UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 1-10767
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VALUE CITY DEPARTMENT STORES, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1322832
-------------------------------- -------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
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(Address of principal executive offices) (Zip Code)
(614) 471-4722
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Registrant's telephone number, including area code
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
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 and
(2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of Common Stock, without par value, as of
December 2, 2001 was 34,416,960.
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at November 3, 2001 and February 3, 2001............................3
Consolidated Statements of Operations for the three and nine months
ended November 3, 2001 and October 28, 2000.................................................4
Consolidated Statements of Cash Flows for the nine months ended
November 3, 2001 and October 28, 2000 ......................................................5
Notes to the Consolidated Financial Statements..................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................17
Item 2. Changes in Securities and Use of Proceeds......................................................17
Item 3. Defaults Upon Senior Securities................................................................17
Item 4. Submission of Matters to a Vote of Security Holders............................................17
Item 5. Other Information..............................................................................17
Item 6. Exhibits and Reports on Form 8-K...............................................................17
Signature........................................................................................................18
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
--------------------------------------------------------------------------------
NOVEMBER 3, FEBRUARY 3,
2001 2001
----------- -----------
ASSETS
Current assets:
Cash and equivalents $ 25,342 $ 10,562
Accounts receivable, net 5,805 44,927
Receivables from affiliates 2,839 9,452
Inventories 493,125 393,577
Prepaid expenses and other assets 18,705 22,290
Deferred income taxes 74,165 51,732
--------- ---------
Total current assets 619,981 532,540
Property and equipment, at cost:
Furniture, fixtures and equipment 227,179 223,675
Leasehold improvements 185,817 176,318
Land and building 801 801
Capital leases 37,413 38,348
--------- ---------
451,210 439,142
Accumulated depreciation and amortization (211,621) (190,103)
--------- ---------
Property and equipment, net 239,589 249,039
Investment in joint venture 5,840 8,292
Goodwill and tradenames, net 60,044 67,056
Other assets 48,304 51,082
--------- ---------
Total assets $ 973,758 $ 908,009
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 205,748 $ 180,736
Accounts payable to affiliates 19,804 13,655
Accrued expenses:
Compensation 18,363 19,662
Taxes 36,774 31,255
Other 66,453 75,227
Current maturities of long-term obligations 623 603
--------- ---------
Total current liabilities 347,765 321,138
Long-term obligations, net of current maturities 381,382 326,449
Deferred income taxes and other noncurrent liabilities 15,127 10,115
Commitments and contingencies - -
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized;
issued, including treasury shares, 34,416,960 and
34,330,863 shares, respectively 146,526 145,659
Retained earnings 91,107 111,155
Deferred compensation expense, net (4,948) (6,448)
Treasury shares, at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (3,142) -
--------- ---------
Total shareholders' equity 229,484 250,307
--------- ---------
Total liabilities and shareholders' equity $ 973,758 $ 908,009
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
NOVEMBER 3, OCTOBER 28, NOVEMBER 3, OCTOBER 28,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales, excluding sales of licensed departments $ 584,403 $ 559,820 $ 1,650,994 $ 1,550,119
Cost of sales (360,943) (446,973) (1,020,041) (1,059,252)
----------- ----------- ----------- -----------
Gross profit 223,460 112,847 630,953 490,867
Selling, general and administrative expenses (229,167) (235,835) (648,968) (607,090)
License fees from affiliates 2,592 1,599 6,843 6,248
Other operating income 1,658 614 4,247 2,048
----------- ----------- ----------- -----------
Operating loss (1,457) (120,775) (6,925) (107,927)
Interest expense, net (7,406) (7,873) (23,900) (21,191)
(Loss) gain on disposal of assets, net (18) (597) (13) 244
----------- ----------- ----------- -----------
Loss before equity in loss of joint venture
and benefit for income taxes (8,881) (129,245) (30,838) (128,874)
Equity in loss of joint venture (1,242) (551) (2,453) (712)
----------- ----------- ----------- -----------
Loss before benefit
for income taxes (10,123) (129,796) (33,291) (129,586)
Benefit for income taxes 3,645 50,781 13,243 50,694
----------- ----------- ----------- -----------
Net loss $ (6,478) $ (79,015) $ (20,048) $ (78,892)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.19) $ (2.35) $ (0.60) $ (2.36)
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED
----------------------------
NOVEMBER 3, OCTOBER 28,
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,048) $ (78,892)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 38,972 32,854
Deferred income taxes and other noncurrent liabilities (17,421) (32,183)
Equity in loss of joint venture 2,453 712
Loss (gain) on disposal of assets 13 (244)
Change in working capital, assets and liabilities excluding
effects of acquisition:
Receivables 49,270 (48,154)
Inventories (99,548) (64,224)
Prepaid expenses and other assets 3,585 3,165
Accounts payable 31,172 59,983
Accrued expenses (8,384) 10,809
--------- ---------
Net cash used in operating activities (19,936) (116,174)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (22,588) (55,052)
Proceeds from sale of assets 131 359
Acquisition - (3,506)
Other assets and lease acquisition costs 1,096 (14,392)
--------- ---------
Net cash used in investing activities (21,361) (72,591)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 784 1,374
Net proceeds from issuance of debt 55,293 186,478
--------- ---------
Net cash provided by financing activities 56,077 187,852
--------- ---------
Net increase (decrease) in cash and equivalents 14,780 (913)
Cash and equivalents, beginning of period 10,562 6,027
--------- ---------
Cash and equivalents, end of period $ 25,342 $ 5,114
========= =========
Non-cash transactions:
Issuance of common shares related to acquisition - $ 5,500
Contribution made in treasury shares - $ 1,080
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
(unaudited)
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1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Value City Department Stores, Inc. (VCDS) and its wholly owned
subsidiaries. These entities are herein referred to collectively as the
Company. The Company operates a chain of full-line, off-price department
stores, principally under the name "Value City", a chain of off-price
specialty retail stores under the name "Filene's Basement", as well as
better-branded off-price shoe stores, under the name "DSW Shoe Warehouse."
As of November 3, 2001 a total of 238 stores were open, including 118 Value
City stores located principally in Ohio (23 stores) and Pennsylvania (19
stores) with the remaining stores dispersed throughout the Midwest, East
and South, 100 DSW Shoe Warehouse stores (DSW) located throughout the
United States, and 20 Filene's Basement stores ("Filene's") located
principally in the New England states.
The accompanying consolidated financial statements reflect all adjustments
consisting of only normal recurring adjustments, which are, in the opinion
of management, necessary to present fairly the consolidated financial
position and results of operations for the periods presented.
Certain previously reported balances have been reclassified to conform with
the current period presentation.
2. SHAREHOLDERS' EQUITY
The Company entered into a $75.0 million Senior Subordinated Convertible
Loan Agreement ("Senior Facility"), dated as of March 15, 2000. The Senior
Facility bears interest at various rates, currently equal to 325 basis
points over LIBOR. The interest rate increases an additional 50 basis
points every 90 days after the first anniversary date. The Senior Facility
is due in September 2003. In December 2000, pursuant to terms of the Senior
Facility, Schottenstein Stores Corporation ("SSC"), direct owner of
approximately 53.0% of the Company's common shares, purchased the
outstanding balance under the same continuing terms. The terms, as amended,
provide that if prior to November 5, 2001, the balance outstanding
thereunder is not repaid from the proceeds of an equity offering or other
subordinated debt acceptable to lenders under the Credit Agreement, then
after that date SSC, as the lender, has the right to convert the debt into
our common stock at a price equal to 95% of the 20-day average of high and
low sales prices reported on the New York Stock Exchange at the time of
conversion. The Company paid SSC a one time fee of 200 basis points, or
$1.5 million, in December 2000 as consideration for entering into a Put
Agreement associated with the Senior Facility.
3. VALUATION ACCOUNTS
For the three and nine months ended November 3, 2001, charges to the
inventory realignment reserve were $-0- and $43.7 million and charges to
the accrued severance liability were $1.8 million and $3.4 million,
respectively.
4. ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues
Statements of Financial Accounting Standards ("SFAS"), some of which
require implementation by a date falling within or after the close of our
fiscal year.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for all fiscal years beginning after June 15, 2000. SFAS 133,
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS 133, certain contracts
that were not formerly considered derivatives may now meet the definition
of a derivative. The Company's adoption of SFAS 133 effective February 4,
2001 did not have a significant impact on the financial position, results
of operations, or cash flows of the Company.
The Company utilizes interest rate swap agreements to manage its interest
rate risks on borrowings under its $300 million variable rate credit
agreement. The Company does not hold or issue derivative financial
instru-
Page 6
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
(unaudited)
--------------------------------------------------------------------------------
ments for trading purposes. The Company does not have derivative financial
instruments that are held or issued and accounted for as hedges of
anticipated transactions.
In June 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". The guidance in SFAS No.
141 supercedes APB 16 and is applicable to business combinations initiated
after June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to
be amortized and will instead be subject to at least an annual assessment
for impairment as set forth in the new standard. The Company is currently
evaluating the Statement's impairment provisions and has not yet determined
what effect, if any, they might have on the consolidated financial position
and results of operations of the Company.
The Company has approximately $49.4 million in goodwill recorded in its
consolidated balance sheet as of November 3, 2001. Amortization of the
goodwill is generally not subject to taxes. Under the provisions of SFAS
No. 142, goodwill will cease to be amortized for fiscal years beginning
after December 15, 2001 (fiscal 2002) for the Company. The Company recorded
approximately $2.8 million in amortization expense related to goodwill for
the nine months ended November 3, 2001. The Company intends to adopt SFAS
No. 142 for the 2002 fiscal year.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Under this
Statement obligations that meet the definition of a liability will be
recognized consistently with the retirement of the associated tangible
long-lived assets. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Because SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a discontinued operation under
Opinion 30, two accounting models existed for long-lived assets to be
disposed of. The Board decided to establish a single accounting model,
based on the framework established in Statement 121, for long-lived assets
to be disposed of by sale. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years.
The Company is currently assessing the impact of SFAS No. 143 and 144. At
this time, the Company has yet to determine the effect of these
pronouncements on its results of operations and its financial position.
5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is defined as the change in equity of
a business enterprise during a period from transactions and other events
and circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The difference between net earnings and
comprehensive earnings for the quarter ending November 3, 2001 relates to
the change in the fair market value of interest rate swap agreements. Other
comprehensive loss is $0.8 million and $3.1 million greater than net loss
for the three and nine month periods ended November 3, 2001, respectively.
6. INVESTMENT IN JOINT VENTURE
Pursuant to the terms of the joint venture Operating Agreement, the Company
in July 2001 informed Mazel Stores, Inc. of its intention to terminate the
joint venture. The Company is in discussion with Mazel regarding the notice
of termination.
Page 7
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
(unaudited)
--------------------------------------------------------------------------------
7. SEGMENT REPORTING
The Company is managed in three operating segments: Value City Department
Stores, DSW Shoe Warehouse stores and Filene's Basement stores, acquired
effective March 17, 2000. All of the operations are located in the United
States. The Company has identified such segments based on management
responsibility and measures segment profit as operating (loss) profit that
is defined as income (loss) before interest expense and income taxes.
Corporate assets include goodwill and loan costs related to the Shonac/DSW
business acquisition.
THREE-MONTH PERIOD ENDED NOVEMBER 3, 2001 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $370,543 $136,219 $77,641 - $584,403
Operating (loss) profit (4,649) 2,094 1,098 - (1,457)
Capital expenditures 2,175 5,432 216 - 7,823
Depreciation and amortization 8,640 1,984 1,825 $1,280 13,729
THREE-MONTH PERIOD ENDED OCTOBER 28, 2000 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $375,525 $111,472 $72,823 - $559,820
Operating (loss) profit (125,027) 5,906 (1,654) - (120,775)
Capital expenditures 14,298 3,891 2,383 - 20,572
Depreciation and amortization 8,884 785 3,272 $928 13,869
NINE-MONTH PERIOD ENDED NOVEMBER 3, 2001 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $1,052,042 $388,885 $210,067 - $1,650,994
Operating (loss) profit (18,136) 5,810 5,401 - (6,925)
Identifiable assets 661,101 168,060 118,101 $26,496 973,758
Capital expenditures 10,022 11,999 567 - 22,588
Depreciation and amortization 26,456 4,702 5,030 2,784 38,972
NINE-MONTH PERIOD ENDED OCTOBER 28, 2000 (IN THOUSANDS):
VALUE CITY DSW FILENE'S CORPORATE TOTAL
---------- --- -------- --------- -----
Net sales $1,086,432 $300,998 $162,689 - $1,550,119
Operating (loss) profit (127,050) 15,048 4,075 - (107,927)
Identifiable assets 720,346 98,373 139,526 $28,801 987,046
Capital expenditures 42,473 9,720 2,859 - 55,052
Depreciation and amortization 23,570 2,191 4,272 2,821 32,854
8. NON-BINDING LETTER OF INTENT FOR THE SALE OF CERTAIN OPERATIONS
In August 2001, the Company entered into a non-binding letter of intent
with SSC whereby SSC may acquire all of the outstanding stock or assets of
Shonac Corporation, DSW Shoe Warehouse, Inc. and Filene's Basement, Inc.
(the "Businesses") for an aggregate purchase price of $275 million,
comprised of $200 million in cash and the assumption of the $75 million
Senior Subordinated Convertible Loan held by SSC.
The non-binding letter of intent, as amended, allowed the Company to
solicit third party preliminary non-binding indications of interest for one
or more of the Businesses through September 2001 and to terminate the
letter of intent or any definitive purchase agreement with SSC pursuant to
a superior proposal for one or more of the Businesses through the later of
October 25, 2001, or the execution of a definitive agreement with SSC,
subject to the payment of a termination fee of $8.45 million.
Page 8
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 3, 2001 AND OCTOBER 28, 2000
(unaudited)
--------------------------------------------------------------------------------
As part of the consideration, in September 2001, SSC agreed to increase
immediately the line of credit under the Value City Subordinated Credit
Agreement from $50 million to $100 million under the same terms as set
forth in the Subordinated Credit Agreement.
The Company is currently considering and evaluating various alternatives to
the non-binding letter of intent.
9. SUBSEQUENT EVENT
In conjunction with the release of the third quarter results of operations
on November 27, 2001, the Company announced the implementation of a
corporate restructuring and workforce reduction program that will be
concluded in the fourth quarter. This reduction, which is primarily at the
Company's corporate offices, includes the immediate elimination of numerous
positions, which will result in approximate annual savings of $8.5 million.
In the fourth quarter, the Company will recognize a pretax charge related
to severance and outplacement costs of approximately $3.5 million.
Page 9
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in the Company's
Consolidated Statements of Operations.
Three months ended Nine months ended
-------------------------------------- ----------------------------------------
November 3, 2001 October 28, 2000 November 3, 2001 October 28, 2000
---------------- ---------------- ---------------- ----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 38.2 20.1 38.2 31.7
Selling, general and
administrative expenses (39.2) (42.1) (39.3) (39.2)
License fees from affiliates and
other operating income 0.7 0.4 0.7 0.5
------- ------- ------- --------
Operating loss (0.3) (21.6) (0.4) (7.0)
Interest expense, net, and
(loss) gain on disposals (1.2) (1.5) (1.4) (1.4)
Equity in loss of joint venture (0.2) (0.1) (0.2) -
------- ------- ------- ----------
Loss before income taxes (1.7) (23.2) (2.0) (8.4)
Benefit for income taxes 0.6 9.1 0.8 3.3
------- ------- ------- --------
Net loss (1.1)% (14.1)% (1.2)% (5.1)%
======= ====== ======= ========
THREE MONTHS ENDED NOVEMBER 3, 2001 COMPARED TO THREE MONTHS ENDED OCTOBER 28,
2000
The Company's net sales increased $24.6 million, or 4.4%, from $559.8 million to
$584.4 million. Fiscal 2001 includes sales of $77.6 million for Filene's
Basement which was acquired in March 2000. The prior year third quarter sales
for Filene's Basement were $72.8 million. Comparable stores sales for the
quarter decreased 0.7%. By segment, comparable store sales were:
2001 2000
---- ----
Value City Department Stores ........... (0.1)% (8.1)%
DSW .................................... (2.4)% 18.3%
Filene's Basement ...................... (1.2)% N/A
TOTAL .................................. (0.7)% (4.3)%
Value City's non-apparel comparable sales increased 9.0% while apparel sales
decreased 2.1%. Children's had a comparable store sales increase of 6.6% while
men's and ladies decreased 2.7% and 5.8%, respectively.
DSW sales were $136.2 million, a 22.2% increase in the quarter, which includes a
net increase of 25 stores.
Gross profit increased $110.7 million, from $112.8 million to $223.5 million,
and increased as a percentage of sales from 20.1% to 38.2%. Last year's gross
margin for the quarter included a $87.4 million charge for the realignment of
excess inventory quantities. Gross profit, as a percent of sales by segment in
the third quarter, were:
Page 10
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
2001 2000
---- ----
Value City Department Stores ........... 38.6% 12.4%
DSW .................................... 39.4% 37.5%
Filene's Basement ...................... 34.6% 33.5%
TOTAL .................................. 38.2% 20.2%
Selling, general and administrative expenses ("SG&A") decreased $6.6 million,
from $235.8 million to $229.2 million, and decreased as a percentage of sales
from 42.1% to 39.2%. This decrease is after an additional $6.9 million was
incurred for new stores in operation at DSW and Filene's Basement. Fiscal 2001
third quarter SG&A includes an additional charge of $8.0 million across all
segments for costs associated with employee health and welfare and employment
taxes. In addition, there is a charge of $1.3 million for two store closings in
Value City. SG&A as a percent of sales by segment in the third quarter were:
2001 2000
---- ----
Value City Department Stores ........... 40.9% 44.8%
DSW .................................... 37.8% 37.0%
Filene's Basement ...................... 33.6% 36.3%
TOTAL 39.2% 42.1%
License fees from affiliates and other operating income increased $2.0 million,
from $2.2 million to $4.2 million, and increased as a percentage of sales from
0.4% to 0.7%.
Operating loss decreased $119.3 million, from $120.8 million to $1.5 million,
and decreased as a percentage of sales from 21.6% to 0.3%. It has been the
Company's experience that new stores generally achieve profitability and
contribute to net income after the first full year of operations. 15 department
stores opened less than twelve months had an operating loss of $6.0 million for
the current three-month period.
Interest expense, net of interest income, decreased $0.5 million, from $7.9
million to $7.4 million, and decreased as a percentage of sales from 1.5% to
1.2%. This decrease is attributable to higher weighted average borrowings offset
by lower effective interest rates.
Equity in the loss of the joint venture represents the Company's fifty percent
interest in a joint venture with Mazel Stores, Inc. and increased from a loss of
$0.6 million to a loss of $1.2 million. Pursuant to terms of the Operating
Agreement, the Company, on July 19, 2001, informed Mazel Stores, Inc. of its
intention to terminate the joint venture. The Company is in discussion with
Mazel regarding the notice of termination.
The effective tax rate for the three months ended November 3, 2001 is 36.0%
versus 39.1% for the three months ended October 28, 2000. The Company expects
its tax rate to trend lower during the remainder of the year, but it will
ultimately depend on operating results for the fourth quarter and the relative
impact of permanent differences between tax and book income.
NINE MONTHS ENDED NOVEMBER 3, 2001 COMPARED TO NINE MONTHS ENDED OCTOBER 28,
2000
The Company's net sales increased $100.9 million, or 6.5%, from $1,550.1 million
to $1,651.0 million. Fiscal 2001 includes sales of $210.1 million for Filene's
Basement which was acquired in March 2000. The prior year third quarter sales
for Filene's Basement were $162.7 million. Comparable stores sales for the
nine-month period decreased 3.0%. By segment comparable store sales were:
Page 11
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
2001 2000
---- ----
Value City Department Stores ........... (4.6)% (2.1)%
DSW .................................... 0.4% 21.7%
Filene's Basement ...................... 2.3% N/A
TOTAL .................................. (3.0)% 1.5%
Value City's non-apparel comparable sales increased 3.7% while apparel sales
decreased 7.0%. Children's had a comparable stores sales increase of 2.4% while
the men's division was down 4.8% and the ladies division was down 12.3%.
DSW sales were $388.9 million, a 29.2% increase in the nine-month period, which
includes a net increase of 25 stores.
Gross profit increased $140.1 million, from $490.9 million to $631.0 million,
and increased as a percentage of sales from 31.7% to 38.2%. Last year's gross
profit included a $87.4 million charge for the realignment of excess inventory
quantities. Gross profit as a percent of sales by segment in the nine-month
period quarter were:
2001 2000
---- ----
Value City Department Stores ........... 38.5% 29.2%
DSW .................................... 39.1% 38.4%
Filene's Basement ...................... 35.3% 35.8%
TOTAL .................................. 38.2% 31.7%
Selling, general and administrative expenses ("SG&A") increased $41.9 million,
from $607.1 million to $649.0 million, and increased as a percentage of sales
from 39.2% to 39.3%. The percentage increase was due in part to the weak sales
performance in the Value City department stores. $26.1 million of the increase
in SG&A is associated with new DSW stores and Filene's Basement stores. New
store pre-opening expenses for the nine-month period were $4.9 million less than
last year. Fiscal 2001 SG&A includes an additional charge of $7.9 million across
all segments for costs associated with employee health and welfare and
employment taxes. In addition, there is a charge of $1.3 million for two store
closings in Value City. SG&A as a percent of sales by segment in the nine-month
period were:
2001 2000
---- ----
Value City Department Stores ........... 41.1% 40.7%
DSW .................................... 37.7% 36.2%
Filene's Basement ...................... 33.5% 34.6%
TOTAL 39.3% 39.2%
License fees from affiliates and other operating income increased $2.8 million,
from $8.3 million to $11.1 million, and increased from 0.5% to 0.7% as a
percentage of sales.
Operating loss decreased $101.0 million, from $107.9 million to $6.9 million,
and decreased as a percentage of sales from 7.0% to 0.4%. 15 department stores
opened less than twelve months had an operating loss of $14.4 million for the
current nine-month period, and 28 DSW stores opened less than twelve months had
an operating profit of $2.4 million, including $4.4 million of pre-opening
expenses. 3 Filene's Basement stores opened less than twelve months had an
operating profit of $0.4 million, including $0.4 million of pre-opening
expenses.
Interest expense, net of interest income, increased $2.7 million, from $21.2
million to $23.9 million, and remained at 1.4% of sales.
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Equity in the loss of the joint venture represents the Company's fifty percent
interest in a joint venture with Mazel Stores, Inc. The loss increased from $0.7
million to $2.5 million. Pursuant to terms of the Operating Agreement, the
Company, on July 19, 2001 informed Mazel Stores, Inc. of its intention to
terminate the joint venture. The Company is in discussion with Mazel regarding
the notice of termination.
The effective tax rate for the nine months ended November 3, 2001 is 39.8%
versus 39.1% for the nine months ended October 28, 2000. The Company expects its
tax rate to trend lower during the remainder of the year, but it will ultimately
depend on our operating results for the fourth quarter and the relative impact
of our permanent differences between tax and book income.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $272.2 million at November 3, 2001, compared to $251.9
million at October 28, 2000. Current ratios at those dates were each 1.78 and
1.72, respectively.
Net cash used in operating activities totaled $19.9 million and $116.2 million
for the nine months ended November 3, 2001 and October 28, 2000, respectively.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
nine months ended November 3, 2001 was $29.6 million.
Net cash used for capital expenditures was $22.6 million and $55.1 million for
the nine months ended November 3, 2001 and October 28, 2000, respectively.
During the nine months ended November 3, 2001, capital expenditures included
$2.2 million for new stores, $7.1 million on existing stores and $13.3 million
for relocation of office, warehousing and operations of our shoe business.
At November 3, 2001, the Company had a $300 million Amended and Restated Credit
Agreement ("Credit Agreement"), dated as of March 15, 2000. The Credit
Agreement, which expires on March 15, 2003, provides for revolving and overnight
loans and issuance of letters of credit. Outstanding advances are secured by a
lien on assets and are subject to a monthly borrowing base of eligible
inventories and receivables, as defined. Terms of the Credit Agreement require
compliance with certain restrictive covenants, including limitations on
dividends, the incurrence of additional debt and financial ratio tests.
Additionally, the Company has provided an unconditional guarantee of 50% of
amounts outstanding on VCM, Ltd's ("VCM") $25.0 million revolving line of
credit. At November 3, 2001, $18.0 million was available under the Credit
Agreement. The Credit Agreement provides for various borrowing rates, currently
equal to 275 basis points over LIBOR. The LIBOR rate on $75.0 million has been
locked in at a fixed annual rate of 6.99% through March 2003 under a swap
agreement.
To supplement operating cash requirements the Company has a $50.0 million
Subordinated Credit Agreement with Schottenstein Stores Corp. ("SSC Facility").
In September 2001, the SSC Facility was increased to $100 million. Outstanding
advances under the SSC Facility are subordinated to the Credit Agreement and are
subject to a junior lien on assets securing the Credit Agreement. At November 3,
2001, $35.0 million was outstanding. The interest rate and terms of the SSC
Facility are generally the same as the Credit Agreement.
The Company has a $75.0 million Senior Subordinated Convertible Loan Agreement
("Senior Facility"), dated as of March 15, 2000. The Senior Facility bears
interest at various rates, currently equal to 325 basis points over LIBOR. The
interest rate increases an additional 50 basis points every 90 days after the
first anniversary date. The Senior Facility is due in September 2003, and is due
to Schottenstein Stores Corp. ("SSC") The terms, as amended, provide that if
prior to November 5, 2001, the balance outstanding thereunder is not repaid from
the proceeds of an equity offering or other subordinated debt acceptable to
lenders under the Credit Agreement, then after that date SSC, as the lender, has
the right to convert the debt into common stock at a price equal to 95% of the
20-day average of high and low sales prices reported on the New York Stock
Exchange at the time of conversion. SSC was paid a one-time fee of 200 basis
points, or $1.5 million, in December 2000 as consideration for entering into a
Put Agreement associated with the Senior Facility.
In the first quarter of fiscal 2001 a major factor reduced our availability of
credit and indicated that the Company needed to strengthen its liquidity and
increase its credit availability from other sources. Future limitations of
credit availability by factors and/or vendors will restrict the ability of the
Company to obtain merchandise and services and may impair operating results.
Although operating results in the first nine fiscal months of 2001 were below
plan, management believes that cash generated by operations, along with the
available proceeds from our Credit Agreement, SSC Facility and other sources of
financing will be sufficient to meet our obligations for working capital,
Page 13
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
capital expenditures, and debt service requirements. However, there is no
assurance that the Company will be able to meet its projections. Further, there
is no assurance that extended financing will be available to the Company in the
future if it fails to meet its projections.
In August 2001, the Company entered into a non-binding letter of intent with SSC
whereby SSC may acquire all of the outstanding stock or assets of Shonac
Corporation, DSW Shoe Warehouse, Inc. and Filene's Basement, Inc. (the
"Businesses") for an aggregate purchase price of $275 million, comprised of $200
million in cash and the assumption of the $75 million Senior Subordinated
Convertible Loan held by SSC.
The non-binding letter of intent, as amended, allowed the Company to solicit
third party preliminary non-binding indications of interest for one or more of
the Businesses through September 2001 and to terminate the letter of intent or
any definitive purchase agreement with SSC pursuant to a superior proposal for
one or more of the Businesses through the later of October 25, 2001, or the
execution of a definitive agreement with SSC, subject to the payment of a
termination fee of $8.45 million.
As part of the consideration, in September 2001 SSC agreed to increase
immediately the line of credit under the Value City Subordinated Credit
Agreement from $50 million to $100 million under the same terms as set forth in
the Subordinated Credit Agreement.
The Company is currently considering and evaluating various alternatives to the
non-binding letter of intent.
SUBSEQUENT EVENT
In conjunction with the release of the third quarter results of operations on
November 27, 2001, the Company announced the implementation of a corporate
restructuring and workforce reduction program that will be completed in the
fourth quarter. This reduction, which is primarily at the Company's corporate
offices, includes the immediate elimination of numerous positions, which will
result in approximate annual savings of $8.5 million. In the fourth quarter, the
Company will recognize a pretax charge related to severance and outplacement
costs of approximately $3.5 million.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) periodically issues Statements
of Financial Accounting Standards ("SFAS"), some of which require implementation
by a date falling within or after the close of our fiscal year.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
133, certain contracts that were not formerly considered derivatives may now
meet the definition of a derivative. The Company's adoption of SFAS 133
effective February 4, 2001 did not have a significant impact on the financial
position, results of operations, or cash flows of the Company.
The Company utilizes interest rate swap agreements to manage its interest rate
risks on borrowings under its $300 million variable rate credit agreement. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company does not have derivative financial instruments that are
held or issued and accounted for as hedges of anticipated transactions.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets". The guidance in SFAS No. 141
supercedes APB 16 and is applicable to business combinations initiated after
June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to be
amortized and will instead be subject to periodic impairment reviews as set
forth in the new standard. The Company is currently evaluating the Statement's
impairment provisions and has not yet determined what effect, if any, they might
have on the consolidated financial position and results of operations of the
Company.
The Company has approximately $49.4 million in goodwill recorded in its
consolidated balance sheet as of November 3, 2001. Amortization of the goodwill
is generally not subject to taxes. Under the provisions of SFAS No. 142,
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
goodwill will cease to be amortized for fiscal years beginning after December
15, 2001 (fiscal 2002) for the Company). The Company recorded approximately $2.8
million in amortization expense related to goodwill for the nine months ended
November 3, 2001. The Company intends to adopt SFAS No. 142 for the 2002 fiscal
year.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addressed financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Under this Statement obligations that meet
the definition of a liability will be recognized consistently with the
retirement of the associated tangible long-lived assets. This Statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Because SFAS No. 121 did not address
the accounting for a segment of a business accounted for as a discontinued
operation under Opinion 30, two accounting models existed for long-lived assets
to be disposed of. The Board decided to establish a single accounting model,
based on the framework established in Statement 121, for long-lived assets to be
disposed of by sale. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years.
The Company is currently assessing the impact of SFAS No. 143 and 144. At this
time, the Company has yet to determine the effect of these pronouncements on its
results of operations and its financial position.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
the effect of inflation, if any, on the results of operations and financial
condition has been minor.
RISK FACTORS AND SAFE HARBOR STATEMENT
We caution that any forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995) contained in this Report,
other filings with the Securities and Exchange Commission or made by our
management involve risks and uncertainties, and are subject to change based on
various important factors. The following factors, among others, in some cases
have affected and in the future could affect our financial performance and
actual results and could cause actual results for 2001 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: decline in demand for our merchandise, our ability to attain our
fiscal 2001 business plan, expected cash from operations, vendor and their
factor relations, flow of merchandise, compliance with the credit agreement, our
ability to strengthen our liquidity and increase our credit availability, the
availability of desirable store locations on suitable terms, changes in consumer
spending patterns, consumer preferences and overall economic conditions, the
impact of competition and pricing, changes in weather patterns, changes in
existing or potential duties, tariffs or quotas, paper and printing costs, and
the ability to hire and train associates.
Historically, our operations have been seasonal, with a disproportionate amount
of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons. As a result of this seasonality, any factors
negatively affecting us during this period, including adverse weather, the
timing and level of markdowns or unfavorable economic conditions, could have a
material adverse effect on our financial condition and results of operations for
the entire year.
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VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk results from fluctuations in interest rates.
The Company is exposed to interest rate risk through borrowings under its
revolving credit agreement, which permits borrowings up to $300 million. To
minimize the effect of interest rate fluctuations, the Company has entered into
a $75 million interest rate swap arrangement. Under this agreement, the Company
pays a fixed rate of interest on a portion of the outstanding balance.
Page 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable
ITEM 5. OTHER INFORMATION. Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Part A Exhibits. Not applicable
Part B Reports on Form 8-K
Forms 8-K/A were filed on October 24, 2001 and on September
19, 2001 relating to Item 5 - "Other Items".
Page 17
SIGNATURE
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.
VALUE CITY DEPARTMENT STORES, INC.
-------------------------------------
(Registrant)
------------
Date: December 17, 2001 By: /s/ James A. McGrady
----------------------- -------------------------------------
James A. McGrady,
Chief Financial Officer and Treasurer
Page 18