
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 1998 AND FEBRUARY 1, 1997
(UNAUDITED)
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3. EARNINGS PER SHARE
Earnings per share are computed in accordance with Statement on Financial
Accounting Standard No. 128, "Earnings per Share," as follows:
<TABLE>
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Three months ended Six months ended
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January 31, February 1, January 31, February 1,
1998 1997 1998 1997
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(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Weighted average number of
shares outstanding 31,894 31,731 31,893 31,712
Plus net shares issuable pursuant
to stock option plans less shares
assumed repurchased at the
average market price 82 522 57 442
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Number of shares for computation of
earnings per share - assuming dilution 31,976 32,253 31,950 32,154
======== ======== ======== ========
Income available to shareholders $12,465 $12,939 $15,743 $18,641
======= ======= ======= =======
Earnings per share $0.39 $0.41 $0.49 $0.59
========= ========= ========= =========
Earnings per share-
assuming dilution $0.39 $0.40 $0.49 $0.58
========= ========= ========= =========
</TABLE>
Options to purchase 1,036,000 of stock ranging from $8.63 to $20.25 per
share were outstanding during the six months ended January 31, 1998 and
options to purchase 362,500 shares of stock ranging from $9.88 to $20.25
were outstanding during the six months ended February 1, 1997 but were not
included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
stock.
4. SUBSEQUENT EVENT
In March 1998, the Company signed letters of intent to purchase all of the
common stock of Shonac Corporation ("Shonac"), from Schottenstein Stores
Corporation ("SSC"), its parent company, and Nacht Management, Inc. and to
acquire the store operations of Valley Fair Corporation from SSC. The
estimated combined purchase price for both acquisitions is $110 million,
subject to the execution of definitive agreements and approval by the
Company's independent directors. Shonac has been the shoe licensee in all
of the Company's stores since its inception in 1969 and also operates 40
DSW shoe warehouse stores throughout the United States. Valley Fair
Corporation operates two department stores located in Irvington and Little
Ferry, New Jersey. The Company has been a licensee of certain departments
in these two stores for 18 years.
page 7
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED
FEBRUARY 1, 1997
Total sales, which include licensed departments sales, increased from
$370.2 million to $385.2 million, an increase of $15.0 million or 4.1%. On
a comparable store basis, total sales increased 4.6%. Net owned sales
decreased from $323.0 million to $313.2 million; however, last year's
reported sales include toys and sporting goods sales of $24.7 million.
These departments are now operated by VCM, Ltd. ("VCM"), a 50/50 joint
venture between the Company and Mazel Stores, Inc., and are therefore
treated as licensed department sales. Excluding these sales from the prior
year period, net sales increased from $298.3 million to $313.2 million, an
increase of approximately $14.9 million or 5.0%. Owned sales for stores
opened during the prior year not yet considered comparable increased $2.7
million. This was partially offset by a loss of approximately $2.2 million
in owned sales for two stores which were closed during the current year.
Comparable store owned sales increased $14.4 million or 5.5%.
Gross profit decreased from $118.3 million to $112.7 million, a decrease of
$5.6 million, or 4.7%. Expressed as a percentage of sales, gross profit
decreased from 36.6% to 36.0%. Last year's gross profit included
approximately $8.4 million related to the toys and sporting goods
departments. Excluding this amount from the prior year, gross profit, as a
percentage of sales, decreased from 36.9% to 36.0% due primarily to higher
markdowns offset partially by higher initial markup.
Selling, general and administrative expenses ("SG&A") decreased $0.9
million, or 0.8% from $102.1 million to $101.2 million, and increased as a
percentage of sales from 31.6% to 32.3%. Stores opened during the prior
fiscal year that are not yet considered comparable contributed an increase
in expenses of $0.4 million. This was offset by savings of $0.6 million for
two stores closed during the current year. New store SG&A, as a percentage
of sales, is higher than that of comparable stores, due primarily to
pre-opening and depreciation expenses. Comparable store SG&A increased by
approximately $1.4 million but decreased 0.8% as a percentage of sales.
Home office expenses, including distribution costs, increased by
approximately $0.9 million, primarily to support the new stores but
decreased 0.1% as a percentage of sales. This was more than offset by a
savings of approximately $3.0 million related to the toys and sporting
goods departments for which the Company no longer directly incurs SG&A
expense. If this year's and last year's quarters were adjusted to eliminate
the effects of the change in the toys and sporting goods departments, SG&A
for the quarter would be 32.7% to sales versus 33.7% in last year's
quarter.
Based upon its experience, the Company estimates the average cost of
opening a new store to range from approximately $5.0 million to $6.5
million, including leasehold improvements, fixtures, inventory, pre-opening
expenses and other costs. Preparations for opening a store generally take
between eight and twelve weeks. The Company charges pre-opening expenses to
operations ratably over the first twelve months of store operations. It has
been the Company's experience that new stores generally achieve
profitability and contribute to net income after the first full year of
operations. Nine stores opened less than twelve months had a pre-tax net
operating loss of $0.4 million for the current three month period,
including $0.3 million of pre-opening expense amortization. Eleven stores
opened less than twelve months during last year's three month period had
pre-tax operating profit of $0.6 million, including $1.7 million of
pre-opening expense amortization.
License fees from affiliates and other operating income increased from $5.5
million to $8.2 million, an increase of $2.7 million or 48.6%, and
increased as a percentage of sales from 1.7% to 2.6%. This is attributable
to approximately $2.4 million of license fees received from VCM on toys and
sporting goods sales of $22.0 million.
Operating profit decreased from $21.7 million to $19.7 million, a decrease
of approximately $2.0 million as a result of the above factors.
Interest expense, net of interest income, decreased from $1.1 million to
$0.4 million due primarily to decreased borrowings.
The Company no longer recognizes income for amortization of excess net
assets over cost due to the amount being fully amortized as of the third
quarter of fiscal 1997.
Other income, net, increased from a loss of $19,000 to a gain of $748,000,
due primarily to a net gain recognized on the sale of lease rights for a
store that was closed during the current quarter.
Equity in earnings of joint venture represents the Company's fifty percent
interest in VCM's net earnings for the quarter.
Income before provision for income taxes decreased from $20.9 million to
$20.4 million, a decrease of $0.5 million as a result of the above factors.
page 8
<PAGE> 9
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED FEBRUARY 1, 1997
Total sales, which include licensed departments sales, increased from
$682.7 million to $710.0 million, an increase of $27.3 million or 4.0%. On
a comparable store basis, total sales increased 2.9%. Net owned sales
decreased from $589.1 million to $577.6 million; however, last year's
reported sales include toys and sporting goods sales of $36.7 million.
These departments are now operated by VCM and are treated as licensed
department sales. Excluding these sales from the prior year period, net
sales increased from $552.4 million to $577.6 million, an increase of
approximately $25.2 million or 4.6%. Owned sales for stores opened during
the prior year not yet considered comparable increased $11.2 million. This
was partially offset by a loss of approximately $2.4 million in owned sales
for two stores which were closed during the current six months. Comparable
store owned sales increased $16.4 million or 3.3%.
Gross profit decreased from $216.7 million to $210.2 million, a decrease of
$6.5 million, or 3.0%. Expressed as a percentage of sales, gross profit
decreased from 36.8% to 36.4%. Last year's gross profit included
approximately $12.0 million related to the toys and sporting goods
departments. Excluding this amount from the prior year, gross profit, as a
percentage of sales, decreased from 37.1% to 36.4% due primarily to higher
markdowns offset partially by increased initial markup.
SG&A increased $3.3 million, or 1.7% from $195.7 million to $199.0 million,
and increased as a percentage of sales from 33.2% to 34.5%. Stores opened
during the prior fiscal year that are not yet considered comparable
contributed an increase in expenses of $4.4 million. This was partially
offset by savings of $0.8 million for two stores closed during the current
six months. New store SG&A, as a percentage of sales, is higher than that
of comparable stores, due primarily to pre-opening and depreciation
expenses. Comparable store SG&A increased by approximately $1.6 million but
decreased 0.5% as a percentage of sales. Home office expenses, including
distribution costs, increased by approximately $3.2 million, primarily to
support the new stores and increased 0.2% as a percent of sales. This was
more than offset by a savings of approximately $5.1 million related to the
toys and sporting goods departments for which the Company no longer
directly incurs SG&A expense. If this year's and last year's six month
periods were adjusted to eliminate the effects of the change in the toys
and sporting goods departments, SG&A for the six months would be 34.8% of
sales versus 34.9% last year.
Nine stores opened less than twelve months had a pre-tax net operating loss
of $2.1 million for the current six month period, including $1.2 million of
pre-opening expense amortization. Eleven stores opened less than twelve
months during last year's six month period had pre-tax operating profit of
$1.9 million, including $3.1 million of pre-opening expense amortization.
This was primarily attributable to the high grand opening sales volume for
six stores opened during the prior year's first quarter.
License fees from affiliates and other operating income increased from
$10.8 million to $15.3 million, an increase of $4.5 million or 41.3%, and
increased as a percentage of sales from 1.8% to 2.7%. This is attributable
to approximately $3.5 million of license fees received from VCM on their
toys and sporting goods sales of $31.6 million.
Operating profit decreased from $31.9 million to $26.5 million, a decrease
of approximately $5.4 million as a result of the above factors.
Interest expense, net of interest income, decreased from $2.3 million to
$1.4 million due primarily to decreased borrowings.
Other income, net, increased from $0.1 million to $1.6 million, due to a
net gain recognized on the sale of land, building and improvements at a
site originally purchased for future store development and a gain
recognized on the sale of lease rights for a store that was closed during
the second quarter.
Equity in loss of joint venture represents the Company's fifty percent
interest in VCM's net losses. These losses are due primarily to weak sales
attributable to transitioning the toys and sporting goods and health and
beauty care merchandise inventories to a new format.
Income before provision for income taxes decreased from $30.4 million to
$25.9 million, a decrease of $4.5 million as a result of the above factors.
page 9
<PAGE> 10
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $167.4 million at January 31, 1998 compared to
$158.5 million at August 2, 1997. Current ratios at those dates were 2.43
and 2.14 to 1.0, respectively.
Net cash provided by operating activities totaled $64.6 million for the six
months ended January 31, 1998 and net cash provided by operating activities
totaled $43.1 million for the six months ended February 1, 1997. Net
income, adjusted for depreciation and amortization, provided $28.8 million
of operating cash flow for the six months ended January 31, 1998. In
addition, operating cash flow was increased by $27.8 million representing a
decrease in inventories net of a decrease in accounts payable of $9.1
million. For the six months ended February 1, 1997, net income, adjusted
for depreciation and amortization, provided $33.2 million of operating cash
flow which was increased by $11.6 million representing a decrease in
inventories net of a decrease in accounts payable of $9.9 million.
Net cash provided by investing activities totaled $6.8 million for the 1998
period while net cash used in investing activities totaled $29.7 million
for the 1997 period. Capital expenditures during the current six months
include $3.6 million for capital improvements in existing stores, $0.9
million for energy management systems, $1.4 million for renovations in
existing warehouses, $1.6 million for M.I.S. equipment upgrades and $0.1
million for transportation equipment. Capital expenditures were offset by
$22.3 million of proceeds from the sale of assets, primarily from those
classified as assets held for sale as of August 2, 1997, including the
land, building and improvements at a site originally purchased for future
store development; the inventory and fixed assets related to the Company's
toys and sporting goods departments which were sold to VCM, at cost in
August 1997; and, the lease rights and leasehold improvements at a store
that was closed during the current quarter. The Company also incurred net
cash outlays of $9.6 million to obtain a fifty percent interest in the VCM
joint venture. Other investing activities include cash outlays of $0.2
million for other assets and cash receipts of $1.9 million from notes
receivable. The Company's inventory control and POS systems are not yet
year 2000 compliant. The inventory control system will require
approximately $0.2 million of programming changes which are scheduled for
completion in 1998. The POS system will be addressed during 1998 in
conjunction with an upgrade to IBM software at a cost of approximately $1.0
million. Capital expenditures for the balance of the fiscal year are
estimated at approximately $18.0 million.
The Company has a $100.0 million credit facility with its bank bearing
interest at or below the prime lending rate depending on certain borrowing
elections made by the Company. At January 31, 1998, the prime rate was
8.5%, there were no direct borrowings but $7.4 million of letters of credit
were issued and outstanding for merchandise purchases, leaving $92.6
million available under the facility. In conjunction with the Company's
investment in VCM, the Company guaranteed fifty percent of VCM's $25.0
million demand note facility. At January 31, 1998, VCM had $1.0 million of
borrowings and $0.9 million of issued and outstanding letters of credit
under the facility.
In March 1998, the Company signed letters of intent to purchase all of the
common stock of Shonac Corporation ("Shonac") from Schottenstein Stores
Corporation ("SSC"), its parent company, and Nacht Management, Inc. and to
acquire the store operations of Valley Fair Corporation ("Valley Fair")
from SSC. The estimated combined purchase price for both acquisitions is
$110 million, subject to the execution of definitive agreements and
approval by the Company's independent directors. Shonac has been the shoe
licensee in all of the Company's stores since its inception in 1969 and
also operates 40 DSW shoe warehouse stores throughout the United States.
Valley Fair Corporation operates two department stores located in Irvington
and Little Ferry, New Jersey. The Company has been a licensee of certain
departments in these two stores for 18 years. The purchase will be funded
using cash from operations and external financing.
The Company believes that the cash generated by its operations, along with
the available proceeds from the credit facility and other sources of
financing will be sufficient to meet its future obligations including
capital expenditures.
SEASONALITY
The Company's business is affected by the pattern of seasonality common to
most retail businesses. Historically, the majority of its sales and
operating profit have been generated during the first six months of its
fiscal year, which includes the back-to-school and Christmas selling
seasons.
page 10
<PAGE> 11
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
INCOME TAXES
The effective tax rate was 39.2% and 38.7% for the six months ended January
31, 1998 and February 1, 1997, respectively.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management
believes that the effect of inflation, if any, on the results of operations
and financial condition has been minor.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained
herein or made by management of the Company involve risks and
uncertainties, and are subject to change based on various important
factors. The following factors, among others, in some cases have affected
and in the future could affect the Company's financial performance and
actual results and could cause actual results for 1998 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: the ability of the Company's new senior management team to
implement its strategies, the ability of the Company to integrate the
operations of Shonac and Valley Fair and to obtain suitable funding for the
acquisitions, changes in consumer spending patterns, consumer preferences
and overall economic conditions, the impact of competition and pricing,
changes in weather patterns, changes in existing or potential duties,
tariffs or quotas, paper and printing costs and the ability to hire and
train associates.
page 11
<PAGE> 12
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.
VALUE CITY DEPARTMENT STORES, INC.
(Registrant)
By /s/ Robert M. Wysinski
------------------------------------------
Robert M. Wysinski, Senior Vice President,
Chief Financial Officer, Treasurer
And Secretary *
Date: March 16, 1998
- --------------------
- --------------------------------------------------------------------------------
* Mr. Wysinski is the principal financial officer and has been duly authorized
to sign on behalf of the registrant.
page 12
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