UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
--------- ------
Commission file number
0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1100630
State or other jurisdiction of (I.R.S. Employer Identification
ncorporation or organization) Number)
3375 Mitchell Lane
Boulder, Colorado 80301-2244
(Address of principal executive offices, including zip code)
(303) 440-5220
(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 ( )
As of August 11, 2000, there were 23,120,936 shares outstanding of the
Registrant's Common Stock (par value $0.001 per share).
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TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheet
July 1, 2000 (Unaudited) and January 1, 2000 3
Consolidated Statement of Operations and Comprehensive Income (Unaudited)
Three and Six Months Ended July 1, 2000 and July 3, 1999 4
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended July 1, 2000 and July 3, 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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WILD OATS MARKETS, INC.
Consolidated Balance Sheet
(in thousands, except share data)
July 1, January 1,
2000 2000
(Unaudited)
----------------- -----------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 13,160 $ 21,877
Accounts receivable (less allowance 2,804 2,159
for doubtful accounts of $232 and
$259, respectively)
Inventories 56,072 51,412
Income tax receivable 333 520
Prepaid expenses and other current assets 1,925 2,424
Deferred income taxes 1,750 1,775
---------- --------
Total current assets 76,044 80,167
Property and equipment, net 170,125 156,156
Long-term equity investment 228 1,500
Intangible assets, net 117,929 108,734
Deposits and other assets 3,887 4,072
Deferred income taxes 4,877
---------- --------
$373,090 $350,629
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 48,080 $ 48,048
Accrued liabilities 34,847 30,381
Current portion of debt and capital leases 37,415 22,709
---------- --------
Total current liabilities 120,342 101,138
Long-term debt and capital leases 87,798 80,328
Deferred income taxes 1,185
Other long-term obligations 1,908 2,591
---------- --------
210,048 185,242
---------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000
shares authorized; no shares issued and
outstanding
Common stock, $0.001 par value; 60,000,000
shares authorized; 23,068,797 and 22,992,437
shares issued and outstanding 23 23
Additional paid-in capital 149,477 148,307
Retained earnings 13,211 16,656
Accumulated other comprehensive income 331 401
---------- --------
Total stockholders' equity 163,042 165,387
---------- --------
$ 373,090 $ 350,629
========== ===========
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The accompanying notes are an integral part of the consolidated
financial statements.
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WILD OATS MARKETS, INC.
Consolidated Statement of Operations and Comprehensive Income
(in thousands, except per-share data)
(Unaudited)
Three Months Ended Six Months Ended
July 1, 2000 July 3, 1999(1) July 1, 2000 July 3, 1999(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 212,772 $ 173,207 $ 424,013 $ 332,850
Cost of goods sold and occupancy costs 146,433 120,402 291,150 231,693
----------- ------------ ----------- ------------
Gross profit 66,339 52,805 132,863 101,157
Operating expenses:
Direct store expenses 47,652 36,974 94,198 70,970
Selling, general and admin expenses 8,352 6,846 16,197 12,986
Pre-opening expenses 544 938 1,898 1,612
Restructuring charges 22,701 _________ 22,701 10,894
----------- ------------ ----------- ------------
Income (loss) from operations (12,910) 8,047 (2,131) 4,695
Interest expense, net 1,975 708 3,757 958
----------- ------------ ----------- ------------
Income (loss) before income taxes (14,885) 7,339 (5,888) 3,737
Income tax expense (benefit) (6,105) 2,743 (2,442) 298
----------- ------------ ----------- ------------
Net income (loss) before cumulative
effect of change in accounting principle (8,780) 4,596 (3,446) 3,439
Cumulative effect of change in accounting
principle, net of tax 281
----------- ------------ ----------- ------------
Net income (loss) (8,780) 4,596 (3,446) 3,158
----------- ------------ ----------- ------------
Other comprehensive income (loss):
foreign currency translation
adjustment, net 106 260 (67) 424
----------- ------------ ----------- ------------
Comprehensive income (loss) $ (8,674) $ 4,856 $ (3,513) $ 3,582
=========== ============ ============== ===========
Basic net income (loss) per common share:
net income (loss) before cumulative
effect of change in accounting principle $ (0.38) $ 0.20 $ (0.15) $ 0.15
Cumulative effect of change in accounting
principle, net of tax _________ _________ _________ (.01)
----------- ------------ ----------- ------------
Net income (loss) $ (0.38) $ 0.20 $ (0.15) $ 0.14
=========== ============ ============== ===========
Diluted net income (loss) per common share:
net income (loss) before cumulative
effect of change in accounting principle $ (0.38) $ 0.20 $ (0.15) $ 0.15
Cumulative effect of change in accounting
principle, net of tax _________ _________ _________ (.01)
----------- ------------ ----------- ------------
Net income (loss) $ (0.38) $ 0.20 $ (0.15)$ 0.14
=========== ============ ============== ===========
Average common shares outstanding 23,044 22,765 23,022 22,696
Dilutive effect of stock options _________ 590 _________ 556
----------- ------------ ----------- ------------
Average common shares outstanding,
assuming dilution 23,044 23,355 23,022 23,252
=========== ============ ============== ===========
</TABLE>
(1) Restated for poolings of interests.
The accompanying notes are an integral part of the consolidated
financial statements.
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WILD OATS MARKETS, INC.
Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended
-----------------------------------
July 1, 2000 July 3, 1999 (1)
------------ ----------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income (loss) $ (3,446) $ 3,158
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 12,418 8,967
Restructuring charges 22,701 10,894
Deferred tax benefit (6,152) (1,468)
Change in assets and liabilities (net of acquisitions):
Inventories (4,010) (3,887)
Receivables and other assets (600) 356
Accounts payable 57 9,109
Accrued liabilities (567) 2,406
---------------- --------------
Net cash provided by operating activities 20,401 29,535
---------------- --------------
Cash Flows from Investing Activities
Capital expenditures (34,704) (32,315)
Payment for purchase of acquired entities, net of cash acquired (16,791) (64,996)
Long-term equity investment (38) _________
---------------- --------------
Net cash used by investing activities (51,533) (97,311)
--------------- --------------
Cash Flows from Financing Activities
Net borrowings under line-of-credit agreement 22,060 75,500
Proceeds from notes payable and long-term debt 364
Repayments on notes payable, long-term debt & capital leases (341) (4,261)
Proceeds from issuance of common stock, net 542 1,132
Distributions to stockholders of pooled businesses _________ (1,858)
---------------- --------------
Net cash provided by financing activities 22,261 70,877
-------------- -------------
Effect of exchange rate changes on cash 154 309
---------------- --------------
Net increase (decrease) in cash and cash equivalents (8,717) 3,410
Cash and cash equivalents at beginning of period 21,877 11,389
-------------- --------------
Cash and cash equivalents at end of period $ 13,160 $ 14,799
============= =============
Non-Cash Investing and Financing Activities
Stock received in exchange for services $ 750
==============
Non-cash adjustment to purchase price for Nature's acquisition $ 2,090
=============
</TABLE>
(1) Restated for poolings of interests.
The accompanying notes are an integral part of the consolidated
financial statements.
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WILD OATS MARKETS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The consolidated balance sheet as of July 1, 2000, the consolidated
statement of operations for the three and six months ended July 1, 2000
and July 3, 1999, as well as the consolidated statement of cash flows
for the six months ended July 1, 2000 and July 3, 1999 have been
prepared without an audit. In the opinion of management, all
adjustments, consisting only of normal, recurring adjustments necessary
for a fair presentation thereof, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with financial statements and notes thereto included in the Company's
1999 Annual Report to Stockholders. The results of operations for
interim periods presented are not necessarily indicative of the
operating results for the full year.
2. New Accounting Pronouncements
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of
Start-Up Activities. SOP 98-5 provides guidance on how entities should
account for pre-opening costs, pre-operating costs, organization costs
and start-up costs. SOP 98-5 requires that the costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998, and the initial application
should be reported as a cumulative effect of a change in accounting
principle. The Company adopted SOP 98-5 in fiscal 1999 and recorded
approximately $281,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of 1999. The Company
expects SOP 98-5 to have no material effect on its ongoing results of
operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either
an asset or liability measured at its fair value. FAS No. 133 also
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued FAS No. 137 which defers the
effective date of FAS No. 133 to fiscal years beginning after June 15,
2000. The Company will adopt FAS No. 137 in the first quarter of fiscal
2001, but does not expect such adoption to materially affect financial
statement presentation.
3. Business Combination
In May 2000, the Company acquired the operations of two existing
natural foods supermarkets in Escondido and Hemet, California. The
purchase price for this acquisition aggregated $13.7 million in cash.
The acquisition was accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $12.7
million was allocated to goodwill, which is being amortized on a
straight-line basis over 40 years.
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4. Earnings Per Share
Earnings per share are calculated in accordance with the provisions of
FAS No. 128, Earnings Per Share. FAS No. 128 requires the Company to
report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted-average number of
common shares outstanding and all dilutive potential common shares
outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period). Antidilutive stock options of
1,567,567 and 74,859 for the six months ended July 1, 2000 and July 3,
1999, respectively, were not included in the earnings per share
calculations.
5. Restructuring Charges
During the three months ended July 1, 2000, the Company's management
made certain decisions relating to the strategic repositioning of the
Company's operations which resulted in a pretax restructuring charge of
$22.7 million. These decisions included (1) the closure of three stores
during the second quarter of 2000 ($4.7 million); (2) the planned sale
or closure of seven stores during the remainder of 2000 ($9.9 million);
(3) exit costs of previously closed or abandoned sites ($5.6 million);
and (4) the discontinuation of e-commerce activities ($2.5 million).
Components of the restructuring charge consist primarily of abandonment
of fixed and intangible assets ($15.3 million); non-cancelable lease
obligations into the year 2003 ($5.3 million); and write-down of the
Company's long-term equity investment in an e-commerce business partner
due to asset impairment ($2.1 million). Substantially all of the
restructuring charges are non-cash expenses. In conjunction with the
restructuring charge, the Company recorded a liability of $4.9 million
of which $4.4 million remained as of July 1, 2000.
6. Subsequent Events
Subsequent to July 1, 2000, and as part of the Company's strategic
repositioning, the Company sold three stores for approximately $2.0
million in cash.
Also subsequent to July 1, 2000, the Company renewed and extended its
credit facility from $120.0 million to $147.5 million. The facility may
be further increased to $170.0 million, assuming available bank
commitments. The facility, as increased and amended, consists of two
separate lines of credit, one as a revolving line of $104.2 million and
the remainder as a term loan, each with a three-year term expiring in
2003. The revolving line bears interest, at the Company's option, at
prime rate or LIBOR plus 1.4%. The term loan bears interest at a rate
determined by the type of interest rate protection instrument the
Company purchases. The line of credit agreement includes certain
financial and other covenants, as well as restrictions on payments of
dividends. As of August 7, 2000, there were $73.4 million in borrowings
outstanding under the revolving facility and $43.3 million in
borrowings outstanding under the term loan.
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
This report on Form 10-Q contains certain forward-looking statements
regarding our future results of operations and performance. Important factors
that could cause differences in results of operations include, but are not
limited to, the availability and integration of acquisitions, the timing and
execution of new store openings, relocations, remodels, sales and closures, the
timing and impact of promotional and advertising campaigns, the impact of
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competition, changes in product supply, changes in management information needs,
changes in customer needs and expectations, governmental and regulatory actions,
and general industry or business trends or events, changes in economic or
business conditions in general or affecting the natural foods industry in
particular, and competition for and the availability of sites for new stores and
potential acquisition candidates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cautionary Statement Regarding
Forward-Looking Statements."
Overview
Store openings, closings, remodels, relocations and acquisitions. In the
second quarter of 2000, we opened one new store in San Diego, California,
acquired two operating stores in Hemet and Escondido, California, relocated one
store in Las Vegas, Nevada, and closed three stores, one each in Denver,
Colorado; Memphis, Tennessee; and Dallas, Texas. To date in the third quarter of
2000, we have opened two new stores in Cincinnati, Ohio and Portland, Oregon and
sold the operations of three stores in West Hollywood, California; Norwalk,
Connecticut; and Santa Fe, New Mexico. We plan to open, acquire or relocate as
many as five stores in the remainder of 2000. We are actively looking for other
acquisition opportunities and may complete additional acquisitions in 2000.
As has been our past practice, we will continue to evaluate the
profitability, strategic positioning, impact of potential competition on and
sales growth potential of all of our stores on an ongoing basis. We may, from
time to time, make decisions regarding closures, disposals, relocations or
remodels in accordance with such evaluations. As a result of such evaluations,
in the second quarter of 2000 we closed three stores. To date in the third
quarter of 2000, we have sold three stores to a third party, and we are
considering the sale or closure of as many as four more stores.
In the second quarter of 2000, the Company undertook an assessment of its
inventory of operating and vacant properties as part of a strategic
repositioning of the Company. We made certain decisions related to the strategic
repositioning of our operations which resulted in a pretax restructuring charge
of $22.7 million. These decisions included (1) the closure of three stores
during the second quarter of 2000 ($4.7 million); (2) the planned sale or
closure of seven stores during the remainder of 2000 ($9.9 million); (3) exit
costs of previously closed or abandoned sites ($5.6 million); and (4) the
discontinuation of e-commerce activities ($2.5 million). Components of the
restructuring charge consist primarily of abandonment of fixed and intangible
assets ($15.3 million); non-cancelable lease obligations into the year 2003
($5.3 million); and write-down of the Company's long-term equity investment in
an e-commerce business partner due to asset impairment ($2.1 million).
Substantially all of the restructuring charges are non-cash expenses. In
conjunction with the restructuring charge, the Company recorded a liability of
$4.9 million of which $4.4 million remained as of July 1, 2000.
Our results of operations have been and will continue to be affected by,
among other things, the number, timing and mix of store openings, acquisitions,
relocations or closings. New stores build their sales volumes and refine their
merchandise selection gradually and, as a result, generally have lower gross
margins and higher operating expenses as a percentage of sales than more mature
stores. We anticipate that the new stores opened in 2000 will experience
operating losses for the first six to 12 months of operation, in accordance with
historical trends. Further, acquired stores, while generally profitable as of
the acquisition date, generate lower gross margins and store contribution
margins than our company average due in part to their substantially lower volume
purchasing discounts and due in part to a merchandise mix that may favor lower
gross margin categories. Over time, typically six months, as we sell through the
acquired inventories and are able to realize our volume purchase discounts, we
expect that the gross margin and store contribution margin of the acquired
stores will improve, in some cases approaching our Company average. Other
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factors that could cause acquired stores to perform at lower than expected
levels include, among other things, turnover of regional and store management,
disruption of advertising, changes in product mix and delays in the integration
of purchasing programs. Given our current high concentration of acquired stores,
including the Nature's, Wild Harvest, and Sun Harvest stores acquired in 1999,
the Company is experiencing certain integration difficulties with some acquired
stores that are having some negative impact on our consolidated results of
operations. We expect that these stores will take longer than our average six
months to show gross margin and store contribution margin improvements.
We are actively upgrading, remodeling or relocating some of our older
stores. We remodeled 10 of our older stores during the first six months of 2000
and plan to remodel or remerchandise as many as 20 of our older stores in the
remainder of 2000 with some remodels extending into 2001. Remodels and
relocations typically cause short-term disruption in sales volume and related
increases in certain expenses as a percentage of sales, such as payroll.
Remodels on average take between 90 and 120 days to complete. We cannot predict
whether sales disruptions and the related impact on earnings may be greater in
time or volume than projected in certain remodeled or relocated stores.
Comparable store sales results. Sales of a store are deemed to be
comparable commencing in the thirteenth full month of operations for new,
relocated and acquired stores. A variety of factors affect our comparable store
sales results, including, among others:
o the opening of stores by us or by our competitors in markets where we have
existing stores o the relative proportion of new or relocated stores to mature
stores o the timing of advertising and promotional events o store remodels o our
ability to execute our operating plans effectively o changes in consumer
preferences for natural foods products o general economic conditions.
Past increases in comparable store sales may not be indicative of future
performance.
Our comparable store sales results have been negatively affected in the
past by, among other factors, planned cannibalization, which is the loss of
sales at an existing store when we open a new store nearby, resulting from the
implementation of our store clustering strategy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Store format and
clustering strategy." We expect that comparable store sales results will
continue to be negatively affected in 2000 by planned cannibalization due to the
opening of new or relocated stores in several of our existing markets,
including, among others, Phoenix, Arizona; San Diego, California; Kansas City
and St. Louis, Missouri; Portland, Oregon; Albuquerque, New Mexico; and Salt
Lake City, Utah. For certain stores opened in the second half of 1999 and the
first half of 2000, we have experienced a higher degree of cannibalization than
in the past in markets where we expected higher demand for additional stores. As
a result of this higher degree of cannibalization, as well as reduced levels of
marketing, increased competition in some regions and other factors, comparable
store sales decreased 2% in the first half of 2000. We expect comparable store
sales percentage results to continue at this slightly negative level for the
remainder of 2000. There can be no assurance that comparable store sales for any
particular period will not decrease in the future.
Store format and clustering strategy. We operate two store formats:
supermarket and urban. The supermarket format is generally 15,000 to 35,000
gross square feet, and typically generates higher sales and store contribution
than the urban format stores, which are generally 8,000 to 15,000 gross square
feet. Our profitability has been and will continue to be affected by the mix of
supermarket and urban format stores opened, acquired or relocated and whether
stores are being opened in markets where we have an existing presence. We expect
to focus primarily on opening, acquiring or relocating supermarket format stores
in the future but will consider additional urban stores when appropriate
opportunities arise. In addition, we have pursued a strategy of clustering
stores in each of our markets to increase overall sales, reduce operating costs
and increase customer awareness. In the past, when we have opened a store in a
market where we have an existing presence, our sales and operating results have
declined at certain of our existing stores in that market. However, over time,
we believe the affected stores generally will achieve store contribution margins
comparable to prior levels on the lower base of sales. Certain new stores opened
in 1999 and in the first half of 2000 have caused a greater degree of
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cannibalization than previously expected, and we are unable to determine at this
time whether store contribution margins at the older, affected stores in these
regions will rebound to their prior levels. In the remainder of 2000 we expect
to cluster several more stores in certain existing markets and expect the sales
and operating results trends for other stores in an expanded market to continue
to experience temporary declines related to the clustering of stores. We are
currently reevaluating our clustering strategy in response to greater than
expected sales cannibalization in certain existing markets where we have
recently opened new stores.
We are currently considering certain revisions to our store format and
design, including, among other things, expanding the average size of our
suburban format stores to an average of 28,000 to 30,000 square feet, expanding
our selections of gourmet and crossover products, housewares, gift items, beer
and wine, bakery and floral and redesigning store layouts and signage. We are
also considering expanding the Henry's Marketplace(R) farmers' market-style
store format as a second, parallel store format. We believe this format, which
is currently concentrated in the metropolitan San Diego, California area,
appeals to a more value-conscious customer.
Pre-opening expenses. Pre-opening expenses include labor, rent, utilities,
supplies and certain other costs incurred prior to a store's opening.
Pre-opening expenses have averaged approximately $250,000 to $350,000 per store
historically, although the amount per store may vary depending on the store
format and whether the store is the first to be opened in a market, or is part
of a cluster of stores in that market.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Accounting for Costs of Start-Up Activities.
Statement of Position 98-5 requires that pre-opening costs be expensed as
incurred. Statement of Position 98-5 is effective for fiscal years beginning
after December 15, 1998, and the initial application should be reported as a
cumulative effect of a change in accounting principle. We adopted Statement of
Position 98-5 in fiscal 1999 and recorded approximately $281,000 as a cumulative
effect of a change in accounting principle, net of taxes, during the first
quarter of 1999.
Results of Operations
The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
<TABLE><CAPTION>
Three Months Ended Six Months Ended
----------------------------- ---------------------------
July 1, 2000 July 3, 1999 July 1, 2000 July 3, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 68.8 69.5 68.7 69.6
---------- ---------- ---------- ----------
Gross margin 31.2 30.5 31.3 30.4
Direct store expenses 22.4 21.4 22.2 21.3
Selling, general and administrative expenses 3.9 4.0 3.8 3.9
Pre-opening expenses 0.3 0.5 0.4 0.5
Restructuring charges 10.7 5.4 3.3
---------- ---------- ---------- ----------
Income (loss) from operations (6.1) 4.6 (0.5) 1.4
Interest expense, net 0.9 0.4 0.9 0.3
---------- ---------- ---------- ----------
Income (loss) before income taxes (7.0) 4.2 (1.4) 1.1
Income tax expense (benefit) (2.9) 1.6 (0.6) 0.1
----------- ---------- ----------- ----------
Net income (loss) before cumulative effect
of change in accounting principles (4.1) 2.6 (0.8) 1.0
Cumulative effect of change in accounting
principle, net of taxes 0.1
---------- ---------- ---------- ----------
Net income (loss) (4.1)% 2.6% (0.8)% 0.9%
=========== ========== =========== ==========
</TABLE>
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Sales Sales for the three months ended July 1, 2000, increased 22.8% to $212.8
million from $173.2 million for the same period in 1999. Sales for the six
months ended July 1, 2000 increased 27.4% to $424.0 million from $332.9 million
for the same period in 1999. The increase was primarily due to the opening of
five new stores, acquisition of two stores, and relocation of three stores in
the first six months of 2000, as well as the inclusion of 17 acquired stores,
eight stores opened, and five stores relocated in 1999. Comparable store sales
decreased 2% for the second quarter of 2000, as compared to an 8% increase for
the same period in 1999, as a result of many factors, including higher than
expected cannibalization of sales by new stores in several regions due to the
implementation of our clustering strategy, reduced levels of marketing and, in
certain regions, increased competition. See Management's Discussion and Analysis
of Financial Condition and Results of Operations - Comparable Store Sales
Results.
Gross Profit Gross profit for the three months ended July 1, 2000, increased
25.6% to $66.3 million from $52.8 million for the same period in 1999. Gross
profit for the six months ended July 1, 2000 increased 31.3% to $132.9 million
from $101.2 million for the same period in 1999. The increase in gross profit is
primarily attributable to the increase in number of stores operated by the
Company. As a percentage of sales, gross profit for the second quarter of 2000
increased to 31.2% from 30.5% in the same period in 1999. Gross profit as a
percentage of sales for the six months ended July 1, 2000 increased to 31.3%
from 30.4% for the same period in 1999. The increase is attributed to the
maturation of the Company's store base and the Company's increasing volume
purchase discounts, as well as implementation of loss prevention policies.
Direct Store Expenses Direct store expenses for the three months ended July 1,
2000, increased 28.9% to $47.7 million from $37.0 million for the same period in
1999. Direct store expenses for the six months ended July 1, 2000 increased
32.7% to $94.2 million from $71.0 million for the same period in 1999. The
increase in direct store expenses is attributable to the increase in the number
of stores operated by the Company. As a percentage of sales, direct store
expenses increased to 22.4% in the second quarter of 2000 from 21.4% for the
same period in 1999. As a percentage of sales, direct store expenses for the six
months ended July 1, 2000 increased to 22.2% from 21.3% for the same period in
1999. The increase is attributed to the increased number of acquired and
newly-opened stores in late 1999, as well as significant investments that the
Company has made in employee benefit programs, particularly expanded health
insurance offerings.
Selling, General and Administrative Expenses Selling, general and administrative
expenses for the three months ended July 1, 2000, increased 22.0% to $8.4
million from $6.8 million for the same period in 1999. Selling, general and
administrative expenses for the six months ended July 1, 2000 increased 24.7% to
$16.2 million from $13.0 million for the same period in 1999. The increase in
selling, general and administrative expenses is primarily the result of
additions to the Company's corporate and regional staffs to support the
Company's growth. As a percentage of sales, selling, general and administrative
expenses decreased to 3.9% from 4.0% for the same period in 1999. As a
percentage of sales, selling, general and administrative expenses for the six
months ended July 1, 2000 decreased to 3.8% from 3.9% for the same period in
1999. The decrease is primarily attributed to modest leverage of such expenses
on a higher sales volume.
Pre-Opening Expenses Pre-opening expenses for the three months ended July 1,
2000, decreased 42.0% to $544,000 from $938,000 for the same period in 1999.
Pre-opening expenses for the six months ended July 1, 2000 increased 17.7% to
$1.9 million from $1.6 million for the same period in 1999. As a percentage of
sales, pre-opening expenses for the three months ended July 1, 2000 decreased to
0.3% from 0.5% for the same period in 1999. As a percentage of sales,
pre-opening expenses for the six months ended July 1, 2000 decreased to 0.4%
from 0.5% for the same period in 1999. The changes in pre-opening costs are the
result of the opening of five new stores and relocation of three stores in the
first six months of 2000, all in the second quarter, as compared to two new
stores and five relocations for the same period in 1999, with the two new stores
and three of the relocations being in the second quarter.
Restructuring Charges During the three months ended July 1, 2000, the Company's
management made certain decisions relating to the strategic repositioning of the
Company's operations which resulted in a pre-tax restructuring charge of $22.7
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million. These decisions included (1) the closure of three stores during the
second quarter of 2000 ($4.7 million); (2) the planned sale or closure of seven
stores during the remainder of 2000 ($9.9 million); (3) exit costs of previously
closed or abandoned sites ($5.6 million); and (4) the discontinuation of
e-commerce activities ($2.5 million). Components of the restructuring charge
consist primarily of abandonment of fixed and intangible assets ($15.3 million);
non-cancelable lease obligations into the year 2003 ($5.3 million); and
write-down of the Company's long-term equity investment in an e-commerce
business partner due to asset impairment ($2.1 million). Substantially all of
the restructuring charges are non-cash expenses. In conjunction with the
restructuring charge, the Company recorded a liability of $4.9 million of which
$4.4 million remained as of July 1, 2000. During the three months ended July 3,
1999, the Company's management made certain decisions relating to the Company's
operations and selected store closures, which resulted in approximately $10.9
million of restructuring expenses being recorded in the three months ended April
3, 1999. These decisions included (1) a change in the Company's strategic
direction with respect to its two "Farm to Market" stores located in Buffalo
Grove, Illinois, and Tempe, Arizona ($4.5 million), and (2) a decision by the
Company's management to allocate corporate resources to servicing new and
existing stores, rather than closed sites ($6.4 million). Components of the
restructuring charge incurred in 1999 consisted primarily of non-cancelable
lease obligations through the year 2000 ($1.2 million) and abandonment of fixed
and intangible assets ($9.7 million). See "Notes to Consolidated Financial
Statements - Note 4 - Subsequent Events" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Store openings,
closings, remodels, relocations and acquisitions."
Interest Expense, Net Net interest expense for the three months ended July 1,
2000, increased 179.0% to $2.0 million, from $708,000 for the same period in
1999. Net interest expense for the six months ended July 1, 2000 increased
292.2% to $3.8 million from $958,000 for the same period in 1999. As a
percentage of sales, net interest expense for the second three months ended July
1, 2000 increased to 0.9 % from 0.4% for the same period in 1999. As a
percentage of sales, net interest expense for the six months ended July 1, 2000
increased to 0.9% from 0.3% for the same period in 1999. The increase is
primarily attributable to increased borrowings on our line of credit to fund
acquisitions, new stores, relocations and remodels.
Liquidity and Capital Resources
Our primary sources of capital have been cash flow from operations, trade
payables, bank indebtedness, and the sale of equity securities. Primary uses of
cash have been the financing of new store development, new store openings,
relocations, remodels, and acquisitions.
Net cash provided by operating activities was $20.4 million during the
first six months of 2000 as compared to $29.5 million during the same period in
1999. Cash provided by operating activities decreased during this period
primarily due to decreases in accounts payable. We have not required significant
external financing to support inventory requirements at our existing and new
stores because we have been able to rely on vendor financing for most of the
inventory costs, and we anticipate that vendor financing will continue to be
available for the new store openings.
Net cash used by investing activities was $51.5 million during the first
six months of 2000 as compared to $97.3 million during the same period in 1999.
The decrease is due to the acquisition of 13 stores in the first half of 1999,
as compared to the acquisition of two stores in the first half of 2000,
partially offset by increased expenditures in the second quarter of 2000 for new
store construction and remodels.
Net cash provided by financing activities was $22.3 million during the
first six months of 2000 as compared to $70.9 million during the same period in
1999. The decrease reflects reduced borrowings under our revolving line of
credit to fund fewer store acquisitions during the first six months of 2000.
In the second quarter of 2000 we had a $120.0 million revolving credit
facility. The facility had two separate lines of credit, one in the amount of
$90.0 million with a three-year term expiring in 2002 and the other in the
amount of $30.0 million with a one-year term, expiring in August 2000. Both bore
interest, at our option, at the prime rate or LIBOR plus 1.15%. As of July 1,
2000, there were $87.3 million in borrowings outstanding under the $90.0 million
line of this facility and $30.0 million in borrowings outstanding under the
$30.0 million line. In the third quarter of 2000, we renewed and increased the
existing credit facility to $147.5 million, which may be further increased at
our request to $170.0 million, assuming available bank commitments. The facility
as increased and amended has two separate lines of credit, a revolving line for
$104.2 million and the remainder in a term loan facility, each with a three-year
term expiring in 2003. The revolving line bears interest, at our option, at
prime rate or LIBOR plus 1.4%. The term loan bears interest at a rate determined
by the type of interest rate protection instrument that the Company purchases.
The line of credit agreement includes certain financial and other covenants, as
well as restrictions on payments of dividends. As of August 7, 2000, there were
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$73.4 million in borrowings outstanding under the revolving facility and $43.3
million in borrowings outstanding under the term loan.
We spent approximately $34.7 million during the first six months of 2000
for new store construction, development, remodels and maintenance capital
expenditures, exclusive of acquisitions, and anticipate that we will spend $60
to $65 million in 2000 for new store construction, equipment, leasehold
improvements, remodels and maintenance capital expenditures and relocations of
existing stores, exclusive of acquisitions. Our average capital expenditures to
open a leased store, including leasehold improvements, equipment and fixtures,
have ranged from approximately $2.0 million to $3.0 million historically,
excluding inventory costs and initial operating losses. We anticipate that our
average capital expenditures will be $2.5 to $3.5 million in the future, partly
because of increases in the size of new stores and partly because our new store
prototype requires more expensive fixturing. Several stores previously projected
to open in 2000 have been delayed to periods in 2000 later than originally
planned or into 2001 because of delays in landlord turnover of sites and receipt
of permits. Delays in opening new stores may result in increased capital
expenditures and increased pre-opening costs for the site, as well as lower than
planned sales for the Company.
We have an inventory of closed stores with non-cancelable leases for which
we are actively pursuing subtenants. There could be a negative impact on future
cash flows if we are unable to offset the lease costs of these closed stores. We
also own one vacant parcel of property acquired as part of the acquisition of
the outstanding stock of Nature's Fresh Northwest in the second quarter of 1999,
and an office building acquired in the fourth quarter of 1999 as part of the
pooling of interests transaction with Sun Harvest Farms, Inc. We currently have
contracts to sell the office building and vacant parcel in the second half of
2000.
The cost of initial inventory for a new store has historically been
approximately $500,000 to $600,000 and is projected to increase to $600,000 to
$800,000 in the future as a function of the increase in average store size and
the introduction of certain new categories of merchandise, including beer and
wine and housewares; however, we obtain vendor financing for most of this cost.
Pre-opening costs currently are approximately $250,000 to $350,000 per store and
are expensed as incurred. The amounts and timing of such pre-opening costs will
depend upon the availability of new store sites and other factors, including the
location of the store and whether it is in a new or existing market for us, the
size of the store, and the required build-out at the site. Costs to acquire
future stores, if any, are impossible to predict and could vary materially from
the cost to open new stores. There can be no assurance that actual capital
expenditures will not exceed anticipated levels. We believe that cash generated
from operations and funds available under our credit facility will be sufficient
to satisfy our cash requirements, exclusive of additional acquisitions, through
2000.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded on the balance sheet as either an asset or liability measured at its
fair value. FAS No. 133 also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. In June 1999, the FASB issued FAS No. 137 which defers the
effective date of FAS No. 133 to fiscal years beginning after June 15, 2000. The
Company will adopt FAS No. 137 in the first quarter of fiscal 2001, but does not
expect such adoption to materially affect financial statement presentation.
Cautionary Statement Regarding Forward-Looking Statements
This Report on Form 10-Q contains "forward-looking statements," within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve
known and unknown risks. Such forward-looking statements include statements as
to the Company's plans to acquire, open or relocate additional stores, the
anticipated performance of such stores, the impact of competition, the amount of
restructuring charge taken in the second quarter of 2000, and other statements
containing words such as "believes," "anticipates," "estimates," "expects,"
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"may," "intends" and words of similar import or statements of management's
opinion. These forward-looking statements and assumptions involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, market performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Important factors that could cause such
differences include, but are not limited to, the availability and integration of
acquisitions, the timing and execution of new store openings, relocations,
remodels, sales and closures, the timing and impact of promotional and
advertising campaigns, the impact of competition, changes in product supply,
changes in management information needs, changes in customer needs and
expectations, governmental and regulatory actions, and general industry or
business trends or events, changes in economic or business conditions in general
or affecting the natural foods industry in particular, competition for and the
availability of sites for new stores and potential acquisition candidates, and
factors such as timing of closures and sales of stores. The Company undertakes
no obligation to update any forward-looking statements in order to reflect
events or circumstances that may arise after the date of this Report.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company's exposure to interest rate changes is primarily related to
its variable rate debt issued under its $120.0 million revolving credit
facility. The facility has two separate lines of credit, one in the amount of
$90.0 million with a three-year term expiring in 2002 and the other in the
amount of $30.0 million with a one-year term, expiring in August 2000. Both bear
interest, at our option, at the prime rate or LIBOR plus 1.15%. As of July 1,
2000, there were $87.3 million in borrowings outstanding under the $90.0 million
line of this facility and $30.0 million in borrowings outstanding under the
$30.0 million line. Because the interest rates on these facilities are variable,
based upon the bank's prime rate or LIBOR, the Company's interest expense and
net income are affected by interest rate fluctuations. If interest rates were to
increase or decrease by 100 basis points, the result, based upon the existing
outstanding debt as of July 1, 2000 and using the average interest rate paid on
borrowed funds during the second quarter of 2000, would be an annual increase or
decrease of approximately $1.2 million in interest expense and a corresponding
decrease or increase of approximately $696,000 in the Company's net income after
taxes.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1998, we filed Wild Oats Markets, Inc. v. Plaza Acquisition, Inc.
in United States District Court for the Northern District of Illinois, Eastern
Division, seeking recovery of $300,000 in tenant improvement allowances owed to
us by our landlord for the build-out of our Buffalo Grove, Illinois store. The
landlord counterclaimed for $1 million in damages, alleging that we breached
covenants requiring construction to be completed by a certain date and other
operating covenants. After we closed the Buffalo Grove store in May 1999, the
landlord increased its counterclaim to $3 million, including accelerated rent
resulting from an alleged breach of a continuous operations clause in the lease.
However, because the lease requires us to pay percentage rent only until a
certain level of gross sales is achieved, and because that level was never
achieved, the actual amount of rent due, even if accelerated, cannot be
determined at this time. We asserted several defenses to the counterclaim. The
landlord has presented its expert's report, measuring total damages at $7.4
million, and we have filed our own expert's report, asserting that there are no
material damages incurred by the landlord. Trial has been set for November of
2000.
In February 2000, the Company was named as defendant in Cornerstone III,
LLC v. Wild Oats Markets, Inc., a suit filed in U.S. District Court for the
Eastern District of Missouri by a former landlord who alleges that the Company
breached its obligations under a lease agreement when Wild Oats notified the
landlord that it was exercising its rights under the lease to terminate after
the landlord failed to turn over possession of the leased property within the
time period provided for in the lease. The plaintiff seeks $4.8 million in
actual damages, as well as punitive damages. We have filed an answer denying the
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plaintiff's allegations. The Company filed a Motion for Partial Judgment on the
Pleadings in June 2000. The motion requests the dismissal of two claims of and
is pending judicial determination. No estimate of probability of success or
potential damages can be made at this time.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders, held on May 5, 2000, the
Company's stockholders elected the following directors for a three-year term:
Michael C. Gilliland and David M. Chamberlain for three-year terms. The
directors were elected by the following number of votes:
Director For Against
Michael C. Gilliland 19,743,084 171,732
David M. Chamberlain 19,744,490 170,326
The remaining directors whose terms continue after the meeting date are
Elizabeth C. Cook, Brian Devine, David Ferguson, James McElwee, John Shields,
and Morris Siegel.
Also at such meeting, the Company's stockholders approved an amendment to
increase by 1,560,000 shares the number of shares of Common Stock reserved for
issuance under the Wild Oats Markets, Inc. 1996 Equity Incentive Plan (the
"Plan"), under which the Company may, from time to time, issue options
exercisable for shares of the Common Stock, stock bonuses and rights to purchase
restricted Common Stock. As of March 1, 2000, options exercisable for 2,828,384
shares of stock had been granted by the Company or exercised by the option
holder, leaving a remaining pool of 261,837 shares available for future grant,
assuming all outstanding options are exercised before their expiration or
termination. The shareholders approved the amendment by the following vote:
For Against Abstain Broker Non-Votes
10,365,002 5,692,555 616,360 3,240,899
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
27.1 Financial Data Schedule (second quarter 2000)
27.2 Restated Financial Data Schedule (second quarter 1999)
Included herewith.
(b) Reports on Form 8-K.
Report dated April 27, 2000 reported under Item 5, Other
Events, the Company's first quarter 2000 operating results.
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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, in the City of Boulder, County of
Boulder, State of Colorado, on the 14th day of August 2000.
Wild Oats Markets, Inc.
By /s/ Mary Beth Lewis
Mary Beth Lewis
Executive Officer, Vice President of Finance, and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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