UNITED STATES
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 May 2, 1998
( ) 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.
(Exact name of registrant as specified in its charter)
Delaware 33-0479906
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9125 Rehco Road, San Diego, California 92121
(Address of principal executive office) (Zip Code)
(619) 453-7845
(Registrant's telephone number, including area code)
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 of each of the registrant's classes of
common stock, as of the latest practicable date.)
Title Date Outstanding
----- ---- -----------
Common Stock, $0.0001 Par Value June 8, 1998 21,073,061
<PAGE> 2
PETCO Animal Supplies, Inc.
Form 10-Q
For the Quarter Ended May 2, 1998
Index
Part I Financial Information Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at January 31, 1998
and May 2, 1998 3
Consolidated Statements of Operations for the thirteen
weeks ended May 3, 1997 and May 2, 1998 4
Consolidated Statements of Cash Flows for the thirteen
weeks ended May 3, 1997 and May 2, 1998 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 12
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE> 3
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
January 31, May 2,
1998 1998
----------- -----------
ASSETS (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,354 $ 2,904
Receivables 10,879 12,245
Inventories 96,873 92,818
Deferred tax assets 8,354 8,354
Other 4,942 5,674
------- -------
Total current assets 124,402 121,995
Fixed assets, net 147,429 153,946
Goodwill 39,348 38,583
Deferred tax assets 17,885 18,277
Other assets 6,131 6,842
------- -------
$335,195 $339,643
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51,794 $ 41,336
Accrued expenses 21,558 23,035
Accrued salaries and employee benefits 9,242 8,916
Current portion of long-term debt 3,375 3,375
Current portion of capital lease and
other obligations 5,073 4,937
------ ------
Total current liabilities 91,042 81,599
Long-term debt, excluding current portion 26,625 43,000
Capital lease and other obligations,
excluding current portion 11,369 10,017
Accrued store closing costs 11,189 10,580
Deferred rent 8,913 9,327
Stockholders' equity:
Common stock, $0.0001 par value, 100,000
shares authorized, 21,060 and
21,073 shares issued and outstanding,
respectively 2 2
Additional paid-in capital 270,755 270,886
Accumulated deficit (84,700) (85,768)
------- -------
Total stockholders' equity 186,057 185,120
------- -------
$335,195 $339,643
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
<TABLE>
Thirteen weeks ended
----------------------
May 3, May 2,
1997 1998
----------------------
<S> <C> <C>
Net sales $ 170,908 $ 196,296
Cost of sales and occupancy costs 129,507 149,620
--------- ---------
Gross profit 41,401 46,676
Selling, general, and administrative expenses 38,697 40,629
Merger and business integration costs -- 6,385
--------- ---------
Operating income (loss) 2,704 (338)
Interest expense, net 522 1,122
--------- ---------
Earnings (loss) before income taxes 2,182 (1,460)
Income taxes (benefit) 884 (392)
--------- ---------
Net earnings (loss) $ 1,298 $ (1,068)
========= =========
Basic and diluted earnings (loss) per common share $ 0.06 $ (0.05)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
PETCO ANIMAL SUPPLIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
Thirteen weeks ended
------------------------
May 3, May 2,
1997 1998
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net earnings(loss) $ 1,298 $ (1,068)
Depreciation and amortization 5,450 6,984
Deferred taxes (708) (392)
Loss on retirement of fixed assets 312 100
Changes in assets and liabilities, net of effects
of purchase acquisitions:
Receivables (1,926) (1,366)
Inventories (8,507) 4,055
Other assets (68) (1,517)
Accounts payable (2,151) (10,458)
Accrued expenses (2,264) 1,477
Accrued salaries and employee benefits (541) (326)
Accrued store closing costs 44 (609)
Deferred rent 495 414
------- -------
Net cash used in operating activities (8,566) (2,706)
------- -------
Cash flows from investing activities:
Additions to fixed assets (12,349) (12,762)
Net cash invested in acquisitions of businesses (6,028) --
------- -------
Net cash used in investing activities (18,377) (12,762)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt agreements 4,000 17,500
Repayment of long-term debt agreements -- (1,125)
Repayment of capital lease and other obligations (1,441) (1,488)
Proceeds from the issuance of common stock 103 131
------- -------
Net cash provided by financing activities 2,662 15,018
------- -------
Net decrease in cash and cash equivalents (24,281) (450)
Cash and cash equivalents at beginning of year 44,338 3,354
------- -------
Cash and cash equivalents at end of period $ 20,057 $ 2,904
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
PETCO ANIMAL SUPPLIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
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 2, 1998,
and for the periods ended May 3, 1997 and May 2, 1998. Certain prior year
balances have been reclassified to conform to current year presentation.
Because of the seasonal nature of the Company's business, the results of
operations for the thirteen weeks ended May 3, 1997 and May 2, 1998, 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 1997 refer to the fiscal year beginning on
February 2, 1997 and ending on January 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto for fiscal 1997
included in the Company's Form 10-K Annual Report (File No. 0-23574) filed with
the Securities and Exchange Commission on April 30, 1998.
Note 2 - Acquisitions
The Company acquired all of the outstanding equity securities of a retailer with
eighty-two pet food and supply stores operated under the tradename PetCare
("PetCare") in November 1997, in exchange for 1,543 shares of common stock.
This transaction has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements for the prior year have been
restated to include the accounts of PetCare.
A reconciliation reflecting the combination of the previously reported results
of the Company with the results of PetCare follows:
<TABLE>
Net Earnings
Net Sales (Loss)
------------- ------------
Thirteen weeks ended May 3, 1997:
<S> <C> <C>
PETCO, as previously reported $ 143,422 $ 2,338
PetCare 27,486 (1,040)
--------- --------
Combined $ 170,908 $ 1,298
========= ========
</TABLE>
The Company recorded merger and business integration costs of $6.4 million
during the thirteen weeks ended May 2, 1998. These costs include transaction
costs, costs attributable to lease cancellation and closure of duplicate or
inadequate facilities and activities, facility conversion costs, cancellation of
certain contractual obligations and other integration costs.
<PAGE> 7
Note 3 - Net Earnings (Loss) Per Share
The consolidated financial statements are presented in accordance with SFAS No.
128, "Earnings per Share." Basic net earnings (loss) per common share are
computed using the weighted average number of common shares outstanding during
the period. Diluted net earnings (loss) per common share incorporate the
incremental shares issuable upon the assumed exercise of stock options. All
prior period net earnings (loss) per common share information are presented in
accordance with SFAS No. 128.
Net earnings (loss) and weighted average common shares used to compute net
earnings (loss) per share, basic and diluted, are presented below:
<TABLE>
Thirteen Weeks Ended
------------------------
May 3, May 2,
1997 1998
--------- ---------
<S> <C> <C>
Net earnings (loss) $ 1,298 $ (1,068)
Common shares, basic 20,157 21,072
Dilutive effect of stock options 538 --
------- -------
Common shares, diluted 20,695 21,072
======= =======
</TABLE>
Dilutive effect of stock options of 248 shares were not included in computing
diluted earnings (loss) per share for the thirteen weeks ended May 2, 1998
because the effect would have been antidilutive.
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 2, 1998, the Company operated 458
stores, including 394 superstores, in 33 states and the District of Columbia.
At May 3, 1997, the Company operated 420 stores, of which 354 were superstores.
As a result of the Company's plan to open approximately 40 superstores this
year, including conversions of existing traditional stores into superstore
formats and excluding acquisitions, 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. As the Company proceeds with the conversion of acquired stores to the
PETCO format, the Company anticipates this conversion process will impact sales
and operating expense relationships with adverse effects early in the process
followed by benefits to such relationships as converted stores become supported
by full marketing efforts. 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
<PAGE> 8
quarter may adversely impact its quarterly results of operations for that
quarter.
In August 1997, the Company acquired a retailer that operated four pet food and
supply stores under the tradename Super Pets located in Southern California. In
October 1997, the Company acquired a retailer that operated nine pet food and
supply stores under the tradename Paws located in Pennsylvania and New Jersey, a
retailer that operated five pet food and supply stores under the tradename The
PetCare Company located in Southern California, and a retailer that operated
four pet food and supply stores under the tradename Pet Food Savemart located in
Kansas and Missouri. These acquisitions were accounted for as immaterial
poolings of interests with their financial positions and results of operations
included in the accompanying consolidated financial statements from the
beginning of the period in which each pooling was completed.
In November 1997, the Company acquired a retailer that operated eighty-two
stores under the tradename PetCare located in ten midwestern and southern
states. This transaction was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements for the prior periods
presented have been restated to include the accounts of PetCare.
Results of Operations
First Quarter 1998 Compared to First Quarter 1997
Net sales increased 15% to $196.3 million for the thirteen weeks ended May 2,
1998 ("first quarter 1998") from $170.9 million for the thirteen weeks ended May
3, 1997 ("first quarter 1997"). The increase in net sales in first quarter 1998
resulted primarily from the addition of 50 superstores, including the conversion
of eight traditional stores into superstores, the acquisition of seven
traditional stores, the closing of 11 stores, and a comparable store net sales
increase of 5.7%. The comparable store net sales increase was attributable to
maturing superstores, increased advertising, and merchandising efforts in
existing stores. The net increase in the Company's store base accounted for
approximately $17.3 million, or 68% of the net sales increase, and $8.1 million,
or 32% 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 $5.3 million to $46.7 million in first quarter 1998 from $41.4 million
in first quarter 1997. As a percentage of sales, gross profit decreased to 23.8%
in first quarter 1998 from 24.2% in first quarter 1997. This decrease reflects
lower gross margins generated from sales in the stores acquired in the last half
of fiscal 1997, which are undergoing conversions to PETCO's assortment and
selling through non-continuing inventory at reduced gross margins and increased
distribution costs associated with increased throughput through the expanded
distribution center network.
Selling, general and administrative expenses increased $1.9 million to $40.6
million in first quarter 1998 from $38.7 million in first quarter 1997. 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 decreased to 20.7% in first quarter
1998 from 22.6% in first quarter 1997 primarily due to net sales increasing at a
<PAGE> 9
greater rate than related expenses and the reduction of these expenses in
certain acquired stores.
Merger and business integration costs of $6.4 million were recorded in first
quarter 1998 in connection with the conversion activities of the stores acquired
in the last half of fiscal 1997. There were no merger and business integration
costs recorded in first quarter 1997.
Operating loss in first quarter 1998 was $0.3 million compared to an operating
income of $2.7 million in first quarter 1997. Excluding merger and business
integration costs, the Company would have reported operating income of 3.1% of
net sales in first quarter 1998 and 1.6% of net sales in first quarter 1997.
Net interest expense was $1.1 million for first quarter 1998 compared to net
interest expense of $0.5 million for first quarter 1997. Increased borrowings in
first quarter 1998 led to the increase in interest expense.
Income tax benefit was $0.4 million in first quarter 1998, compared to income
taxes of $0.9 million in first quarter 1997. Income tax benefit reflects the
Federal and state tax benefits of the loss before income taxes, net of the
effect of non-deductible expenses.
Net loss was $1.1 million for first quarter 1998 compared with a net income of
$1.3 million for first quarter 1997. Excluding merger and business integration
costs and related tax benefits, net earnings for first quarter 1998 would have
been $3.0 million, or $0.14 per diluted share, compared to $1.3 million, or
$0.06 per diluted share in first quarter 1997.
Year 2000 Issues
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. In 1997, the Company
developed a plan to deal with the Year 2000 problem to assure that its systems
are Year 2000 compliant. In general, the Company expects to resolve Year 2000
issues through planned replacements or upgrades. The Company does not expect
that the cost of its Year 2000 compliance program will be material to its
business, results of operations, or financial condition. Although the impact on
the Company caused by the failure of the Company's significant suppliers to
achieve Year 2000 compliance in a timely or effective manner is uncertain, the
Company's business and results of operations could be materially adversely
affected by such failure.
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 2,
1998, total assets were $339.6 million, $122.0 million of which were current
assets. Net cash used in operating activities was $2.7 million for first
quarter 1998 and $8.6 million for first quarter 1997. 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.
<PAGE> 10
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. Cash used in investing
activities was $12.8 million for first quarter 1998 and $18.4 million for first
quarter 1997.
The Company also finances some of its purchases of equipment and fixtures
through capital lease and other obligations. Purchases of $0.4 million of fixed
assets were financed in this manner during first quarter 1997. The Company
believes additional sources of capital lease and other obligation 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 conversion of traditional stores into
superstores. Cash flows provided by financing activities were $15.0 million in
first quarter 1998 and $2.7 million in first quarter 1997. Cash flows from
financing activities were used to finance the acquisition of related businesses
and fund the Company's expansion program and working capital requirements.
The Company has a credit facility with a syndicate of banks with a commitment of
up to $110.0 million that expires January 30, 2003. The credit facility
provides for $80.0 million in revolving loans and a $30.0 million term loan.
Borrowings under the credit facility are unsecured and bear interest, at the
Company's option, at the agent bank's corporate base rate or LIBOR plus 0.50% to
1.50%, based on the Company's leverage ratio at the time. The credit agreement
contains certain affirmative and negative covenants related to indebtedness,
interest and fixed charges coverage, and consolidated net worth. As of May 2,
1998, the Company had $62.5 million of revolving loans available under the
credit facility.
As of January 31, 1998, the Company had available net operating loss
carryforwards of $39.2 million for federal income tax purposes, which begin
expiring in 2004, and $36.4 million for state income tax purposes, which begin
expiring in 1998.
The Company anticipates that funds generated by operations, funds available
under the credit facility and currently available vendor financing and capital
lease and other obligation financing will be sufficient to finance its continued
operations and planned store openings at least through the next twelve months.
<PAGE> 11
Certain Cautionary Statements
Certain statements in this Quarterly Report on Form 10 - Q, including, but not
limited to, Item 2 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
Section 21E of the Securities Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, that are not historical facts but
rather reflect current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely,"
"will," and similar expressions identify such forward-looking statements. These
forward-looking statements are subject to risks, uncertainties, and other
factors, some of which are beyond the Company's control, that could cause actual
results to differ materially from those forecast or anticipated in such forward-
looking statements. These factors include, but are not limited to, the
Company's expansion plans, the integration of operations as a result of
acquisitions, reliance on vendors and product lines and exclusive distribution
arrangements, competition, performance of new superstores and their future
operating results, quarterly and seasonal fluctuations, dependence on senior
management, and possible volatility of stock price. These factors are discussed
in greater detail under the caption "Certain Cautionary Statements" in PETCO's
Annual Report on Form 10-K for the year ended January 31, 1998.
<PAGE> 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Part II. Other Information
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 2, 1998.
<PAGE> 13
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 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-30-1999
<PERIOD-END> MAY-3-1997 MAY-2-1998
<CASH> 20,057 2,904
<SECURITIES> 0 0
<RECEIVABLES> 9,807 12,245
<ALLOWANCES> 0 0
<INVENTORY> 91,289 92,818
<CURRENT-ASSETS> 123,692 121,995
<PP&E> 117,190 153,946
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 304,495 339,251
<CURRENT-LIABILITIES> 76,221 81,207
<BONDS> 0 0
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 197,898 185,118
<TOTAL-LIABILITY-AND-EQUITY> 304,495 339,251
<SALES> 170,908 196,296
<TOTAL-REVENUES> 170,908 196,296
<CGS> 129,507 149,620
<TOTAL-COSTS> 129,507 149,620
<OTHER-EXPENSES> 38,697 47,014
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 522 1,122
<INCOME-PRETAX> 2,182 (1,460)
<INCOME-TAX> 884 (392)
<INCOME-CONTINUING> 1,298 (1,068)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,298 (1,068)
<EPS-PRIMARY> 0.06 (0.05)
<EPS-DILUTED> 0.06 (0.05)
</TABLE>
