SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[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 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 No. 000-19372
CATHERINES STORES CORPORATION
(exact name of registrant as specified in its charter)
Tennessee 62-1350411
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3742 Lamar Avenue, Memphis, Tennessee, 38118
(Address of principal executive offices)
Registrant's telephone number, including area code (901) 363-3900
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 [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date:
As of December 3, 1999 there were 6,821,196 shares of Catherines Stores
Corporation common stock outstanding.
<PAGE>
CATHERINES STORES CORPORATION
FORM 10-Q
October 30, 1999
Table of Contents
PART 1 - FINANCIAL INFORMATION
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART 2 - OTHER INFORMATION
<PAGE>
PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Thirteen weeks ended Thirty-nine weeks ended
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 75,572,432 $ 73,019,529 $234,205,696 $224,298,534
Cost of sales,
including buying and
occupancy costs 50,978,959 50,134,942 153,814,907 150,452,408
------------ ------------ ------------ ------------
Gross margin 24,593,473 22,884,587 80,390,789 73,846,126
Selling, general and
administrative expenses 19,949,464 19,816,219 60,898,883 59,561,720
Amortization of
intangible assets 261,799 261,031 764,513 790,411
------------ ------------ ------------ ------------
Operating income before write-down
of store assets and store
closing costs 4,382,210 2,807,337 18,727,393 13,493,995
Write-down of store assets
and store closing costs 118,843 67,608 356,123 267,363
------------ ------------ ------------ ------------
Operating income 4,263,367 2,739,729 18,371,270 13,226,632
Interest and other, net 64,387 158,335 259,310 592,122
------------ ------------ ------------ ------------
Income before
income taxes 4,198,980 2,581,394 18,111,960 12,634,510
Provision for
income taxes 1,588,000 949,000 7,153,000 5,072,000
------------ ------------ ------------ ------------
Net income $ 2,610,980 $ 1,632,394 $ 10,958,960 $ 7,562,510
============ ============ ============ ============
Net income per
common share $0.38 $0.23 $1.58 $1.04
===== ===== ===== =====
Net income per common share,
assuming dilution $0.37 $0.22 $1.54 $1.02
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 30, 1999 January 30, 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,936,086 $ 11,561,223
Receivables 4,453,902 2,457,333
Merchandise inventory 60,326,219 50,355,267
Prepaid expenses and other 3,966,682 3,398,562
Deferred income taxes 4,203,000 4,203,000
------------- -------------
Total current assets 82,885,889 71,975,385
------------- -------------
Property and Equipment, at cost:
Land 500,000 500,000
Buildings and leasehold improvements 28,668,463 25,751,524
Fixtures and equipment 36,285,901 31,910,633
Equipment under capital leases 15,336,874 13,588,016
Improvements in process 518,391 2,644,496
------------- -------------
81,309,629 74,394,669
Less accumulated depreciation
and amortization (45,213,629) (39,410,261)
------------- -------------
36,096,000 34,984,408
------------- -------------
Other Assets and Deferred Charges,
less accumulated amortization
of $2,238,091 and $1,997,082 1,929,311 2,290,022
Goodwill, less accumulated amortization
of $6,000,980 and $5,534,646 21,116,359 21,871,164
------------- -------------
$ 142,027,559 $ 131,120,979
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 26,740,828 $ 22,310,110
Accrued expenses 20,389,976 19,347,208
Current maturities of long-term bank
and other debt 1,810,838 1,816,119
------------- -------------
Total current liabilities 48,941,642 43,473,437
------------- -------------
Long-Term Bank and Other Debt,
less current maturities 9,175,077 9,517,067
Deferred Income Taxes 378,000 378,000
Stockholders' Equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $.01 par value,
50,000,000 shares authorized,
6,794,133 and 7,279,949 shares
issued and outstanding 67,942 72,800
Additional paid-in capital 41,351,450 46,525,187
Retained earnings 42,113,448 31,154,488
---------- ----------
Total stockholders' equity 83,532,840 77,752,475
---------- ----------
$142,027,559 $131,120,979
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
CATHERINES STORES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended
October 30, October 31,
1999 1998
---- ----
Cash Flows from Operating Activities:
Net income $ 10,958,960 $ 7,562,510
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating activities--
Depreciation and amortization 6,787,078 6,827,371
Write-down of closed store assets 359,905 47,067
Change in reserve for store closing costs (368,243) 27,249
Net change in current assets and liabilities (7,708,376) (5,947,526)
Change in other noncash reserves 1,014,464 1,598,684
Change in other assets 198,423 (75,514)
------------ ------------
Total adjustments 283,251 2,477,331
------------ ------------
Net cash provided by operating activities 11,242,211 10,039,841
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures (6,170,192) (3,660,323)
------------ ------------
Net cash used in investing activities (6,170,192) (3,660,323)
------------ ------------
Cash Flows from Financing Activities:
Sales of common stock 581,786 129,885
Repurchases of common stock (5,760,381) --
Proceeds from long-term bank
and other debt -- 6,919,000
Principal payments of long-term bank
and other debt (1,518,561) (9,780,476)
------------ ------------
Net cash used in financing activities (6,697,156) (2,731,591)
------------ ------------
Net Increase in Cash and Cash Equivalents (1,625,137) 3,647,927
Cash and Cash Equivalents, beginning of period 11,561,223 3,089,290
------------ ------------
Cash and Cash Equivalents, end of period $ 9,936,086 $ 6,737,217
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
CATHERINES STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) which management considers necessary to present fairly the
consolidated financial position of Catherines Stores Corporation ("Stores") and
its wholly owned subsidiaries as of October 30, 1999 and January 30, 1999, the
consolidated results of their operations for the thirteen and thirty-nine weeks
ended October 30, 1999 and October 31, 1998 and their cash flows for the
thirty-nine weeks ended October 30, 1999 and October 31, 1998. Stores and its
subsidiaries are collectively referred to as the "Company". The results of
operations for the thirteen and thirty-nine week periods may not be indicative
of the results for the entire year.
These statements should be read in conjunction with the Company's audited
financial statements and related notes which have been incorporated by reference
in the Company's Form 10-K for the year ended January 30, 1999. Accordingly,
significant accounting policies and other disclosures necessary for complete
financial statements in conformity with generally accepted accounting principles
have been omitted since such items are reflected in the Company's audited
financial statements and related notes thereto.
Certain prior year balances have been reclassified to conform to the
current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities, at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) Accounts Receivable
The Company sells accounts receivable generated from its proprietary credit
card to a third-party provider, without recourse. Under the agreement, the
Company sells its receivables from in-house credit sales on a daily basis. In
April 1999, the agreement was extended to January 2005. In addition, certain
terms of the agreement were favorably amended. Also, as an incentive to extend
the agreement, the third-party provider agreed to pay the Company an up-front
cash payment. This amount will be amortized into income evenly over the life of
the new agreement.
<PAGE>
(3) Statements of Cash Flows
The changes in current assets and liabilities reflected in the statements
of cash flows were as follows:
Thirty-nine weeks ended
October 30, October 31,
1999 1998
---- ----
Increase (decrease) in cash and
cash equivalents-
Receivables $ (1,993,762) $ (1,053,378)
Merchandise inventory (10,842,223) (16,338,018)
Prepaid expenses and other (568,120) 528,476
Accounts payable 4,430,718 5,916,457
Accrued expenses 1,265,011 4,998,937
------------ ------------
Total $ (7,708,376) $ (5,947,526)
============ ============
Interest paid during the thirty-nine weeks ended October 30, 1999 and
October 31, 1998 was approximately $660,000 and $746,000, respectively. Interest
expense is net of interest income of approximately $437,000 and $149,000 for the
first nine months of fiscal 1999 and 1998, respectively. Income taxes paid
during the thirty-nine weeks ended October 30, 1999 and October 31, 1998 were
approximately $7,429,000 and $3,902,000, respectively.
(4) Accrued Expenses
Accrued expenses consisted of the following:
October 30, January 30,
1999 1999
---- ----
Payroll and related benefits $ 4,554,689 $ 5,012,439
Taxes other than income taxes 1,670,353 1,761,964
Rent and other related costs 2,558,494 2,427,805
Deferred revenues 3,811,277 1,836,298
Reserve for customer awards 725,000 1,513,900
Reserve for store closing costs 742,102 1,110,345
Income taxes 781,120 1,000,333
Other 5,546,941 4,684,124
----------- -----------
Total $20,389,976 $19,347,208
=========== ===========
<PAGE>
(5) Long-Term Bank and Other Debt
Long-term bank and other debt consisted of the following:
October 30, January 30,
1999 1999
---- ----
Due to banks:
Mortgage note $ 6,664,634 $ 6,784,599
Working capital notes -- --
Other:
Capital lease and other obligations 4,321,281 4,548,587
------------ ------------
10,985,915 11,333,186
Less current maturities (1,810,838) (1,816,119)
------------ ------------
Total $ 9,175,077 $ 9,517,067
============ ============
The mortgage financing agreement provides a $6,919,000 mortgage facility
with a seven-year term and a 20-year amortization period. The interest rate on
the mortgage note is fixed at 7.5%. The working capital facility has a total
availability of $28 million, including the swing line of credit. The interest
rate fluctuates based on the Company's debt coverage ratio. The interest rate
can range from LIBOR plus 1 1/4 to LIBOR plus 2 1/4, or the agent bank's prime
rate, at the Company's option. Based on the formula in the agreement, the
Company's current borrowing cost would be LIBOR plus 1 1/4%, or the agent bank's
prime rate, at the Company's option. Amounts available under this facility are
based on the Company's eligible receivables and inventories.
At October 30, 1999, the Company had approximately $22,900,000 available
under its combined working capital and swing line facility. Outstanding letters
of credit were approximately $5,100,000 at October 30, 1999. During the
thirty-nine weeks ended October 30, 1999, the Company entered into capital lease
agreements for the purpose of obtaining computer equipment, at a cost of
approximately $1,200,000.
(6) Leases
During the thirty-nine weeks ended October 30, 1999, the Company entered,
amended or extended leases for 64 stores, which increased future minimum rental
payments by approximately $6,070,000 since January 30, 1999. Total future
minimum rental payments under all noncancelable operating leases with initial or
remaining lease terms of one year or more are approximately $77,433,000.
Total rent expense for all operating leases was as follows:
Thirty-nine weeks ended
October 30, October 31,
1999 1998
---- ----
Minimum rentals $15,777,242 $15,615,066
Contingent rentals 286,537 216,850
----------- -----------
Total $16,063,779 $15,831,916
=========== ===========
<PAGE>
(7) Net Income Per Common Share
The reconciliation of net income per common share and net income per common
share, assuming dilution, is as follows:
<TABLE>
<CAPTION>
Net Income
Net Per
Income Common
Per Share,
Common Stock Assuming
Share Options Dilution
----- ------- --------
<S> <C> <C> <C>
Thirty-nine weeks ended October 30, 1999:
Net income $10,958,960 --- $10,958,960
Weighted average shares 6,936,907 164,207 7,101,114
--------- ---------
Per share amount $1.58 $1.54
===== =====
Thirty-nine weeks ended October 31, 1998:
Net income $7,562,510 --- $7,562,510
Weighted average shares 7,241,376 138,528 7,379,904
--------- ---------
Per share amount $1.04 $1.02
===== =====
Thirteen weeks ended October 30, 1999:
Net income $2,610,980 --- $2,610,980
Weighted average shares 6,789,846 226,864 7,016,710
--------- ---------
Per share amount $0.38 $0.37
===== =====
Thirteen weeks ended October 31, 1998:
Net income $1,632,394 --- $1,632,394
Weighted average shares 7,248,457 127,666 7,376,123
--------- ---------
Per share amount $0.23 $0.22
===== =====
</TABLE>
(8) Store Closing Costs
In late fiscal 1997, the Company adopted a plan to close approximately 30
underperforming stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed, including eight during
the first nine months. In addition, based on financial performance evaluations,
management added 10 stores to the store closing plan and removed 11 stores from
the store closing plan, bringing the number of stores in the store closing plan
to 15 at January 30, 1999. The Company closed seven unprofitable stores during
the first nine months of fiscal 1999.
The Company has scheduled three additional stores, not included in the
plan, for closing during the remainder of fiscal 1999. Negotiations are
continuing with landlords to terminate the leases of the eight stores remaining
in the plan. Write-down of store assets and store closing costs were
approximately $356,000 and $267,000 during the first nine months of 1999 and
1998, respectively.
<PAGE>
(9) Stockholders' Equity
The change in stockholders' equity was as follows:
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings Total
----- ------- -------- -----
<S> <C> <C> <C> <C>
Balance at
January 30, 1999 $ 72,800 $ 46,525,187 $ 31,154,488 $ 77,752,475
Net proceeds from the
sale of 79,600
common shares 796 580,990 -- 581,786
Repurchase of 565,416
common shares (5,654) (5,754,727) -- (5,760,381)
Net income -- -- 10,958,960 10,958,960
------------ ------------ ------------ ------------
Balance at
October 30, 1999 $ 67,942 $ 41,351,450 $ 42,113,448 $ 83,532,840
============ ============ ============ ============
</TABLE>
The Company began a stock repurchase initiative in late January 1999.
During the nine months ended October 30, 1999, the Company repurchased and
retired 565,416 shares of its outstanding common stock for approximately $10.19
per share. The Company has repurchased a total of 650,416 shares since inception
of this initiative. Additionally, 67,503 common stock options have been
exercised during the first nine months of 1999 and 12,097 common shares have
been purchased through the employee stock purchase plan.
(10) Subsequent Event
Subsequent to quarter-end, the Company's Board of Directors approved a
definitive merger agreement with Charming Shoppes, Incorporated ("Charming")
whereby Charming will acquire all of the common stock of Catherines Stores
Corporation ("Catherines") pursuant to a tender offer and merger. Charming has
submitted a tender offer to Catherines' shareholders to purchase their stock for
$21 per common share in cash. J.C. Bradford & Co., Catherines' financial
advisor, has delivered its opinion to Catherines' Board of Directors that the
offer is fair to Catherines' shareholders from a financial point of view. The
initial offering period expires January 6, 2000, and, if ninety percent or more
of the Company's outstanding shares are tendered, the transaction is anticipated
to close shortly thereafter.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This outlook contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on current expectations that are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Such factors include, but are not limited to, the following: Year 2000
information systems issues; general economic conditions; competitive factors and
pricing pressures; the Company's ability to predict fashion trends; consumer
apparel buying patterns; adverse weather conditions and inventory risks due to
shifts in market demand. The Company does not undertake to publicly update or
revise the forward-looking statements even if experience or future changes make
it clear that projected results expressed or implied therein will not be
realized.
Overview
The Company's net income for the thirteen week period ended October 30,
1999 was $2,611,000 compared to $1,632,000 in the thirteen week period ended
October 31, 1998. Operating income margins were 5.6% for the third quarter of
1999 compared to 3.8% in 1998.
Net income for the thirty-nine week period ended October 30, 1999 was
$10,959,000 compared to $7,563,000 in the thirty-nine week period ended October
31, 1998. Operating income for the first nine months of 1999 increased 38.9%
over the first nine months of 1998. Operating income margins were 7.8% for the
first nine months of 1999 compared to 5.9% for the first nine months of 1998.
The improvement in operating income margin over the prior year is
attributable to improved sales and merchandise margins, leveraged buying and
occupancy costs and savings generated from the amendment and extension of the
contract with the Company's third party credit processor.
Subsequent to quarter-end, the Company's Board of Directors approved a
definitive merger agreement with Charming Shoppes, Incorporated ("Charming")
<PAGE>
whereby Charming will acquire all of the common stock of Catherines Stores
Corporation ("Catherines") pursuant to a tender offer and merger. Charming has
submitted a tender offer to Catherines' shareholders to purchase their stock for
$21 per common share in cash. J.C. Bradford & Co., Catherines' financial
advisor, has delivered its opinion to Catherines' Board of Directors that the
offer is fair to Catherines' shareholders from a financial point of view. The
initial offering period expires January 6, 2000, and, if ninety percent or more
of the Company's outstanding shares are tendered, the transaction is anticipated
to close shortly thereafter.
Liquidity and Capital Resources
The Company's cash provided by operations was $11,242,000 during the
thirty-nine weeks ended October 30, 1999, compared to cash provided by
operations of $10,040,000 during the thirty-nine weeks ended October 31, 1998.
The increase in cash flow provided by operations is primarily attributable to an
increase in net income, offset by an increase in working capital. The Company's
working capital was $33,900,000 at October 30, 1999 compared to $30,000,000 at
October 31, 1998. The Company's internally generated cash flow financed its
operating requirements, capital expenditures, debt service and stock repurchases
during the thirty-nine week period ended October 30, 1999.
The Company maintains a merchant services agreement with a third party
credit processor. This agreement provides for the Company to sell, without
recourse, accounts receivable from private label credit card sales. The third
party provides all authorization, billing and collection services for these
accounts. The agreement was amended and extended during the first quarter of
1999, allowing the Company to obtain more favorable terms. Also, as an incentive
to extend the agreement, the third-party provider agreed to pay the Company an
up-front cash payment. This amount will be amortized evenly into income over the
life of the new agreement. The agreement expires in January 2005.
Capital Expenditures
The Company incurred approximately $4,000,000 to open new stores and
relocate, remodel or expand existing stores during the first nine months of
1999. An additional $1,000,000 was incurred on other store expenditures. The
Company estimates that fiscal 1999 capital expenditures will be approximately
$9,000,000 of which an estimated $7,000,000 will be used for the opening of 12
new locations and the remodeling, relocation and expansion of approximately 45
other locations. The remainder of capital expenditures are to upgrade existing
computer systems, add additional software technology and to maintain existing
facilities.
Banking Arrangements
The mortgage financing agreement provides a $6,919,000 mortgage facility
with a seven-year term and a 20-year amortization period. The interest rate on
the mortgage note is fixed at 7.5%. The existing bank credit facility has an
availability of $28,000,000, including the swing line of credit. The interest
rate fluctuates based on the Company's debt coverage ratio. The interest rate
can range from LIBOR plus 1 1/4 to LIBOR plus 2 1/4, or the agent bank's prime
rate, at the Company's option. Based on the formula in the agreement, the
Company's current borrowing cost would be LIBOR plus 1 1/4%, or
<PAGE>
the agent bank's prime rate, at the Company's option. The agreement expires
June 30, 2001.
At October 30, 1999, the Company had approximately $22,900,000 available
under its combined working capital and swing line facility and approximately
$5,100,000 in outstanding letters of credit.
The Company believes that its internally generated cash flow, together with
borrowings under the bank credit agreement, will be adequate to finance the
Company's operating requirements, debt repayments and capital needs during the
foreseeable future.
Results of Operations
Thirteen Weeks Ended October 30, 1999 Compared to Thirteen Weeks Ended October
31, 1998
Net sales in the third quarter of 1999 increased 3.5% to $75,572,000 from
$73,020,000 in the third quarter of 1998. Comparable stores' sales increased
3.8%, primarily due to an increase in the number of saleschecks generated and
the average number of units per salescheck. The average unit price declined.
During the third quarter, one store was closed and five stores were opened,
bringing the number of stores operated by the Company on October 30, 1999 to
437. At October 31, 1998, the Company operated 438 stores.
Gross margin, after buying and occupancy costs, increased as a percentage
of sales to 32.5% from 31.3% in the third quarter of 1998. The increase is
attributable to an increase in merchandise margin, which increased as a
percentage of sales by 80 basis points. The increase in merchandise margin was
driven primarily by an increase in merchandise markup. Additionally, the Company
leveraged its buying and occupancy costs as a result of increased sales. Buying
and occupancy costs as a percentage of sales decreased by 40 basis points.
Selling, general and administrative expenses increased to $19,949,000 in
the third quarter of 1999 compared to $19,816,000 in the third quarter of 1998.
As a percentage of sales, the selling, general and administrative expenses
decreased to 26.4% from 27.1% in 1998. The decrease is primarily attributable to
the income generated from the amended third-party credit agreement.
In late fiscal 1997, the Company adopted a plan to close approximately 30
underperforming stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed, including seven during
the first half. In addition, based on financial performance evaluations,
management added 10 stores to the store closing plan and removed 11 stores from
the store closing plan, bringing the number of stores in the store closing plan
to 15 at January 30, 1999.
<PAGE>
The Company closed one unprofitable store during the third quarter of 1999,
bringing the total number of stores closed in 1999 to seven. The Company has
scheduled three additional stores, not included in the plan, for closing during
the remainder of fiscal 1999. Negotiations are continuing with landlords to
terminate the leases of the eight stores remaining in the plan. Write-down of
store assets and store closing costs were approximately $119,000 and $68,000
during the third quarters of 1999 and 1998, respectively.
Net interest expense was approximately $64,000 in the third quarter of 1999
compared to $158,000 in the third quarter of 1998. The decrease is primarily
attributable to an increase in interest income.
Income taxes were provided at effective rates of 37.8% and 36.8% for the
thirteen weeks ended October 30, 1999 and October 31, 1998, respectively. Third
quarter tax rates reflect adjustments to bring the year-to-date effective tax
rate equal to the expected annual tax rate. The statutory rate is affected
primarily by non-deductible goodwill amortization and state income taxes.
Net income for the third quarter of 1999 was $2,611,000 compared to
$1,632,000 for the third quarter of 1998. Net income per common share, assuming
dilution, ("Net income per common share") was $0.37 per share in the third
quarter of 1999 and $0.22 per share in the third quarter of 1998.
Thirty-Nine Weeks Ended October 30, 1999 Compared to Thirty-Nine Weeks Ended
October 31, 1998
Net sales in the first nine months of 1999 increased 4.4% to $234,206,000
from $224,299,000 in the first nine months of 1998. Comparable stores' sales
increased 5.0%, primarily due to an increase in the number of saleschecks
generated and the average number of units per salescheck. The average unit price
declined. During the first nine months of 1999, seven stores were closed and 12
stores were opened.
Gross margin, after buying and occupancy costs, increased as a percentage
of sales to 34.3% from 32.9% in the first nine months of 1998. The increase is
attributable to an increase in merchandise margin, which increased as a
percentage of sales by 100 basis points. The increase in merchandise margin was
driven primarily by an increase in merchandise markup. Additionally, the Company
leveraged its buying and occupancy costs as a result of increased sales. Buying
and occupancy costs as a percentage of sales decreased by 40 basis points.
Selling, general and administrative expenses increased to $60,899,000 in
the first nine months of 1999 compared to $59,562,000 in the first nine months
of 1998. As a percentage of sales, the selling, general and administrative
expenses decreased to 26.0% from 26.6% in the first nine months of 1998. The
decrease is primarily attributable to the income generated from the third-party
credit agreement, offset slightly by increased freight to stores.
<PAGE>
In late fiscal 1997, the Company adopted a plan to close approximately 30
underperforming stores upon lease termination or settlement with the landlords.
During fiscal 1998, 14 unprofitable stores were closed. In addition, based on
financial performance evaluations, management added 10 stores to the store
closing plan and removed 11 stores from the store closing plan, bringing the
number of stores in the store closing plan to 15 at January 30, 1999.
The Company closed seven unprofitable stores during the first nine months
of 1999. The Company has scheduled three additional stores, not included in the
plan, for closing during the remainder of fiscal 1999. Negotiations are
continuing with landlords to terminate the leases of the eight stores remaining
in the plan. Write-down of store assets and store closing costs were
approximately $356,000 and $267,000 during the first nine months of 1999 and
1998, respectively.
Net interest expense was approximately $259,000 in the first nine months of
1999 compared to $592,000 in the first nine months of 1998. The decrease is
primarily attributable to an increase in interest income.
Income taxes were provided at an effective rate of 39.5% in the first nine
months of 1999 and 40.1% in 1998. The statutory rate is affected primarily by
non-deductible goodwill amortization and state income taxes.
Net income for the first nine months of 1999 was $10,959,000 compared to
$7,563,000 for the first nine months of 1998. Net income per common share was
$1.54 compared to $1.02 per share reported in the first nine months of 1998.
Year 2000 Compliance
The year 2000 computer noncompliance occurs when a computer system cannot
recognize dates stored with only a two digit year rather than a four digit year.
The Company's risks are mitigated by the fact that the Company is a retailer of
women's apparel and therefore does not rely on a single customer for a
significant amount of sales. Similarly, the Company has over 300 active vendors
from which they purchase merchandise, with no one vendor accounting for more
than 3% of total annual purchases. However, the Company has developed a plan to
ensure its systems are compliant with the requirements to process transactions
in the year 2000.
The majority of the Company's information systems are provided and serviced
by outside vendors who have successfully completed testing the majority of those
systems. Testing included changing the dates at the Company's point of sale
registers as well as testing the home office mainframe and servers. Management
currently believes that any other minor technological equipment, if not year
2000 compliant, will not have a material impact on the Company's business
operations.
The Company has requested, from its key third-party providers,
certifications of year 2000 compliance. The Company has completed substantially
all of the testing on the systems where the third-party responded as being
compliant by December 31, 1999. Contingency plans to address unexpected year
2000 scenarios have been developed to address the material risks and
uncertainties for those third-parties who either did not respond or who
responded that they will not be compliant. The Company expects the majority of
its information systems to be year 2000 compliant by 2000; however, no
assurances can be given that the efforts by the Company and its third-parties
will be successful. To date, the costs to remedy year 2000 technologies have not
been significant and the Company does not currently estimate that the remaining
costs to remedy year 2000 noncompliant technologies will be significant.
<PAGE>
PART 2 - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in the Rights of the Company's Security Holders
Not applicable
Item 3. Defaults by the Company on its Senior Securities
Not applicable
Item 4. Submission of Matters to a vote of Security Holder
See Quarterly Report on Form 10-Q for the period ended May 1, 1999 for the
results of the Company's Annual Meeting of Stockholders held on June 2, 1999.
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(A) 27.1 Financial Data Schedule (for EDGAR filing only)
(B) None
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIGNATURES
December 1, 1999 /s/ David C. Forell
--------------------
(Date) David C. Forell,
Executive Vice President,
Chief Financial Officer
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