10-K 1 a15-1387_110k.htm 10-K

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended January 30, 2015

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 1-11735

 

99 CENTS ONLY STORES LLC

(Exact name of registrant as specified in its charter)

 

California

 

95-2411605

(State or other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

4000 Union Pacific Avenue,

 

 

City of Commerce, California

 

90023

(Address of Principal Executive Offices)

 

(zip code)

 

Registrant’s telephone number, including area code: (323) 980-8145

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.  Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x  No o

 

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 o  No x

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)  is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No x

 

The registrant is privately held.  There is no trading in the registrant’s membership units and therefore an aggregate market value based on the registrant’s membership units is not determinable.

 

As of April 20, 2015, there were 100 units outstanding of the registrant’s membership units, none of which are publicly traded.

 

 

 



Table of Contents

 

Table of Contents

 

 

 

Page

 

Part I

 

Item 1.

Business

4

Item 1A.

Risk Factors

12

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

23

Item 3.

Legal Proceedings

23

Item 4.

Mine Safety Disclosures

23

 

Part II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

Item 6.

Selected Financial Data

25

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 8.

Financial Statements and Supplementary Data

42

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

80

Item 9A.

Controls and Procedures

80

Item 9B.

Other Information

80

 

Part III

 

Item 10.

Directors, Executive Officers and Corporate Governance

81

Item 11.

Executive Compensation

84

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

94

Item 13.

Certain Relationships and Related Transactions, and Director Independence

96

Item 14.

Principal Accounting Fees and Services

98

 

Part IV

 

Item 15.

Exhibits, Financial Statement Schedule

99

 

2



Table of Contents

 

As used in this Annual Report on Form 10-K (this “Report”), unless the context suggests otherwise, the terms “Company,” “99 Cents,” “we,” “us,” and “our” refer to 99¢ Only Stores and its consolidated subsidiaries prior to the Conversion (as defined and described below in Item 1 “Business-Conversion to LLC”) and to 99 Cents Only Stores LLC and its consolidated subsidiaries at the time of or after the Conversion.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

 

This Report contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “expect,” “estimate,” “anticipate,” “predict,” “will,” “project,” “plan,” “believe” and other similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this Report and include statements regarding the intent, belief or current expectations of 99 Cents Only Stores LLC and our directors or officers with respect to, among other things, (a) trends affecting our financial condition or results of operations, (b) our business and growth strategies (including our new store opening growth rate) and (c) our investments in our existing stores, warehouse and distribution facilities and information systems, that are not historical in nature. Readers are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are and will be based on our then-current expectations, estimates and assumptions regarding future events and are applicable only as of the date of such statements.  We may not realize our expectations and our estimates and assumptions may not prove correct.  In addition, such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in this Report, for the reasons, among others, discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.  You should carefully review the risk factors described in this Report and other documents we file from time to time with the Securities and Exchange Commission, including our quarterly reports on Form 10-Q and any current reports on Form 8-K.

 

Fiscal Periods and Basis of Presentation

 

On December 16, 2013, the board of directors of the Company’s sole member, Number Holdings, Inc., a Delaware corporation (“Parent”), approved a resolution changing the end of the Company’s fiscal year. Prior to the change, the fiscal year of the Company ended on the Saturday closest to the last day of March.  The Company’s new fiscal year end is the Friday closest to the last day of January, with each successive quarterly period ending the Friday closest to the last day of April, July, October or January, as applicable.

 

As described in more detail below, on January 13, 2012, we merged with Number Merger Sub, Inc. and became a subsidiary of Parent, an entity controlled by affiliates of Ares Management LLC (“Ares Management”) and Canada Pension Plan Investment Board (“CPPIB”) and certain rollover investors (the “Merger”). As a result of the Merger, the accompanying financial information is presented for the “Predecessor” and “Successor” periods relating to the periods preceding and succeeding the Merger, respectively. Our fiscal year 2015 (“fiscal 2015”) (Successor) began on February 1, 2014 and ended on January 30, 2015 and consisted of 52 weeks. Our fiscal year ended January 31, 2014 (“transition fiscal 2014” or the “ten months ended January 31, 2014”) (Successor) began on March 31, 2013 and ended on January 31, 2014 and consisted of 44 weeks. Our fiscal year 2013 (“fiscal 2013”) (Successor) began on April 1, 2012 and ended on March 30, 2013, consisting of 52 weeks. Our fiscal year 2012 (“fiscal 2012”) is presented as a Successor period from January 15, 2012 to March 31, 2012 consisting of 11 weeks and a Predecessor period from April 3, 2011 to January 14, 2012 consisting of 41 weeks, for a total of 52 weeks. Where meaningful, we have presented disclosures with respect to the combination of the Successor and Predecessor periods, on a pro forma basis, which we refer to as “pro forma fiscal year 2012.” Our fiscal year 2016 (“fiscal 2016”) will consist of 52 weeks beginning January 31, 2015 and ending January 29, 2016. Unless otherwise stated, references to years in this Report relate to fiscal years rather than calendar years.

 

3



Table of Contents

 

PART I

 

Item 1. Business

 

With over 30 years of operating experience, we believe, based on our industry experience, that we are a leading operator of extreme value retail stores in the southwestern United States. As of January 30, 2015, we operated 383 stores located in the states of California (277 stores), Texas (49 stores), Arizona (36 stores) and Nevada (21 stores). Our stores offer everyday consumable products and other household items as well as seasonal items that are primarily priced at 99.99¢ or less. We carry a wide assortment of regularly available products as well as a broad variety of first-quality closeout merchandise.  In addition, we carry domestic and imported fresh produce, deli, dairy and frozen and refrigerated food products, which we believe are generally of greater value than what consumers can find elsewhere.  We believe that our differentiated merchandise mix, combined with outstanding value, enables us to appeal to a broad consumer demographic, increases our overall customer traffic and frequency of customer visits, as well as strengthens our customer loyalty.  We believe that our stores are significantly larger than those of other U.S. publicly reporting dollar store chains, which enables us to offer a wider assortment of merchandise and provide our customers with a better shopping experience.

 

As of January 30, 2015, on a trailing 52-week period, our stores open for the full year averaged net sales of $5.4 million per store and $328 per estimated saleable square foot, which we believe, based on our industry experience, is the highest among U.S. publicly reporting dollar store chains.  We opened 40 net new stores during fiscal 2015, including 32 stores in California, three in Nevada, two in Arizona and three in Texas.  In fiscal 2016, we currently intend to increase our store count by approximately 30 to 40 stores, all of which are expected to be opened in our existing markets.

 

We also sell merchandise through our Bargain Wholesale division to retailers, distributors and exporters.  The Bargain Wholesale division complements our retail operations by exposing us to a broader selection of opportunistic buys and generating additional sales with relatively small incremental operating expenses.  Bargain Wholesale represented 2.3% of our total sales in fiscal 2015.

 

Merger and Repurchase Transaction with Rollover Investors

 

On January 13, 2012, the Company was acquired through the Merger with Merger Sub, with the Company surviving. In connection with the Merger, we became a subsidiary of Parent, which is controlled by affiliates of Ares Management (“Ares”) and CPPIB (together with Ares, the “Sponsors”) and, prior to the Gold-Schiffer Purchase (as defined below), the Rollover Investors (as defined below).

 

The total cash merger consideration paid was approximately $1.6 billion, which was funded from equity contributions from the Sponsors and cash of the Company, as well as proceeds received by Merger Sub in connection with debt financing consisting of (i) $535 million of funded debt provided by Royal Bank of Canada, Bank of Montreal, Deutsche Bank Trust Company Americas, City National Bank, a National Banking Association, Siemens Financial Services, Inc. and HSBC Bank USA, N.A. under (a) a $525 million first lien term loan facility (as amended, the “First Lien Term Loan Facility”), and (b) $10 million of borrowings under a $175 million first lien based revolving credit facility (as amended, the “ABL Facility” and together with the First Lien Term Loan Facility, the “Credit Facilities”) and (ii) issuance of $250 million 11% senior unsecured notes due 2019 (the “Senior Notes”).  In addition, Eric Schiffer, our former Chief Executive Officer, Jeff Gold, our former President and Chief Operating Officer, Howard Gold, our former Executive Vice President, Karen Schiffer and The Gold Revocable Trust dated October 26, 2005 (collectively, the “Rollover Investors”) contributed approximately 4,545,451 shares of Company common stock, valued at the $22.00 per share merger consideration, to Parent, in exchange for approximately 15.73% of the outstanding common stock of Parent.  As a result of the Merger, the Company common stock was delisted from the New York Stock Exchange and we ceased to be a publicly held and traded equity company.

 

On October 15, 2013, Parent and the Company entered into an agreement with the Rollover Investors, pursuant to which (a) Parent repurchased (i) all of the shares of Class A Common Stock of Parent, par value $0.001 per share (“Class A Common Stock”) and Class B Common Stock of Parent, par value $0.001 per share (“Class B Common Stock”) owned by each Rollover Investor and (ii) all of the options to purchase shares of Class A Common Stock and Class B Common Stock held by such Rollover Investor for aggregate consideration of approximately $129.7 million (the “Gold-Schiffer Purchase”) and (b) the Company agreed to certain amendments to the Non-Competition, Non-Solicitation and Confidentiality Agreements and the Separation and Release Agreements with the Rollover Investors who were former management of the Company. The Gold-Schiffer Purchase was completed on October 21, 2013 and funded through a combination of borrowings under the First Lien Term Loan Facility and cash on hand at the Company and Parent. In connection with the Gold-Schiffer Purchase, we made a distribution to Parent of $95.5 million and an investment in shares of preferred stock of Parent of $19.2 million. In addition, we made a payment of $7.8 million to the Rollover Investors to repurchase all options of Class A Common Stock and Class B Common Stock held by the Rollover Investors.

 

4



Table of Contents

 

Conversion to LLC

 

On October 18, 2013, 99¢ Only Stores converted (the “Conversion”) from a California corporation to a California limited liability company, 99 Cents Only Stores LLC (“99 LLC”), that is managed by a single member, Parent.  In connection with the Conversion, each outstanding share of Class A common stock of 99¢ Only Stores, par value $0.01 per share, was converted into one membership unit of 99 LLC, and each outstanding share of Class B common stock of 99¢ Only Stores, par value $0.01 per share, was cancelled and forfeited.  Pursuant to the laws of the State of California, all rights and property of 99¢ Only Stores were vested in 99 LLC and all debts, liabilities and obligations of 99¢ Only Stores continued as debts, liabilities and obligations of 99 LLC.  99 LLC has elected to be treated as a disregarded entity for United States federal income tax purposes.  The Conversion did not have any effect on deferred tax assets or liabilities, and we will continue to use the liability method of accounting for income taxes.  The Company and its Parent will continue to file consolidated or combined income tax returns with its subsidiaries in all jurisdictions.

 

Our Competitive Strengths

 

Differentiated Retail Concept

 

We believe our stores offer consumers an extreme value shopping experience that is unique in our industry due to:

 

·                  Our current average store size of approximately 16,000 saleable square feet, which we believe are significantly larger than stores of other U.S. publicly reporting dollar store chains, enabling us to carry a wide assortment of consumable, general merchandise and seasonal products in a clean, attractive and comfortable shopping environment;

 

·                  Our large selection of food and grocery items, which is approximately 57% of gross sales, and includes many of the fresh produce, deli, dairy and refrigerated and frozen food items which we believe generally provide greater value than consumers can find elsewhere. We believe our extensive food and grocery offerings drive recurring traffic from customers who rely on us for their weekly household needs;

 

·                  Our wide assortment of closeout merchandise, which helps create an atmosphere of treasure-hunt excitement within our stores. We believe that our wide assortment of closeout merchandise is a competitive advantage as many of our competitors lack the vendor relationships, management expertise or logistical capabilities to handle as large a percentage of sales as we do in closeout merchandise; and

 

·                  We are able to source a significant portion of our merchandise from abroad and we believe that additional opportunities exist to increase volume of private-label and direct source foreign merchandise, which would enable us to expand our product assortment and meet consumer demands.

 

We believe, based on our industry experience, that these competitive strengths enable us to be the most productive stores among U.S. publicly reporting dollar store chains when ranked by sales per store and average sales per square foot.

 

Attractive Industry Fundamentals

 

The U.S. dollar store industry is large and growing, and we believe benefits from a number of attractive industry fundamentals which will continue to support our growth, including:

 

·                  Historical and projected growth in dollar store revenues driven by the addition of new dollar stores and the increasing acceptance of dollar stores among consumers;

 

·                  Same store sales growth among U.S. publicly reporting dollar store chains, which are outperforming many other retail channels, particularly U.S. publicly reporting traditional grocery stores;

 

·                  Within the dollar store industry, the opportunity for larger chains, including 99 Cents, to grow faster than the overall industry, the balance of which we believe consists primarily of independent store operators; and

 

·                  Strong historical performance by dollar stores throughout economic cycles.

 

We believe that these attractive industry fundamentals, when combined with the large population size and favorable income and demographic attributes within our existing markets, represent growth opportunities for 99 Cents.

 

5



Table of Contents

 

Attractive Store Footprint

 

We have over 30 years of experience operating our stores.  We currently operate a large network of extreme value retail stores in California and have a strong presence in three other southwestern states, Texas, Nevada and Arizona. Our stores are typically clustered in and around densely populated areas. We believe that many of our stores are more convenient than traditional “big box” retailers that typically occupy larger buildings located in less urban areas as a result of their store size requirements. We believe that the density of our store geographic coverage is a competitive advantage and would be difficult to replicate.

 

We believe that our southwestern geographic markets have attractive attributes that support our business model.  Our markets generally have large, growing and ethnically diverse populations. Many of the markets we serve have high proportions of low-income consumers, as well as nearby middle and upper middle income consumers, who we believe are increasingly shopping dollar stores.

 

Strong Vendor Relationships and Sourcing Expertise Both Domestically and Globally

 

We believe that our sourcing expertise and our long-standing, mutually beneficial vendor relationships are competitive advantages. Many of our vendors have been supplying products to us for over 20 years. We are a trusted partner and a preferred buyer to our vendors, many of whom we believe contact us first when they are selling closeout inventory. We believe we are a preferred buyer due to our ability to, among other things:

 

·                  Make immediate buying decisions;

 

·                  Acquire large volumes of inventory and take possession of goods immediately;

 

·                  Pay cash or accept abbreviated credit terms; and

 

·                  Purchase goods that have a shorter than normal shelf life or are off-season or near the end of a selling season.

 

We believe our vendor relationships are also strengthened by our ability to minimize channel conflict for the manufacturer as well as our ability to quickly sell products through well-maintained, attractively merchandised stores.

 

Strong Financial Performance and Compelling Unit Economics

 

Our store base is profitable and growing. Our stores continue to demonstrate strong revenue growth, having posted positive same-stores sales growth in each of the past ten years with same-store sales growth of 0.4% in fiscal 2015.

 

With our strong store sales productivity metrics, our new store model generates attractive cash on cash returns.  Our newly opened stores ramp up quickly and typically reach near full sales volumes within the first 12 months. Historically, our new stores have demonstrated relatively consistent profitability levels as a percentage of sales across fiscal years. Our stores have a low cost operating model with attractive margins, low maintenance capital expenditures and low ongoing working capital needs.

 

6



Table of Contents

 

Our Business Strategy

 

Accelerate Our Store Growth

 

We opened 40 net new stores during fiscal 2015 and we currently intend to open approximately 30 to 40 stores in fiscal 2016.  We plan to continue to pursue an accelerated store growth plan in our existing markets.  We believe that this will strengthen our competitive advantage in our key geographic regions and enable us to take advantage of economies of scale in distribution and store logistics.

 

Maximize Profitable Sales

 

We expect to achieve sustainable increases in sales and product margin results through enhancing the customer shopping experience, optimizing our product mix and expanding our global sourcing, as follows:

 

Enhancing the Customer Shopping Experience

 

We plan to improve our customers’ shopping experience, which we believe will maximize profitable sales in our stores, through a multi-year three-step plan for our stores:

 

1.              Raising the height of the shelving to create a dramatic canvas for visual merchandising,

 

2.              Optimizing the store layout and space allocation to drive sales and margin, and

 

3.              Remodeling our store interiors and exteriors to attract new customers.

 

During fiscal 2015, we implemented the first step by retrofitting our existing store base to raise our shelving to 78 inches from the previous 54 inches.  We believe that this initiative has improved the customer experience by placing more products at eye level, which provides cleaner displays and creates a more appealing store appearance.

 

Optimizing Our Product Mix and Expanding Global Sourcing

 

We are increasing our focus on sourcing globally and directly, which we believe will help us to:

 

·            Supplement our private-label consumable offerings, which will enhance the category margins,

 

·            Become the “go-to destination” for general and seasonal merchandise, and

 

·            Go directly to overseas factories to expand our product assortment, increase our close-out opportunities and reduce our product costs.

 

We are enhancing our product offering to customers through an expanded assortment of everyday consumable products that we believe will drive traffic and increase average transaction value.

 

In addition, we offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items.

 

Deliver Superior Key Metrics

 

We intend to become a more effective retailer with simplified business processes and organization.  We are in the process of upgrading our IT and supply chain infrastructure as well as building and developing our management and field operations teams.  We intend to continue to implement best practices to strengthen the operational performance of our stores. At the store level, we intend to optimize the flow of goods to and through the store. We are continuing to implement automated forecasting and replenishment systems. We also believe there are opportunities to further improve our labor scheduling and to deliver superior key metrics over time. At our warehouse and distribution facilities, we intend to continue to drive operating efficiencies through consolidating and improving our warehouse and distribution facilities, labor and logistics systems as well as drive integrated supply chain initiatives to reduce operating costs. Through our operationally focused strategies, we believe we can further improve our profitability and competitive position.  Over time, we believe that this will allow us to deliver superior results in key metrics such as sales productivity, expense leverage and overall profitability.

 

Retail Operations

 

Our stores offer customers a wide assortment of regularly available consumer goods, as well as a broad variety of quality, closeout merchandise. Merchandise sold in our 99¢ Only stores is priced primarily at or below 99.99¢ per item.

 

7



Table of Contents

 

The following table sets forth certain relevant information with respect to our retail operations (dollar amounts in thousands, except percentages and sales per square footage):

 

 

 

Year Ended

 

Ten Months Ended

 

Years Ended

 

 

 

January 30,
2015

 

January 31,
2014

 

March 30,
2013

 

March 31,
2012
(e)

 

April 2,
2011

 

 

 

(Successor)

 

(Successor)

 

(Successor)

 

(Pro Forma)

 

(Predecessor)

 

Net retail sales

 

$

1,881,865

(a)

$

1,486,699

(c)

$

1,620,683

 

$

1,488,094

 

$

1,380,357

(f)

Annual net retail sales growth rate

 

6.8

%(a)

10.7

%(c)

8.9

%

7.8

%

5.0

%(f)

Store count at beginning of year

 

343

 

316

 

298

 

285

 

275

 

New stores

 

41

 

28

 

19

 

13

 

11

 

Stores closed

 

1

 

1

 

1

 

 

1

 

Total store count at year-end

 

383

 

343

 

316

 

298

 

285

 

Average net sales per store open the full years(g)

 

$

5,366

 

$

5,446

(i)

$

5,327

 

$

5,152

 

$

4,874

 

Estimated store saleable square foot

 

6,189,669

 

5,607,991

 

5,211,483

 

4,948,344

 

4,758,432

 

Average net sales per estimated saleable square foot(g)

 

$

328

 

$

330

(i)

$

321

 

$

309

 

$

291

 

Change in comparable same-store sales(h)

 

0.4

%(b)

3.7

%(d)

4.3

%

7.3

%

0.7

%

 


(a)         For fiscal 2015, each of annual net retail sales of $1,881.9 million and the annual net retail sales growth rate of 6.8% was calculated based on the net retail sales for the 52-week period ended January 31, 2014.

 

(b)         Comparable same-store sales for fiscal 2015 are calculated based on the 52-week period ended January 30, 2015 as compared to the 52-week period ended January 31, 2014.

 

(c)          For transition fiscal 2014, net retail sales of $1,486.7 million were based on a 44-week period and the annual net retail sales growth rate of 10.7% was calculated based on the net retail sales for the 43-week period ended January 26, 2013.  See Note 2 to our Consolidated Financial Statements for the comparative Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the ten months ended January 31, 2014 (a 44-week period) and ten months ended January 26, 2013 (a 43-week period).

 

(d)         Comparable same-store sales for transition fiscal 2014 are calculated based on the 43-week period ended January 25, 2014 as compared to the 43-week period ended January 26, 2013.

 

(e)          Amounts in pro forma fiscal year ended March 31, 2012 column represent the mathematical combination of the Predecessor financial data from April 3, 2011 to January 14, 2012 and the Successor financial data from January 15, 2012 to March 31, 2012 included in our Consolidated Financial Statements.

 

(f)           For fiscal 2011, net retail sales of $1,380.4 million were based on a 53-week period, compared to a 52-week period for the other periods presented (except for transition fiscal 2014, which was based on a 44-week period).

 

(g)          Stores open for 12 months.

 

(h)         Change in comparable same-store sales for year ended January 30, 2015 is based on stores open at least 14 months. For other periods presented change in comparable same-store sales is based on stores open at least 15 months. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional discussion.

 

(i)             Average net sales per store and average net sales per estimated saleable square foot are based on trailing 52-week period.

 

Merchandising.  All of our stores offer a broad variety of first-quality, name-brand and other closeout merchandise as well as a wide assortment of regularly available consumer goods. We also carry private-label consumer products made for us.  We believe that the success of our 99¢ Only stores concept arises in part from the value inherent in pricing consumable items primarily at 99.99¢ or less per item, many of which are name-brands, which generally provide greater value than consumers can find elsewhere.  We offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items.

 

8



Table of Contents

 

A significant amount of our gross sales are from products available for reorder, including many branded consumable items. The mix and the specific brands of merchandise frequently changes, depending primarily upon the availability of closeout merchandise at suitable prices. A significant amount of our sales are from closeout merchandise, which we believe represents a significantly larger share of closeout merchandise than those of other U.S. publicly reporting dollars stores chains, some of whom carry few or no closeouts. We currently expect to be able to obtain sufficient name-brand closeouts, as well as re-orderable merchandise, at attractive prices. We believe that the frequent changes in specific name-brands and products found in our stores encourage impulse and larger volume purchases, result in customers shopping more frequently, and help to create a sense of urgency, fun and treasure hunt excitement.

 

We believe that we differentiate ourselves from traditional dollar stores by offering a wider assortment of food and grocery items, including frozen, dairy, deli and produce, which collectively account for approximately 57% of our revenue. Substantially all of our stores have free-standing fresh and refrigerated produce displays as well as built-in refrigerated and frozen food wall units. We believe that many of our customers shop at our stores weekly for their groceries and frequently shop 99¢ Only stores first before supplementing these purchases at other food stores.

 

Substantially all of our business is transacted in U.S. dollars and, accordingly, foreign exchange rate fluctuations have not historically had a significant impact on us.

 

Our retail sales by product category for fiscal 2015, the transition fiscal 2014 and fiscal 2013 are set forth below:

 

 

 

Year Ended

 

Ten Months Ended

 

Years Ended

 

 

 

January 30,
2015

 

January 31,
2014

 

March 30,
2013

 

 

 

(Successor)

 

(Successor)

 

(Successor)

 

Product Category:

 

 

 

 

 

 

 

Food and grocery

 

57

%

56

%

55

%

Household and housewares

 

13

%

14

%

14

%

Health and beauty care

 

9

%

9

%

9

%

Hardware

 

3

%

3

%

3

%

Stationery and party

 

5

%

5

%

5

%

Seasonal

 

5

%

4

%

5

%

Other

 

8

%

9

%

9

%

 

 

100

%

100

%

100

%

 

We target value-conscious consumers from a wide range of socio-economic backgrounds with diverse demographic characteristics. Purchases are by cash, credit card, debit card or EBT (electronic benefit transfers). Our stores currently do not accept checks or manufacturer’s coupons. Our stores’ operating hours are designed to meet the needs of families.

 

Store Size, Layout and Locations.  We strive to provide stores that are attractively merchandised, brightly lit, clean, well-maintained, “destination” locations. Our stores are typically clustered around densely populated areas where it is convenient for our customers to do their weekly household shopping.  The interior of each store is designed to reflect a generally uniform format, featuring consistent merchandise displays, bright lighting, customized check-out counters and a distinctive color scheme on its interior and exterior signage.

 

Marketing and Advertising.  Our marketing strategy is based on our network of locations with good visibility, effective and efficient signage, word-of-mouth publicity, a grand new store opening program and occasionally supplemental advertising.

 

Purchasing

 

We believe a primary factor contributing to our success is our ability to identify and take advantage of opportunities to purchase merchandise with high customer appeal at prices lower than regular wholesale. We purchase most merchandise directly from the manufacturer. Other sources of merchandise include wholesalers, manufacturers’ representatives, importers, barter companies, auctions, professional finders and other retailers, varying on the season and closeout activity.

 

We continuously seek out buying opportunities from both our existing vendors and new sources. No single vendor accounted for more than 5% of our total purchases in fiscal 2015. During fiscal 2015, we purchased merchandise from more than 999 vendors, many of which have been supplying us product for over 20 years.

 

A significant portion of the merchandise purchased by us in fiscal 2015 was closeout merchandise. We have developed strong relationships with many vendors and distributors who recognize that our merchandise can be moved quickly through our retail and wholesale distribution channels. Our buyers continuously search for closeout opportunities.

 

9



Table of Contents

 

Our experience and expertise in buying merchandise has enabled us to develop relationships with many manufacturers that often offer some or all of their closeout merchandise to us prior to attempting to sell it through other channels. The key elements to these vendor relationships include our (i) ability to make immediate buying decisions; (ii) experienced buying staff; (iii) willingness to take on large volume purchases and take possession of merchandise immediately; (iv) ability to pay cash or accept abbreviated credit terms; (v) commitment to honor all issued purchase orders; and (vi) willingness to purchase goods close to a target season or out of season. We believe our relationships with our vendors are further enhanced by our ability to minimize channel conflict for a manufacturer.

 

Our strong relationships with many manufacturers and distributors, along with our ability to purchase in large volumes, also enable us to purchase re-orderable name-brand goods at prices that we believe are below general wholesale prices.

 

We utilize and develop private label consumer products to broaden the assortment of merchandise that is consistently available and to maintain attractive margins. We also import merchandise in product categories such as kitchen items, housewares, toys, seasonal products, party, pet-care and hardware.

 

Warehousing and Distribution

 

An important aspect of our purchasing strategy involves our ability to warehouse and distribute merchandise quickly and with flexibility. Our warehousing and distribution facilities are strategically located next to the Long Beach, CA and Los Angeles, CA port systems, the rail yards in the City of Commerce and the major California interstate arteries. This enables quick turnaround of time-sensitive products as well as provides long-term warehousing capabilities for one-time closeout purchases and seasonal or holiday items.  Our distribution center in the Houston area has both dry and cold storage capacity, and services our Texas operations.

 

We utilize both our private fleet and outside carriers for our store deliveries / backhauls and vendor pick-ups. We have primarily used common carriers or owner-operators to deliver to stores outside of Southern California including our stores in Northern and Central California, Texas, Arizona and Nevada. In December 2014, we began warehouse operations in a new distribution center in the City of Commerce, California.  We believe our Texas distribution center has the capacity to support our planned growth in that region for the next several years. However, there can be no assurance that our existing warehouses will provide adequate storage space for our long-term storage needs or to support sales levels at peak seasons for all products, that high levels of opportunistic or seasonal purchases may not temporarily exceed the warehouse capacity, or that we will not make changes, including capital expenditures, to expand or otherwise modify our warehousing and distribution operations.

 

Our primary distribution practice is to have the majority of the merchandise delivered from our vendors to our warehouses and then shipped to our store locations.  We do, however, occasionally utilize direct store deliveries for select product categories.

 

Additional information pertaining to warehouse and distribution facilities is described under Item 2, “Properties.”

 

Information Systems

 

We currently operate financial, accounting, human resources, and payroll data processing using Lawson Software’s Financial and Human Resource Suites.  We also operate several proprietary supply chain systems that are tightly coupled with HighJump’s warehouse management solutions (“WMS”).  These proprietary systems include an IBM UNIX-based purchase order and inventory control system, and a store back office personal computer system.  The HighJump WMS was upgraded in fiscal 2015 and all distribution centers currently use a common system platform.

 

We utilize SAP’s Master Data, Price Management, Point-of-Sale barcode scanning, Sales Audit and Reporting systems to record and process retail sales.  In fiscal 2015, we implemented an automated store replenishment and forecasting solution from JustEnough for our stores in California, Nevada and Arizona.  In the beginning of fiscal 2016, we plan to migrate the majority of our procurement and financial systems to SAP, including Purchasing, Inventory Management, Order Management, Accounts Payable, General Ledger and Financial Reporting.  We plan to continue our deployment of JustEnough’s store replenishment solution and further implement its distribution center replenishment and allocation tools.  We also will be reviewing and implementing new administrative systems including workforce management, human resources and payroll for both our retail stores and corporate offices.

 

10



Table of Contents

 

Competition

 

We face competition in both the acquisition of inventory and the sale of merchandise from other discount stores, single-price-point merchandisers, mass merchandisers, food markets, drug chains, club stores, wholesalers, and other retailers. Industry competition for acquiring closeout merchandise also includes a large number of retail and wholesale companies and individuals. In some instances, these competitors are also customers of our Bargain Wholesale division. There is increasing competition with other wholesalers and retailers, including other extreme value retailers, for the purchase of quality closeout merchandise. Some of these competitors have substantially greater financial resources and buying power than us. Our ability to compete will depend on many factors, including the success of our purchase and resale of such merchandise at lower prices than our competitors. In addition, we may face intense competition in the future from new entrants in the extreme value retail industry that could have an adverse effect on our business and results of operations.

 

We believe that we are able to compete effectively against other dollar stores as a result of our differentiated retail format, the larger size and more convenient location of our stores, our economies of scale in our operations and more than three decades of experience operating in the industry. For products where we compete with traditional grocery stores, such as fresh produce, deli, dairy and frozen food items, we believe that we offer greater value than our grocery competitors and our stores are often more convenient. For products where we compete with warehouse clubs and mass merchandisers, we believe we compete effectively on the basis of greater value, no membership fees, more convenient store locations and smaller, easier to navigate stores.

 

Employees

 

As of January 30, 2015, we had approximately 18,200 employees. None of our employees are party to a collective bargaining agreement and none are represented by a labor union.

 

Trademarks

 

“99¢ Only Stores,” “Bargain Wholesale” and multiple other product trademarks are listed on the United States Patent and Trademark Office Principal Register. We believe that our trademarks are an important but not critical element of our merchandising strategy. We routinely undertake enforcement efforts against certain parties whom we believe are infringing upon our “99¢” family of marks and our other intellectual property rights, although we believe that simultaneous litigation against all persons everywhere whom we believe to be infringing upon these marks is not feasible.

 

Seasonality

 

For information regarding the seasonality of our business, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality and Quarterly Fluctuations,” which is incorporated by reference in this Item 1.

 

Environmental Matters

 

In the ordinary course of business, we handle or dispose of commonplace household products that are classified as hazardous materials under various environmental laws and regulations. Under various federal, state, and local environmental laws and regulations, current or previous owners or occupants of property may face liability associated with hazardous substances. These laws and regulations often impose liability without regard to fault. In the future we may be required to incur substantial costs for preventive or remedial measures associated with hazardous materials. We have several storage tanks at our distribution and warehouse facilities, including: aboveground and underground diesel storage tanks in our two City of Commerce, California distribution centers, a compressed natural gas tank at one City of Commerce, California distribution center; ammonia storage at our Southern California cold storage facility and our Texas warehouse; aboveground diesel and propane storage tanks at our Texas warehouse; an aboveground propane storage tank at our two main Southern California warehouses; and an aboveground propane storage tank at our leased Slauson distribution center in City of Commerce, California.  Except as disclosed in Item 3. Legal Matters, we have not been notified of, and are not aware of, any potentially material current environmental liability, claim or non-compliance, concerning our owned or leased real estate.

 

Available Information

 

We make available free of charge our annual and transition reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports through a hyperlink from the “Investor Relations” portion of our website, www.99only.com, to the Securities and Exchange Commission’s website, www.sec.gov.  Such reports are available on the same day that we electronically filed them with or furnished to the Securities and Exchange Commission.  The reference to our website address does not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

 

Copies of the reports and other information we file with the Securities and Exchange Commission may also be examined by the public without charge at 100 F Street, N.E., Room 1580, Washington D.C., 20549, or on the Internet at http://sec.gov.  Copies of all or a portion of such materials can be obtained from the Securities and Exchange Commission upon payment of prescribed fees.  Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information.

 

11



Table of Contents

 

Item 1A. Risk Factors

 

Risks Related to Our Business

 

Inflation may affect our ability to keep pricing almost all of our merchandise at 99.99¢ or less

 

Our ability to provide quality merchandise for profitable resale primarily at a price point of 99.99¢ or less is subject to certain economic factors which are beyond our control. Inflation could have a material adverse effect on our business and results of operations, especially given the constraints on our ability to pass on incremental costs due to wholesale price increases or other factors. A sustained trend of significantly increased inflationary pressure could require us to abandon our customary practice of pricing our merchandise primarily at no more than 99.99¢, which could have a material adverse effect on our business and results of operations.  In addition, the minimum wage has increased or is scheduled to increase in multiple states and local jurisdictions and there is a possibility that Congress will increase the federal minimum wage.  We can pass price increases on to customers to a certain extent, such as by selling smaller units for the same price and increasing the price of merchandise presently sold at less than 99.99¢, but there are limits to the ability to effectively increase prices on a sufficiently wide range of merchandise in this manner while rarely exceeding a dollar. In certain circumstances, we have discontinued and may continue to discontinue some items from our offerings due to vendor wholesale price increases or availability, which may adversely affect sales. We offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items. However, an expanded offering of over 99.99¢ items may not gain customer acceptance, which could damage our brand name and harm our revenues and profitability.

 

We are dependent in part on new store openings for future growth

 

Our ability to generate growth in sales and operating income depends in part on our ability to successfully open and operate new stores both within and outside of our existing markets and to manage future growth profitably. Our strategy depends on many factors, including our ability to identify suitable markets and sites for new stores, negotiate leases or purchases with acceptable terms, refurbish stores, successfully compete against local competition and the increasing presence of large and successful companies entering or expanding into the markets in which we operate, gain brand recognition and acceptance in new markets, and manage operating expenses and product costs. In addition, we must be able to hire, train, motivate, and retain competent managers and store personnel to support our growth. Many of these factors are beyond our control or are difficult to manage. As a result, we cannot assure that we will be able to achieve our goals with respect to growth. Any failure by us to achieve these goals on a timely basis, differentiate ourselves and obtain acceptance in markets in which we currently have limited or no presence, attract and retain management and other qualified personnel, and effectively manage operating expenses could adversely affect our future operating results and our ability to execute our business strategy.

 

A variety of factors, including store location, store size, local demographics, rental terms, competition, the level of store sales, availability of locally sourced merchandise, locally prevailing wages and labor pools, distance and time from existing distribution centers, local regulations, and the level of initial advertising, influence if and when a store becomes profitable. Assuming that planned expansion occurs as anticipated, the store base will include a portion of stores with relatively short operating histories. New stores may not achieve the sales per estimated saleable square foot and store-level operating margins historically achieved at existing stores. If new stores on average fail to achieve these results, planned expansion could decrease overall sales per estimated saleable square foot and store-level operating margins. Increases in the level of advertising and pre-opening expenses associated with the opening of new stores could also contribute to a decrease in operating margins. New stores opened in existing and in new markets have in the past and may in the future be less profitable than existing stores and/or may reduce retail sales of existing stores, negatively affecting same-store sales. As we expand, differences in the available labor pool and potential customers could adversely impact us.

 

Additionally, our growth will place increased demands on our operational, managerial and administrative resources Also, new store openings in markets where we have existing stores may result in reduced sales volumes at those existing stores. This may lead to decline in profitability at our stores, and if we experience such a decline in financial condition and operating results as a result of such difficulties, we may slow store openings in our existing markets.

 

Some of our new stores may be located in areas where we have little experience or a lack of brand recognition. Those markets may have different competitive conditions, market conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause these new stores to be less successful than stores in our existing markets. If we fail to successfully execute our growth strategy, including by opening new stores, our financial condition and operating results may be adversely affected.

 

12



Table of Contents

 

Current economic conditions and other economic factors may adversely affect our financial performance and other aspects of our business by negatively impacting our customer’s disposable income or discretionary spending, increasing our costs of goods sold and selling, general and administrative expenses, and adversely affecting our sales or profitability.

 

We believe many of our customers are on fixed or low incomes and generally have limited discretionary spending dollars. Any factor that could adversely affect that disposable income would decrease our customer’s spending and could cause our customers to shift their spending to products other than those sold by us or to products sold by us that are less profitable than other product choices, all of which could result in lower net sales, decreases in inventory turnover, greater markdowns on inventory, and a reduction in profitability due to lower margins. Factors that could reduce our customers’ disposable income include but are not limited to a slowdown in the economy, a delayed economic recovery, or other economic conditions such as increased or sustained high unemployment or underemployment levels, reduction and/or cessation of unemployment benefit payments, inflation, increases in fuel or other energy costs and interest rates, lack of available credit, consumer debt levels, higher tax rates and other changes in tax laws.

 

Many of the factors identified above that affect disposable income, as well as commodity rates, transportation costs (including the costs of diesel fuel), costs of labor, insurance and healthcare, foreign exchange rate fluctuations, lease costs, measures that create barriers to or increase the costs associated with international trade, changes in other laws and regulations and other economic factors, also affect our cost of goods sold and our selling, general and administrative expenses, which may adversely affect our sales or profitability. We have limited or no ability to control many of these factors.

 

In addition, many of the factors discussed above, along with current global economic conditions and uncertainties, the potential for additional failures or realignments of financial institutions, and the related impact on available credit may affect us and our vendors and other business partners, landlords and service providers in an adverse manner including, but not limited to, reducing access to liquid funds or credit, increasing the cost of credit, limiting our ability to manage interest rate risk, increasing the risk of bankruptcy of our vendors, landlords or counterparties to, or other financial institutions involved in, the Credit Facilities and our derivative and other contracts, increasing the cost of goods to us, and other adverse consequences which we are unable to fully anticipate or control.

 

Our operations are concentrated in California

 

As of January 30, 2015, 277 of our 383 stores were located in California (with 49 stores in Texas, 36 stores in Arizona and 21 stores in Nevada). We expect that we will continue to open additional stores in as well as outside of California.  For the foreseeable future, our results of operations will depend significantly on trends in the California economy and its legal/regulatory environment.  Declines in retail spending on higher margin discretionary items and continuing trends of increasing demand for lower margin food products may negatively impact our profitability.  California has also historically enacted minimum wages that exceed federal standards (and certain of our cities have enacted “living wage” laws that exceed State minimum wage laws) and California typically has other factors making compliance, litigation and workers’ compensation claims more prevalent and costly. Additional local regulation in certain California jurisdictions may further pressure margins.

 

Material damage to, or interruptions to, our information systems as a result of external factors, staffing shortages and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations

 

We depend on information technology systems for the efficient functioning of our business. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches and natural disasters. Any material interruptions or the cost of replacements may have a material adverse effect on our business or results of operations.

 

We also rely heavily on our information technology staff. If we cannot meet our staffing needs in this area, we may not be able to maintain or improve our systems in the future. Further, we still have certain legacy systems that are not generally supportable by outside vendors, and should those of our information technology team who are conversant with such systems leave, these legacy systems could be without effective support.

 

We rely on certain software vendors to maintain and periodically upgrade many of these systems. The software programs supporting many of our systems are maintained and supported by independent software companies. The inability of these companies to continue to maintain and upgrade these information systems and software programs might disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner. In addition, costs and potential interruptions associated with the implementation of new or upgraded systems and technology could also disrupt or reduce the efficiency of our operations.

 

13



Table of Contents

 

Our decision to implement a new SAP software platform could interrupt operational transactions during the implementation

 

We depend on a variety of information systems for our operations, many of which are proprietary, which have historically supported many of our business operations such as inventory and order management, shipping, receiving, and accounting. Because most of our information systems consist of a number of internally developed applications, it can be more difficult to upgrade or adapt them compared to commercially available software solutions. Our new SAP system became operational at the beginning of the first quarter of fiscal year 2016, but we are still currently in the process of migrating our operations from our legacy proprietary system to SAP’s enterprise resource planning software, which includes integrated financial and inventory management systems.  There are inherent risks associated with replacing and changing these core systems, including accurately capturing data and possible supply chain and vendor payment disruptions.  In addition, this process is complex, time-consuming and expensive. Although we believe we are taking appropriate action to mitigate the risks through testing, training and staging implementation, we can make no assurances that we will not have disruptions, delays and/or negative business impacts from this forthcoming deployment. Any operational disruptions during the course of this process, delays or deficiencies in the design and implementation of the new SAP system, or in the performance of our legacy systems could materially and adversely affect our ability to effectively run and manage our business.  Our success depends, in large part, on our ability to manage our inventory, pay our vendors and record and report financial and management information on a timely and accurate basis, which could be impaired while we are making these enhancements.   Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could materially and adversely impact our ability to fulfill orders and interrupt other processes. If our information systems do not allow us to transmit accurate information, even for a short period of time, to key decision makers, the ability to manage our business could be disrupted and the results of operations and financial condition could be materially and adversely affected.  Failure to properly or adequately address these issues could impact our ability to perform necessary business operations, which could materially and adversely affect our reputation, competitive position, business, results of operations and financial condition.

 

Natural disasters, unusually adverse weather conditions, pandemic outbreaks, terrorist acts, and global political events could cause temporary or permanent distribution center or store closures, impair our ability to purchase, receive or replenish inventory, or decrease customer traffic, all of which could result in lost sales and otherwise adversely affect our financial performance

 

The occurrence of natural disasters, such as earthquakes, hurricanes, fires, floods and tsunamis, unusually adverse weather conditions, pandemic outbreaks, terrorist acts or disruptive global political events, such as civil unrest in countries in which our vendors are located, or similar disruptions could adversely affect our operations and financial performance. These events could result in the closure of one or more of our distribution centers or a significant number of stores, the temporary or long-term disruption in the supply of products from some local and overseas vendors, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our distribution centers or stores, the temporary reduction in the availability of products in our stores, and disruption to our information systems.

 

Our current insurance program may expose us to unexpected costs and negatively affect our financial performance

 

Our insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions that we believe are prudent. However, there are types of losses we may incur but against which we cannot be insured or which we believe are not economically reasonable to insure, such as losses due to employment practices, acts of war, employee, blackouts and certain other crime and some natural disasters, including earthquakes and tsunamis. If we incur these losses and they are material, our business could suffer. In addition, we self-insure a significant portion of expected losses under our workers’ compensation and general liability programs. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses could result in materially different amounts of expense than expected under these programs, which could have a material adverse effect on our financial condition and results of operations.  In the third quarter of transition fiscal 2014, we recorded an increase to our workers’ compensation accrual of $38.1 million, primarily as a result of an increase in severity of workers’ compensation claims. We have begun implementing action plans to reduce the frequency and severity of workers’ compensation claims against us, however there can be no assurance that such frequency or severity will decrease over time.  Although we continue to maintain property insurance for catastrophic events, we are effectively self-insured for property losses up to the amount of our deductibles. If we experience a greater number of these losses than we anticipate, our financial performance could be adversely affected.

 

We self-insure a portion of our health insurance program that may expose us to unexpected costs and negatively affect our financial performance

 

We self-insure a portion of our employee medical benefit claims. The liability for the self-funded portion of our health insurance program is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We maintain stop loss insurance coverage to limit our exposure for the self-funded portion of our health insurance program. Liabilities

 

14



Table of Contents

 

associated with these losses include estimates of both claims filed and losses incurred but not yet reported. Unanticipated changes in any applicable actuarial assumptions and management estimates underlying our recorded liabilities for these losses could result in materially different amounts of expense than expected under these programs, which could have a material adverse effect on our financial condition and results of operations.

 

Failure to attract and retain qualified employees, particularly field, store and distribution center managers, while controlling labor costs, as well as other labor issues, could adversely affect our financial performance

 

Our future growth and performance depends on our ability to attract, retain and motivate qualified employees, many of whom are in positions with historically high rates of turnover such as field managers and distribution center managers. Our ability to meet our labor needs, while controlling our labor costs, is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs, and changes in employment and labor laws (including changes in the process for our employees to join a union) or other workplace regulation (including changes in “entitlement” programs such as health insurance and paid leave programs). To the extent a significant portion of our employee base unionizes, or attempts to unionize, our labor costs could increase. In addition, recently enacted comprehensive healthcare reform legislation will likely cause our healthcare costs to increase. While the significant costs of the healthcare reform legislation will not occur until fiscal 2016, due to provisions of the legislation being phased in over time, changes to our healthcare costs structure could have a significant negative effect on our business. Our ability to pass along labor costs to our customers is constrained by our low price model.

 

We could experience disruptions in receiving and distribution or our transportation network

 

Our success depends upon whether receiving and shipments are processed timely, accurately and efficiently. As we continue to grow, we may face increased or unexpected demands on warehouse operations, as well as unexpected demands on our transportation network. We distribute our products primarily by truck and rail. In addition, we rely on a variety of private fleet and common carriers for our store deliveries/backhauls and vendor pick-ups, and we route our products through various world ports, with the greatest reliance on California ports. In addition, new store locations receiving shipments from distribution centers that are increasingly further away will increase transportation costs and may create transportation scheduling strains. The very nature of our closeout business makes it uniquely susceptible to periodic interruptions and difficult to foresee warehouse/distribution center overcrowding caused by spikes in inventory resulting from opportunistic closeout purchases. Such demands could cause delays in delivery of merchandise to and from warehouses and/or to stores. We periodically evaluate new warehouse distribution and merchandising systems and could experience interruptions during implementations of new facilities and systems. A fire, earthquake, or other disaster at our warehouses could also hurt our business, financial condition and results of operations, particularly because much of our merchandise consists of closeouts and other irreplaceable products. We also face the possibility of reduced availability of trucks or rail cars due to adverse weather conditions, allocation of assets to other industries or geographies or otherwise, which could disrupt our receiving, processing, and shipment of merchandise.

 

In addition, our reliance upon ocean freight transportation for the delivery of our inventory exposes us to various inherent risks, including port workers’ union disputes and associated strikes, work slow-downs and work stoppages, severe weather conditions, natural disasters and terrorism, any of which could result in delivery delays and inefficiencies, increase our costs and disrupt our business. A severe and prolonged disruption to ocean freight transportation, such as the disruption to California port operations which began in calendar year 2014 and is continuing into calendar year 2015 due to a port workers’ union dispute, has already caused, and may continue to cause delays in delivery of merchandise to our stores and in-stock inventory availability. Efficient and timely inventory deliveries and proper inventory management are important factors in our operations. Reduced product availability may diminish sales and brand loyalty. Severe and extended delays in the delivery of our inventory or our inability to effectively manage our inventory could have a material adverse effect on our business, financial condition, results of operations and liquidity.

 

We depend upon our relationships with vendors and the availability of closeout merchandise

 

Our success depends in large part on our ability to locate and purchase quality closeout merchandise at attractive prices. This supports a changing mix of name-brand and other merchandise primarily at or below 99.99¢ price point. We cannot be certain that such merchandise will continue to be available in the future at wholesale prices consistent with our business plan and/or historical costs. Further, we may not be able to find and purchase merchandise in necessary quantities, particularly as we grow, and therefore require a greater quantity of such merchandise at competitive prices.  Additionally, vendors sometimes restrict the advertising, promotion and method of distribution of their merchandise. These restrictions in turn may make it more difficult for us to quickly sell these items from inventory.  Although we believe our relationships with vendors are good, we typically do not have long-term agreements or pricing commitments with any vendors. As a result, we must continuously seek out buying opportunities from existing vendors and from new sources. There is increasing competition for these opportunities with other wholesalers and retailers, discount and deep-discount stores, mass merchandisers, food markets, drug chains, club stores, and various other companies and individuals as the extreme value retail segment continues to expand outside and within existing retail channels. There is also a trend towards consolidation among vendors and vendors of merchandise targeted by us. A disruption in the availability of merchandise at attractive prices could impair our business.

 

15



Table of Contents

 

We purchase in large volumes and our inventory is highly concentrated

 

To obtain inventory at attractive prices, we take advantage of large volume purchases and closeouts. As a result, we carry high inventory levels relative to our sales and from time to time this can result in overcrowding in our warehouses and place stress on our distribution operations as well as the back rooms of our retail stores. This can also result in inventory shrinkage due to spoilage if merchandise cannot be sold in the anticipated timeframes. Our store and warehouse inventory, net of allowance, approximated $296.0 million and $206.2 million at January 30, 2015 and January 31, 2014, respectively. We periodically review the net realizable value of our inventory and make adjustments to our carrying value when appropriate. The current carrying value of inventory reflects our belief that we will realize the net values recorded on the balance sheet. However, we may not do so, and if we do not, this may result in overcrowding and supply chain difficulties. If we sell large portions of inventory at amounts less than their carrying value or if we write down or otherwise dispose of a significant part of inventory, cost of sales, gross profit, operating income, and net income could decline significantly during the period in which such event or events occur. Margins could also be negatively affected should the grocery category sales become a larger percentage of total sales in the future, and by increases in shrinkage and spoilage from perishable products.  In addition, we offer selected items priced above 99.99¢ and we believe that we have additional opportunities to expand our selection of these items.  If we cannot sell these items above 99.99¢ in the volumes that we expect this could further exacerbate the foregoing risks.

 

If we fail to protect our brand name, competitors may adopt trade names that dilute the value of our brand name

 

We may be unable or unwilling to strictly enforce our trademark in each jurisdiction in which we do business. Also, we may not always be able to successfully enforce our trademarks against competitors or against challenges by others. Our failure to successfully protect our trademarks could diminish the value and efficacy of our brand recognition, and could cause customer confusion, which could, in turn, adversely affect our sales and profitability.

 

We face strong competition

 

We compete in both the acquisition of inventory and sale of merchandise with other wholesalers and retailers, discount and deep-discount stores, single price point merchandisers, mass merchandisers, food markets, drug chains, club stores and other retailers. We also compete for retail real estate sites. In the future, new companies may also enter the extreme value retail industry. It is also becoming more common for superstores to sell products competitive with our product offerings. Additionally, we currently face increasing competition for the purchase of quality closeout merchandise, and some of these competitors are entering or may enter our traditional markets. Also, as we expand, we may enter new markets where our own brand is weaker and established brands are stronger, and where our own brand value may have been diluted by other retailers with similar names, appearances and/or business models. Some of our competitors have substantially greater financial resources and buying power than we do, as well as nationwide name-recognition and organization. Our ability to compete will depend on many factors including the ability to successfully purchase and resell merchandise at lower prices than competitors and the ability to differentiate ourselves from competitors that do not share our price and merchandise attributes, yet may appear similar to prospective customers. We also face competition from other retailers with similar names and/or appearances. We cannot assure that we will be able to compete successfully against current and future competitors in both the acquisition of inventory and the sale of merchandise.

 

We are subject to governmental regulations, procedures and requirements. A significant change in, or noncompliance with, these regulations could have a material adverse effect on our financial performance

 

Our business is subject to numerous federal, state and local laws and regulations. We routinely incur costs in complying with these regulations. New laws or regulations, particularly those dealing with healthcare reform, hazardous waste, product safety, and labor and employment, among others, or changes in existing laws and regulations, especially those governing the sale of products, may result in significant added expenses or may require extensive system and operating changes that may be difficult to implement and/or could materially increase our cost of doing business. In addition, such changes or new laws may require the write off and disposal of existing product inventory, resulting in significant adverse financial impact to us. Untimely compliance or noncompliance with applicable regulations or untimely or incomplete execution of a required product recall can result in the imposition of penalties, including loss of licenses or significant fines or monetary penalties, in addition to reputational damage.

 

Litigation may adversely affect our business, financial condition and results of operations

 

Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, shareholders, government agencies and others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits, regulatory actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if

 

16



Table of Contents

 

decided adversely to us or settled by us, may result in liability material to our financial statements as a whole or may negatively affect our operating results if changes to our business operation are required. The outcome of litigation is difficult to assess or quantify and the cost to defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. See Item 3, “Legal Proceedings.”

 

We face risks associated with international sales and purchases

 

International sales historically have not been important to our overall net sales. However, some of the inventory we purchase from domestic vendors is manufactured outside the United States, primarily China and we expect to directly source an increasing portion of our products from outside of the United States.  Because we expect a larger percentage of our merchandise to be manufactured or sourced abroad, we will be required to order these products further in advance than would be the case if these products were manufactured domestically.  International transactions may be subject to risks such as:

 

·                  political or financial instability or disputes;

 

·                  lack of knowledge by foreign manufacturers of or compliance with applicable federal and state product, content, packaging and other laws, rules and regulations;

 

·                  foreign currency exchange rate fluctuations and local economic conditions, including inflation;

 

·                  uncertainty in dealing with foreign vendors and countries where the rule of law is less established;

 

·                  disruptions in the global transportation network, such as raw material shortages, factory consolidations, work stoppages, strikes or shutdowns of major ports or airports, or other political or labor unrest;

 

·                  risk of loss due to overseas transportation;

 

·                  import and customs review can delay delivery of products as could labor disruptions at ports;

 

·                  changes in import and export regulations, including “trade wars” and retaliatory responses;

 

·                  changes in tariff, import duties and freight rates; and

 

·                  testing and compliance.

 

The United States and other countries have at times proposed various forms of protectionist trade legislation.  We are subject to trade restrictions in the form of tariffs or quotas, or both, applicable to the products we sell as well as to raw material imported to manufacture those products. We may also be subjected to additional duties, significant monetary penalties, the seizure and forfeiture of the products we are attempting to import, or the loss of import privileges if we or our vendors are found to be in violation of U.S. laws and regulations applicable to the importation of our products. Our and our vendors’ compliance with the regulations is subject to interpretation and review by applicable authorities.  Any changes in current tariff structures or other trade policies or interpretations could result in increases in the cost of and/or store level reduction in the availability of certain merchandise and could adversely affect our ability to purchase such merchandise and our operations.  In addition, decreases in the value of the U.S. dollar against foreign currencies, particularly the Chinese renminbi, could increase the cost of products we purchase from overseas vendors. The pricing of our products in our stores may also be affected by changes in foreign currency rates and require us to make adjustments which would impact our revenue and profit.

 

Disruptions due to labor stoppages, strikes or slowdowns, shutdowns or major port or airport or other disruptions involving our vendors or the transportation and handling industries also may negatively affect our ability to receive merchandise and thus may negatively affect sales.  Prolonged disruptions could also materially increase our labor costs both during and following the disruption.  Significant increases in wages or wage taxes paid by contract facilities may increase the cost of goods manufactured, which could have a material adverse effect on our profit margins and profitability.  For example, the costs of labor and wage taxes have increased in China, which means we are at risk of higher costs associated with goods manufactured in China.

 

These and other factors affecting our vendors and our access to products, including the supply of our imported merchandise or the imposition of additional costs of purchasing or shipping imported merchandise, could have a material adverse effect on our business, financial condition and results of operations unless and until alternative supply arrangements are secured. Products from alternative sources may be of lesser quality or more expensive than those we currently purchase, resulting in a loss of sales or profit.  As we increase our imports of merchandise from foreign vendors, the risks associated with foreign imports will increase.

 

17



Table of Contents

 

We have potential risks regarding our store physical inventories and our inventory replenishment and forecasting systems

 

We maintain a perpetual inventory system in our warehouses, and follow a cycle count program that is adhered to over the course of each year in order to ensure that inventories are accurately reported.  We do not maintain a perpetual inventory system in our retail stores. Physical inventory counts are completed at each of the Company’s retail stores at least once a year by an outside inventory service company.  Based on the results of annual inventory counts, we have made adjustments to inventory estimates, which at times have been significant. We are in the process of implementing an SAP system throughout the Company, including all retail stores, which we anticipate will be completed during fiscal 2016. Our failure to adequately reserve for shrinkage and excess and obsolete inventory or otherwise to not continue to improve our inventory processes and procedures could have a materially adverse effect on our store physical inventory results, shrinkage and margins. This in turn could materially affect our ability to timely complete our financial reporting obligations and our financial condition and results or operations.

 

Also, our success depends in part on management’s ability to effectively anticipate and respond to changing consumer preferences, product trends and store inventory needs and its ability to translate these preferences, trends and needs into marketable product offerings in advance of the actual time of sale to the customer. Even if we are successful in anticipating consumer demands, we must continue to be able to develop and introduce innovative, high-quality products in order to sustain consumer demand.

 

There can be no assurance that we will be able to successfully anticipate changing consumer preferences, product trends, store inventory needs or economic conditions and, as a result, we may not successfully manage inventory levels to meet our future order requirements. If we fail to accurately forecast these needs, we may experience excess inventory levels or a shortage of product required to meet the demand. Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on the image and reputation of our brands and negatively impact profitability.

 

We could encounter risks related to transactions with affiliates

 

Prior to the Merger, we leased 13 store locations and a parking lot associated with one of these stores from the Rollover Investors and their affiliates, of which 12 stores were leased on a month to month basis. In connection with the Merger, we entered into new lease agreements for these 13 stores and one parking lot. Although the terms negotiated were acceptable to us, we cannot be certain that terms negotiated are no less favorable than a negotiated arm’s length transaction with a third party.

 

We are dependent on key management individuals and the loss of any of these key individuals could curtail our growth and adversely affect our business.

 

We depend on a limited number of key management personnel, including our executive management team.  Losing the services of any or a significant number of such individuals could result in a loss of management continuity and institutional knowledge and thus adversely affect our business.  Other personnel may not have the experience and expertise to readily replace these individuals.  As a result, our board of directors may have to search outside of the Company for qualified replacements. This search may be prolonged, and we cannot provide assurance that we would be able to locate and hire qualified replacements. We do not maintain key person insurance on any of our executives or key management personnel. Further, the market for qualified executive candidates, with the right talent and competencies, is highly competitive, and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key employees may adversely affect our ability to conduct operations in accordance with the standards that we have set.

 

Our operating results may fluctuate and may be affected by seasonal buying patterns

 

Historically, we have experienced higher net sales and higher operating income during the quarters that have included the Halloween, Christmas and Easter selling seasons.  If for any reason our net sales were to fall below norms during the Halloween, Christmas and/or Easter selling seasons, it could have an adverse impact on profitability and impair the results of operations for the entire fiscal year. Transportation scheduling, warehouse capacity constraints, supply chain disruptions, adverse weather conditions, labor disruptions or other disruptions during peak holiday seasons could also affect net sales and profitability for the fiscal year.

 

In addition to seasonality, many other factors may cause the results of operations to vary significantly from quarter to quarter. These factors, some beyond our control, include the following:

 

·                  the number, size and location of new stores and timing of new store openings;

 

·                  the distance of new stores from existing stores and distribution sources;

 

·                  the level of advertising and pre-opening expenses associated with new stores;

 

·                  the integration of new stores into operations;

 

18



Table of Contents

 

·                  the general economic health of the extreme value retail industry;

 

·                  changes in the mix of products sold;

 

·                  increases in fuel, shipping merchandise and energy costs;

 

·                  the ability to successfully manage inventory levels and product mix across our multiple distribution centers and our stores;

 

·                  changes in personnel;

 

·                  the expansion by competitors into geographic markets in which they have not historically had a strong presence;

 

·                  fluctuations in the amount of consumer spending;

 

·                  the amount and timing of operating costs and capital expenditures relating to the growth of the business and our ability to uniformly capture such costs; and

 

·                  the timing of certain holidays, such as Easter and Halloween. For example, during fiscal 2013 there were two Easter selling seasons that occurred in early April 2012 and in late March 2013, compared to no Easter selling season in transition fiscal 2014.

 

We could be exposed to product liability, food safety claims or packaging violation claims

 

We purchase many products on a closeout basis, some of which are manufactured or distributed by overseas entities, and some of which are purchased by us through brokers or other intermediaries as opposed to directly from their manufacturing or distribution sources. Many products are also sourced directly from manufacturers. The closeout nature of certain of these products and transactions may impact our opportunity to investigate all aspects of these products. We attempt to ensure compliance, and to test products when appropriate, but there can be no assurance that we will consistently succeed in these efforts. Despite our best efforts to ensure the quality and safety of the products we sell, we may be subject to product liability claims from customers or penalties from government agencies relating to products, including food products that are recalled, defective or otherwise alleged to be harmful. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. We have or have had, and in the future could face, labeling, environmental, or other claims, from private litigants as well as from governmental agencies.  Our litigation expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully pursued.

 

We face risks related to protection of data related to our employees, customers, vendors and other parties

 

As part of our normal business activities, we collect and store sensitive personal information, related to our employees, customers, vendors and other parties. We have certain procedures and technology in place to protect such data, but third parties may have the technology or know-how to breach the security of this information, and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and any resulting negative publicity could significantly harm our reputation.

 

We need to comply with credit and debit card security regulations

 

As a merchant who processes credit and debit card payments from customers, we are required to comply with the Payment Card Industry Data Security Standards and other requirements imposed on us for the protection and security of our customers’ credit and debit card information. If we are unable to remain compliant with these requirements, our business and operations could be adversely affected because we could incur significant fines or penalties from payment card companies or we could be prevented in the future from accepting customer payments by means of a credit or debit card. We also may need to expend significant management and financial resources to become or remain compliant with these requirements, which could divert these resources from other initiatives and adversely impact our results of operations, financial condition, business and prospects.

 

We may be adversely impacted if our security measures fail

 

Our relationships with our customers may be adversely affected if the security measures that we use to protect their personal information, such as credit card numbers, are ineffective or perceived by consumers to be inadequate. We primarily rely on security and authentication technology that we license from other parties. With this technology, we perform real-time credit card authorization and verification with our banks and we are subject to the customer privacy standards of credit card companies and various consumer protection laws. We cannot predict whether there will be a compromise or breach of the technology we use to protect our customers’ personal information. If there is a compromise or breach of this nature, there is the potential that parties could seek damages from us, and we could lose the confidence of customers or be subject to lawsuits or significant fines or penalties from credit card companies or regulatory agencies.

 

19



Table of Contents

 

Furthermore, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any such breaches.

 

We are subject to environmental regulations

 

Under various federal, state and local environmental laws and regulations, current or previous owners or occupants of property may face liability associated with hazardous substances. These laws and regulations often impose liability without regard to fault. In the future, we may be required to incur substantial costs for preventive or remedial measures associated with hazardous materials.  We have several storage tanks at our distribution and warehouse facilities, including: aboveground and underground diesel storage tanks in our two City of Commerce, California distribution centers, a compressed natural gas tank at one City of Commerce, California distribution center; ammonia storage at our Southern California cold storage facility and our Texas warehouse; aboveground diesel and propane storage tanks at our Texas warehouse; an aboveground propane storage tank at our two main Southern California warehouses; and an aboveground propane storage tank at our leased Slauson distribution center in City of Commerce, California. Except as disclosed in Item 3. Legal Matters, we have not been notified of, and are not aware of, any potentially material current environmental liability, claim or non-compliance.  We could incur costs in the future related to owned properties, leased properties, storage tanks, or other business properties and/or activities. In the ordinary course of business, we handle or dispose of commonplace household products that are classified as hazardous materials under various environmental laws and regulations. We have adopted policies regarding the handling and disposal of these products, but we cannot be assured that our policies and training are comprehensive and/or are consistently followed, and we are still potentially subject to liability under, or violations of, these environmental laws and regulations in the future even if our policies are consistently followed.

 

Changes to accounting rules or regulations may adversely affect our results of operations

 

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may even affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations or the questioning of current accounting practices may adversely affect our results of operations.

 

The Financial Accounting Standards Board (“FASB”) is focusing on several broad-based convergence projects. In August 2010, the FASB issued an exposure draft outlining proposed changes to current lease accounting under generally accepted accounting principles in the United States (“GAAP”) in FASB Accounting Standards Codification 840, “Leases.” In May 2013, the FASB issued a new exposure draft. Currently, substantially all of our leased properties are accounted for as operating leases with limited related assets and liabilities recorded on our balance sheet. The proposed new accounting pronouncement, if ultimately adopted in its proposed form, could result in significant changes to our current accounting, including the capitalization of leases on the balance sheet that currently are recorded off balance sheet as operating leases. While this change would not impact the cash flow related to our store leases, we would expect our assets and liabilities to increase relative to the current presentation, which may impact our ability to raise additional financing from banks or other sources in the future. The guidance as proposed may also affect the future reporting of our results from operations as both income and expense on leases previously accounted for as operating leases would be front-end loaded as compared to the existing accounting requirements. However, even if the new guidance is adopted as proposed, certain incurrence ratios and other provisions under the Indenture (as defined below) and under the Credit Facilities permit us to account for leases in accordance with the existing accounting requirements. As a result, our ability to incur additional debt or otherwise comply with such covenants may not directly correlate to our financial condition or results from operations as each would be reported under GAAP as so amended.

 

Impairment of our goodwill or our intangible assets could negatively impact our net income and stockholders’ equity

 

A substantial portion of our total assets consists of goodwill and intangible assets. Goodwill and certain intangible assets are not amortized, but are tested for impairment at least annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of our net assets is less than its carrying amount. Testing for impairment involves an estimation of the fair value of our net assets and other factors and involves a high degree of judgment and subjectivity. There are numerous risks that may cause the fair value of our net assets to fall below its carrying amount, including those described elsewhere in this Report. If we have an impairment of our goodwill or intangible assets, the amount of any impairment could be significant and could negatively impact our net income and stockholders’ equity for the period in which the impairment charge is recorded.

 

20



Table of Contents

 

Risks Related to Our Substantial Indebtedness

 

We have substantial indebtedness and lease obligations, which could affect our ability to meet our obligations under our indebtedness and may otherwise restrict our activities

 

Our total indebtedness, as of January 30, 2015, was $907.5 million, consisting of borrowings under our First Lien Term Facility of $600.5 million, $57.0 million under our ABL Facility and $250.0 million of Senior Notes. We have additional availability under our ABL Facility subject to the borrowing base of $115.5 million and, subject to certain limitations and the satisfaction of certain conditions, we are also permitted to incur up to an aggregate of $100 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Facility.

 

We also have, and will continue to have, significant lease obligations. As of January 30, 2015, our minimum annual rental obligations under long-term operating leases for fiscal 2016 are $70.6 million.

 

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Senior Notes and our Credit Facilities. Our substantial indebtedness could have important consequences, including:

 

·                  increasing our vulnerability to adverse economic, industry or competitive developments;

 

·                  requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

·                  exposing us to the risk of increased interest rates because certain of our borrowings, including borrowings under our Credit Facilities, are at variable rates of interest;

 

·                  making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Senior Notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the Indenture and the agreements governing such other indebtedness;

 

·                  restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

·                  imposing restrictions on the operation of our business that may hinder our ability to take advantage of strategic opportunities or to grow our business;

 

·                  limiting our ability to obtain additional financing for working capital, capital expenditures (including real estate acquisitions and store expansion), debt service requirements and general corporate or other purposes, which could be exacerbated by further volatility in the credit markets; and

 

·                  limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to any of our competitors who are less leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

 

We and our subsidiaries are still able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness

 

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The Indenture and our Credit Facilities each contain restrictions on the incurrence of additional indebtedness. However, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. Accordingly, we and our subsidiaries may be able to incur substantial additional indebtedness in the future. We have additional availability under our ABL Facility subject to the borrowing base of $115.5 million. Subject to certain limitations and the satisfaction of certain conditions, we are also permitted to incur up to an aggregate of $100 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Facility. If new debt is added to our and our subsidiaries’ current debt levels, the risks that we now face as a result of our leverage would intensify and could have a negative impact on our credit rating.

 

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful

 

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal of, and premium, if any, and additional interest, if any, on, our indebtedness, including the Senior Notes.

 

21



Table of Contents

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the Senior Notes. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of the Indenture and our Credit Facilities or any future debt instruments that we may enter into may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

 

Our debt agreements contain restrictions that limit our flexibility in operating our business

 

Our Credit Facilities and the Indenture contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our Parent’s (solely with respect to our Credit Facilities) and our restricted subsidiaries’ ability to, among other things:

 

·                  incur additional indebtedness or issue certain preferred shares;

 

·                  pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

·                  make certain investments;

 

·                  transfer or sell certain assets;

 

·                  create or incur liens;

 

·                  consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

·                  enter into certain transactions with our affiliates.

 

A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions, and, in the case of our Credit Facilities, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under our Credit Facilities, the lenders could elect to declare all amounts outstanding under our Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit under the ABL Facility. Such actions by those lenders could cause cross defaults under our other indebtedness. If we were unable to repay those amounts, the lenders under our Credit Facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under our Credit Facilities. If the lenders under our Credit Facilities accelerate the repayment of borrowings, we may not have sufficient assets to repay our Credit Facilities as well as our other indebtedness, including the Senior Notes.

 

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly

 

Borrowings under our Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on our variable rate indebtedness will increase even though the amount borrowed would remain the same, and our net income and cash flow, including cash available for servicing our indebtedness, will correspondingly decrease. Although during the quarter ended June 30, 2012 (the “first quarter of fiscal 2013”), we entered into interest rate cap and swap agreements to hedge the variability of cash flows related to our floating rate indebtedness, these measures may not fully mitigate our risk or may not be effective.

 

Item 1B. Unresolved Staff Comments

 

None.

 

22



Table of Contents

 

Item 2. Properties

 

As of January 30, 2015, we owned 73 stores and leased 310 of our 383 store locations. Additionally, as of January 30, 2015, we owned five parcels of land for potential store sites.

 

Our leases generally provide for a fixed minimum rental, and some leases require additional rental based on a percentage of sales once a minimum sales level has been reached. Management believes that our stable operating history and ability to generate substantial customer traffic give us leverage when negotiating lease terms. Certain leases include cash reimbursements from landlords for leasehold improvements and other cash payments received from landlords as lease incentives. A large majority of our store leases were entered into with multiple renewal periods, which are typically five to ten years and occasionally longer.

 

The large majority of our store leases were entered into with multiple renewal options of typically five years per option. Historically, we have exercised the large majority of the lease renewal options as they arise, and anticipate continuing to do so for the majority of leases for the foreseeable future.

 

The following table sets forth, as of January 30, 2015, information relating to the calendar year expiration dates for our current store leases:

 

Calendar Years

 

Number of Leases Expiring
Assuming No Exercise of Renewal
Options

 

Number of Leases Expiring
Assuming Full Exercise of Renewal
Options

 

2015

 

5

 

2

 

2016-2018

 

108

 

10

 

2019-2021

 

80

 

16

 

2022-2026

 

114

 

46

 

2027-thereafter

 

3

 

236

 

 

We own our main distribution center and executive office facility, located in the City of Commerce, California. We also own an additional warehouse nearly adjacent to our main distribution facility. We also own a cold storage distribution center and lease additional warehouse facilities located near the City of Commerce, California. In April 2013, we entered into a 15-year lease (expiring in December 2028) for a cold warehouse facility located in Los Angeles, California to provide us with additional cold warehousing capacity.  In May 2014, we entered into a lease agreement for corporate office and warehouse space in the City of Commerce, California that expires in February 2030.

 

We own a distribution center in the Houston area to service our Texas operations.

 

As our needs change, we may relocate, expand, and/or otherwise increase or decrease the size and/or costs of our distribution or warehouse facilities.

 

Item 3. Legal Proceedings

 

Information for this item is included in Note 10 to our Consolidated Financial Statements included in this Report, and incorporated herein by reference.

 

Item 4. Mine Safety Disclosures

 

None.

 

23


 


Table of Contents

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Subsequent to the Merger, our membership units are privately held and there is no established public trading market for such units.

 

Dividends

 

On October 21, 2013, in connection with the Gold-Schiffer Purchase, we made a distribution to Parent of $95.5 million. See Note 9 to our Consolidated Financial Statements for more information on the Gold-Schiffer Purchase. This amount was permitted through amendment of our First Lien Term Loan Facility. See Note 6 to our Consolidated Financial Statements for information on restrictions under the instruments governing our indebtedness on our ability to make dividends and other similar payments.

 

We do not expect to make any dividends, distributions or other similar payments to Parent in the foreseeable future.

 

24



Table of Contents

 

Item 6. Selected Financial Data

 

The selected consolidated financial data presented below as of January 30, 2015 (Successor) and January 31, 2014 (Successor) and for the year ended January 30, 2015 (Successor), ten months ended January 31, 2014 (Successor) and for the year ended March 30, 2013 (Successor), have been derived from our Consolidated Financial Statements and notes thereto included in this Report. The selected consolidated financial data as of March 30, 2013 (Successor), March 31, 2012 (Successor) and April 2, 2011 (Predecessor), and for the periods January 15, 2012 to March 31, 2012 (Successor), and April 3, 2011 to January 14, 2012 (Predecessor) and year ended April 2, 2011 (Predecessor) (as adjusted for the change in the presentation of financial statements discussed below) have been derived from our audited consolidated financial statements which are not included in this Report.

 

In the first quarter ended May 2, 2014 (the “first quarter of fiscal 2015”), we changed the presentation of our financial statements to include receiving, distribution, warehouse costs and transportation to and from stores in our cost of sales. Previously, these costs were included in selling, general and administrative expenses.  Depreciation expense related to these costs, which was historically included in selling, general and administrative expense, is also now included in cost of sales.  Also, depreciation and amortization expense previously included in selling, general and administrative expense is no longer presented separately.  Reclassifications of $87.0 million, $88.8 million, $17.6 million, $58.6 million and $70.7 million from selling, general and administrative expense to cost of sales were made for the ten months ended January 31, 2014, for the year ended March 30, 2013, for the periods January 15, 2012 to March 31, 2012, and April 3, 2011 to January 14, 2012 and year ended April 2, 2011, respectively, to conform to current year presentation.  This change does not change previously reported operating income or net income.  This change in presentation of financial statements was made in order to be in line with our peers in the retail industry.

 

The Successor fiscal year ended January 30, 2015 is comprised of 52 weeks. The Successor period for the ten months ended January 31, 2014 is comprised of 44 weeks.  The Successor fiscal year ended March 30, 2013 is comprised of 52 weeks. The Successor period January 15, 2012 to March 31, 2012 contains 11 weeks.  The Predecessor period April 3, 2012 to January 14, 2012 contains 41 weeks. The Predecessor fiscal year ended on April 2, 2011 is comprised of 53 weeks.

 

The historical results presented below are not necessarily indicative of the results to be expected for any future period.  The information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto included in this Report.

 

 

 

Year Ended

 

Ten Months Ended

 

Year Ended

 

For the Periods

 

Year Ended

 

 

 

January 30,
 2015

 

January 31,
 2014

 

March 30,
2013

 

January 15, 2012
to
March 31, 2012

 

 

April 3, 2011
to
January 14, 2012

 

April 2,
 2011

 

 

 

(Successor)

 

(Successor)

 

(Successor)

 

(Successor)

 

 

(Predecessor)

 

(Predecessor)

 

 

 

(Amounts in thousands, except operating data)

 

Statements of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99¢ Only Stores

 

$

1,881,865

 

$

1,486,699

 

$

1,620,683

 

$

329,361

 

 

$

1,158,733

 

$

1,380,357

 

Bargain Wholesale

 

45,084

 

42,044

 

47,968

 

9,555

 

 

34,047

 

43,521

 

Total sales

 

1,926,949

 

1,528,743

 

1,668,651

 

338,916

 

 

1,192,780

 

1,423,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

1,308,849

 

1,033,077

 

1,117,051

 

221,727

 

 

769,555

 

913,500

 

Gross profit

 

618,100

 

495,666

 

551,600

 

117,189

 

 

423,225

 

510,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

546,259

 

481,449

 

493,316

 

104,260

 

 

339,438

 

392,895

 

Operating income

 

71,841

 

14,217

 

58,284

 

12,929

 

 

83,787

 

117,483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense (income), net

 

62,734

 

55,195

 

77,282

 

16,119

 

 

340

 

(741

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

9,107

 

(40,978

)

(18,998

)

(3,190

)

 

83,447

 

118,224

 

Provision (benefit) for income taxes

 

3,605

 

(28,493

)

(10,089

)

2,103

 

 

33,699

 

43,916

 

Net income (loss)

 

$

5,502

 

$

(12,485

)

$

(8,909

)

$

(5,293

)

 

$

49,748

 

$

74,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales Growth:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99¢ Only Stores

 

N/A

 

N/A

 

8.9

%

N/A

 

 

N/A

 

5.0

%

Bargain Wholesale

 

N/A

 

N/A

 

10.0

%

N/A

 

 

N/A

 

6.3

%

Total sales

 

N/A

 

N/A

 

8.9

%

N/A

 

 

N/A

 

5.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

32.1

%

32.4

%

33.1

%

34.6

%

 

35.5

%

35.8

%

Operating margin

 

3.7

%

0.9

%

3.5

%

3.8

%

 

7.0

%

8.3

%

Net income (loss)

 

0.3

%

(0.8

)%

(0.5

)%

(1.6

)%

 

4.2

%

5.2

%

 

25



Table of Contents

 

 

 

January 30,
2015

 

January 31,
2014

 

March 30,
 2013

 

March 31,
2012

 

 

April 2,
2011

 

 

 

(Successor)

 

(Successor)

 

(Successor)

 

(Successor)

 

 

(Predecessor)

 

 

 

(Amounts in thousands, except operating data)

 

Retail Operating Data (a) :

 

 

 

 

 

 

 

 

 

 

 

 

99¢ Only Stores at end of period

 

383

 

343

 

316

 

298

 

 

285

 

Change in comparable same-store sales

 

0.4

%(b)

3.7

%(c)

4.3

%(c)

N/A

 

 

0.7

%(c)

Average net sales per store open the full year

 

$

5,366

 

$

5,446

 

$

5,327

 

N/A

 

 

$

4,874

 

Average net sales per estimated saleable square foot (d)

 

$

328

 

$

330

 

$

321

 

N/A

 

 

$

291

 

Estimated saleable square footage at year end

 

6,189,669

 

5,607,991

 

5,211,483

 

4,948,344

 

 

4,758,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

94,529

 

$

96,326

 

$

152,362

 

$

153,541

 

 

$

323,314

 

Total assets

 

$

1,929,166

 

$

1,770,234

 

$

1,757,237

 

$

1,768,041

 

 

$

824,215

 

Capital and financing lease obligation, including current portion

 

$

25,061

 

$

285

 

$

354

 

$

431

 

 

$

448

 

Long-term debt, including current portion

 

$

907,533

 

$

855,390

 

$

758,325

 

$

763,601

 

 

$

 

Total member’s/shareholders’ equity

 

$

507,752

 

$

499,087

 

$

638,970

 

$

630,767

 

 

$

681,549

 

 


(a)         Includes retail operating data solely for our 99¢ Only stores. For comparability purposes, average net sales per store and average net sales per estimated saleable square foot are based on a trailing 52-week period for all periods presented. Comparable same-store sales is based on a comparable 52-week period for all periods presented, except for the ten months ended January 31, 2014, which is based on a comparable 43-week period of the prior year.

(b)         Change in comparable same-store sales compares net sales for all stores open at least 14 months.

(c)          Change in comparable same-store sales compares net sales for all stores open at least 15 months.

(d)         Computed based upon estimated total saleable square footage of stores open for at least 12 months.

 

26



Table of Contents

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” of this Report.

 

Overview

 

On January 13, 2012, we merged with Number Merger Sub, Inc. and became a subsidiary of Parent. See Item 1, “Business—Merger” for more information about the Merger.

 

On December 16, 2013, the board of directors of our sole member, Parent, approved a resolution changing the end of our fiscal year. Prior to the change, our fiscal year ended on the Saturday closest to the last day of March.  Our new fiscal year end is the Friday closest to the last day of January, with each successive quarterly period ending the Friday closest to the last day of April, July, October or January, as applicable.  Fiscal 2015 thus consisted of 52 weeks beginning February 1, 2014 and ending January 30, 2015. Our fiscal year 2014 consisted of 44 weeks and transition fiscal 2014 and the fourth interim period of transition fiscal 2014 ended on January 31, 2014.  Fiscal 2013 began on April 1, 2012 and ended on March 30, 2013 and consisted of 52 weeks. Fiscal year 2016 will consist of 52 weeks beginning January 31, 2015 and ending January 29, 2016.

 

For comparability purposes, same-store sales for transition fiscal 2014 are based on the 43-week period ended January 25, 2014 as compared to the 43-week period ended January 26, 2013.  Annual same-store sales for all other periods presented are based on the comparable 52-week period.  For comparability purposes, average annual sales per store and annual sales per estimated saleable square foot calculations included in this Report are based on trailing 52-week period, ended January 30, 2015 for fiscal 2015, ended on January 25, 2014 for transition fiscal 2014 and ended on March 30, 2013 for fiscal 2013.

 

In the first quarter of fiscal 2015, we changed the presentation of our financial statements to include receiving, distribution, warehouse costs and transportation to and from stores in our cost of sales. Previously, these costs were included in selling, general, and administrative expenses.  Depreciation expense related to these costs which was historically included in selling, general and administrative expense, is now also included in cost of sales.  Also, depreciation and amortization expense previously included in selling, general and administrative expense is no longer presented separately on the income statement.  Reclassifications of $87.0 million and $88.8 million from selling, general and administrative expense to cost of sales were made for the ten months ended January 31, 2014 and for the year ended March 30, 2013, respectively, to conform to current year presentation.  This change does not change previously reported operating income or net income.  This change in presentation of financials was made in order to be in line with our peers in the retail industry.

 

In the first quarter of fiscal 2015, we modified our definition of same-store sales. Previously, we defined same-store sales as sales at stores that have been open at least 15 months. In situations in which the store was relocated, or closed and later reopened in the same location, the affected store was considered a new store for any same-store sales analysis. A store would only be included in the same-store sales analysis once it had been open, or reopened, for 15 months. Under the new definition, same-store sales are sales at stores that have been open at least 14 months, including stores that have been remodeled, expanded or relocated during that period. Since we do not have e-commerce sales, such sales are not part of our same-store sales calculation. This change in definition of same-store sales was a prospective change and was made in order to be in line with our peers in the retail industry.

 

During fiscal 2015, we had net sales of $1,926.9 million, operating income of $71.8 million and net income of $5.5 million.  Same-store sales in fiscal 2015 increased by 0.4%.  Average sales per store open at least 12 months, on a trailing 52-week period, were $5.4 million in fiscal 2015 compared to $5.4 million in transition fiscal 2014.  Average net sales per estimated saleable square foot (computed for stores open at least 12 months) on a trailing 52-week period were $328 per square foot for fiscal 2015 compared to $330 per square foot for transition fiscal 2014. Existing stores at January 30, 2015 averaged approximately 16,000 saleable square feet.

 

In fiscal 2015, we continued to expand our store base by opening 40 net new stores. Of these newly opened stores, 32 stores are located in California, three in Nevada, two in Arizona, and three in Texas.  In fiscal 2016, we currently intend to increase our store count by approximately 30 to 40 stores, all of which are expected to be opened in our existing markets. We believe that our near term growth in fiscal 2016 will primarily result from new store openings in our existing territories and increases in same-store sales.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect reported earnings. These estimates and assumptions are evaluated on an on-going basis and are based on historical experience and other factors that management believes are reasonable. Estimates and assumptions include, but are not limited to, the areas of inventories, long-lived asset impairment, goodwill and other intangibles, legal reserves, self-insurance reserves, leases, taxes and share-based compensation.

 

27



Table of Contents

 

We believe that the following items represent the areas where more critical estimates and assumptions are used in the preparation of our financial statements:

 

Inventory valuation.  Inventories are valued at the lower of cost or market. Inventory costs are established using a methodology that approximates first in, first out, which for store inventories is based on a retail inventory method.  Valuation allowances for shrinkage, as well as excess and obsolete inventory are also recorded. Shrinkage is estimated as a percentage of sales for the period from the last physical inventory date to the end of the applicable period. Such estimates are based on experience and the most recent physical inventory results. Physical inventory counts are taken at each of our retail stores at least once a year by an outside inventory service company.  We perform inventory cycle counts at our warehouses throughout the year.  We also perform inventory reviews and analysis on a quarterly basis for both warehouse and store inventory to determine inventory valuation allowances for excess and obsolete inventory.  The valuation allowances for excess and obsolete inventory are based on the age of the inventory, sales trends and future merchandising plans.  The valuation allowances for excess and obsolete inventory require management judgment and estimates that may impact the ending inventory valuation and valuation allowances that may have a material effect on the reported gross margin for the period.

 

In the fourth quarter of fiscal 2013, we revised our inventory merchandising and liquidation philosophies to significantly reduce and liquidate slow moving inventories prospectively as directed by the current management team.  As a result of this change, we recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.1 million in the fourth quarter of fiscal 2013. This was a prospective change and did not have an effect on prior periods.

 

At the end of the third quarter of transition fiscal 2014, based on new merchandising plans, we increased our valuation allowances for excess and obsolete inventory.  The Company recorded a charge to cost of sales and a corresponding reduction in inventory of approximately $9.6 million.  This was a prospective change and did not have an effect on prior periods.

 

In the fourth quarter of fiscal 2015, we recorded a charge for additional inventory shrinkage based upon the results of annual physical inventory counts completed during the quarter. This resulted in a net charge to cost of sales and a corresponding reduction in inventory of approximately $10.0 million, which was primarily related to the implementation of certain strategic initiatives, including the “Go Taller” store remodeling program.

 

Considerable management judgment is necessary to estimate these inventory valuation reserves. As an indicator of the sensitivity of this estimate, a 10% increase in our estimates of expected losses from shrinkage and the excess and obsolete inventory provision at January 30, 2015, would have increased these reserves by approximately $1.3 million and $0.4 million, respectively, and decreased pre-tax income in fiscal 2015 by the same amounts.

 

In order to obtain inventory at attractive prices, we take advantage of large volume purchases, closeouts and other similar purchase opportunities. Consequently, our inventory fluctuates from period to period and the inventory balances vary based on the timing and availability of such opportunities.  Our inventory was $296.0 million as of January 30, 2015 and $206.2 million as of January 31, 2014.

 

Long-lived asset impairment We assess the impairment of depreciable long-lived assets when events or changes in circumstances indicate that the carrying value may not be recoverable. We group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual identifiable cash flows are available.  If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, the carrying amount is compared to its fair value and an impairment charge is recognized to the extent of the difference.  Factors that we consider important which could individually or in combination trigger an impairment review include the following: (1) significant underperformance relative to expected historical or projected future operating results; (2) significant changes in the manner we use of the acquired assets or the strategy for our overall business; and (3) significant changes in our business strategies and/or negative industry or economic trends. On a quarterly basis, we assess whether events or changes in circumstances occur that potentially indicate that the carrying value of long-lived assets may not be recoverable. Considerable management judgment is necessary to estimate projected future operating cash flows.  Accordingly, if actual results fall short of such estimates, significant future impairments could result.  During fiscal 2015, we wrote down the carrying value of a held for sale property to the estimated net realizable value, net of expected disposal costs, and accordingly recorded an asset impairment charge of $0.1 million.  During transition fiscal 2014, we did not record any long-lived asset impairment charges.  During fiscal 2013, we wrote down the carrying value of a held for sale property to estimated net realizable value, net of expected disposal costs, and accordingly recorded an asset impairment charge of $0.5 million.  We have not made any material changes to our long-lived asset impairment methodology during fiscal 2015.

 

Goodwill and other intangible assets.  The Merger was accounted for as a purchase business combination, whereby the purchase price paid was allocated to recognize the acquired assets and liabilities at their fair value. In connection with the purchase price allocation, certain intangible assets were established or revalued. The purchase price in excess of the fair value of assets and liabilities was recorded as goodwill.

 

28



Table of Contents

 

Indefinite-lived intangible assets, such as the 99¢ trademark and goodwill, are not subject to amortization. We assess the recoverability of indefinite-lived intangibles whenever there are indicators of impairment, or at least annually in January. If the recorded carrying value of an intangible asset exceeds our estimated fair value, we record a charge to write the intangible asset down to its fair value.

 

Intangible assets with a definite life are amortized on a straight line basis over their useful lives. Amortizable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on undiscounted cash flows, and, if impaired, written down to fair value based on either discounted cash flows or appraised values.  Significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows used in the impairment tests.

 

During the fourth quarter of fiscal 2015, we completed step one of our goodwill impairment test for the two reporting units and determined that there was no impairment of goodwill since the fair value of the reporting units exceeded the carrying amount.  Additionally, during the fourth quarter of fiscal 2015, we completed our annual indefinite-lived intangible asset impairment test and determined there was no impairment since the fair value of the 99¢ trademark exceeded the carrying amount of the trademark. Considerable management judgment is necessary in estimating future cash flows, market interest rates, discount rates and other factors affecting the valuation of goodwill and intangibles.  We use historical financial information, internal plans and projections, and industry information in making such estimates.  However, because the new basis of accounting established at the Merger date set the book values of goodwill and intangibles equal to fair value and impairment tests are highly sensitive to changes in assumptions, minor changes to assumptions, including assumptions regarding future performance (including sales growth, pricing and commodity costs) and discount rates, could result in impairment losses. In our fiscal 2015 impairment test, both our retail reporting unit and our wholesale reporting unit had excess fair value over the book value of net assets that was substantial. Our 99¢ trademark fair value also exceeded the book value in fiscal 2015.

 

Legal reserves.  We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of business.  A number of these lawsuits, proceedings and claims may exist at any given time.  While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, and litigation is inherently unpredictable, in management’s opinion, none of these matters arising in the ordinary course of business are expected to have a material adverse effect on our financial position, results of operations, or overall liquidity. Material pending legal proceedings (other than ordinary routine litigation incidental to our business) and material proceedings known to be contemplated by governmental authorities are reported in our reports pursuant to the Securities Exchange Act of 1934, as amended.  We record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

 

There were no material changes in the estimates or assumptions used to determine legal reserves during fiscal 2015 and a 10% change in legal reserves would not be material to our consolidated financial position or results of operations.

 

Self-insured workers’ compensation liability.  We self-insure for workers’ compensation claims in California and Texas. We have established a liability for losses from both estimated known and incurred but not reported insurance claims based on reported claims and actuarial valuations of estimated future costs of known and incurred but not yet reported claims. Should an amount of claims greater than anticipated occur, the liability recorded may not be sufficient and additional workers’ compensation costs, which may be significant, could be incurred. We do not discount the projected future cash outlays for the time value of money for claims and claim related costs when establishing our workers’ compensation liability.  As a result of the increase in severity of open claims, we significantly increased our workers’ compensation liability reserves in transition fiscal 2014. As an indicator of the sensitivity of this estimate, at January 30, 2015, a 10% increase in our estimate of expected losses from workers compensation claims would have increased this reserve by approximately $7.0 million and decreased fiscal 2015 pre-tax income by the same amount.

 

Self-insured health insurance liability.  We self-insure for a portion of our employee medical benefit claims.  The liability for the self-funded portion of our health insurance program is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We maintain stop loss insurance coverage to limit our exposure for the self-funded portion of our health insurance program.  At January 30, 2015, a 10% change in self-insurance liability would not have been material to our consolidated financial position or results of operations.

 

Operating leases.  We recognize rent expense for operating leases on a straight-line basis (including the effect of reduced or free rent and rent escalations) over the applicable lease term. The difference between the cash paid to the landlord and the amount recognized as rent expense on a straight-line basis is included in deferred rent. Cash reimbursements received from landlords for leasehold improvements and other cash payments received from landlords as lease incentives are recorded as deferred tenant improvements. Deferred rent related to landlord incentives is amortized as an offset to rent expense using the straight-line method over the applicable lease term.

 

29



Table of Contents

 

In certain lease arrangements, we can be involved with the construction of the building. If it is determined that we have substantially all of the risks of ownership during construction of the leased property and therefore are deemed to be the owner of the construction project, we record an asset for the amount of the total project costs and an amount related to the value attributed to the pre-existing leased building in property and equipment, net and the related financing obligation as part of current and non-current liabilities.  Once construction is complete, if it is determined that the asset does not qualify for sale-leaseback accounting treatment, we amortize the obligation over the lease term and depreciate the asset over the life of the lease. We do not report rent expense for the portion of the rent payment determined to be related to the assets which are owned for accounting purposes. Rather, this portion of the rent payment under the lease is recognized as a reduction of the financing obligation and interest expense.

 

For store closures where a lease obligation still exists, we record the estimated future liability associated with the rental obligation on the cease use date (when the store is closed).  Liabilities are established at the cease use date for the present value of any remaining operating lease obligations, net of estimated sublease income, and at the communication date for severance and other exit costs. Key assumptions in calculating the liability include the timeframe expected to terminate lease agreements, estimates related to the sublease potential of closed locations, and estimation of other related exit costs. If actual timing and potential termination costs or realization of sublease income differ from our estimates, the resulting liabilities could vary from recorded amounts. These liabilities are reviewed periodically and adjusted when necessary.

 

Tax Valuation Allowances and Contingencies.  We recognize deferred tax assets and liabilities using the enacted tax rates for the effect of temporary differences between the financial reporting basis and tax basis of recorded assets and liabilities.  Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. We had approximately $129.1 million of net deferred tax liabilities as of January 30, 2015, which was comprised of approximately $95.4 million of net deferred tax assets and $224.5 million of deferred tax liabilities. We had approximately $124.6 million of net deferred tax liabilities as of January 31, 2014, which was comprised of approximately $102.4 million of net deferred tax assets and $227.0 million of deferred tax liabilities.  Management evaluated the available evidence in assessing our ability to realize the benefits of our deferred tax assets at January 30, 2015 and concluded it is more likely than not that we will realize all of our deferred tax assets.  Significant management judgment is required in accounting for income tax contingencies as the outcomes are often difficult to predict.  There are no uncertain tax positions at January 30, 2015.

 

Share-Based Compensation.  Subsequent to the Merger, Parent issued options to acquire shares of common stock of our Parent to certain of our executive officers and employees. We account for stock-based payment awards based on their fair values.  Stock options have a term of ten years.  For awards classified as equity, we estimate the fair value for each option award as of the date of grant using the Black-Scholes option pricing model or other appropriate valuation models.  Assumptions utilized to value options include estimating the fair value of Parent’s common stock (which is not publicly traded), the term that the options are expected to be outstanding, an estimate of the volatility of Parent’s stock price (which is based on a peer group of publicly traded companies), applicable interest rates and the expected dividend yield of Parent’s common stock. Other factors involving judgments that affect the expensing of share-based payments include estimated forfeiture rates of stock-based awards.  All of the options that we have granted to our executive officers and employees (with the exception of options granted to Rollover Investors that contained no repurchase rights and options granted to our current chief executive officer and certain directors that contain less restrictive repurchase rights) give the Parent repurchase rights as described in more detail in Note 11 to the Consolidated Financial Statements. In accordance with accounting guidance, we have not recorded any stock-based compensation expense for these grants.  For all other time-based options, the value of the portion of the award that is ultimately expected to vest is recognized as an expense ratably over the requisite service periods, which is generally a vesting term of five years.  As described in more detail in Note 11 to the Consolidated Financial Statements, certain former executive put rights that were previously outstanding were classified as equity awards and revalued using a binomial model at each reporting period with changes in fair value recognized as stock-based compensation expense.  As further described in Note 11 to the Consolidated Financial Statements, we have also granted options that will vest only upon achievement of certain performance hurdles.  These options were valued using a Monte Carlo simulation method.  Compensation expense associated with these options will not be recognized until it is probable that the performance hurdles will be achieved.

 

Results of Operations

 

The following discussion defines the components of the statement of income and should be read in conjunction with “Item 6. Selected Financial Data.”

 

Net Sales:  Revenue is recognized at the point of sale in our stores (“retail sales”). Bargain Wholesale sales revenue is recognized in accordance with the shipping terms agreed upon on the purchase order.  Bargain Wholesale sales are typically recognized free on board origin, where title and risk of loss pass to the buyer when the merchandise leaves our distribution facility.

 

30



Table of Contents

 

Cost of SalesCost of sales includes the cost of inventory, freight in, obsolescence, spoilage, scrap and inventory shrinkage, and is net of discounts and allowances.  Cost of sales also includes receiving, warehouse costs and distribution costs (which include payroll and associated costs, occupancy, transportation to and from stores and depreciation expense).  Cash discounts for satisfying early payment terms are recognized when payment is made, and allowances and rebates based upon milestone achievements such as reaching a certain volume of purchases of a vendor’s products, are included as a reduction of cost of sales when such contractual milestones are reached. In addition, we analyze our inventory levels and related cash discounts received to arrive at a value for cash discounts to be included in the inventory balance.

 

Selling, General, and Administrative Expenses:  Selling, general and administrative expenses include the costs of selling merchandise in stores (which include payroll and associated costs, occupancy and other store-level costs) and corporate costs (which include payroll and associated costs, occupancy, advertising, professional fees and other corporate administrative costs).  Selling, general and administrative expenses also include depreciation and amortization expense relating to these costs.

 

Other Expense (Income):  Other expense (income) relates primarily to loss on extinguishment of debt, interest expense on our debt, capitalized and financing leases.

 

The following table sets forth, for the periods indicated, certain selected income statement data, including such data as a percentage of net sales.  The year ended January 30, 2015 consists of 52 weeks. The ten months ended January 31, 2014 consists of 44 weeks.  The year ended March 30, 2013 consists of 52 weeks (the percentages may not add up due to rounding):

 

 

 

Year Ended

 

Ten Months Ended

 

Year Ended

 

 

 

January 30,
2015

 

% of
Net
Sales

 

January 31,
2014

 

% of
Net
Sales

 

March 30,
2013

 

% of
Net
Sales

 

 

 

(Amounts in thousands, except percentages)

 

Net Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

99¢ Only Stores

 

$

1,881,865

 

97.7

%

$

1,486,699

 

97.2

%

$

1,620,683

 

97.1

%

Bargain Wholesale

 

45,084

 

2.3

 

42,044

 

2.8

 

47,968

 

2.9

 

Total sales

 

1,926,949

 

100.0

 

1,528,743

 

100.0

 

1,668,651

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

1,308,849

 

67.9

 

1,033,077

 

67.6

 

1,117,051

 

66.9

 

Gross profit

 

618,100

 

32.1

 

495,666

 

32.4

 

551,600

 

33.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

546,259

 

28.3

 

481,449

 

31.5

 

493,316

 

29.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

71,841

 

3.7

 

14,217

 

0.9

 

58,284

 

3.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

0.0

 

(16

)

0.0

 

(342

)

0.0

 

Interest expense

 

62,734

 

3.3

 

50,820

 

3.3

 

60,898

 

3.6

 

Loss on extinguishment of debt

 

 

0.0

 

4,391

 

0.3

 

16,346

 

1.0

 

Other

 

 

0.0

 

 

0.0

 

380

 

0.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expenses, net

 

62,734

 

3.3

 

55,195

 

3.6

 

77,282

 

4.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

9,107

 

0.5

 

(40,978

)

(2.7

)

(18,998

)

(1.1

)

Provision (benefit) for income taxes

 

3,605

 

0.2

 

(28,493

)

(1.9

)

(10,089

)

(0.6

)

Net income (loss)

 

$

5,502

 

0.3

 

$

(12,485

)

(0.8

)

$

(8,909

)

(0.5

)%

 

31



Table of Contents

 

Fiscal Year Ended January 30, 2015 (52 Weeks) Compared to Ten Months Ended January 31, 2014 (44 Weeks)

 

Net sales.  Total net sales increased $398.2 million, or 26.0%, to $1,926.9 million in fiscal 2015, a 52-week period, from $1,528.7 million in transition fiscal 2014, a 44-week period. The increase in total net sales was primarily due to the fact that there were eight more weeks in fiscal 2015 as compared to transition fiscal 2014. Net retail sales increased $395.2 million, or 26.6%, to $1,881.9 million in fiscal 2015 from $1,486.7 million in transition fiscal 2014.  Bargain Wholesale net sales increased by approximately $3.0 million, or 7.2%, to $45.1 million in fiscal 2015 from $42.0 million in transition fiscal 2014.  Net retail sales for stores that were open at least 14 months in fiscal 2015 were $1,737.3 million, representing a 0.4% increase in same-store sales over a comparable 52-week period of the prior year.  The 0.4% increase in same-store sales was from higher average ticket. The full year effect of new stores opened in transition fiscal 2014 was $94.8 million and the effect of new stores opened in fiscal 2015 was $43.4 million.

 

During fiscal 2015, we added 40 net new stores: 32 in California, two in Arizona, three in Nevada and three in Texas. At the end of fiscal 2015, we had 383 stores compared to 343 stores at the end of transition fiscal 2014. Gross retail square footage as of January 30, 2015 and January 31, 2014 was 7.89 million and 7.14 million, respectively.  For 99¢ Only stores open all of fiscal 2015, the average net sales per estimated saleable square foot was $5.4 million per store and $328 per estimated saleable square foot.

 

Gross profit.  Gross profit was $618.1 million in fiscal 2015 compared to $495.7 million in transition fiscal 2014.  As a percentage of net sales, overall gross margin decreased to 32.1% in fiscal 2015, from 32.4% in transition fiscal 2014. Among the gross profit components, cost of products sold decreased by 10 basis points compared to transition fiscal 2014. Inventory shrinkage increased 60 basis points compared to transition fiscal 2014 (as described in Note 1 to the Consolidated Financial Statements). Gross profit in transition fiscal 2014 was negatively impacted by an excess and obsolete inventory reserve charge of $9.6 million representing 60 basis points in the third quarter of transition fiscal 2014 (also as described in Note 1 to the Consolidated Financial Statements). Gross profit in fiscal 2015 was negatively impacted by an increase in distribution and transportation expenses of 40 basis points primarily due to higher labor costs as well as the addition of an incremental warehouse facility for part of fiscal 2015. The remaining change was due to other less significant items included in cost of sales.

 

Selling, general and administrative expenses.  Selling, general and administrative expenses were $546.3 million in fiscal 2015 compared to $481.4 million in transition fiscal 2014.  As a percentage of net sales, selling, general and administrative expenses decreased to 28.3% for fiscal 2015 from 31.5% for transition fiscal 2014.  The 320 basis point decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to an increase in workers’ compensation accrual of $38.4 million, representing 250 basis points in transition fiscal 2014 (as described in Note 10 to the Consolidated Financial Statements) and to lower payroll-related and legal expenses in fiscal 2015. These improvements were partially offset by higher stock-based compensation expense of $2.8 million in fiscal 2015 compared to negative stock-based compensation expense of $4.8 million in transition fiscal 2014 (attributable to a decrease in the fair value of former executive put rights, as described in Note 11 to the Consolidated Financial Statements) and higher rent as percentage of net sales in fiscal 2015. Selling, general and administrative expenses were also favorably impacted by lower depreciation expense as a percentage of net sales.

 

Operating income. Operating income was $71.8 million for fiscal 2015 compared to operating income of $14.2 million for transition fiscal 2014.  Operating income as a percentage of net sales was 3.7% in fiscal 2015 compared to 0.9% in transition fiscal 2014.  The increase in operating income as a percentage of net sales was primarily due to changes in gross margin and operating expenses, as discussed above.

 

Interest expense and loss on extinguishment of debt. Interest expense was $62.7 million in fiscal 2015 compared to $50.8 million in transition fiscal 2014, primarily due to the fact that there were eight more weeks in fiscal 2015.  Transition fiscal 2014 reflects a loss on extinguishment of debt was $4.4 million, relating to amendments to the First Lien Term Loan Facility in October 2013.

 

Provision (benefit) for income taxes.  The provision for income taxes was $3.6 million in fiscal 2015 compared to a benefit of $28.5 million in in transition fiscal 2014, primarily due to pre-tax income in fiscal 2015 compared to a pre-tax loss in transition fiscal 2014. The effective tax rate for fiscal 2015 was 39.6% compared to an effective tax rate of (69.5)% for transition fiscal 2014.  The effective combined federal and state income tax rates for fiscal 2015 differ from the statutory rates primarily due to the non-deductibility of certain costs.  The effective combined federal and state income tax rates for transition fiscal 2014 differ from the statutory rates due to the benefit of federal hiring credits, the release of valuation allowance on the California enterprise zone credit carry-forward and other discrete items recognized during transition fiscal 2014 (as described in Note 5 to the Consolidated Financial Statements).

 

Net income.  As a result of the items discussed above, net income for fiscal 2015 was $5.5 million compared to a net loss of $12.5 million for transition fiscal 2014. Net income as a percentage of net sales was 0.3% in fiscal 2015 compared to net loss as a percentage of sales of (0.8)% in transition fiscal 2014.

 

32



Table of Contents

 

Ten Months Ended January 31, 2014 (44 Weeks) Compared Fiscal Year Ended March 30, 2013 (52 Weeks)

 

Net sales.  Total net sales decreased $140.0 million, or 8.4%, to $1,528.7 million in transition fiscal 2014, a 44-week period, from $1,668.7 million in fiscal 2013, a 52-week period. The decrease in total net sales was primarily due to the fact that there were eight fewer weeks in transition fiscal 2014 as compared to fiscal 2013. Net retail sales decreased $134.0 million, or 8.3%, to $1,486.7 million in transition fiscal 2014 from $1,620.7 million in fiscal 2013.  Bargain Wholesale net sales decreased by approximately $6.0 million, or 12.3%, to $42.0 million in transition fiscal 2014 from $48.0 million in fiscal 2013.  Net retail sales for stores that were open at least 15 months in transition fiscal 2014 were $1,343.1 million, representing 3.7% increase in same-store sales over a comparable 43-week period of the prior year.  The 3.7% increase in same-store sales was from increased transactions and higher average ticket. The full year effect of new stores opened in fiscal 2013 was $68.0 million and effect of new stores opened in transition fiscal 2014 was $47.0 million. We closed one store in transition fiscal 2014 which contributed $0.7 million in sales.

 

During transition fiscal 2014, we added 27 net new stores: 13 in California, five in Arizona, two in Nevada and seven in Texas. At the end of transition fiscal 2014, we had 343 stores compared to 316 stores at the end of fiscal 2013. Gross retail square footage as of January 31, 2014 and March 30, 2013 was 7.14 million and 6.63 million, respectively.  As of January 25, 2014, on a trailing 52-week period basis, our stores open for the full year averaged net sales of $5.4 million per store and $330 per estimated saleable square foot.

 

Gross profit.  Gross profit was $495.7 million in transition fiscal 2014 compared to $551.6 million in fiscal 2013.  As a percentage of net sales, overall gross margin decreased to 32.4% in transition fiscal 2014, from 33.1% in fiscal 2013.  Among the gross profit components, cost of products sold decreased by 10 basis points compared to fiscal 2013, primarily attributable to a shift in the product mix toward lower margin merchandise.  Gross profit was negatively impacted by an excess and obsolete inventory reserve charge of $9.6 million in the third quarter of transition fiscal 2014, representing 60 basis points (as described in Note 1 to our Consolidated Financial Statements), compared to a $9.1 million inventory reserve in fiscal 2013, representing 60 basis points. Gross profit in transition fiscal 2014 was negatively impacted by an increase in distribution and transportation expenses of 40 basis points primarily due to higher labor costs and increases in rent expense for additional warehouse space. The remaining change was due to other less significant items included in cost of sales.

 

Selling, general and administrative expenses. Selling, general and administrative expenses were $481.4 million in transition fiscal 2014 compared to $493.3 million in fiscal 2013.  As a percentage of net sales, selling, general and administrative expenses increased to 31.5% for transition fiscal 2014 from 29.6% for fiscal 2013. The 190 basis point increase in selling, general and administrative expenses as a percentage of net sales was primarily due to an increase in workers’ compensation accrual of $38.4 million, representing 250 basis points in transition fiscal 2014 (as described in Note 10 to the Consolidated Financial Statements) and to higher legal and outside service fees in transition fiscal 2014.  This increase in selling, general and administrative expenses as a percentage of sales was partially offset by lower stock-based compensation expense attributable to a decrease in the fair value of former executive put rights, that resulted in a negative stock-based compensation expense of $4.8 million in transition fiscal 2014, compared to an expense of $18.4 million for fiscal 2013. In fiscal 2013, we recorded stock-based compensation expense of $18.4 million (including $9.9 million of accelerated vesting expense for three executive officers and one employee who separated from their positions in the fourth quarter of fiscal 2013 and $6.5 million related to former executive officers’ put rights) (see Note 11 to the Consolidated Financial Statements).  Additionally, the increase as a percentage of sales was partially offset by higher payroll-related severance charges of $10.2 million in fiscal 2013 compared to restructuring charges of $4.4 million in transition fiscal 2014 related to a third quarter of transition fiscal 2014 reduction in force.

 

Operating income. Operating income was $14.2 million for transition fiscal 2014 compared to operating income of $58.3 million for fiscal 2013.  Operating income as a percentage of net sales was 0.9% in transition fiscal 2014 compared to 3.5% in fiscal 2013.  The decrease in operating income as a percentage of net sales was primarily due to changes in gross margin and selling, general and administrative expenses, as discussed above.

 

Interest expense and loss on extinguishment of debt. Interest expense was $50.8 million in transition fiscal 2014 compared to $60.9 million in fiscal 2013, primarily due to the fact that there were eight fewer weeks in transition fiscal 2014.  Loss on extinguishment of debt was $4.4 million for transition fiscal 2014 and $16.3 million for fiscal 2013, relating to amendments to the First Lien Term Loan Facility (as defined below) in October 2013 and April 2012, respectively.

 

Interest income and other expenses.  Interest income for transition fiscal 2014 was not significant due to liquidation of our previously-held investment portfolio. Interest income was $0.3 million for fiscal 2013.  Other expense of $0.4 million in fiscal 2013, primarily reflects realized losses on sale of investments.

 

(Benefit) provision for income taxes.  The provision for income taxes was a benefit of $28.5 million in transition fiscal 2014 compared to a benefit of $10.1 million in fiscal 2013, due to pre-tax losses in both periods. The effective tax rate for transition fiscal 2014 was (69.5)% compared to an effective tax rate of (53.1)% for fiscal 2013.  The effective combined federal and state income tax rates for transition fiscal 2014 differ from the statutory rates due to the benefit of federal hiring credits, the release of valuation

 

33



Table of Contents

 

allowance on the California enterprise zone credit carry-forward and other discrete items recognized during the transition fiscal 2014 (as described in Note 5 to the Consolidated Financial Statements).  The effective combined federal and state income tax rates for fiscal 2013 differ from the statutory rates due to the release of valuation allowance on the Texas margin tax credit carry-forward and benefit of federal hiring credits.

 

Net loss.  As a result of the items discussed above, net loss for transition fiscal 2014 was $12.5 million compared to a net loss of $8.9 million in fiscal 2013.  Net loss as a percentage of net sales was (0.8)% in transition fiscal 2014 compared to net loss as a percentage of sales of (0.5)% in fiscal 2013.

 

Effects of Inflation

 

During fiscal 2015, transition fiscal 2014 and fiscal 2013, inflation did not have a material impact on our overall operations.  Increases in various costs due to future inflation may impact our operating results to the extent that such increases cannot be passed along to our customers.  See Item 1A, “Risk Factors—Risks Related to Our Business—Inflation may affect our ability to keep pricing almost all of our merchandise at 99.99¢ or less.”

 

Liquidity and Capital Resources

 

Our capital requirements consist primarily of purchases of inventory, expenditures related to new store openings, investments in information technology and supply chain infrastructure, working capital requirements for new and existing stores, including lease obligations, and debt service requirements. Our primary sources of liquidity are the net cash flow from operations, which we believe will be sufficient to fund our regular operating needs and principal and interest payments on our indebtedness, together with availability under our ABL Facility (as defined below) for at least the next 12 months. Availability under our ABL Facility is not expected to materially affect our ability to make immediate buying decisions, willingness to take on large volume purchases or ability to pay cash or accept abbreviated credit terms.

 

As of January 30, 2015, we held $12.5 million in cash, and our total indebtedness was $907.5 million, consisting of borrowings under our First Lien Term Loan Facility of $600.5 million, borrowings under the ABL Facility of $57.0 million and $250.0 million of our Senior Notes.  Availability under the ABL Facility (subject to the borrowing base) was $115.5 million and, subject to certain limitations and the satisfaction of certain conditions, we were also permitted to incur up to an aggregate of $100 million of additional borrowings under incremental facilities in our ABL Facility and First Lien Term Loan Facility.  We also have, and will continue to have, significant lease obligations.  As of January 31, 2014, our minimum annual rental obligations under long-term operating leases for fiscal 2015 are $70.6 million. These obligations are significant and could affect our ability to pursue significant growth initiatives, such as strategic acquisitions, in the future. However, we expect to be able to service these obligations from our net cash flow from operations, and we do not expect these obligations to negatively affect our expansion plans for the foreseeable future, including our plans to increase our store count, planned upgrades to our information technology systems and other planned capital expenditures.

 

Credit Facilities and Senior Notes

 

On January 13, 2012, in connection with the Merger, we obtained Credit Facilities provided by a syndicate of lenders arranged by Royal Bank of Canada as administrative agent, as well as other agents and lenders that are parties to these Credit Facilities. The Credit Facilities include our ABL Facility and our First Lien Term Loan Facility.

 

First Lien Term Loan Facility

 

Under the First Lien Term Loan Facility, (i) $525.0 million of term loans were incurred on January 13, 2012 (the “Original Closing Date”) and (ii) $100.0 million of additional term loans were incurred pursuant to an incremental facility effected through an amendment entered into on October 8, 2013 (the “Second Amendment”) (all such term loans, collectively, the “Term Loans”).  The First Lien Term Loan Facility has a term of seven years with a maturity date of January 13, 2019.  All obligations under the First Lien Term Loan Facility are guaranteed by Parent and our direct or indirect 100% owned subsidiaries, except for immaterial subsidiaries (collectively, the “Credit Facilities Guarantors”).  In addition, the First Lien Term Loan Facility is secured by pledges of certain of our equity interests and the equity interests of the Credit Facilities Guarantors.

 

We are required to make scheduled quarterly payments each equal to 0.25% of the principal amount of the Term Loans, with the balance due on the maturity date.  Borrowings under the First Lien Term Loan Facility bear interest at an annual rate equal to an applicable margin plus, at the Company’s option, either (i) a base rate (the “Base Rate”) determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as the “Prime Rate” (3.25% as of January 30, 2015), (b) the federal funds effective rate plus 0.50% and (c) an adjusted Eurocurrency rate for one month (determined by reference to the greater of the Eurocurrency rate for the interest period subject to certain adjustments) plus 1.00%, or (ii) an Adjusted Eurocurrency Rate.

 

34



Table of Contents

 

On April 4, 2012, we amended the terms of the First Lien Term Loan Facility (the “First Amendment”) and incurred related refinancing costs of $11.2 million.  The First Amendment, among other things, (i) decreased the applicable margin from London Interbank Offered Rate (“LIBOR”) plus 5.50% (or Base Rate plus 4.50%) to LIBOR plus 4.00% (or Base Rate plus 3.00%) and (ii) decreased the LIBOR floor from 1.50% to 1.25%.

 

In connection with the First Amendment and in the first quarter of fiscal 2013 ended June 30, 2012, we recognized a $16.3 million loss on debt extinguishment related to a portion of the unamortized debt issuance costs, unamortized original issue discount (“OID”) and other related refinancing costs.  We recorded $0.3 million of deferred debt issuance costs and $5.9 million of OID in connection with the First Amendment in fiscal 2013.

 

On October 8, 2013, we entered into the Second Amendment which among other things, (i) provided $100.0 million of additional term loans as described above, (ii) decreased the applicable margin from LIBOR plus 4.00% (or Base Rate plus 3.00%) to LIBOR plus 3.50% (or Base Rate plus 2.50%) and (iii) decreased the LIBOR floor from 1.25% to 1.00%.  We will continue to be required to make scheduled quarterly payments each equal to 0.25% of the amended principal amount of the Term Loans (approximately $1.5 million).

 

In connection with the Second Amendment and in the third quarter of transition fiscal 2014, we recognized a loss on debt extinguishment of approximately $4.4 million related to a portion of the unamortized debt issuance costs, unamortized OID and other repricing costs.  We recorded $1.6 million as deferred debt issuance costs in connection with the Second Amendment in transition fiscal 2014.

 

In addition, the Second Amendment (i) amended certain restricted payment provisions, (ii) removed the maximum capital expenditures covenant from the agreement governing the First Lien Term Loan Facility, (iii) modified the existing provision restricting our ability to make dividend and other payments so that from and after March 31, 2013, the permitted payment amount represents the sum of (a) a calculation based on 50% of Consolidated Net Income (as defined in the First Lien Term Loan Facility agreement), if positive, or a deficit of 100% of Consolidated Net Income, if negative, and (b) $20 million, and (iv) permitted proceeds of any sale leasebacks of any assets acquired after January 13, 2012, to be reinvested in our business without restriction.

 

As of January 30, 2015 and January 31, 2014, the interest rate on the First Lien Term Loan Facility was 4.50% (1.00% Eurocurrency rate, plus the Eurocurrency loan margin of 3.50%).  As of January 30, 2015 and January 31, 2014, the amount outstanding under the First Lien Term Loan Facility was $600.5 million and $605.4 million, respectively.

 

Following the end of each fiscal year, we are required to make prepayments on the First Lien Term Loan Facility in an amount equal to (i) 50% of Excess Cash Flow (as defined in the agreement governing the First Lien Term Loan Facility), with the ability to step down to 25% and 0% upon achievement of specified total leverage ratios, minus (ii) the amount of certain voluntary prepayments made on the First Lien Term Loan Facility and/or the ABL Facility during such fiscal year.  The Excess Cash Flow required payment for fiscal 2013 was $3.3 million and was made in July 2013.  There was no Excess Cash Flow payment required for fiscal 2015 and transition fiscal 2014.

 

The First Lien Term Loan Facility includes certain customary restrictions, among other things, on our ability and the ability of Parent, our subsidiary 99 Cents Only Stores Texas Inc. (“99 Cents Texas”) and certain future subsidiaries of ours to incur or guarantee additional indebtedness, make certain restricted payments, acquisitions or investments, materially change our business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets, make capital expenditures or merge or consolidate with or into, another company.  As of January 30, 2015, we were in compliance with the terms of the First Lien Term Loan Facility.

 

During the first quarter of fiscal 2013, we entered into an interest rate swap agreement to limit the variability of cash flows associated with interest payments on the First Lien Term Loan Facility that result from fluctuations in the LIBOR rate.  See Note 7 to our Consolidated Financial Statements for more information on our interest rate swap agreement.

 

ABL Facility

 

The ABL Facility provides for up to $175.0 million of borrowings, subject to certain borrowing base limitations.  Subject to certain conditions, we may increase the commitments under the ABL Facility by up to $50.0 million.  All obligations under the ABL Facility are guaranteed by Parent and the other Credit Facilities Guarantors.  The ABL Facility is secured by substantially all of our assets and the assets of the Credit Facilities Guarantors.

 

Borrowings under the ABL Facility bear interest at a rate based, at our option, on (i) LIBOR plus an applicable margin to be determined (1.75% as of January 30, 2015) or (ii) the determined base rate (Prime Rate) plus an applicable margin to be determined (0.75% at January 30, 2015), in each case based on a pricing grid depending on average daily excess availability for the most recently ended quarter.

 

35



Table of Contents

 

In addition to paying interest on outstanding principal under the Credit Facilities, we are required to pay a commitment fee to the lenders under the ABL Facility on unused commitments.  The commitment fee is adjusted at the beginning of each quarter based upon the average historical excess availability of the prior quarter (0.50% for the quarter ended January 30, 2015 and January 31, 2014).  We must also pay customary letter of credit fees and agency fees. The weighted average interest rate for borrowings under the ABL Facility was 1.99% as of January 30, 2015.

 

As of January 30, 2015, borrowings under the ABL Facility were $57.0 million, outstanding letters of credit were $2.5 million and availability under the ABL Facility subject to the borrowing base, was $115.5 million. As of January 31, 2014, we had no outstanding borrowings under the ABL Facility and outstanding letters of credit of were $1.0 million.

 

The ABL Facility includes restrictions on our ability and the ability of Parent and certain of our subsidiaries to incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, its capital stock, make certain acquisitions or investments, materially change its business, incur or permit to exist certain liens, enter into transactions with affiliates, sell assets or merge or consolidate with or into another company.

 

On October 8, 2013, we amended the ABL Facility to, among other things, modify the provision restricting our ability to make dividend and other payments.  Such payments are subject to achievement of Excess Availability (as defined in the agreement governing the ABL Facility) and a ratio of EBITDA (as defined in the agreement governing the ABL Facility) to fixed charges.  As of January 30, 2015, we were in compliance with the terms of the ABL Facility.

 

Senior Notes

 

On December 29, 2011, we issued the Senior Notes that mature on December 15, 2019.  The Senior Notes are guaranteed by the same subsidiaries that guarantee the Credit Facilities (the “Senior Notes Guarantors”).

 

Pursuant to the terms of the Indenture, we may redeem all or a part of the Senior Notes at certain redemption prices that vary based on the date of redemption.  We are not required to make any mandatory redemptions or sinking fund payments, and may at any time or from time to time purchase notes in the open market.

 

The Indenture contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to incur or guarantee additional indebtedness, create or incur certain liens, pay dividends or make other restricted payments and investments, incur restrictions on the payment of dividends or other distributions from restricted subsidiaries, sell assets, engage in transactions with affiliates, or merge or consolidate with other companies.  As of January 30, 2015, we were in compliance with the terms of the Indenture.

 

36



Table of Contents

 

Cash Flows

 

Operating Activities

 

 

 

Year Ended

 

Ten Months Ended

 

Year Ended

 

 

 

January 30,
2015

 

January 31,
2014

 

March 30,
2013

 

 

 

(52 Weeks)

 

(44 Weeks)

 

(52 Weeks)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

5,502

 

$

(12,485

)

$

(8,909

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

53,911

 

52,467

 

56,810

 

Amortization of deferred financing costs and accretion of OID

 

4,344

 

3,681

 

4,229

 

Amortization of intangible assets

 

1,787

 

1,500

 

1,767

 

Amortization of favorable/unfavorable leases, net

 

735

 

438

 

182

 

Loss on extinguishment of debt

 

 

4,391

 

16,346

 

(Gain) loss on disposal of fixed assets

 

(84

)

(357

)

895

 

(Gain) loss on interest rate hedge

 

1,504

 

(92

)

592

 

Long-lived assets impairment

 

149

 

 

515

 

Excess tax benefit from share-based payment arrangements

 

 

(138

)

 

Deferred income taxes

 

4,212

 

(28,999

)

(32,800

)

Stock-based compensation

 

2,846

 

(4,766

)

18,387

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities associated with operating activities:

 

 

 

 

 

 

 

Accounts receivable

 

(161

)

58

 

1,321

 

Inventories

 

(89,796

)

(4,643

)

5,811

 

Deposits and other assets

 

(2,258

)

(3,049

)

(7,163

)

Accounts payable

 

52,530

 

20,653

 

6,458

 

Accrued expenses

 

7,586

 

12,682

 

1,700

 

Accrued workers’ compensation

 

(3,427

)

34,420

 

474

 

Income taxes

 

(6,413

)

(529

)

6,339

 

Deferred rent

 

10,105

 

8,365

 

4,025

 

Other long-term liabilities

 

(4,801

)

(2,673

)

4,445

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

38,271

 

80,924

 

81,424

 

 

Cash provided by operating activities in fiscal 2015 was $38.3 million and consisted of (i) net income of $5.5 million; (ii) net income adjustments for depreciation and other non-cash items of $69.4 million; (iii) a decrease in working capital activities of $40.5 million; and (iv) an increase in other activities of $3.9 million, primarily due to increase in deferred rent, partially offset by a decrease in other long-term liabilities, and an increase in other long-term assets.  The decrease in working capital activities was primarily due to an increase in inventories and income taxes receivable, partially offset by increases in accounts payable and accrued expenses. Inventory increased as a result of several factors, including the opening of new stores, an expansion of our seasonal merchandise programs, higher volume of purchases sourced directly from international vendors, and the “Go Taller” store remodeling program which increased shelf height (and consequently, merchandising space) across our stores.

 

Cash provided by operating activities in transition fiscal 2014 was $80.9 million and consisted of (i) net loss of $12.5 million; (ii) net loss adjustments for depreciation and other non-cash items of $28.1 million; (iii) an increase in working capital activities of $60.8 million; and (iv) an increase in other activities of $4.5 million, primarily due to an increase in deferred rent partially offset by a decrease other long-term liabilities, and an increase in other long-term assets.  The increase in working capital activities was primarily due to increases in accrued workers’ compensation, accrued expenses and accounts payable, which were partially offset by an increase in inventories.

 

Cash provided by operating activities in fiscal 2013 was $81.4 million and consisted of (i) net loss of $8.9 million; (ii) net loss adjustments for depreciation and other non-cash items of $66.9 million; (iii) an increase in working capital activities of $16.5 million; and (iv) an increase in other activities of $6.9 million, primarily due to an increase in deferred rent and other long-term liabilities and a decrease in other long-term assets.  The increase in working capital activities was primarily due to decreases in inventories and income taxes receivable as well as increases in accounts payable and accrued expenses, which were partially offset by an increase in other current assets.

 

37



Table of Contents

 

Investing Activities

 

 

 

Year Ended

 

Ten Months Ended

 

Year Ended

 

 

 

January 30,
2015

 

January 31,
2014

 

March 30,
2013

 

 

 

(52 weeks)

 

(44 Weeks)

 

(52 Weeks)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

$

(111,387

)

$

(62,090

)

$

(62,494

)

Proceeds from sale of fixed assets

 

39

 

1,473

 

12,064

 

Purchases of investments

 

 

 

(1,996

)

Proceeds from sale of investments

 

 

 

5,256

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

$

(111,348

)

$

(60,617

)

$

(47,170

)

 

Capital expenditures in fiscal 2015 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects, totaling $111.4 million.

 

Capital expenditures in transition fiscal 2014 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects, totaling $62.1 million.

 

Capital expenditures in fiscal 2013 consisted of property acquisitions, leasehold improvements, fixtures and equipment for new store openings, information technology projects and other capital projects, totaling $62.5 million. Property purchases in fiscal 2013 included the acquisition for $13.5 million of a 1.6 acre site with two adjacent buildings and parking lots.  The site is in a high visibility commercial area of west Los Angeles, California that we plan to develop into one of our stores. Proceeds from sale of fixed assets primarily relate to sale-leaseback transactions and the sale of a held for sale warehouse.  In fiscal 2013, we also completed the liquidation of our investment portfolio.

 

We estimate that total capital expenditures over the next twelve months will be approximately $85 million, comprised of approximately $70 million for leasehold improvements and fixtures and equipment for new and existing stores, approximately $15 million primarily related to information technology upgrades and supply chain infrastructure maintenance. We expect to fund a portion of the capital expenditures through divestitures of surplus assets and sale-leaseback transactions. We are also finalizing our long-term plans regarding our supply chain, which could increase our capital spend in this area over the next 12 to 24 months.

 

38



Table of Contents

 

Financing Activities

 

 

 

Year Ended

 

Ten Months Ended

 

Year Ended

 

 

 

January 30,
2015

 

January 31,
2014

 

March 30,
2013

 

 

 

(52 Weeks)

 

(44 Weeks)

 

(52 Weeks)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Investment in Number Holdings, Inc. preferred stock

 

 

(19,200

)

 

Dividend paid

 

 

(95,512

)

 

Proceeds from long-term debt

 

 

100,000

 

 

Payments of long-term debt

 

(6,138

)

(6,174

)

(5,237

)

Proceeds under revolving credit facility

 

305,500

 

 

 

Payments under revolving credit facility

 

(248,500

)

 

 

Payments of debt issuance costs

 

 

(2,343

)

(11,230

)

Payments of capital lease obligation

 

(88

)

(69

)

(77

)

Payments to repurchase stock options of Number Holdings, Inc.

 

(76

)

(7,781

)

 

Excess tax benefit from share-based payment arrangements

 

 

138

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

50,698

 

(30,941

)

(16,544

)

 

Net cash provided by financing activities in fiscal 2015 was comprised primarily of net borrowings under the ABL Facility, partially offset by repayments of borrowings on the First Lien Term Loan facility.

 

Net cash used in financing activities in transition fiscal 2014 was comprised primarily of payments made in connection with the Gold-Schiffer Purchase, partially offset by additional borrowings under the First Lien Term Loan Facility used to fund part of the Gold-Schiffer Purchase.

 

Net cash used in financing activities in fiscal 2013 is comprised primarily of payment of debt issuance costs and repayments of debt.

 

Off-Balance Sheet Arrangements

 

As of January 30, 2015, we had no off-balance sheet arrangements.

 

Contractual Obligations

 

The following table summarizes our consolidated contractual obligations (in thousands) as of January 30, 2015.

 

 

 

Payment due by period

 

 

 

Total

 

Less than 1 year

 

1-3 years

 

3-5 years

 

More than 5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations

 

$

913,139

 

$

6,138

 

$

69,276

 

$

837,725

 

$

 

Interest payments (a)

 

251,881

 

58,212

 

111,146

 

82,523

 

 

Capital lease obligations (b)

 

213

 

106

 

107

 

 

 

Financing lease obligations (b)

 

42,306

 

91

 

4,194

 

4,511

 

33,510

 

Operating lease obligations

 

459,830

 

70,554

 

119,075

 

93,630

 

176,571

 

Purchase obligations (c)

 

6,483

 

3,163

 

2,040

 

1,280

 

 

Deferred compensation liability

 

724

 

 

 

 

724

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,674,576

 

$

138,264

 

$

305,838

 

$

1,019,669

 

$

210,805

 

 


(a)         Includes interest expense on fixed and variable debt. Variable debt interest expense based on amended First Lien Term Loan Facility Agreement; see Note 6 to our Consolidated Financial Statements.

 

(b)         Includes capital and financing lease obligations and related interest.

 

(c)          Purchase obligations include legally binding agreements that primarily consist of construction contracts of new stores, and purchases and service commitment for logistics and store operations.  Amounts committed under open purchase orders for merchandise are not included if cancelable without penalty prior to a date that precedes the vendors’ scheduled shipment date.

 

We do not have any liabilities related to uncertain tax positions as of January 30, 2015.  See Note 5 to our Consolidated Financial Statements.

 

39



Table of Contents

 

Lease Commitments

 

We lease various facilities under operating leases (except for one location classified as a capital lease and one location classified as a financing lease), which will expire at various dates through fiscal year 2035.  Most of the lease agreements contain renewal options and/or provide for fixed rent escalations or increases based on the Consumer Price Index. Total minimum lease payments under each of these lease agreements, including scheduled increases, are charged to expenses on a straight-line basis over the term of each respective lease. Most leases require us to pay property taxes, maintenance and insurance. Rental expenses (including property taxes, maintenance and insurance) charged to expenses in fiscal 2015 were approximately $85.5 million.  Rental expenses (including property taxes, maintenance and insurance) charged to expenses in transition fiscal 2014 were approximately $60.8 million.  Rental expenses (including property taxes, maintenance and insurance) charged to expenses in fiscal 2013 were approximately $63.0 million.  We typically seek leases with a five-year to ten-year term and with multiple five-year renewal options. See “Item 2. Properties.”  The large majority of our store leases were entered into with multiple renewal periods, which are typically five years and occasionally longer.

 

Variable Interest Entities

 

As of January 30, 2015 and January 31, 2014, we did not have any variable interest entities.

 

Seasonality and Quarterly Fluctuations

 

We have historically experienced and expect to continue to experience some seasonal fluctuations in our net sales, operating income, and net income. During the quarters that have included the Halloween, Christmas and Easter selling seasons, we have historically experienced higher net sales and higher operating income.  Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of certain these holidays, the timing of new store openings and the merchandise mix.

 

During fiscal 2013 there were two Easter selling seasons that occurred in early April 2012 and in late March 2013. There was no Easter selling season in transition fiscal 2014.

 

New Authoritative Standards

 

Information regarding new authoritative standards is contained in Note 1 to our Consolidated Financial Statements which is incorporated herein by this reference.

 

40



Table of Contents

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to interest rate risk for our debt borrowings.

 

Our primary interest rate exposure relates to outstanding amounts under our Credit Facilities.  As of January 30, 2015, we had variable rate borrowings of $600.5 million under our First Lien Term Loan Facility and $57.0 million under our ABL Facility.  The Credit Facilities provide interest rate options based on certain indices as described in Note 6 to our Consolidated Financial Statements.

 

We may manage interest rate risk through the use of interest swap agreements or interest cap agreements to limit the effect of interest rate fluctuations from time to time. During the first quarter of fiscal 2013, we entered into an interest rate swap agreement to limit the variability of cash flows associated with interest payments on the First Lien Term Loan Facility that result from fluctuations in the LIBOR rate.  The swap limits our interest exposure on a notional value of $261.8 million to 1.36% plus an applicable margin of 3.50%.  The term of the swap is from November 29, 2013 through May 31, 2016.  The fair value of the swap on the trade date was zero as we neither paid nor received any value to enter into the swap, which was entered into at market rates.  As of January 30, 2015, the fair value of the interest rate swap was a liability of $2.2 million.

 

A change in interest rates on our variable rate debt impacts our pre-tax earnings and cash flows.  Based on our variable rate borrowing levels and interest rate derivatives outstanding as of January 30, 2015 and January 31, 2014, respectively, the annualized effect of a 1% increase in applicable interest rates would have resulted in an increase of our pre-tax loss and a decrease in cash flows of approximately $0.8 million for fiscal 2015 and $0.2 million for the transition fiscal year ended January 31, 2014.

 

41



Table of Contents

 

Item 8. Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

 

99 Cents Only Stores LLC

 

Report of Independent Registered Public Accounting Firm

43

Consolidated Balance Sheets as of January 30, 2015 and January 31, 2014

44

Consolidated Statements of Comprehensive Income (Loss) for the year ended January 30, 2015, the ten months ended January 31, 2014 and the year ended March 30, 2013

45

Consolidated Statements of Member’s/Shareholders’ Equity for the year ended January 30, 2015, the ten months ended January 31, 2014 and the year ended March 30, 2013

46

Consolidated Statements of Cash Flows for the year ended January 30, 2015, the ten months ended January 31, 2014 and the year ended March 30, 2013

47

Notes to Consolidated Financial Statements

48

Schedule II — Valuation and Qualifying Accounts

100

 

42



Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Member of 99 Cents Only Stores LLC

 

We have audited the accompanying consolidated balance sheets of 99 Cents Only Stores LLC and subsidiaries as of January 30, 2015 and January 31, 2014, and the related consolidated statements of comprehensive income (loss), member’s/shareholders’ equity and cash flows for the year ended January 30, 2015, ten months ended January 31, 2014 and year ended March 30, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(b) for the year ended January 30, 2015, ten months ended January 31, 2014 and year ended March 30, 2013. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at January 30, 2015 and January 31, 2014, and the consolidated results of its operations and its cash flows for the year ended January 30, 2015, ten months ended January 31, 2014 and year ended March 30, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

/s/ Ernst & Young LLP

Los Angeles, California

April 22, 2015

 

43



Table of Contents

 

99 Cents Only Stores LLC

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

 

 

January 30,
2015

 

January 31,
2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash

 

$

12,463

 

$

34,842

 

Accounts receivable, net of allowance for doubtful accounts of $58 and $107 as of January 30, 2015 and January 31, 2014, respectively

 

1,954

 

1,793

 

Income taxes receivable

 

10,911

 

4,498

 

Deferred income taxes

 

41,583

 

46,953

 

Inventories, net

 

296,040

 

206,244

 

Assets held for sale

 

3,094

 

1,680

 

Other

 

19,039

 

18,190

 

Total current assets

 

385,084

 

314,200

 

Property and equipment, net

 

581,020

 

485,046

 

Deferred financing costs, net

 

15,463

 

18,526

 

Intangible assets, net

 

460,311

 

466,311

 

Goodwill

 

479,745

 

479,745

 

Deposits and other assets

 

7,543

 

6,406

 

Total assets

 

$

1,929,166

 

$

1,770,234

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

139,287

 

$

71,057

 

Payroll and payroll-related

 

20,004

 

24,461

 

Sales tax

 

14,087

 

5,522

 

Other accrued expenses

 

40,168

 

36,690

 

Workers’ compensation

 

70,491

 

73,918

 

Current portion of long-term debt

 

6,138

 

6,138

 

Current portion of capital and financing lease obligation

 

380

 

88

 

Total current liabilities

 

290,555

 

217,874

 

Long-term debt, net of current portion

 

901,395

 

849,252

 

Unfavorable lease commitments, net

 

8,220

 

11,718

 

Deferred rent

 

23,293

 

13,188

 

Deferred compensation liability

 

724

 

1,142

 

Capital and financing lease obligation, net of current portion

 

24,681

 

197

 

Long-term deferred income taxes

 

170,678

 

171,573

 

Other liabilities

 

1,868

 

6,203

 

Total liabilities

 

1,421,414

 

1,271,147

 

Commitments and contingencies (Note 10)

 

 

 

 

 

Member’s Equity:

 

 

 

 

 

Member units — 100 units issued and outstanding at January 30, 2015 and January 31, 2014

 

549,135

 

546,365

 

Investment in Number Holdings, Inc. preferred stock

 

(19,200

)

(19,200

)

Accumulated deficit

 

(21,185

)

(26,687

)

Other comprehensive loss

 

(998

)

(1,391

)

Total equity

 

507,752

 

499,087

 

Total liabilities and equity

 

$

1,929,166

 

$

1,770,234

 

 

The accompanying notes are an integral part of these financial statements.

 

44



Table of Contents

 

99 Cents Only Stores LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Amounts in thousands)

 

 

 

Year ended

 

Ten Months Ended

 

Year Ended

 

 

 

January 30,
2015

 

January 31,
2014

 

March 30,
2013

 

 

 

(52 Weeks)

 

(44 Weeks)

 

(52 Weeks)

 

Net Sales:

 

 

 

 

 

 

 

99¢ Only Stores

 

$

1,881,865

 

$

1,486,699

 

$

1,620,683

 

Bargain Wholesale

 

45,084

 

42,044

 

47,968

 

Total sales

 

1,926,949

 

1,528,743

 

1,668,651

 

Cost of sales

 

1,308,849

 

1,033,077

 

1,117,051

 

Gross profit

 

618,100

 

495,666

 

551,600

 

Selling, general and administrative expenses (includes asset impairment of $149, $0 and $515 for the years ended January 30, 2015, January 31, 2014 and March 30, 2013, respectively)

 

546,259

 

481,449

 

493,316

 

Operating income

 

71,841

 

14,217

 

58,284

 

Other (income) expense:

 

 

 

 

 

 

 

Interest income

 

 

(16

)

(342

)

Interest expense

 

62,734

 

50,820

 

60,898

 

Loss on extinguishment of debt

 

 

4,391

 

16,346

 

Other

 

 

 

380

 

Total other expense, net

 

62,734

 

55,195

 

77,282

 

Income (loss) before provision for income taxes

 

9,107

 

(40,978

)

(18,998

)

Provision (benefit) for income taxes

 

3,605

 

(28,493

)

(10,089

)

Net income (loss)

 

5,502

 

(12,485

)

(8,909

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Unrealized holding gains on securities arising during period

 

 

 

4

 

Unrealized losses on interest rate cash flow hedge

 

(576

)

(284

)

(1,252

)

Less: reclassification adjustment included in net income (loss)

 

969

 

145

 

(27

)

Other comprehensive income (loss), net of tax

 

393

 

(139

)

(1,275

)

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

5,895

 

$

(12,624

)

$

(10,184

)

 

The accompanying notes are an integral part of these financial statements.

 

45



Table of Contents

 

99 Cents Only Stores LLC

CONSOLIDATED STATEMENTS OF MEMBER’S/SHAREHOLDERS’ EQUITY

(Amounts in thousands)

 

 

 

Common Stock

 

Member Units

 

Additional
Paid-In

 

Investment
in Number
Holdings,
Inc.
Preferred

 

Retained
Earnings
(Accumulated

 

Accumulated
Other
Comprehensive

 

Member’s/
Shareholders’

 

 

 

Shares

 

Amount

 

Units

 

Amount

 

Capital

 

Stock

 

Deficit)

 

Income (Loss)

 

Equity

 

BALANCE, March 31, 2012

 

 

$

 

 

$

 

$

636,037

 

 

$

(5,293

)

$

23

 

$

630,767

 

Net loss

 

 

 

 

 

 

 

(8,909

)

 

(8,909

)

Net unrealized investment losses

 

 

 

 

 

 

 

 

(23

)

(23

)

Net unrealized losses on interest rate cash flow hedge

 

 

 

 

 

 

 

 

(1,252

)

(1,252

)

Stock-based compensation expense