<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 Quarterly Period Ended Commission File Number:
October 31, 1998 0-23570
JUST FOR FEET, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 52-2098043
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7400 Cahaba Valley Road, Birmingham, Alabama 35242
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 408-3000
----------------------------
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Common Stock, par value $.0001 per share 31,195,722 shares
- ---------------------------------------- --------------------------------
Class Outstanding at December 11, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
JUST FOR FEET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
October 31, January 31,
1998 1998
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,896 $ 82,490
Accounts receivable 16,641 15,840
Merchandise inventories 342,186 206,128
Other 18,827 6,709
-------- --------
Total current assets 384,550 311,167
PROPERTY AND EQUIPMENT, NET 129,035 94,529
REPURCHASED FRANCHISE RIGHTS, NET 2,778 2,913
GOODWILL, NET 68,557 36,106
OTHER ASSETS 4,506 3,637
-------- --------
$589,426 $448,352
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 90,667
Accounts payable $ 60,826 51,162
Accrued expenses 42,593 9,292
Income taxes 1,363
Current maturities of long-term obligations 5,732 3,222
-------- --------
Total current liabilities 109,151 155,706
LONG-TERM OBLIGATIONS 145,708 16,646
DEFERRED LEASE RENTALS 12,429 7,212
DEFERRED INCOME TAXES 648 704
-------- --------
Total liabilities 267,936 180,268
-------- --------
SHAREHOLDERS' EQUITY:
Common stock - par value $.0001 per share; 70,000 shares authorized;
31,181 and 29,993 shares issued and outstanding at October 31, 1998
and January 31, 1998, respectively 3 3
Paid-in capital 248,191 218,616
Retained earnings 73,296 49,465
-------- --------
Total shareholders' equity 321,490 268,084
-------- --------
$589,426 $448,352
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
1
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
October 31, October 31,
-----------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $226,008 $131,033 $553,258 $336,205
Cost of sales 134,861 77,466 322,977 196,382
-------- -------- -------- --------
Gross profit 91,147 53,567 230,281 139,823
-------- -------- -------- --------
Franchise fees, royalties and other revenue 405 284 1,001 762
-------- -------- -------- --------
Operating expenses:
Store operating 64,798 37,922 162,558 97,563
Store opening costs 1,403 1,538 6,646 4,610
Amortization of intangibles 655 380 1,449 706
General and administrative 6,181 5,094 17,362 13,068
-------- -------- -------- --------
Total operating expenses 73,037 44,934 188,015 115,947
-------- -------- -------- --------
Operating income 18,515 8,917 43,267 24,638
Interest (expense) income, net (2,189) (104) (4,517) 305
-------- -------- -------- --------
Earnings before income taxes 16,326 8,813 38,750 24,943
Provision for income taxes 6,286 3,437 14,919 9,561
-------- -------- -------- --------
Net earnings $ 10,040 $ 5,376 $ 23,831 $ 15,382
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $ 0.32 $ 0.18 $ 0.78 $ 0.52
======== ======== ======== ========
Diluted $ 0.32 $ 0.18 $ 0.75 $ 0.51
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 31,180 29,984 30,585 29,489
======== ======== ======== ========
Diluted 31,795 30,611 31,722 30,358
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
2
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Nine Months Ended
October 31,
------------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 23,831 $ 15,382
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation and amortization 11,147 6,079
Deferred income taxes (56) (229)
Deferred lease rentals 1,922 2,036
Changes in assets and liabilities providing (using) cash, net of
effects of acquisitions in 1998 and 1997:
Accounts receivable (561) (5,147)
Merchandise inventories (108,471) (18,559)
Other assets 4,382 (4,710)
Accounts payable (4,958) (23,963)
Accrued expenses 22,725 4,824
Income taxes (1,362) 3,266
--------- ---------
Net cash used by operating activities (51,401) (21,021)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property and equipment (43,642) (31,649)
Acquisitions, net of cash acquired (199) (25,521)
Purchases of marketable securities (14,726)
Maturities and sales of marketable securities 47,564
--------- ---------
Net cash used for investing activities (43,841) (24,332)
--------- ---------
FINANCING ACTIVITIES:
Repayments under financing agreements, net (12,010) (99,462)
Borrowings of long-term obligations, net 11,690 11,848
Principal payments on long-term obligations (2,895) (2,140)
Proceeds from issuance of common stock 20,000
Proceeds from exercise of options 2,863 783
--------- ---------
Net cash provided by (used in) financing activities 19,648 (88,971)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (75,594) (134,324)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 82,490 138,785
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,896 $ 4,461
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
3
<PAGE>
JUST FOR FEET, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------
NOTE 1 - GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, Regulation S-X and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
These unaudited financial statements include all adjustments, consisting of
normal, recurring accruals, which Just For Feet, Inc. (the "Company") considers
necessary for a fair presentation of the financial position and the results of
operations for these periods.
The results of operations for the three and nine months ended October 31, 1998
are not necessarily indicative of the results to be expected for the full year
ending January 31, 1999. For further information, refer to the financial
statements and notes thereto for the fiscal year ended January 31, 1998 included
in the Company's Form 10-K as filed with the Securities and Exchange Commission.
CREDIT FACILITIES WITH BANKS
At October 31, 1998, the Company had unsecured revolving credit lines with banks
aggregating $133 million due December 31, 1998, which bore interest at floating
rates above LIBOR (6.4% to 7.3% at October 31, 1998) under which $121.7 million
was outstanding at October 31 1998.
On December 10, 1998, the Company obtained a $200 million revolving senior
credit facility (the "Facility") from a syndicate of banks. The Facility
terminates on December 10, 2001, bears interest at a floating rate above either
prime or LIBOR, is guaranteed and secured by the stock of the Company's domestic
subsidiaries and 66 2/3% of the Company's foreign subsidiary and is subject to
certain restrictive covenants. On December 14, 1998, the Company used this
Facility to repay amounts outstanding under the Company's other revolving bank
lines. Accordingly, such amounts have been classified as long-term obligations
in the accompanying consolidated balance sheet at October 31, 1998.
FISCAL YEAR
The Company's fiscal year ends on January 31. References to fiscal year by date
refer to the fiscal year beginning February 1 of that calendar year; for example
"fiscal 1998" began on February 1, 1998 and will end on January 31, 1999.
NOTE 2 - ACQUISITIONS
On March 17, 1997, the Company acquired Athletic Attic for approximately $9.7
million in cash, net of cash acquired, the repayment of approximately $1.3
million of Athletic Attic's debt, and approximately $5.6 million of common stock
(259,000 shares). On May 14, 1997, the Company acquired Imperial Sports for
approximately $5.8 million in cash, net of cash acquired, the repayment of
approximately $8.7 million of Imperial Sports' debt, and approximately $21.5
million of common stock (1,077,000 shares).
These acquisitions have been accounted for as purchases and, accordingly, each
purchase price has been allocated to assets acquired and liabilities assumed
based upon their estimated fair values as of the acquisition dates. The excess
of the aggregate purchase prices over the fair market value of net assets
acquired is being amortized over 30 years. The accompanying consolidated
statements of earnings for the three and nine months ended October 31, 1997
includes the results of operations of Athletic Attic and Imperial Sports
(collectively "the specialty store division") from their respective acquisition
dates.
4
<PAGE>
On July 2, 1998, the Company acquired all of the outstanding stock of Sneaker
Stadium, Inc. ("Sneaker") for nominal cash consideration and the assumption of
$43.0 million of existing bank debt. Such debt was immediately paid off with the
proceeds of a term loan by the Company. The Company will make additional
payments of up to $33.0 million after April 2002 to certain specified former
lenders of Sneaker, if the acquired Sneaker Stadium stores attain certain
financial targets. Such additional payments, if required, will be accounted for
as additional consideration for the acquisition. The acquisition has been
accounted for as a purchase and accordingly the purchase price has been
allocated to assets acquired and liabilities assumed based upon their estimated
fair values as of the acquisition date. The excess of the purchase price over
the fair market value of net assets acquired is being amortized over 30 years.
The estimated fair values of assets acquired and liabilities assumed were
considered to be the best estimates as of the acquisition date and may be
adjusted as more information is obtained.
These estimates are summarized as follows (in thousands):
Cash $ 2,476
Accounts receivable 240
Merchandise inventories 27,587
Property and equipment 674
Other assets 17,444
Goodwill 33,499
Accounts payable and accrued expenses (25,273)
Interest bearing debt (43,000)
Other liabilities (4,261)
--------
$ 9,386
========
Consideration consisted of:
Cash (principally for direct acquisition costs) $ 2,675
Warrants issued 6,711
--------
$ 9,386
========
Concurrent with and as a condition of the Company's acquisition of Sneaker, an
affiliate of Thomas H. Lee Company ("THL"), a firm which owned a controlling
interest in Sneaker, purchased from the Company an aggregate of 926,355 units,
each consisting of one share of the Company's common stock and a warrant to
purchase 0.997 of a share of the Company's common stock at a purchase price of
$21.59 per share. The aggregate purchase price for the units was $20.0 million.
The warrants' estimated fair market value on July 2, 1998 was $6.7 million
which, for accounting purposes, was considered a part of the consideration paid
by the Company for Sneaker.
The accompanying consolidated statement of earnings for the three and nine
months ended October 31, 1998 includes the results of operations of Sneaker
Stadium from its acquisition date.
The following unaudited pro forma consolidated results of operations for the
nine month periods ended October 31, 1998 and 1997 assume the Sneaker Stadium
acquisition occurred as of February 1, 1997 (in thousands, except per share
amounts):
1998 1997
-------- --------
Net sales $618,381 $438,508
Net earnings 19,960 9,963
Earnings per share:
Basic $ 0.63 $ 0.33
Diluted $ 0.61 $ 0.32
The pro forma results are not necessarily indicative of the results of the
Company had the Sneaker acquisition occurred at the beginning of the periods
presented, nor necessarily indicative of the results of future operations. The
acquisitions of the specialty stores would not have a material effect on the
1997 pro forma results.
5
<PAGE>
NOTE 3 - NEW ACCOUNTING STANDARDS
The Company is required to adopt Statement of Financial Accounting Standards
("SFAS") No. 131 Disclosures about Segments of an Enterprise and Related
Information in fiscal 1998. Because the Company operates solely in the retail
athletic footwear and apparel industry, management believes that the
implementation of SFAS No. 131 will have no significant impact on future
financial reporting. In June 1998, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued. This Statement requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. This Statement will be effective for the Company in
fiscal 2000. The Company's management has not determined the effect of SFAS No.
133 on its financial statements.
In April 1998 the Financial Accounting Standards Board issued Statement of
Position No. 98-5 (the "SOP") Reporting on the Cost of Start-Up Activities which
requires that costs of start-up activities and organization costs be expensed as
incurred. The Company currently expenses start-up costs for new stores in the
month that the new store opens. The SOP is effective for years beginning after
December 15, 1998. If the SOP had been adopted for the nine months ended
October 31, 1998, the cumulative effect of the change in accounting principle
would have resulted in a net charge to earnings of approximately $600,000 ($0.02
per basic and diluted share), net of applicable income taxes of approximately
$375,000. The effect on the three month period ended October 31, 1998 would
have been to increase operating expenses by approximately $2,660,000 and
decrease net income by approximately $1,635,000 ($0.05 per basic and diluted
share). The effect on the nine month period ended October 31, 1998 would have
been to increase operating expenses by approximately $3,030,000 and decrease net
income by approximately $1,865,000 ($0.06 per basic and diluted share).
NOTE 4 - LITIGATION
In July 1997, a lawsuit was filed by a shareholder (individually and on behalf
of others) against the Company and certain of its current and former officers, a
former director and two of the four managing underwriters in the Company's June
1996 public offering of common stock. The suit alleges that the Company's
registration statement and prospectus used in such offering contained certain
misleading financial information. The Company, its named officers and directors
deny any liability on those claims (the dollar amount of which is currently
unspecified) and are vigorously defending the suit.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company operates retail stores in the brand-name athletic and outdoor
footwear and apparel market. The Company was founded in 1977 with the opening
of a small mall-based store and in 1988, Just For Feet opened its first
superstore in Birmingham, Alabama. There were 145 Just For Feet superstores at
October 31, 1998, operating in 27 states and Puerto Rico, including 94 opened by
the Company, 39 acquired Sneaker Stadium superstores and 12 stores operated by
Just For Feet's only superstore franchisee. The Company's fiscal year ends on
January 31. References to fiscal year by date refer to the fiscal year
beginning February 1 of that calendar year; for example "fiscal 1998" began on
February 1, 1998 and will end on January 31, 1999.
Of the 94 Company opened Just For Feet superstores, 21 superstores were opened
in the first nine months of fiscal 1998. The Company expects to open a total
of approximately 25 new superstores and 24 remodeled former Sneaker Stadium
superstores during fiscal 1998. The Company may accelerate the opening of new
stores in any one fiscal quarter.
On July 2, 1998, the Company acquired Sneaker Stadium, Inc. ("Sneaker"), an
operator of 39 athletic footwear and apparel superstores located primarily in
the Northeast and Mid-Atlantic regions of the United States. It is the Company's
intention to convert the acquired superstores to the Just For Feet format and
systems over the subsequent nine months and to close the corporate headquarters
of Sneaker Stadium and consolidate all operations into the Company's Birmingham,
Alabama headquarters. In connection with the acquisition, Just For Feet assumed
$43.0 million of existing Sneaker Stadium debt and, if the acquired Sneaker
Stadium stores attain certain future financial targets, the Company will make
additional payments of up to $33.0 million on or after April 30, 2002.
The Sneaker acquisition has been accounted for as a purchase and accordingly,
the results of operations are included in the consolidated statement of earnings
as of the acquisition date. Acquired stores that are to be remodeled and
integrated into the Company's operations must be closed during the remodeling
period. During such remodeling period, the Company will continue to incur rent
and other store operating expenses, including salaries and wages, without
generating any sales. These expenses, which would otherwise be recognized as
store operating costs, will be principally deferred and recognized as store
opening costs in the month in which each remodeled store reopens for business.
These conditions may affect the Company's profitability for such periods and the
comparability of the Company's results of operations for the fourth quarter of
fiscal 1998 and the first quarter of fiscal 1999 as compared to the same periods
for fiscal 1997 and 1998.
Concurrent with the Company's acquisition of Sneaker, Thomas H. Lee Company
("THL"), a firm which owned a controlling interest in Sneaker, through an
affiliated entity purchased from the Company 926,355 shares of common stock and
a warrant to purchase an additional 923,591 shares of common stock at an
exercise price of $21.59 per share, for a total investment of $20.0 million.
The warrants' estimated fair market value on July 2, 1998 was $6.7 million and,
for accounting purposes, the warrants were considered a part of the
consideration paid by the Company for Sneaker Stadium. In addition, THL became
entitled to designate one member of the Board of Directors.
As part of its long-term growth strategy, the Company entered the specialty
store segment of the athletic and outdoor footwear and apparel market in fiscal
1997 through the acquisitions of Athletic Attic and Imperial Sports, which are
now operated as the specialty store division of the Company. Both acquisitions
have been accounted for as purchases and, accordingly, the results of operations
of these acquired businesses are included in the Company's consolidated
statements of earnings from their respective acquisition dates. At October 31,
1998, there were 122 Company-owned and 48 franchised specialty stores in 23
states and Puerto Rico. The Company anticipates opening a total of
approximately 52 specialty stores during fiscal 1998, of which 32 were opened in
the nine months ended October 31, 1998.
7
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In recent years, the Company has achieved positive comparable store sales
growth on an annual basis. During the three and nine month periods ended October
31, 1998, comparable store sales increased 3.1% and 2.8%, respectively as
compared to 4.9% and 4.7% for the same periods last year. The Company does not
expect comparable store sales to continue to increase in the future at
historical rates, nor can any assurance be given that increases in comparable
store sales will continue. The first quarter of fiscal 1998 was the first
quarter that the Company included the specialty stores in the comparable store
sales base. The Company will not report the 39 superstores acquired from Sneaker
Stadium in its comparable sales results until such stores have been remodeled,
reopened and operated as Just For Feet superstores for 13 months.
In April 1998, the Financial Accounting Standards Board issued Statement of
Position No. 98-5 Reporting on the Cost of Start-Up Activities (the "SOP") which
requires that costs of start-up activities and organization costs be expensed as
incurred. The Company currently expenses start-up costs for new stores in the
month that the new store opens. The SOP is effective for years beginning after
December 15, 1998. If the SOP had been adopted for the nine months ended
October 31, 1998, the cumulative effect of the change in accounting principle
would have resulted in a net charge to earnings of approximately $600,000 ($0.02
per basic and diluted share), net of applicable income taxes of approximately
$375,000. The effect on the three month period ended October 31, 1998 would
have been to increase operating expenses by approximately $2,660,000 and
decrease net income by approximately $1,635,000 ($0.05 per basic and diluted
share). The effect on the nine month period ended October 31, 1998 would have
been to increase operating expenses by approximately $3,030,000 and decrease net
income by approximately $1,865,000 ($0.06 per basic and diluted share).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, income statement data
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------ ------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.7 59.1 58.4 58.4
----- ----- ----- -----
Gross profit 40.3 40.9 41.6 41.6
Franchise fees, royalties and other revenue 0.2 0.2 0.2 0.2
Operating expenses:
Store operating 28.7 28.9 29.4 29.0
Store opening costs 0.6 1.2 1.2 1.4
Amortization of intangibles 0.3 0.3 0.3 0.2
General and administrative 2.7 3.9 3.1 3.9
----- ----- ----- -----
Operating income 8.2 6.8 7.8 7.3
Interest (expense) income, net (1.0) (.1) (0.8) 0.1
----- ----- ----- -----
Earnings before income taxes 7.2 6.7 7.0 7.4
Provision for income taxes 2.8 2.6 2.7 2.8
----- ----- ----- -----
Net earnings 4.4% 4.1% 4.3% 4.6%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1997
Impact of Sneaker Stadium Store Sales - The Company acquired 39 Sneaker Stadium
stores on July 2, 1998. During the quarter ended October 31, 1998, 24 of these
acquired stores ran clearance sales through the third week of September, at
which time such stores were closed for remodeling and conversion to Just For
Feet superstores. Most of these stores are expected to open at the end of
November or in early December 1998. The remaining Sneaker Stadium stores began
clearance sales in early November and are scheduled to close for remodeling in
early January 1999 with planned reopenings as Just For Feet superstores
scheduled for the first quarter of fiscal 1999. As a result of the unusually
high volume of sales with lower gross profit from the clearance sales,
consolidated gross profit and store operating expenses, as a percentage of net
sales have been reduced below typical operating levels. The second group of
clearance sales are planned to be completed during the fourth quarter of this
fiscal year.
8
<PAGE>
Net Sales - Net sales increased approximately $95.0 million, or approximately
72.5%, to $226.0 million in the third quarter of fiscal 1998 compared to net
sales of $131.0 million for the third quarter of fiscal 1997. This increase was
primarily attributable to 28 new superstores and 37 new specialty stores opened
since October 31, 1997, an increase in comparable store sales of 3.1% and
additional sales during the quarter of $54.3 million from the Sneaker Stadium
superstores acquired in July 1998. The calculation of comparable store sales
included 57 superstores and 79 specialty stores at October 31, 1998. The
acquisitions of Sneaker Stadium on July 2, 1998 and the specialty stores
(Athletic Attic on March 17, 1997 and Imperial Sports on May 14, 1997) have been
accounted for as purchases and accordingly, the results of operations of those
businesses are included in the Company's consolidated statement of earnings from
their respective acquisition dates.
Gross Profit - Gross profit for the third quarter of fiscal 1998 increased 70.2%
to $91.1 million from $53.6 million in the prior year comparable period,
primarily as a result of increased sales. As a percentage of net sales, gross
profit for the third quarter of fiscal 1998 decreased to 40.3% from 40.9% for
the third quarter of fiscal 1997 primarily as a result of the dilutive impact of
the clearance sales for 24 of the acquired Sneaker Stadium superstores.
Store Operating Expenses. Store operating expenses increased $26.9 million or
approximately 70.9% to $64.8 million in the third quarter of fiscal 1998 from
$37.9 million in the third quarter of fiscal 1997. The increase was primarily
attributable to the operating expenses of the 28 new superstores and 37 new
specialty stores opened since October 31, 1997, as well as the operating
expenses of the 39 Sneaker Stadium stores acquired in July 1998. As a
percentage of net sales, store operating expenses decreased to 28.7% for the
three month period ended October 31, 1998 from 28.9% for the three month period
ended October 31, 1997 primarily as a result of the dilutive impact of clearance
sales at the Sneaker Stadium stores. Excluding the impact of Sneaker Stadium,
store operating expenses approximated 29.2% of net sales, a slight increase over
the prior year quarter as a result of higher, as a percentage of net sales,
payroll and occupancy expenses all of which was offset by lower net advertising
costs.
Store Opening Costs. Store opening costs are charged to operations in the month
the applicable store opens. These costs remained relatively constant at
approximately $1.4 million and $1.5 million in the third quarters of fiscal 1998
and 1997, respectively. The Company opened four new superstores and 13 new
specialty stores in the third quarter of fiscal 1998 as compared to five new
superstores and three new specialty stores in the third quarter of fiscal 1997.
As a percentage of net sales, such costs declined to 0.6% for the current
quarter from 1.2% in the prior year third quarter as a result of the increase in
net sales noted above.
Amortization of Intangibles. Amortization of intangibles, which includes
amortization of goodwill and franchise rights, increased to approximately
$655,000 for the third quarter of fiscal 1998 from approximately $380,000 in the
third quarter of fiscal 1997. This increase is attributable to the amortization
of goodwill resulting from the acquisitions of the specialty stores and Sneaker
Stadium.
General and Administrative Expenses. General and administrative expenses
increased approximately $1.1 million or 21.3%, to $6.2 million in the third
quarter of fiscal 1998 from $5.1 million in the third quarter of fiscal 1997.
This increase was primarily attributable to the increase in corporate staff to
support the Company's planned growth and the general and administrative expenses
attributed to the Sneaker Stadium acquisition. As a percentage of net sales,
general and administrative expenses decreased to approximately 2.7% in the third
quarter of fiscal 1998 from approximately 3.9% in the third quarter of fiscal
1997, due primarily to the dilutive impact of the clearance sales at the Sneaker
Stadium stores and continued leverage on higher sales at Just For Feet
superstores and specialty stores and continued focus on controlling such costs.
Operating Income. Operating income increased 107.6% to $18.5 million in the
third quarter of fiscal 1998 from $8.9 million in the third quarter of fiscal
1997. Operating income, as a percentage of net sales, increased to 8.2% in the
third quarter of fiscal 1998 from 6.8% in the third quarter of fiscal 1997
primarily due to the decreases in store operating, store opening and general and
administrative expenses as a percentage of net sales, as outlined above.
9
<PAGE>
Interest Expense/Income, Net. Net interest expense was approximately $2.2
million in the third quarter of fiscal 1998, compared to $104,000 in the third
quarter of fiscal 1997. The increase in net interest expense was primarily due
to the increase in debt to fund the acquisition of Sneaker Stadium and to fund
the cash requirements for opening 28 new superstores and 37 new specialty stores
since October 31, 1997.
Provision for Income Taxes. The Company's effective combined federal and state
income tax rate decreased to 38.5% in the quarter ending October 31, 1998
compared to 39.0% in the third quarter of the prior year.
Net Income. As a result of the above factors, net income increased
approximately 86.8% to $10.0 million in the third quarter of fiscal 1998 from
$5.4 million in the third quarter of fiscal 1997.
NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1997
Impact of Sneaker Stadium Store Sales - The Company acquired 39 Sneaker Stadium
stores on July 2, 1998. During the nine months ended October 31, 1998, 24 of
these acquired stores ran clearance sales beginning in mid July and continuing
through the third week of September, at which time such stores were closed for
remodeling and conversion to Just For Feet superstores. Most of these stores are
expected to open at the end of November or in early December 1998. The remaining
Sneaker Stadium stores began clearance sales in early November and are scheduled
to close for remodeling in early January 1999 with planned reopenings as Just
For Feet superstores scheduled for the first quarter of fiscal 1999. As a result
of the unusually high volume of sales with lower gross profit from the clearance
sales, consolidated gross profit and store operating expenses, as a percentage
of net sales have been reduced below typical operating levels. The second group
of clearance sales are planned to be completed during the fourth quarter of this
fiscal year.
Net Sales - Net sales increased $217.1 million, or approximately 64.6%, to
$553.3 million in the first nine months of fiscal 1998 compared to net sales of
$336.2 million for the first nine months of fiscal 1997. This increase was
primarily attributable to 28 new superstores and 37 new specialty stores opened
since October 31, 1997, an increase in comparable store sales of 2.8%, and
additional sales of $71.2 million from the Sneaker Stadium superstores acquired
in July 1998. The calculation of comparable store sales included 57 superstores
and 79 specialty stores at October 31, 1998. Athletic Attic was acquired on
March 17, 1997, Imperial Sports was acquired on May 14, 1997 and Sneaker Stadium
was acquired on July 2, 1998. These acquisitions have been accounted for as
purchases and, accordingly, the results of operations of these acquired
businesses are included in the Company's consolidated statement of earnings from
their respective acquisition dates.
Gross Profit - Gross profit increased 64.7% to $230.3 million for the first nine
months in fiscal 1998 from $139.8 million for the first nine months of fiscal
1997 primarily as a result of increased sales. As a percentage of net sales,
gross profit was 41.6% for the first nine months in both fiscal 1998 and 1997.
Store Operating Expenses. Store operating expenses increased approximately
66.6% to $162.6 million in the first nine months of fiscal 1998 from $97.6
million in the first nine months of fiscal 1997. The increase was primarily
attributable to the operating expenses of the 28 new superstores and 37 new
specialty stores opened since October 31, 1997, and the operating expenses of
the Sneaker Stadium stores acquired in July 1998. As a percentage of net sales,
store operating expenses increased to 29.4% for the nine month period ended
October 31, 1998 from 29.0% for the first nine months of fiscal 1997 primarily
as a result of increased superstore regional management payroll and related
expenses and the increase in superstore level payroll (as a result of the impact
of the minimum wage increase in September 1997), as well as the higher store
operating cost structure of the specialty store group all of which was offset by
lower net advertising costs.
10
<PAGE>
Store Opening Costs. Store opening costs are charged to operations in the month
the applicable store opens. Twenty-one superstores and 32 specialty stores were
opened in the nine month period ended October 31, 1998 compared to 16
superstores opened in the nine month period ended October 31, 1997. These costs
increased approximately $2.0 million to approximately $6.6 million in the first
nine months of fiscal 1998 from approximately $4.6 million in the first nine
months of fiscal 1997.
Amortization of Intangibles. Amortization of intangibles, which includes
amortization of goodwill and franchise rights, increased to approximately $1.5
million for the first nine months of fiscal 1998 from $706,000 for the first
nine months of fiscal 1997. This increase was primarily attributable to the
amortization of goodwill resulting from the acquisitions of Athletic Attic,
Imperial Sports and Sneaker Stadium.
General and Administrative Expenses. General and administrative expenses
increased to $17.4 million, or approximately 32.9%, in the first nine months of
fiscal 1998 from $13.1 million in the first nine months of fiscal 1997. This
increase was primarily attributable to the increase in corporate staff to
support the Company's planned growth and the higher general and administrative
expenses as a percentage of net sales for the specialty store division. As a
percentage of net sales, general and administrative expenses decreased to
approximately 3.1% in the first nine months of fiscal 1998 from approximately
3.9% in the first nine months of fiscal 1997 primarily due to the increase in
sales and the reduction in the percentage of such expenses at the specialty
store division as that division continues to rationalize its overhead structure.
Operating Income. Operating income increased to approximately $43.3 million in
the first nine months of fiscal 1998 from approximately $24.6 million in the
first nine months of fiscal 1997. Operating income, as a percentage of net
sales, increased to approximately 7.8% for the first nine months of fiscal 1998
from approximately 7.3% for the first nine months of fiscal 1997.
Net Interest Income/Expense. Net interest expense was approximately $4.5
million in the first nine months of fiscal 1998, compared to net interest income
of approximately $305,000 in the first nine months of fiscal 1997. The increase
in net interest expense was primarily due to the increase in debt to fund the
acquisitions of Sneaker Stadium in July 1998 and to fund the cash requirements
for opening 28 new superstores and 37 new specialty stores since October 31,
1997 and the May 1997 acquisition of Imperial Sports.
Provision for Income Taxes. The Company's effective combined federal and state
income tax rate increased to 38.5% for the nine months ending October 31, 1998
versus 38.3% for the nine months ending October 31, 1997. The increase in the
effective tax rate resulted primarily from the impact in the prior year period
of non-taxable interest income and the inclusion of non-deductible goodwill
resulting from the acquisitions of Athletic Attic, Imperial Sports and Sneaker
Stadium.
Net Income. As a result of the above factors, net income increased
approximately 54.9% to $23.8 million in the first nine months of fiscal 1998
from net income of $15.4 million in the first nine months of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Just For Feet's primary sources of working capital are cash flows from
operations and borrowings under its lines of credit and other credit facilities
and proceeds from public offerings of securities. The Company had working
capital of $275.4 million and $155.5 million at October 31, 1998 and January 31,
1998, respectively. The principal use of cash has been to fund acquisitions and
store operations, remodel the acquired Sneaker Stadium stores and to purchase
inventory, equipment and fixtures. During the first nine months of fiscal 1998,
the Company acquired approximately $43.6 million of property and equipment,
including approximately $20.1 million to open new stores, approximately $19.0
million for improvements to existing stores, and approximately $4.5 million for
corporate additions and improvements. The Company's short-term operational cash
requirements are not highly seasonal. The Company had approximately $6.9
million in cash and cash equivalents as of October 31, 1998.
11
<PAGE>
On July 2, 1998, the Company consummated the private placement of 926,355
shares of common stock and warrants to purchase an additional 923,591 shares of
common stock to an affiliate of Thomas H. Lee Company, one of the former owners
of Sneaker Stadium. The warrants are exercisable at any time at a price of
$21.59 per share. The Company received $20.0 million from such private
placement.
At October 31, 1998, the Company had unsecured revolving credit lines with
banks aggregating $133 million due December 31, 1998, which bore interest at
floating rates above LIBOR (6.4% to 7.3% at October 31, 1998) under which $121.7
million was outstanding at October 31, 1998.
On December 10, 1998, the Company obtained a $200 million revolving senior
credit Facility (the "Facility") from a syndicate of banks. The Facility
terminates on December 10, 2001, bears interest at a floating rate above either
prime or LIBOR, is guaranteed and secured by the stock of the Company's domestic
subsidiaries and 66 2/3% of the Company's foreign subsidiary and is subject to
certain restrictive covenants. On December 14, 1998, the Company used this
facility to repay amounts outstanding under the Company's other revolving bank
lines. Accordingly, such amounts have been classified as long-term obligations
in the accompanying consolidated balance sheet at October 31, 1998.
The Company also has several arrangements to finance certain store fixtures,
point-of-sale ("POS") equipment and management information systems. Just For
Feet's future capital requirements are primarily for the opening of new
superstores and specialty stores and the conversion of existing Sneaker Stadium
stores to the Just For Feet format and operating systems. The Company estimates
that the total cash required to open a new 15,000 to 20,000 square foot
prototype superstore, including store fixtures and equipment, leasehold
improvements, net working capital and store opening costs, typically ranges from
$1.5 to $2.5 million, depending on the amount of vendor and landlord assistance.
The Company estimates that the total cash required to open a 4,000 to 6,000
square foot specialty store ranges from $300,000 to $400,000. The Company
currently has or will open a total of approximately 25 new superstores, 24
remodeled former Sneaker Stadium stores and 52 new specialty stores in fiscal
1998 and approximately 25 new superstores, 11 to 12 remodeled former Sneaker
Stadium stores and 60 to 100 specialty stores in fiscal 1999. The Company
estimates the cost to remodel a Sneaker Stadium superstore to be approximately
$500,000. The Company plans to increase the average inventory at these stores
from approximately $1.3 million prior to remodeling to approximately $1.8
million at their reopening.
The Company is not currently planning any material expenditures other than
those mentioned above, and believes that internally generated funds, cash on
hand and existing or additional bank borrowings will be adequate to fund its
anticipated needs through at least the end of fiscal 1999.
SEASONALITY
The Company does not experience significant seasonal fluctuations in its
business. However, the highest sales periods for the Company are the spring,
back-to-school and Christmas selling seasons. The Company also generally
experiences lower gross margins during January, February, September and October
due to retail markdowns taken to clear seasonal merchandise. Quarterly results
may fluctuate materially depending on the timing of new store openings and
related store opening expenses, net sales contributed by new stores and
increases or decreases in comparable store sales.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material, adverse effect
on net sales or results of operations. The Company has generally been able to
pass on increased costs through increases in selling prices.
12
<PAGE>
YEAR 2000 READINESS DISCLOSURE
As part of the Company's Compliance Validation Project, the Company has assessed
its hardware and software systems for Year 2000 compliance. The Company also
established policies and procedures to coordinate changes to computer systems
and applications necessary to achieve a Year 2000 date conversion with no effect
on customers or disruption to business operations. These actions are necessary
to ensure that the systems and applications will recognize and process the Year
2000 and beyond. The critical business systems used by the Company break down
into five categories for the discussion of system compliance, findings,
certifications, and remediation of software. The categories include the
following:
. Merchandise control applications, related hardware, and operating systems.
. Administration applications, related hardware, and operating systems.
. Network hardware and software.
. System utilities and databases, related hardware, and operating systems.
. Desktop office automation applications, related hardware, and operating
systems.
All known Year 2000 upgrade, replacement or remediation efforts for key systems
are complete with the following two exceptions:
. User files generated through desktop office automation applications
(estimated completion date June 1999).
. Specialty store division's cash register applications on IBM's Retail
Applications for DOS (estimated completion date April 1999).
The Company relies on two applications to manage inventory and monitor
sales activity. The two applications are Island Pacific's I3 Merchandising
Applications for Retail ("I3") and IBM's Retail Applications for DOS ("RADOS").
Another application, Premenos, provides electronic data interchange ("EDI")
interface capabilities between the Company and vendors for I3 processing. I3 is
an inventory and distribution management system that the Company uses to analyze
sales and inventory, and to purchase, price and distribute product. The Company
also uses an integrated financial package from I3. The Company does not use any
other application for inventory item control or for recording financial
information. The I3 version 1.3, is the latest supported software release of
these applications and is certified Year 2000 compliant by the vendor. I3 runs
on the Company's IBM AS400 model 535 computer. The AS400 runs IBM OS400
operating system software, which IBM certifies is Year 2000 compliant. In
addition, as part of the AS400 upgrades, which took place in 1997 as part of a
normal maintenance routine, the Company ensured Year 2000 compliance of that
hardware. The Company also completed a conversion of all point of sale ("POS")
equipment in its superstores to address enhanced operational needs which also
ensured Year 2000 compliance of those terminals. The completion date of the
upgrade to the Year 2000 RADOS release for the specialty stores is estimated to
be April 1999. All superstore POS registers now operate on the latest version of
RADOS, which IBM certifies as being Year 2000 compliant. RADOS runs on IBM 4694
model 144 POS terminals. These terminals are upgraded to the latest version of
hardware BIOS. The oldest terminal in the Company inventory is approximately two
years old.
Premenos is the Company's EDI translation software. The application sends
electronic purchase orders to the Company's vendors and receives invoices from
them electronically. The application version the Company currently has
installed is certified to be Year 2000 compliant. This upgraded version has
been tested and certified and is operating and exchanging information with I3 on
a daily basis without significant incident.
The human resource application employed by the Company was internally
developed approximately 2 years ago. The system was developed using Delphi
development tools and is integrated with an Oracle database that contains
employee data. The application and the supporting database are currently
processing century date. The Company does plan a major revision or replacement
of the system in the next two years.
13
<PAGE>
The Family Plan application, the Company's "13th pair is free" customer purchase
tracking system, tracks customer's shoe purchases and after 12 pairs are
purchased, provides customers with a free pair of shoes (the 13th pair is free)
at a value equal to the average purchase price of the 12 purchased pairs of
shoes. The system was developed approximately two years ago using the Delphi
development tool kit and is Year 2000 compliant. The application has two
components; a corporate application for tracking and reporting and a store
component for inquiry and redemption. The corporate application runs on a
Solaris 3000 operating system, utilizing Solaris 2.6 and Oracle 7.3. The store
component runs on a Compaq, Windows 95B personal computer. All system hardware
and software for both components are Year 2000 compliant.
The Company's payroll system consists of the following three major components.
. Time clock application.
. The Company's employee information system.
. Ceridian payroll system interface.
The time clock application used by the Company was internally developed. The
application was developed along with the human resource and employee information
system using the Delphi development tool set and integrated with an Oracle
database containing the employee information including time and attendance
information.
The corporate payroll applications run on a Sun 3000 computer, utilizing Solaris
2.6 and accessing employee data in an Oracle, version 7.3, database.
The remaining component of the payroll system consists of an interface written
by the Company with the Ceridian system that calculates net pay and produces
paychecks for Company employees. The interface was written using the Delphi
development toolkit. Validation of Ceridian Year 2000 compliance is part of the
Company's Compliance Validation Project and is scheduled to be completed in
early 1999.
Novell Intranetware version 4.10 is the system software that provides directory
services and server management functions for all of the corporate and store
local area networks. Version 4.10 is Year 2000 compliant and is functioning on
a daily basis without significant incidents. The Company also uses many
utilities and management tools developed by Novell for network management. All
versions of Novell utilities used by the Company are Year 2000 compliant.
The Company's other applications which are not dependent on computers or
software such as security, fire, phone, audio and visual entertainment systems,
heating and air conditioning and other such systems have been evaluated and are
considered to be Year 2000 compliant. Vendor surveys and requests for
certifications of Year 2000 compliance are being developed. All major vendors
considered critical to the Company's business continuity have been contacted
directly by phone. The process of finalizing communications with the Company
vendors is scheduled to be completed by early 1999.
The Company has not developed a contingency plan but will do so, if deemed
necessary, upon completion of its assessment of vendor readiness with regard to
the Year 2000 issue. The Company has not incurred any significant historical
costs related to the Year 2000 issue as their systems have been upgraded as part
of the Company's normal maintenance routines and also due to their rapid growth.
Management currently estimates that the total remaining costs of achieving Year
2000 compliance and of assessing major vendor compliance will not exceed
$500,000. Any failure of the Company's computer system or those of certain
third parties to achieve Year 2000 compliance on a timely basis could have a
material adverse effect on the Company's business, financial condition and
results of operations.
14
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This filing contains statements that constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. These statements appear in a number of places in this filing and
the Company's other filings with the Securities and Exchange Commission ("SEC")
and include statements regarding the intent, belief or current expectations of
the Company, its directors or its officers with respect to, among other things:
(i) the timing, magnitude and costs of the Company's entry into the smaller
specialty store market of the industry; (ii) the Company's expansion plans;
(iii) the Company's ability to successfully convert Sneaker Stadium superstores
to Just For Feet superstores; (iv) potential acquisitions by the Company; (v)
trends affecting the Company's financial condition or results of operations; and
(vi) the Company's business and growth strategies. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. The information contained in this filing and the
Company's other filings with the SEC, including without limitation the
information set forth under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" identifies important factors that
could cause such differences.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------- ---------------------------------
(a) Exhibits. No exhibits are required to be filed with this Report.
(b) Reports on Form 8-K. No Reports on Form 8-K were filed during the
three months ended October 31, 1998.
15
<PAGE>
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.
JUST FOR FEET, INC.
Dated: December 15, 1998 By: /s/ Harold Ruttenberg
-----------------------
Harold Ruttenberg
Chairman, President and Chief
Executive Officer
Dated: December 15, 1998 By: /s/ Eric L. Tyra
------------------
Eric L. Tyra
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUST FOR
FEET, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1998
<PERIOD-START> FEB-01-1998 FEB-01-1997
<PERIOD-END> OCT-31-1998 OCT-31-1997
<CASH> 6,896 82,490
<SECURITIES> 0 0
<RECEIVABLES> 16,641 15,840
<ALLOWANCES> 0 0
<INVENTORY> 342,186 206,128
<CURRENT-ASSETS> 384,550 311,167
<PP&E> 152,692 108,487
<DEPRECIATION> 23,657 13,958
<TOTAL-ASSETS> 589,426 448,352
<CURRENT-LIABILITIES> 109,151 155,706
<BONDS> 0 0
0 0
0 0
<COMMON> 3 3
<OTHER-SE> 321,487 268,081
<TOTAL-LIABILITY-AND-EQUITY> 589,426 448,352
<SALES> 553,258 336,205
<TOTAL-REVENUES> 554,393<F1> 338,293
<CGS> 322,977 196,382
<TOTAL-COSTS> 492,181<F2> 298,555
<OTHER-EXPENSES> 18,811<F3> 13,774
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,561 1,021
<INCOME-PRETAX> 38,750 24,943
<INCOME-TAX> 14,919 9,561
<INCOME-CONTINUING> 23,831 15,382
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,831 15,382
<EPS-PRIMARY> 0.78 0.52
<EPS-DILUTED> 0.75 0.51
<FN>
<F1>Includes - Sales, Franchise fees, Royalties and Other Income and interest
income.
<F2>Includes - CGS, store operating and store opening costs.
<F3>Includes - Amortization of intangibles and general and administrative costs.
</FN>
</TABLE>
