<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended October 31, 1998
Commission File Number 0-19714
PERFUMANIA, INC.
STATE OF FLORIDA I.R.S. NO. 65-0026340
11701 N.W. 101ST ROAD
MIAMI, FLORIDA 33178
TELEPHONE NUMBER: (305) 889-1600
Indicate by check mark whether the registrant, (1) has filed all reports
required to be filed by Ssection 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (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 ninety (90) days.
YES [X] NO [ ]
Common Stock $.01 Par value
Outstanding Shares at october 31, 1998 - 6,519,440
<PAGE> 2
TABLE OF CONTENTS
PERFUMANIA, INC.
PART I
FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets ........................ 2
Consolidated Statements of Operations .............. 3
Consolidated Statements of Cash Flows .............. 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................ 9
PART II
OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ..................... 13
SIGNATURES ......................................... 14
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERFUMANIA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,806,154 $ 1,554,117
Trade receivables, less allowance for doubtful
accounts of $794,954 and $704,954 5,638,831 5,186,473
Advances to suppliers 5,709,779 7,611,036
Inventories, net of reserve of $235,336 and $2,750,000 72,119,410 73,137,842
Prepaid expenses and other current assets 1,570,278 2,086,118
Tax refund receivable -- 814,766
Net deferred tax asset 1,219,856 1,219,856
Due from related parties 622,855 772,855
------------- -------------
Total current assets 88,687,163 92,383,063
Property and equipment, net 23,495,531 18,307,240
Leased equipment under capital leases, net 1,523,816 2,266,674
Other assets 1,686,492 1,764,906
------------- -------------
$ 115,393,002 $ 114,721,883
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit and current portion of
notes payable $ 37,970,490 $ 34,139,766
Accounts payable - non affiliates 13,455,773 13,308,914
Accounts payable - affiliates 24,976,620 16,958,163
Accrued expenses and other liabilities 6,049,905 6,848,923
Income taxes payable 367,542 505,098
Current portion of obligations under capital leases 496,516 1,030,340
Due to related parties 356,352 304,483
------------- -------------
Total current liabilities 83,673,198 73,095,687
------------- -------------
Long term portion of notes payable 3,586,527 4,709,434
Long-term portion of obligations under capital leases 618,212 933,615
------------- -------------
Total liabilities 87,877,937 78,738,736
------------- -------------
Commitments and contingencies -- --
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 25,000,000 shares
authorized, 7,930,291 and 7,845,291 shares issued
and outstanding 79,303 78,453
Capital in excess of par 52,385,511 52,386,361
Treasury stock (5,085,435) (4,521,068)
Accumulated deficit (19,864,314) (11,960,599)
------------- -------------
Total stockholders' equity 27,515,065 35,983,147
------------- -------------
$ 115,393,002 $ 114,721,883
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
2
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PERFUMANIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-nine Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 31, 1998 November 1, 1997 October 31, 1998 November 1, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales:
Unaffiliated customers $ 37,084,488 $ 38,753,773 $ 115,236,827 $ 103,796,306
Affiliates -- 21,257 -- 2,251,978
------------- ------------- ------------- -------------
37,084,488 38,775,030 115,236,827 106,048,284
------------- ------------- ------------- -------------
Cost of goods sold:
Unaffiliated customers 22,064,227 22,846,084 68,900,374 59,782,336
Affiliates -- 15,921 -- 1,818,644
------------- ------------- ------------- -------------
22,064,227 22,862,005 68,900,374 61,600,980
------------- ------------- ------------- -------------
Gross profit 15,020,261 15,913,025 46,336,453 44,447,304
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 16,765,194 16,008,318 47,625,516 44,494,625
Depreciation and amortization 1,104,130 1,206,312 3,280,603 3,492,533
------------- ------------- ------------- -------------
Total operating expenses 17,869,324 17,214,630 50,906,119 47,987,158
------------- ------------- ------------- -------------
Loss from operations before other
Expense (2,849,063) (1,301,605) (4,569,666) (3,539,854)
Other expense (1,010,382) (740,067) (3,334,049) (2,593,656)
------------- ------------- ------------- -------------
Loss before income taxes (3,859,445) (2,041,672) (7,903,715) (6,133,510)
Benefit for income taxes -- 816,669 -- 2,453,404
------------- ------------- ------------- -------------
Net loss before cumulative effect of
change in accounting principle (3,859,445) (1,225,003) (7,903,715) (3,680,106)
------------- ------------- ------------- -------------
Cumulative effect of change in
acounting principle, net of income
tax benefit of $380,958 -- -- -- (631,418)
------------- ------------- ------------- -------------
Net loss $ (3,859,445) $ (1,225,003) $ (7,903,715) $ (4,311,524)
============= ============= ============= =============
Basic loss per common share:
Net loss before cumulative effect
of change in accounting principle $ (0.59) $ (0.17) $ (1.21) $ (0.52)
Cumulative effect of change in
accounting principle, net of tax benefit -- -- -- $ (0.09)
------------- ------------- ------------- -------------
Net loss $ (0.59) $ (0.17) $ (1.21) $ (0.61)
------------- ------------- ------------- -------------
Diluted loss per common share:
Net loss before cumulative effect
of change in accounting principle $ (0.59) $ (0.17) $ (1.21) $ (0.52)
Cumulative effect of change in
accounting principle, net of tax benefit -- -- -- $ (0.09)
------------- ------------- ------------- -------------
Net loss $ (0.59) $ (0.17) $ (1.21) $ (0.61)
------------- ------------- ------------- -------------
Weighted average number of shares outstanding:
Basic 6,519,440 7,062,922 6,533,103 7,133,372
Diluted 6,577,380 7,092,142 6,559,776 7,273,934
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
PERFUMANIA, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
October 31, 1998 November 1, 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,903,715) $ (4,311,524)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for doubtful accounts 90,000 1,270,000
Benefit for income taxes -- (2,453,404)
Depreciation and amortization 3,281,168 3,492,533
Loss on disposition -- 239,970
Cumulative effect of change in accounting principle -- 631,418
Change in assets and liabilities,
(Increase) decrease in: --
Trade receivables (542,358) 411,606
Advances to suppliers 1,901,257 (2,512,357)
Inventories 1,018,432 (2,434,724)
Other current assets 515,840 (399,091)
Due from related parties 150,000 --
Tax refund receivable 814,766 --
Other assets 77,849 218,100
Increase (decrease) in:
Accounts payable 8,165,316 6,894,941
Other current liabilities (799,018) 171,912
Income taxes payable (137,556) (1,012,694)
------------ ------------
Total adjustments 14,535,696 4,518,210
------------ ------------
Net cash provided by operating activities 6,631,981 206,686
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (7,726,036) (4,701,006)
------------ ------------
Net cash used in investing activities (7,726,036) (4,701,006)
------------ ------------
Cash flows from financing activities:
Borrowings and repayments under loan payable 2,707,817 5,872,764
Borrowings and repayments from related parties 51,869 16,483
Principal payments under capital lease obligations (849,227) (845,627)
Purchases of treasury stock (564,367) (578,656)
------------ ------------
Net cash provided by financing activities 1,346,092 4,464,964
------------ ------------
Increase (decrease) in cash and cash equivalents 252,037 (29,356)
Cash and cash equivalents at beginning of period 1,554,117 1,641,527
------------ ------------
Cash and cash equivalents at end of period $ 1,806,154 $ 1,612,171
============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,582,915 $ 3,421,770
Income Taxes 137,556 1,012,694
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 6
PERFUMANIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1). SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of
Perfumania and subsidiaries (the Company). All material intercompany balances
and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The financial information presented
herein, which is not necessarily indicative of results to be expected for the
current fiscal year, reflects all adjustments which, in the opinion of the
Company, are necessary for a fair statement of the results for the periods
indicated. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 1998.
(2). STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TREASURY STOCK
------------------------ EXCESS ------------------------ ACCUMULATED
SHARES AMOUNT OF PAR SHARES AMOUNT DEFICIT TOTAL
--------- ------------ ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31, 1998 7,845,291 $ 78,453 $ 52,386,361 1,218,360 ($ 4,521,068) ($11,960,599) $ 35,983,147
Issuance of
common stock 85,000 850 (850) -- -- -- --
Purchases of
treasury stock -- -- -- 192,491 (564,367) -- (564,367)
Net loss for the
thirty-nine weeks
ended Oct. 31, 1998 -- -- -- -- -- (7,903,715) (7,903,715)
--------- ------------ ------------ --------- ------------ ------------ ------------
Balance at
October 31, 1998 7,930,291 $ 79,303 $ 52,385,511 1,410,851 $ (5,085,435) $(19,864,314) $ 27,515,065
--------- ------------ ------------ --------- ------------ ------------ ------------
</TABLE>
5
<PAGE> 7
(3). BASIC AND DILUTED LOSS PER COMMON SHARE
Basic and diluted loss per share, net of cumulative effect of change in
accounting principle, is computed as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------------
October 31, 1998 November 1, 1997
---------------- ----------------
<S> <C> <C>
Net Loss $(3,859,445) $(1,225,003)
=========== ===========
Weighted average number of shares outstanding used
in basic earnings per share calculation 6,519,440 7,062,922
=========== ===========
Basic loss per common share $ (0.59) $ (0.17)
=========== ===========
Weighted average number of shares outstanding used
in basic earnings per share calculation 6,519,440 7,062,922
Effect of dilutive securities:
Stock options 57,940 29,220
----------- -----------
Weighted average number of shares used in diluted
earnings per share calculation 6,577,380 7,092,142
=========== ===========
Diluted net loss per common share $ (0.59) $ (0.17)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------------------
October 31, 1998 November 1, 1997
---------------- -----------------
<S> <C> <C>
Net Loss $(7,903,715) $(4,311,524)
=========== ===========
Weighted average number of shares outstanding used
in basic earnings per share calculation 6,533,103 7,133,372
=========== ===========
Basic loss per common share $ (1.21) $ (0.61)
=========== ===========
Weighted average number of shares outstanding used
in basic earnings per share calculation 6,533,103 7,133,372
Effect of dilutive securities:
Stock options 26,673 140,562
----------- -----------
Weighted average number of shares used in diluted
earnings per share calculation 6,559,776 7,273,934
=========== ===========
Diluted net loss per common share $ (1.21) $ (0.61)
=========== ===========
</TABLE>
6
<PAGE> 8
(4). SEGMENT INFORMATION
The Company operates in two industry segments, specialty retail sale and
wholesale distribution of fragrances and related products. Financial information
for these segments is summarized in the following table.
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
OCT. 31, 1998 NOV. 1, 1997 OCT. 31, 1998 NOV. 1, 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales
Wholesale $ 6,993,408 $ 8,590,382 $ 30,696,200 $ 23,464,369
Retail 30,091,080 30,184,648 84,540,627 82,583,915
------------ ------------ ------------ ------------
Total net sales $ 37,084,488 $ 38,775,030 $115,236,827 $106,048,284
------------ ------------ ------------ ------------
Cost of goods sold
Wholesale $ 6,079,837 $ 6,519,325 $ 24,682,207 $ 17,772,556
Retail 15,984,390 16,342,680 44,218,167 43,828,424
------------ ------------ ------------ ------------
Total cost of goods sold $ 22,064,227 $ 22,862,005 $ 68,900,374 $ 61,600,980
------------ ------------ ------------ ------------
Gross profit
Wholesale $ 913,571 $ 2,071,057 $ 6,013,993 $ 5,691,813
Retail 14,106,690 13,841,968 40,322,460 38,755,491
------------ ------------ ------------ ------------
Total gross profit $ 15,020,261 $ 15,913,025 $ 46,336,453 $ 44,447,304
------------ ------------ ------------ ------------
Number of stores 294 283
</TABLE>
October 31, January 31,
1998 1998
----------- -----------
INVENTORY
Wholesale $12,547,590 $20,368,792
Retail 59,571,820 52,769,050
----------- -----------
$72,119,410 $73,137,842
----------- -----------
An unaffiliated customer of the wholesale segment accounted for approximately 8%
and 7% of the consolidated net sales for the thirty-nine weeks ended October 31,
1998 and November 1, 1997, respectively, and 2% and 47% of the consolidated net
trade accounts receivable balance at October 31, 1998 and November 1, 1997,
respectively.
7
<PAGE> 9
(5). RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities", which requires the Company to expense preopening expenses as
incurred. Previously, the Company had capitalized and amortized these expenses
over 18 months. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, does not require restatement of prior periods
and is applied as of the beginning of the fiscal year in which the SOP is first
adopted. The Company early adopted SOP 98-5 in fiscal 1997 and reported the
initial application as a cumulative effect of a change in accounting principle
in the Consolidated Statement of Operations for the year ended January 31, 1998.
Accordingly, the Company's net loss and net loss per common share for the
thirteen and thirty-nine weeks ended November 1, 1997 in the accompanying
Consolidated Statements of Operations has been restated to reflect this change.
The effect of the change in accounting principle was to reduce the net loss
before cumulative effect of change in accounting principle reported for the
first thirty-nine weeks of 1997 by approximately $258,000.
(6). OTHER
During the fiscal years 1997 and 1996, the Company made sales to L. Luria & Son,
Inc. ("Luria's") in the amounts of $1,999,823 and $2,473,623, respectively. The
Company wrote off in 1997 receivables from Luria's in the approximate amount of
$1,200,000. The Company has been characterized as an insider in the liquidating
plan or reorganization filed on April 6, 1998 by Luria's in the United States
Bankruptcy Court, Southern District of Florida. In August 1998, the committee of
unsecured creditors in Luria's bankruptcy proceedings filed a complaint with the
United States Bankruptcy Court, Southern District of Florida, to recover
substantial funds from the Company. The complaint alleges that Luria's made
preference payments, as defined by the Bankruptcy Court, to the Company and
seeks recovery of said preference payments, as well as disallowing any and all
claims of the Company against Luria's until full payment of the preference
payments have been made. Management cannot presently predict the outcome of
these matters.
8
<PAGE> 10
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Perfumania does not provide forecasts of future financial performance.
Forward-looking statements in this Form 10-Q and other Company reports and press
releases are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and, in connection therewith, the
Company wishes to caution readers that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results and could cause such results to differ materially from those
expressed in forward-looking statements made by or on behalf of the Company.
SEASONALITY. The Company has historically experienced higher sales in
the third and fourth fiscal quarters than in the first and second fiscal
quarters. Significantly higher fourth fiscal quarter retail sales result from
increased purchases of fragrances as gift items during the Christmas holiday
season. The Company's quarterly results may also vary due to the level of
wholesale sales, which is not predictable, as well as the timing of new store
openings, net sales contributed by new stores and fluctuations in comparable
sales of existing stores. A variety of factors affect the sales levels of new
and existing stores, including the retail sales environment and the level of
competition, the effect of marketing and promotional programs, acceptance of new
product introductions, adverse weather conditions and general economic
conditions.
LACK OF LONG-TERM AGREEMENTS WITH SUPPLIERS. The Company's success
depends to a large degree on its ability to provide an extensive assortment of
brand name and designer fragrances. The Company has no long-term purchase
contracts or other contractual assurance of continued supply, pricing or access
to new products. While the Company believes it has good relationships with its
vendors, the inability to obtain merchandise from one or more key vendors on a
timely basis, or a material change in the Company's ability to obtain necessary
merchandise could have a material adverse effect on its results of operations.
DEPENDENCE ON LINE OF CREDIT. As discussed above, the Company
experiences significant seasonal fluctuations in its sales and operating
results, as is common with many specialty retailers. The Company utilizes its
line of credit to fund inventory purchases and to support new retail store
openings. Any future limitation on the Company's borrowing ability and access to
financing could limit the Company's ability to open new stores and to obtain
merchandise on satisfactory terms. The Company's current line of credit contains
financial covenants, including a net income covenant. Should the Company not be
able to meet its covenants, its borrowing ability and thus, its operations will
be seriously affected.
DEPENDENCE ON KEY PERSONNEL. Jerome Falic, the Company's President and
Simon Falic, the Company's Chief Operating Officer and Chief Financial Officer
are primarily responsible for the Company's merchandise purchases, and have
developed strong, reliable relationships with suppliers, as well as customers of
the Wholesale division in the United States, Europe, Asia and South America. The
loss of service of either of these, or any of the Company's other current
executive officers could have a material adverse effect on the Company.
ABILITY TO MANAGE GROWTH. While the Company has grown significantly in
the past several years, there is no assurance that the Company will sustain the
growth in the number of retail stores and revenues that it has achieved
historically. The Company's growth is dependent, in large part, upon the
Company's ability to open and operate new retail stores on a profitable basis,
which in turn is subject to, among other things, the Company's ability to secure
suitable stores sites on satisfactory terms, the Company's ability to hire,
train and retain qualified management and other personnel, the availability of
adequate capital
9
<PAGE> 11
resources and the successful integration of new stores into existing operations.
There can be no assurance that the Company's new stores will achieve sales and
profitability comparable to existing stores, or that the opening of new
locations will not cannibalize sales at existing locations.
LITIGATION. As is often the case in the fragrance and cosmetics
business, some of the merchandise purchased by suppliers such as the Company may
have been manufactured by entities who are not the owners of the trademarks or
copyrights for the merchandise. If the Company were called upon or challenged by
the owner of a particular trademark or copyright to demonstrate that the
specific merchandise was produced and sold with the proper authority and the
Company were unable to do so, the Company could, among other things, be
restricted from reselling the particular merchandise or be subjected to other
liabilities, which could have an adverse effect on the Company's business and
results of operations.
OTHER. The Company has been characterized as an insider in the
liquidating plan of reorganization filed on April 6, 1998 by L. Luria & Son,
Inc. ("Luria's") in the United States Bankruptcy Court, Southern District of
Florida. In August 1998, the committee of unsecured creditors in Luria's
bankruptcy proceedings filed a complaint with the United States Bankruptcy
Court, Southern District of Florida, to recover substantial funds from the
Company. The complaint alleges that Luria's made preference payments, as defined
by the Bankruptcy Court, to the Company and seeks recovery of said preference
payments, as well as disallowing any and all claims of the Company against
Luria's until full payment of the preference payments have been made. Management
cannot presently predict the outcome of these matters.
SEASONALITY
The Company's operations have historically been seasonal, with generally higher
retail sales in the third and fourth fiscal quarters than in the first and
second fiscal quarters. Significantly higher fourth fiscal quarter retail sales
result from increased purchases of fragrances as gift items during the Christmas
holiday season. Wholesale sales also vary by fiscal quarter as a result of the
selection of merchandise available for sale as well as the need for the Company
to stock its retail stores for the Christmas holiday season. Therefore, the
results of any interim period are not necessarily indicative of the results that
might be expected during a full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working capital needs,
new store additions and renovation of existing stores. For the first thirty-nine
weeks of fiscal 1998, these capital requirements have generally been satisfied
by short-term borrowings and cash flows from operations.
Net cash provided by operating activities during the thirty-nine weeks ended
October 31, 1998 was approximately $6.6 million, principally as a result of the
net change in the Company's trade receivables, advances to suppliers,
inventories and accounts payable. At October 31, 1998, approximately $0.7
million of the Company's trade receivables were considered past due compared to
$0.9 million at January 31, 1998. Of the $5.6 million in trade receivables due
from unaffiliated customers at October 31, 1998, $0.1 million was due from one
customer, which also accounted for 3.3% of the Company's wholesale sales during
the thirteen weeks ended October 31, 1998. The Company's sales to this customer
are made on an open account terms and since late 1991 the Company has extended
credit terms to this customer of up to one year. The Company has not experienced
any write-offs of accounts receivable from this customer due to collectibility.
Net cash used in investing activities during the thirty-nine weeks ended October
31, 1998 was $7.7 million. This represents purchases of furniture, fixtures and
equipment for new store openings and the renovation of existing stores during
fiscal 1998.
10
<PAGE> 12
Net cash provided by financing activities during the thirty-nine weeks ended
October 31, 1998 was approximately $1.3 million, which was primarily the result
of an increase in the Company's use of its line of credit. In May 1998, the
Company's $35 million line of credit was extended from April 1999 to April 2001,
and certain covenants were revised. As of October 31, 1998, the Company was not
in compliance with certain financial covenants required by the line of credit.
Management is currently negotiating a waiver of this non-compliance with the
Bank and believes that this waiver will be obtained.
Management believes that cash provided by operations together with the borrowing
under the Company's line of credit will be sufficient to fund estimated capital
expenditures associated with the Company's scheduled opening of new stores for
at least the next twelve months and other working capital requirements.
During the thirty-nine weeks ended October 31, 1998, the Company closed nineteen
stores and opened twenty-eight stores. At October 31, 1998, the Company operated
294 stores.
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED OCTOBER 31, 1998 WITH THE THIRTEEN WEEKS
ENDED NOVEMBER 1, 1997.
Net sales decreased $1.7 million from $38.8 million in the thirteen weeks ended
November 1, 1997 to $37.1 million in the thirteen weeks ended October 31, 1998.
The decrease in net sales was primarily the result of a $1.6 million decrease in
wholesale sales (from $8.6 million to $7.0 million); retail sales were $30.1,
compared to $30.2 million in the prior year. The decrease in retail sales was
principally due to a 2.7% decrease in comparable store sales during the current
period when compared to last year.
Gross profit decreased 5.6% from $15.9 million in the thirteen weeks ended
November 1, 1997 (41.0% of net sales) to $15.0 million in the thirteen weeks
ended October 31, 1998 (40.5% of total net sales) due primarily to the decrease
in wholesale sales.
Gross profit for the wholesale division decreased from $2.1 million in the
thirteen weeks ended November 1, 1997 to $0.9 million in the thirteen weeks
ended October 31, 1998 as a result of lower wholesale sales and also lower
margin wholesale sales. As a percentage of net sales, gross profit for the
wholesale division decreased from 24.1% in the thirteen weeks ended November 1,
1997 to 13.1% in the thirteen weeks ended October 31, 1998.
Gross profit for the retail division increased 1.9% from $13.8 million in the
thirteen weeks ended November 1, 1997 to $14.1 million in the thirteen weeks
ended October 31, 1998 as a result of higher retail gross margins. As a
percentage of net sales, gross profit for the retail division increased from
45.9% in the thirteen weeks ended November 1, 1997 to 46.9% in the thirteen
weeks ended October 31, 1998 due primarily to less promotional sales of
merchandise at lower margins.
Operating expenses, which include selling, general and administrative expenses
as well as depreciation, increased from $17.2 million in the thirteen weeks
ended November 1, 1997 to $17.9 million in the thirteen weeks ended October 31,
1998. The increase was primarily due to costs associated with the operation of
an average of 10 additional stores.
As a result of the foregoing, the Company had a net loss of $3,859,445, or
($0.59) per diluted share in the thirteen weeks ended October 31, 1998 compared
to a net loss of $1,225,003, or ($0.17) per diluted share, in the thirteen weeks
ended November 1, 1997. Excluding the tax benefit of $816,669 in 1997, the loss
for the thirteen weeks ended November 1, 1997 was $2,041,672 or ($0.29) per
diluted share.
11
<PAGE> 13
COMPARISON OF THE THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 WITH THE THIRTY-NINE
WEEKS ENDED NOVEMBER 1, 1997.
Net sales increased 8.7% from $106.0 million in the thirty-nine weeks ended
November 1, 1997 to $115.2 million in the thirty-nine weeks ended October 31,
1998. The increase in net sales was due to a 30.8% increase in wholesale sales
(from $23.5 million to $30.7 million), and a 2.4% increase in retail sales (from
$82.6 million to $84.5 million).
The increase in wholesale sales was due to continued efforts to reduce inventory
levels. The increase in retail sales was principally due to the increase in the
number of stores operated during the thirty-nine weeks ended October 31, 1998
compared to the thirty-nine weeks ended November 1, 1997. Comparable store sales
during the thirty-nine weeks ended October 31, 1998 decreased 2.7% when compared
to last year.
Gross profit increased 4.3% from $44.5 million in the thirty-nine weeks ended
November 1, 1997 (41.9% of net sales) to $46.3 million in the thirty-nine weeks
ended October 31, 1998 (40.2% of net sales) primarily as a result of the
increase in net sales. The decrease in gross profit as a percentage of sales is
due to the increase in wholesale sales. Wholesale sales yield significantly
lower margins compared to retail sales.
Gross profit for the wholesale division increased 5.7% from $5.7 million in the
thirty-nine weeks ended November 1, 1997 to $6.0 million in the thirty-nine
weeks ended October 31, 1998. As a percentage of net sales, gross profit for the
wholesale division decreased from 24.3% in the thirty-nine weeks ended November
1, 1997 to 19.6% in the thirty-nine weeks ended October 31, 1998, primarily due
to lower margin sales.
Gross profit for the retail division increased 4.0% from $38.8 million in the
thirty-nine weeks ended November 1, 1997 to $40.3 million in the thirty-nine
weeks ended October 31, 1998. The retail division's gross margin increased from
46.9% in the thirty-nine weeks ended November 1, 1997 to 47.7% in the
thirty-nine weeks ended October 31, 1998 due primarily to less promotional sales
of merchandise at lower margins.
Operating expenses increased $2.9 million in the thirty-nine weeks ended October
31, 1998 compared to the thirty-nine weeks ended November 1, 1997. The increase
was primarily due to costs associated with the operation of an average of 13
additional stores.
During the thirty-nine weeks ended October 31, 1998 the Company had a net loss
of $7,903,715 or ($1.21) per diluted share, compared to a net loss of $4,311,524
or ($0.61) per diluted share during the thirty-nine weeks ended November 1,
1997. Excluding the cumulative effect of the change in accounting principle of
$631,418 and a tax benefit of $2,453,404 in 1997, the loss for the first
thirty-nine weeks of 1997 was $6,133,510 or ($0.84) per diluted share.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule (for SEC use only) (1)
- -----------------------
(1) Filed herewith.
(b) The Company did not file any reports on Form 8-K during the quarter ended
October 31, 1998.
13
<PAGE> 15
PERFUMANIA, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PERFUMANIA, INC.
(Registrant)
Date: December 15, 1998 By: /s/ Ilia Lekach
----------------------------------
Ilia Lekach
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Simon Falic
----------------------------------
Simon Falic
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> AUG-02-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,806,154
<SECURITIES> 0
<RECEIVABLES> 5,638,831
<ALLOWANCES> 0
<INVENTORY> 72,119,410
<CURRENT-ASSETS> 1,570,278
<PP&E> 23,495,531
<DEPRECIATION> 0
<TOTAL-ASSETS> 115,393,002
<CURRENT-LIABILITIES> 83,673,198
<BONDS> 0
0
0
<COMMON> 79,303
<OTHER-SE> 27,435,762
<TOTAL-LIABILITY-AND-EQUITY> 115,393,002
<SALES> 115,236,827
<TOTAL-REVENUES> 115,236,827
<CGS> 68,900,374
<TOTAL-COSTS> 68,900,374
<OTHER-EXPENSES> 50,906,119
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,903,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,903,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,903,715)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
