FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 3, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-23574
PETCO ANIMAL SUPPLIES, INC.
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Delaware 33-0479906
9125 Rehco Road
San Diego, CA 92121
(619) 453-7845
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.
Title Date Outstanding
Common Stock, $.0001 Par Value June 12, 1997 18,659,034
PETCO Animal Supplies Inc.
Index
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at February 1, 1997
and May 3, 1997 3
Consolidated Statements of Operations for the thirteen
weeks ended May 4, 1996 and May 3, 1997 4
Consolidated Statements of Cash Flows for the
thirteen weeks ended May 4, 1996 and May 3, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
<TABLE>
<S> <C> <C>
February 1, May 3,
1997 1997
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 42,932 $ 18,577
Receivables 7,212 8,990
Inventories 68,498 76,075
Other current assets 1,976 2,076
Total current assets 120,618 105,718
Fixed assets, net 96,374 103,800
Goodwill 42,408 41,643
Deferred tax assets 19,071 19,071
Other assets 1,877 1,825
$280,348 $272,057
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,090 $ 29,224
Accrued expenses 17,067 14,879
Accrued salaries and employee benefits 9,096 8,555
Revolving credit facility -- --
Current portion of capital lease and
other obligations 4,575 4,652
Total current liabilities 66,828 57,310
Capital lease and other obligations,
excluding current portion 14,102 13,036
Accrued store closing costs 8,691 8,046
Deferred rent 6,103 6,601
Stockholders' equity:
Common Stock, $.0001 par value, 100,000,000
shares authorized, 18,609,978 and
18,618,988 shares issued and outstanding,
respectively 2 2
Additional paid-in capital 236,766 236,868
Accumulated deficit (52,144) (49,806)
Total stockholders' equity 184,624 187,064
Commitments and contingencies
$280,348 $272,057
</TABLE>
See accompanying notes to consolidated financial statements
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share data)
<TABLE>
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Thirteen weeks ended
May 4, May 3,
1996 1997 x
Net sales $ 111,103 $ 143,422
Cost of sales and occupancy costs 83,939 107,596
Gross profit 27,164 35,826
Selling, general, and administrative expenses 24,438 31,860
Operating income 2,726 3,966
Interest expense, net 284 37
Earnings before income taxes 2,442 3,929
Income taxes 909 1,591
Net earnings $ 1,533 $ 2,338
Net earnings per common and common
equivalent share $ 0.10 $ 0.13
Weighted average number of common and common
equivalent shares outstanding 15,809,147 18,613,747
</TABLE>
See accompanying notes to consolidated financial statements.
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
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Thirteen weeks ended x
May 4, May 3,
1996 1997 x
Cash flows from operating activities:
Net earnings $ 1,533 $ 2,338
Depreciation and amortization 3,281 4,663
Deferred taxes 34 --
Changes in assets and liabilities:
Receivables 1,352 (1,778)
Inventories (8,546) (7,577)
Other assets (752) (58)
Accounts payable (1,739) (6,866)
Accrued expenses (656) (2,188)
Accrued salaries and employee benefits 35 (541)
Accrued store closing costs (3,311) (645)
Deferred rent 473 498
Other -- 312
Net cash used in operating activities (8,296) (11,842)
Cash flows from investing activities:
Additions to fixed assets (6,521) (11,626)
Net cash invested in acquisitions of businesses (7,788) --
Net cash used in investing activities (14,309) (11,626)
Cash flows from financing activities:
Borrowings under other obligations 523 --
Repayment of capital lease and other obligations (905) (989)
Proceeds from the issuance of common stock 69,950 102
Distributions to shareholders (510) --
Net cash provided by (used in) financing
activities 69,058 (887)
Net increase (decrease) in cash and cash equivalents 46,453 (24,355)
Cash and cash equivalents at beginning of year 15,740 42,932
Cash and cash equivalents at end of period $ 62,193 $ 18,577
</TABLE>
See accompanying notes to consolidated financial statements
PETCO ANIMAL SUPPLIES, INC.
Notes to Consolidated Financial Statements
Note 1 - General
In the opinion of management of Petco Animal Supplies, Inc. (the "Company" or
"PETCO"), the unaudited consolidated financial statements contain all
adjustments, consisting of normal recurring adjustments, necessary to
present the
financial position, results of operations and cash flows as of May 3, 1997 and
for the periods ended May 4, 1996 and May 3, 1997. Because of the seasonal
nature of the Company's business, the results of operations for the thirteen
weeks ended May 4, 1996 and May 3, 1997, are not necessarily indicative of the
results to be expected for the full year. The Company's fiscal year ends
on the
Saturday closest to January 31, resulting in years of either 52 or 53 weeks.
All
references to a fiscal year refer to the fiscal year ending on the Saturday
closest to January 31 of the following year. For example, references to fiscal
1996 refer to the fiscal year beginning on February 4, 1996 and ending on
February 1, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto for fiscal 1996 included in the Company's Form
10-K Annual Report (File No. 0-23574) filed with the Securities and Exchange
Commission on April 30, 1997.
Note 2 - Acquisitions
In March 1996, the Company assumed lease obligations and purchased all tangible
personal property and inventory used in connection with eight pet food and
supply
stores located in Maryland and Virginia and operated under the trade name P.T.
Moran ("P.T. Moran"). The transaction was accounted for as a purchase with the
fair market value of assets acquired of $7.6 million and the excess of the cost
over the fair market value of net assets recorded as goodwill and amortized
over
fifteen years. The consolidated financial statements include the operating
results from the closing date.
The Company also acquired eight Pet Nosh stores in July 1996, four PETS USA
stores in October 1996 and thirty-two Pet Food Warehouse stores in December
1996,
(collectively, the "Pooled Companies") all of which were accounted for as
poolings of interests and, therefore, all prior period financial statements
have
been restated. A reconciliation reflecting the combination of the previously
reported results of the Company with the results of the Pooled Companies
follows
(in thousands):
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Pooled
PETCO Companies Combined
Thirteen weeks ended May 4, 1996
Net sales $ 86,956 $ 24,147 $ 111,103
Net earnings 1,332 201 1,533
</TABLE>
Distributions to shareholders reflected in the accompanying Consolidated
Statements of Cash Flows are related to activities of the Pooled Companies.
Note 3 - Net Earnings Per Share
Net earnings per common and common equivalent share are computed by dividing
net
earnings by the weighted average number of common and common equivalent shares
outstanding during the period.
For the thirteen weeks ended May 4, 1996 and May 3, 1997, common equivalent
shares were not included as their effects would not be materially dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations
General
The Company currently utilizes both superstore and traditional store formats
and
follows a strategy of converting and expanding its store base from a
traditional
store format to a superstore format. As a result of this strategy, the Company
has opened and acquired superstores, has expanded, remodeled, and relocated
traditional stores into superstores, collectively referred to as conversions,
and
has closed underperforming stores. At May 3, 1997, the Company operated 341
stores, including 285 superstores, in 22 states and the District of Columbia.
At
May 4, 1996, the Company operated 299 stores, of which 227 were superstores.
As a result of the Company's plan to open approximately 40 to 50 superstores
this
year, including conversions of existing traditional stores into superstore
formats and excluding acquisitions, the Company anticipates certain costs to
increase as a percentage of sales in the near term. In addition, the timing of
new superstore openings and related preopening expenses and the amount of
revenue
contributed by new and existing superstores may cause the Company's quarterly
results of operations to fluctuate. The Company expects continued downward
pressure on its gross profit as a percentage of sales from higher occupancy
costs
in new stores and increased competitive pressures in certain markets. This
trend
should be offset, however, by increased sales from maturing stores and the
benefit of expanded merchandise assortments in existing stores. Increased
payroll, advertising and other store level expenses as a percentage of sales in
new stores should also contribute to lower store operating margins. In
addition,
the Company charges preopening costs associated with each new superstore to
earnings as incurred. Therefore, the Company expects that the opening of a
large
number of new superstores in a given quarter may adversely impact its quarterly
results of operations for that quarter.
In March 1996, the Company assumed lease obligations and purchased all tangible
personal property and inventory used in connection with eight pet food and
supply
stores operated under the trade name P.T. Moran. The Company also acquired
eight
Pet Nosh stores in July 1996, four PETS USA stores in October 1996 and
thirty-two
Pet Food Warehouse stores in December 1996, all of which were accounted for as
poolings of interests and, therefore, all prior period financial statements
have
been restated. Although the Company does not expect the results of these stores
to be dilutive on fiscal 1997 operating results, there can be no assurances
these
stores can achieve their anticipated profitability.
The Company's business is also subject to some seasonal fluctuations.
Historically, the Company has realized a higher portion of its net sales during
the fourth quarter and a lower portion of its net sales in the third quarter.
Results of Operations
First Quarter 1997 Compared to First Quarter 1996
Net sales increased 29.1% to $143.4 million for the thirteen weeks ended May 3,
1997, ("first quarter 1997") from $111.1 million for the thirteen weeks
ended May
4, 1996, ("first quarter 1996"). The increase in net sales in first quarter
1997
resulted primarily from the addition of 66 superstores, including the
conversion
of 19 traditional stores into superstores, partially offset by the closing of
24
stores in the past year, and a comparable store net sales increase of 14.0%.
The
comparable store net sales increase was attributable to maturing superstores,
increased advertising and expanded merchandise assortments in existing stores.
The net increase in the Company's store base accounted for approximately $20.4
million, or 63.2% of the net sales increase, and $11.9 million, or 36.8% of the
net sales increase, was attributable to the increase in comparable store net
sales.
Gross profit, defined as net sales less cost of sales including occupancy
costs,
increased to $35.8 million in first quarter 1997 from $27.2 million in first
quarter 1996. As a percentage of sales, gross profit increased to 25.0% in
first
quarter 1997 from 24.5% in first quarter 1996. This increase reflects a better
sales mix, increased occupancy leverage and lowered distribution expenses
related
to the more efficient operation of the Company's central distribution facility
during the current period.
Selling, general and administrative expenses increased $7.5 million to $31.9
million in first quarter 1997 from $24.4 million in the same period last year.
Selling, general and administrative expenses increased primarily as a result of
higher personnel and related costs associated with new store openings and
acquisitions. As a percentage of net sales, these expenses increased to 22.2%
in
first quarter 1997 from 22.0% in first quarter 1996 primarily due to increased
operating costs of larger and more immature superstores in the store base.
Operating income in first quarter 1997 increased 48.1% to $4.0 million compared
to $2.7 million in first quarter 1996 and increased as a percentage of net
sales
to 2.8% in first quarter 1997 from 2.4% in first quarter 1996.
Income taxes were $1.6 million in first quarter 1997, compared to $0.9 million
in
first quarter 1996.
Net earnings increased 53.3% to $2.3 million, or $0.13 per share, for the first
quarter 1997 from $1.5 million, or $0.10 per share, for the same period last
year.
Liquidity and Capital Resources
The Company has financed its operations and expansion program through internal
cash flow, external borrowings and the sale of equity securities. At May 3,
1997, total assets were $272.1 million, of which $105.7 million were current
assets. Net cash used in operating activities was $11.8 million for the first
quarter 1997 and $8.3 million for the same period of the prior year. The
Company's sales are substantially on a cash basis, therefore cash flow
generated
from operating stores provides a significant source of liquidity to the
Company.
The principal use of operating cash is for the purchase of merchandise
inventories. A portion of the Company's inventory purchases is financed
through
vendor credit terms.
The Company uses cash in investing activities to acquire stores, purchase fixed
assets for new and converted stores and, to a lesser extent, to purchase
warehouse and office fixtures, equipment and computer hardware and software in
support of its distribution and administrative functions. During the first
quarter 1996 the Company acquired one retailer of pet food and supplies with
net
cash of $7.8 million invested in the acquisition of this business. Cash used
in
investing activities was $11.6 million for the first quarter 1997 and $14.3
million for the same period of the prior year.
The Company also finances some of its purchases of equipment and fixtures
through
capital leases and other obligations. Purchases of $1.8 million of fixed
assets
were financed in this manner during the first quarter 1996. The Company
believes
that additional sources of capital lease and other financing are available on a
cost-effective basis and plans to use them, as necessary, in connection with
its
expansion program.
The Company's primary long-term capital requirement is funding for the
opening or
acquisition of superstores and the conversion of traditional stores into
superstores. During the first quarter 1996, net proceeds of $70.0 million were
obtained from a public offering of common stock to provide funds for the
Company's expansion program, the acquisition of related businesses and for
working capital requirements.
The Company has a Revolving Credit Facility with a commitment of up to $40.0
million which expires December 6, 1998. Borrowings under this facility are
unsecured and bear interest, at the Company's option, at either the bank's
reference rate or LIBOR plus 0.375% based on the Company's leverage ratio at
May
3, 1997. At May 3, 1997 the Company had no outstanding borrowings under this
facility. The Revolving Credit Facility contains certain affirmative and
negative covenants related to debt, interest and fixed charges coverage and
consolidated net worth.
As of February 1, 1997, the Company had available net operating loss
carryforwards of $14.9 million for federal income tax purposes, which begin
expiring in 2004, and $8.9 million for state income tax purposes, which begin
expiring in 1997.
The Company anticipates that funds generated by operations, funds available
under
the Revolving Credit Facility, currently available vendor financing and capital
lease and other obligation financing will be sufficient to finance its
continued
operations and planned store openings for at least the next twelve months.
Certain Cautionary Statements
Certain statements in this Quarterly Report on Form 10-Q that are not
historical
fact constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause
the actual results of the Company to be materially different from historical
results or from any results expressed or implied by such forward-looking
statements. These factors are discussed under the caption "Certain Cautionary
Statements" in the Company's Annual Report on Form 10-K for the year ended
February 1, 1997.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Part II. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits
(a) 27.1 Financial Data Schedule (filed electronically only)
2. Reports on Form 8-K
(a) The Company filed no reports on Form 8-K during the thirteen weeks
ended May 3, 199
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETCO ANIMAL SUPPLIES, INC.
By: /s/ James M. Myers
James M. Myers
Senior Vice President Finance
and Chief Accounting Officer
Date: June 16, 1997
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<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-03-1997
<CASH> 18,577
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<RECEIVABLES> 8,990
<ALLOWANCES> 0
<INVENTORY> 76,075
<CURRENT-ASSETS> 105,718
<PP&E> 103,800
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0
0
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<SALES> 143,422
<TOTAL-REVENUES> 143,422
<CGS> 107,596
<TOTAL-COSTS> 107,596
<OTHER-EXPENSES> 31,860
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<NET-INCOME> 2,338
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