<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
For the Quarterly Period Ended: October 28, 2000
Commission File Number: 000-23515
---------
GART SPORTS COMPANY
-------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1242802
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1001 Lincoln Avenue, Denver, Colorado 80203
-------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (303) 861-1122
Indicate by check mark whether the registrant 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 shorter period that the registrant was required to
file such reports).
Yes [X] No [_]
Indicate by check mark whether the registrant has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of November 27, 2000 there were outstanding 7,348,864 shares of the
registrant's common stock, $.01 par value, and the aggregate market value of the
shares (based upon the closing price on that date of the shares on the NASDAQ
National Market) held by non-affiliates was approximately $24,622,000.
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
QUARTERLY PERIOD ENDED OCTOBER 28, 2000
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets......................... 1
Consolidated Statements of Operations............... 2
Consolidated Statement of Stockholders' Equity...... 3
Consolidated Statements of Cash Flows............... 4
Notes to Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................... 12
SIGNATURES........................................................... 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
October 28, January 29,
2000 2000
---------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,595 $ 7,843
Accounts receivable, net of allowance for doubtful accounts of $269 and $266,
respectively 7,654 6,871
Inventories 283,012 240,891
Prepaid expenses and other current assets 6,913 6,887
Deferred income taxes 1,533 1,533
---------------- ------------------
Total current assets 304,707 264,025
Property and equipment, net 60,324 60,441
Favorable leases acquired, net -- 12,536
Asset held for sale 1,634 1,729
Deferred tax asset 12,620 --
Other assets, net of accumulated amortization of $1,206 and $810, respectively 5,018 5,517
---------------- ------------------
Total assets $ 384,303 $ 344,248
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 134,314 $ 127,410
Current portion of capital lease obligations 454 417
Accrued expenses and other current liabilities 30,692 31,345
---------------- ------------------
Total current liabilities 165,460 159,172
Long-term debt 133,800 105,900
Capital lease obligations, less current portion 1,930 2,276
Deferred rent and other long-term liabilities 6,593 5,292
Deferred income taxes -- 5,714
---------------- ------------------
Total liabilities 307,783 278,354
---------------- ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value. 3,000,000 shares authorized; none issued -- --
Common stock, $.01 par value. 22,000,000 shares authorized;
7,718,203 and 7,694,617 shares issued and 7,336,064 and 7,507,078
shares outstanding at October 28, 2000 and January 29, 2000, respectively. 77 77
Additional paid-in capital 56,891 55,990
Unamortized restricted stock compensation (2,202) (1,770)
Accumulated other comprehensive loss (634) (574)
Retained earnings 24,800 13,393
---------------- ------------------
78,932 67,116
Treasury stock, 382,139 and 187,539 common shares,respectively, at cost (2,412) (1,222)
---------------- ------------------
Total stockholders' equity 76,520 65,894
---------------- ------------------
Total liabilities and stockholders' equity $ 384,303 $ 344,248
================ ==================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------------ -----------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 166,128 $ 155,495 $ 519,477 $ 479,990
Cost of goods sold, buying, distribution and occupancy 124,906 121,155 391,740 369,234
------------- ------------ ------------ ------------
Gross profit 41,222 34,340 127,737 110,756
Operating expenses 38,379 35,821 114,689 106,769
------------- ------------ ------------ ------------
Operating income (loss) 2,843 (1,481) 13,048 3,987
Non operating income (expense):
Interest expense, net (2,814) (2,735) (8,326) (7,949)
Other income 204 98 367 507
------------- ------------ ------------ ------------
Income (loss) before income taxes 233 (4,118) 5,089 (3,455)
Income tax benefit -- 1,606 6,318 1,347
------------- ------------ ------------ ------------
Net income (loss) $ 233 $ (2,512) $ 11,407 $ (2,108)
============= ============ ============ ============
Earnings (loss) per share:
Basic $ 0.03 $ (0.33) $ 1.54 $ (0.28)
============= ============ ============ ============
Diluted $ 0.03 $ (0.33) $ 1.49 $ (0.28)
============= ============ ============ ============
Weighted average shares of common
stock outstanding:
Basic 7,335,744 7,653,598 7,391,744 7,653,186
============= ============ ============ ============
Diluted 7,855,009 7,653,598 7,643,934 7,653,186
============= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Unamortized other
Common paid-in restricted stock comprehensive Retained Comprehensive Treasury
stock capital compensation loss earnings income stock
------- ---------- ---------------- ------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 29, 2000 $ 77 $ 55,990 $ (1,770) $ (574) $ 13,393 $ (1,222)
------- ---------- ---------------- ------------- -------- ---------
Net income -- -- -- -- 11,407 $ 11,407 --
Unrealized loss on equity securities -- -- -- (60) -- (60) --
-----------
Comprehensive income $ 11,347
===========
Purchase of treasury stock -- -- -- -- -- (1,190)
Issuance of common stock -- 34 -- -- -- --
Issuance of restricted stock -- 921 (921) -- -- --
Exercise of stock options -- 95 -- -- -- --
Cancellation of restricted stock -- (149) 149 -- -- --
Amortization of restricted stock -- -- 340 -- -- --
------- ---------- ---------------- ------------- -------- ---------
BALANCES AT OCTOBER 28, 2000 $ 77 $ 56,891 $ (2,202) $ (634) $ 24,800 $ (2,412)
======= ========== ================ ============= ======== =========
<CAPTION>
Total
Stockholders'
equity
-------------
<S> <C>
BALANCES AT JANUARY 29, 2000 $ 65,894
-------------
Net income 11,407
Unrealized loss on equity securities (60)
Comprehensive income
Purchase of treasury stock (1,190)
Issuance of common stock 34
Issuance of restricted stock --
Exercise of stock options 95
Cancellation of restricted stock --
Amortization of restricted stock 340
-------------
BALANCES AT OCTOBER 28, 2000 $ 76,520
=============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GART SPORTS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
------------------------------------------------
October 28, October 30,
2000 1999
--------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,407 $ (2,108)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 11,101 10,407
Loss (gain) on sale of assets 83 (179)
Deferred taxes (6,318) --
Increase in deferred rent 1,147 1,151
Deferred compensation 34 68
Changes in operating assets and liabilities:
Accounts receivable, net (783) (1,358)
Inventories (42,121) (53,282)
Prepaid expenses and other current assets (75) (171)
Other assets 237 148
Accounts payable 6,904 13,929
Accrued expenses and other current liabilities (653) (4,110)
--------------------- ---------------------
Net cash used in operating activities (19,037) (35,505)
--------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities -- 2,979
Purchases of property and equipment (9,829) (9,837)
--------------------- ---------------------
Net cash used in investing activities (9,829) (6,858)
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 171,568 172,508
Principal payments on long-term debt (143,668) (133,908)
Principal payments on capital lease obligations (309) (279)
Purchase of treasury stock (1,190) (311)
Payment of notes receivable 122 124
Proceeds from the issuance of common stock 95 --
--------------------- ---------------------
Net cash provided by financing activities 26,618 38,134
--------------------- ---------------------
Decrease in cash and cash equivalents (2,248) (4,229)
Cash and cash equivalents at beginning of period 7,843 10,779
--------------------- ---------------------
Cash and cash equivalents at end of period $ 5,595 $ 6,550
===================== =====================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest, net $ 8,269 $ 7,344
===================== =====================
Cash received during the period for income taxes $ (396) $ (499)
===================== =====================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not include
all information and footnotes necessary for the annual presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America,
and should be read in conjunction with the 1999 Annual Report on Form 10-K.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the statement of
financial position and the results of operations for the interim periods
have been included. The results for the thirteen and thirty-nine week
periods ended October 28, 2000 are not necessarily indicative of the results
to be expected for the full year.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. EARNINGS (LOSS) PER SHARE
The following table sets forth the computations of basic and diluted earnings
(loss) per share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
----------------------------- -------------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) available to common stockholders $ 233 $ (2,512) $ 11,407 $ (2,108)
Weighted average shares of common stock
outstanding - basic 7,335,744 7,653,598 7,391,744 7,653,186
---------- ---------- ---------- ----------
Basic earnings (loss) per share $ 0.03 $ (0.33) $ 1.54 $ (0.28)
========== ========== ========== ==========
Number of shares used for diluted earnings
per share:
Weighted average shares of common stock
outstanding - basic 7,335,744 7,653,598 7,391,744 7,653,186
Dilutive securities - stock options and restricted
stock 519,265 -- 252,190 --
---------- ---------- ---------- ----------
Weighted average shares of common stock
outstanding - diluted 7,855,009 7,653,598 7,643,934 7,653,186
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ 0.03 $ (0.33) $ 1.49 $ (0.28)
========== ========== ========== ==========
</TABLE>
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement will be effective for the Company beginning February 4, 2001, the
start of fiscal year 2001. The new statement requires that every derivative
instrument be recorded on the balance sheet as either an asset or liability,
measured at its fair value, and requires that changes in the derivative's fair
value be recognized currently in earnings, unless specific hedge accounting
criteria are met. The Company does not anticipate there will be a material
impact on the results of operations or financial position due to the adoption
of Statement No. 133.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".
This staff accounting bulletin summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. This statement will be adopted by the Company during the
fourth quarter of this fiscal year and is not expected to have a material
impact on results of operations or financial position.
4. CONTINGENCIES
Tax Contingency
Under the terms of the Company's tax sharing agreement with its former parent,
the Company is responsible for its share, on a separate return basis, of any
tax payments associated with proposed deficiencies or adjustments, and related
interest and penalties charged to the controlled group which may arise as a
result of an assessment by the IRS.
On July 24, 1997, the IRS proposed adjustments to the Company's former
parent's 1992 and 1993 federal income tax returns in conjunction with the
former parent's IRS examination. The proposed adjustments are related to the
manner in which LIFO inventories were characterized on such returns. The
Company recorded approximately $9,700,000 as a long-term deferred tax
liability for the tax effect of the LIFO inventory basis difference. The IRS
has asserted that this basis difference should have been reflected in taxable
income in 1992 and 1993. The Company has taken the position that the inventory
acquired in connection with the acquisition of its former parent was
appropriately allocated to its inventory pools. The IRS has asserted the
5
<PAGE>
inventory was acquired at a bargain purchase price and should be allocated to a
separate pool and liquidated as inventory turns. Based on management's
discussions with the Company's former parent, the Company believes the
potential accelerated tax liability, which could have a negative effect on
liquidity in the near term, ranges from approximately $1,000,000 to $9,700,000.
The range of loss from possible assessed interest charges resulting from the
proposed adjustments range from approximately $200,000 to $3,300,000. The
Company has accrued $1,100,000 for estimated interest charges in the
consolidated financial statements. No penalties are expected to be assessed
relating to this matter. At October 28, 2000, the LIFO inventory and other
associated temporary differences continue to be recorded as long-term
deferred tax liabilities since final settlement terms have not been negotiated.
The Company has reviewed the various matters that are under consideration and
believes that it has adequately provided for any liability that may result from
this matter. In the opinion of management, any additional liability beyond the
amounts recorded that may arise as a result of the IRS examination will not
have a material adverse effect on the Company's consolidated financial
condition, results of operations, or liquidity.
In addition, the Company is currently under examination for the fiscal tax
years ended September 1997 and 1998. No adjustments have been proposed at this
time.
Legal Proceedings
In June 2000, a former employee of Sportmart brought two class action
complaints in California against the Company, alleging certain wage and hour
claims in violation of the California Labor Code, California Business and
Professional Code section 17200 and other related matters. One complaint
alleges that the Company classified certain managers in its California stores
as exempt from overtime pay when they would have been classified as non-exempt
and paid overtime. The second complaint alleges that the Company failed to pay
hourly employees in its California stores for all hours worked. Both complaints
seek compensatory damages, punitive damages and penalties. The amount of
damages sought is unspecified. Although the court recently denied motions to
dismiss the complaints, the Company intends to vigorously defend these matters
and at this time, the Company has not ascertained the future liability, if any,
as a result of these complaints.
The Company is a party to various other legal proceedings and claims arising in
the ordinary course of business. Management believes that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition, results of operations or liquidity.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto included elsewhere
within this report and the 1999 Annual Report on Form 10-K.
The Company is a leading retailer of sporting goods in the midwest and western
United States. Given the economic characteristics of the store formats, the
similar nature of the products sold, the type of customer and method of
distribution, the operations of the Company are aggregated in one reportable
segment.
The Company uses a 52-53 week fiscal reporting year ending on the Saturday
closest to the end of January.
RESULTS OF OPERATIONS
The following table sets forth the Company's consolidated statement of
operations data as a percentage of net sales and the number of stores open at
the end of each period for the periods indicated (dollars rounded to millions):
<TABLE>
<CAPTION>
Thirteen weeks ended Thirty-nine weeks ended
------------------------------------------------ -----------------------------------------------
October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999
Dollars % Dollars % Dollars % Dollars %
---------------- ----- ---------------- ----- ---------------- ----- ---------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 166.1 100.0 % $ 155.5 100.0 % $ 519.5 100.0 % $ 480.0 100.0 %
Cost of goods sold, buying,
distribution and occupancy (124.9) (75.2) (121.2) (77.9) (391.8) (75.4) (369.2) (76.9)
---------- ----- ------------ ----- ---------- ---- ---------- -----
Gross profit 41.2 24.8 34.3 22.1 127.7 24.6 110.8 23.1
Operating expenses (38.4) (23.1) (35.8) (23.1) (114.7) (22.1) (106.8) (22.3)
---------- ----- ------------ ----- ---------- ---- ---------- -----
Operating income (loss) 2.8 1.7 (1.5) (1.0) 13.0 2.5 4.0 0.8
Interest expense, net (2.8) (1.7) (2.7) (1.7) (8.3) (1.6) (8.0) (1.6)
Other income 0.2 0.1 0.1 0.1 0.4 0.1 0.5 0.1
---------- ----- ------------ ----- ---------- ---- ---------- -----
Income (loss) before income taxes 0.2 0.1 (4.1) (2.6) 5.1 1.0 (3.5) (0.7)
Income tax benefit -- 0.0 1.6 1.0 6.3 1.2 1.4 0.3
---------- ----- ------------ ----- ---------- ---- ---------- -----
Net income (loss) $ 0.2 0.1 % $ (2.5) (1.6)% $ 11.4 2.2 % $ (2.1) (0.4)%
========== ===== ============ ===== ========== ==== ========== =====
Number of stores at end of period 123 128 123 128
========== ============ ========== ==========
</TABLE>
The following table sets forth pro-forma fiscal year 2000 results excluding the
effect of the significant tax benefit and utilizing statutory tax rates (dollars
rounded to millions, except per share amounts):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 0.2 0.1 % $ (4.1) (2.6)% $ 5.1 1.0 % $ (3.5) (0.7)%
Income tax benefit (expense) (0.1) (0.0) 1.6 1.0 (2.0) (0.4) 1.4 0.3
---------- ---- ------------ ----- ---------- ---- ---------- -----
Net income (loss) $ 0.1 0.1 % $ (2.5) (1.6)% $ 3.1 0.6 % $ (2.1) (0.4)%
========== ==== ============ ===== ========== ==== ========== =====
Earnings (loss) per share:
Basic $ 0.02 $ (0.33) $ 0.42 $ (0.28)
========== ============ ========== ==========
Diluted $ 0.02 $ (0.33) $ 0.41 $ (0.28)
========== ============ ========== ==========
Basic weighted average shares
outstanding 7,335,744 7,653,598 7,391,744 7,653,186
========== ============ ========== ==========
Diluted weighted average shares
outstanding 7,855,009 7,653,598 7,643,934 7,653,186
========== ============ ========== ==========
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
30, 1999
Net Sales. Net sales for the thirteen weeks ended October 28, 2000 were $166.1
million compared to $155.5 million for the thirteen weeks ended October 30,
1999, an increase of $10.6 million. Comparable store sales increased 5.4% for
the quarter, primarily due to increased sales in hardgoods and outdoor products,
including skateboards, scooters, exercise fitness, and athletic hardgoods. Sales
of skateboards increased as a result of improved selection and inventory levels
throughout all stores, while the popularity of the recently introduced scooter
products remained strong. Exercise fitness sales increased primarily due to
7
<PAGE>
increased demand for fitness products, including typical products such as
fitness and exercise machines, as well as products such as boxing equipment,
which increased as a result of boxing's expanded appeal in fitness applications.
Athletic hardgood sales increased in many categories including football,
baseball, and basketball.
Gross Profit. Gross profit for the thirteen weeks ended October 28, 2000 was
$41.2 million, or 24.8% of net sales, as compared to $34.3 million, or 22.1% of
net sales, for the thirteen weeks ended October 30, 1999. The increase is due to
improved merchandise margins in most departments. These increases were partially
offset by higher occupancy costs including scheduled rent increases and
increases associated with the opening of two new superstores and the relocation
of two stores to larger locations since the prior year period.
Operating Expenses. Operating expenses for the thirteen weeks ended October
28, 2000 were $38.4 million, or 23.1% of net sales, compared to $35.8 million,
or 23.1% of net sales, for the thirteen weeks ended October 30, 1999. As a
percentage of sales, operating expenses were the same compared to the year ago
quarter. Operating expense dollars increased as a result of increased store
payroll and depreciation due to the increase in the number of superstores over
the prior year and the related depreciation of new apparel fixtures and
signage in many stores.
Operating Income. As a result of the factors described above, operating income
increased 286.7% versus the year-ago quarter. Operating income for the thirteen
weeks ended October 28, 2000 was $2.8 million compared to an operating loss of
$1.5 million for the thirteen weeks ended October 30, 1999.
Interest Expense, Net. Interest expense, net for the thirteen weeks ended
October 28, 2000 was $2.8 million, or 1.7% of net sales, compared to $2.7
million, or 1.7% of net sales, for the thirteen weeks ended October 30, 1999.
The slight increase is primarily due to an increase in the effective borrowing
rate as a result of rising interest rates versus the year ago quarter, partially
offset by a decrease in the average outstanding debt for the period.
Income Taxes. The Company did not record income tax expense for the thirteen
weeks ended October 28, 2000 compared to an income tax benefit of $1.6 million
for the thirteen weeks ended October 30, 1999. The Company's estimated effective
tax rate for the year is expected to be at or below 0.0% as compared to 39.0%
for the prior year. This is principally due to the reversal of previously
recorded deferred tax valuation allowances.
THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 30, 1999
Net Sales. Net sales for the thirty-nine weeks ended October 28, 2000 were
$519.5 million compared to $480.0 million for the thirty-nine weeks ended
October 30, 1999, an increase of $39.5 million. Comparable store sales increased
4.9% for the same period, primarily due to increased sales in hardgoods, outdoor
products, and certain apparel categories. The hardgoods and outdoor products
improvement has been driven by exercise fitness, skateboards and scooters. The
trends realized in these categories during the third quarter, as discussed
above, have been consistent throughout the entire fiscal year. Ladies activewear
and the outdoor apparel categories have also increased compared to the year ago
period. The apparel categories were positively impacted by the store remodeling
program and the introduction of new apparel fixtures and signage, designed to
highlight the quality name brands offered and make these areas easier to shop.
Gross Profit. Gross profit for the thirty-nine weeks ended October 28, 2000
was $127.7 million, or 24.6% of net sales, as compared to $110.8 million, or
23.1% of net sales, for the thirty-nine weeks ended October 30, 1999. Increases
in gross profit due to improved merchandise margins in most departments were
only slightly offset by higher occupancy costs associated with the opening of
two new superstores over the past year and scheduled rent increases in existing
stores.
8
<PAGE>
Operating Expenses. Operating expenses for the thirty-nine weeks ended October
28, 2000 were $114.7 million, or 22.1% of net sales, compared to $106.8 million,
or 22.3% of net sales, for the thirty-nine weeks ended October 30, 1999. As a
percentage of sales, operating expenses decreased 0.2 percentage points compared
to the first nine months of last fiscal year due to improved sales and
continued cost controls. The dollar increase is due primarily to increased store
payroll and depreciation due to an increase in the number of superstores
compared to the prior year.
Operating Income. As a result of the factors described above, operating income
increased 225.0% versus the year-ago period. Operating income for the thirty-
nine weeks ended October 28, 2000 was $13.0 million compared to operating income
of $4.0 million for the thirty-nine weeks ended October 30, 1999.
Interest Expense, Net. Interest expense, net for the thirty-nine weeks ended
October 28, 2000 was $8.3 million, or 1.6% of net sales, compared to $8.0
million, or 1.6% of net sales, in the thirty-nine weeks ended October 30, 1999.
The slight dollar increase is primarily due to an increase in the effective
borrowing rate as a result of rising interest rates over the past year,
partially offset by a decrease in the average outstanding debt for the period.
Income Taxes. The Company's income tax benefit for the thirty-nine week period
ended October 28, 2000 was $6.3 million compared to an income tax benefit of
$1.4 million for the thirty-nine weeks ended October 30, 1999. The income tax
benefit reflects the reversal of valuation allowances, which had offset
previously generated deferred tax assets. The Company's estimated effective tax
rate for the year is expected to be at or below 0.0% as compared to 39.0% for
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for inventory, capital
improvements, and expenditures to support the Company's expansion plans, as well
as for various investments in store remodeling, store fixtures and ongoing
infrastructure improvements.
<TABLE>
<CAPTION>
Cash Flow Analysis
Thirty-nine weeks ended
-------------------------------------
October 28, October 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Cash used in operating activities $ (19,037) $(35,505)
Cash used in investing activities (9,829) (6,858)
Cash provided by financing activities 26,618 38,134
Capital expenditures $ (9,829) $ (9,837)
Long-term debt (at end of period) 133,800 138,600
Working capital (at end of period) 139,247 133,596
Current ratio (at end of period) 1.84 1.80
Debt to equity ratio (at end of period) 1.75 2.22
</TABLE>
Cash used in operating activities in the first nine months of fiscal 2000 was
primarily the result of purchases of inventory, offsetting increases in accounts
payable and net income adjusted for non-cash items.
Cash used in investing activities in the first nine months of fiscal 2000 was
for capital expenditures. These expenditures were primarily for store
remodeling, store fixtures, and the purchase or enhancement of certain
information systems.
Cash provided by financing activities in the first nine months of fiscal 2000
represents net proceeds from borrowings on the Company's revolving line of
credit, partially offset by purchases of treasury stock and payments of capital
lease obligations.
9
<PAGE>
The Company's liquidity and capital needs have been met by cash from
operations and borrowings under a revolving line of credit with CIT
Group/Business Credit, Inc., as agent, ("CIT"). The long-term debt currently
consists of the Credit Agreement, which allows the Company to borrow up to 70%
of its eligible inventories (as defined in the Credit Agreement) during the year
and up to 75% of its eligible inventories for any consecutive 90 day period in a
fiscal year. Borrowings are limited to the lesser of $175 million or the amount
calculated in accordance with the borrowing base, and are secured by
substantially all inventories, trade receivables and intangible assets. The
lenders may not demand repayment of principal absent an occurrence of default
under the Credit Agreement prior to January 9, 2003. The Credit Agreement
contains certain covenants, including financial covenants that require the
Company to maintain a specified minimum level of net worth at all times and
limits the Company's ability to pay dividends.
Under the terms of the revolving credit facility, loan interest is payable
monthly at Chase Manhattan Bank's prime rate plus a margin rate that cannot
exceed 0.25% or, at the option of the Company, at Chase Manhattan Bank's LIBOR
rate plus a margin that cannot exceed 1.75%. The margin rates on prime and LIBOR
borrowings were reduced to 0.00% and 1.50% during the first quarter of fiscal
2000, as a result of achieving certain earnings levels. There was $41.2 million
available for borrowing at October 28, 2000.
The Internal Revenue Service has proposed adjustments to the 1992 and 1993
consolidated federal income tax returns of the Company's former parent, now
Thrifty PayLess Holdings, Inc. (Thrifty), a subsidiary of RiteAid Corporation,
in conjunction with the former parent's IRS examination. The proposed
adjustments are related to the manner in which LIFO inventories were
characterized on such returns. Based on management's discussion with the
Company's former parent, the Company believes the potential accelerated tax
liability, which could have a negative effect on liquidity in the near term,
ranges from approximately $1,000,000 to $9,700,000.
Capital expenditures are projected to be approximately $13.0 million in fiscal
2000, of which, $9.8 million has been spent to date. These capital expenditures
arvcce for store remodeling, store fixtures, information systems, distribution
center facilities, and ski rental equipment. The Company leases all of its store
locations and intends to continue to finance its new stores with long-term
operating leases. Based upon historical data, newly constructed superstores
require a cash investment of approximately $1.8 million for a 40,000 square foot
store and $1.5 million for a 33,000 square foot store. Superstores constructed
in existing retail space historically have required capital investments of
approximately $700,000 in leasehold improvements per location. The level of
capital improvements is affected by the mix of new construction versus
renovation of existing retail space.
The Company believes that cash generated from operations, combined with funds
available under the Credit Agreement, will be sufficient to fund projected
capital expenditures and other working capital requirements for the foreseeable
future. The Company intends to utilize the Credit Agreement to meet seasonal
fluctuations in cash flow requirements.
SEASONALITY AND INFLATION
The fourth quarter has historically been the strongest quarter for the
Company. The Company believes that two primary factors contribute to this
seasonality. First, increased sales of cold weather sporting goods, including
sales of ski and snowboard merchandise during the quarter, which corresponds
with much of the ski and snowboard season. Second, holiday sales contribute
significantly to the Company's operating results. As a result of these factors,
inventory levels, which gradually increase beginning in April, generally reach
their peak in November and then decline to their lowest level following the
December holiday season. Any decrease in sales for the fourth quarter, whether
due to a slow holiday selling season, poor snowfall in ski areas near the
Company's markets or otherwise, could have a material adverse effect on the
Company's business, financial condition and operating results for the entire
fiscal year.
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a material
impact on the Company's results of operations. The Company believes that it is
generally able to pass along any inflationary increases in costs to its
customers.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement will be effective for the Company beginning February 4, 2001, the
start of fiscal year 2001. The new statement requires that every derivative
instrument be recorded on the balance sheet as either an asset or liability,
measured at its fair value, and requires that changes in the derivative's fair
value be recognized currently in earnings, unless specific hedge accounting
criteria are met. The Company does not anticipate there will be a material
impact on the results of operations or financial position due to the adoption
of Statement No. 133.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements". This
staff accounting bulletin summarizes certain of the SEC's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This statement will be adopted by the Company during the fourth
quarter of this fiscal year and is not expected to have a material impact on
results of operations or financial position.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The information discussed herein includes "forward-looking statements" within
the meaning of the federal securities laws. Although the Company believes that
the expectations reflected in such forward looking statements are reasonable,
the Company's actual results could differ materially as a result of certain
factors, including, but not limited to: the Company's ability to manage its
expansion efforts in existing and new markets, availability of suitable new
store locations at acceptable terms, general economic conditions, and retail and
sporting goods business conditions, specifically, the availability of
merchandise to meet fluctuating consumer demands, fluctuating sales margins,
increasing competition in sporting goods and apparel retailing, as well as other
factors described from time to time in the Company's periodic reports including
the 1999 Annual Report of the Company on Form 10-K for its year ended January
29, 2000, filed with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS.
Exhibit 27.1 - Financial Data Schedule
B. REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended October
28, 2000.
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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 December 6, 2000 on its
behalf by the undersigned thereunto duly authorized.
GART SPORTS COMPANY
By: /s/ JOHN DOUGLAS MORTON
-------------------------------------
John Douglas Morton,
Chairman of the Board of Directors,
President and Chief Executive Officer
By: /s/ THOMAS T. HENDRICKSON
-------------------------------------
Thomas T. Hendrickson,
Executive Vice President, Chief
Financial Officer and Treasurer
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