10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-Q Quarterly Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended April 29, 2000 Commission file number 33-27126 -------------------- PEEBLES INC. (Exact name of registrant as specified in its charter) Virginia 54-0332635 ------------------------ -------------- (State of Incorporation) (I.R.S. Employer Identification No.) One Peebles Street South Hill, Virginia 23970-5001 (804) 447-5200 --------------------------------- ------------------ (Address of principal executive offices) (Telephone Number) Indicate by check (x) mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__x___. No_____. As of May 1, 2000, 1,000 shares of Common Stock of Peebles Inc. were outstanding. PART I FINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED BALANCE SHEETS PEEBLES INC. & SUBSIDIARIES (in thousands, except shares and per share amounts) April 29, January 29, May 1, 2000 2000 1999 -------- ----------- --------- ASSETS (Unaudited) (Unaudited) CURRENT ASSETS Cash $ 288 $ 1,008 $ 109 Accounts receivable, net 32,140 37,949 29,739 Merchandise inventories 81,836 70,181 79,328 Prepaid expenses 1,024 709 1,647 Income taxes receivable 683 1,201 657 Other 828 2,670 1,217 ------- ------- ------- TOTAL CURRENT ASSETS 116,799 113,718 112,697 PROPERTY AND EQUIPMENT, NET 51,765 53,063 53,145 OTHER ASSETS Excess of cost over net assets acquired, net 38,620 39,100 40,537 Deferred financing cost 1,547 1,895 2,940 Other 2,681 2,441 3,269 ------- ------- ------- 42,848 43,436 46,746 ------- ------- ------- $211,412 $210,217 $212,588 ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 13,161 $ 12,795 $ 13,943 Accrued compensation and other expenses 3,440 7,268 4,168 Deferred income taxes 2,139 2,139 2,433 Current maturities of long-term debt 3,700 3,700 3,700 Other 2,165 3,582 2,057 ------- ------- ------- TOTAL CURRENT LIABILITIES 24,605 29,484 26,751 LONG-TERM DEBT 108,440 102,677 116,054 LONG-TERM CAPITAL LEASE OBLIGATIONS 443 614 836 DEFERRED INCOME TAXES 8,883 8,883 6,990 STOCKHOLDERS' EQUITY Preferred stock- no par value, authorized 1,000,000 shares, none issued and outstanding -- -- -- Common stock-- par value $.10 per share, authorized 5,000,000 shares, 1,000 issued and outstanding. 1 1 1 Additional capital 59,307 59,307 59,307 Retained earnings: accumulated from May 27, 1995; 9,733 9,251 2,649 ------- ------- ------- 69,041 68,559 61,957 ------- ------- ------- $211,412 $210,217 $212,588 ======= ======= ======= See notes to condensed consolidated financial statements CONDENSED CONSOLIDATED STATEMENTS OF INCOME PEEBLES INC. & SUBSIDIARIES (in thousands, except shares and per share amounts) (Unaudited) Three-Month Period Ended -------------------------------- April 29, 2000 May 1, 1999 -------------- ----------- NET SALES $ 63,363 $ 64,422 COSTS AND EXPENSES Cost of sales 38,171 39,063 Selling, general and administrative expenses 19,035 19,713 Depreciation and amortization 2,494 2,129 ------- ------- 59,700 60,905 ------- ------- OPERATING INCOME 3,663 3,517 INTEREST EXPENSE 2,803 2,755 ------- ------- INCOME BEFORE INCOME TAXES 860 762 INCOME TAXES Federal, state and deferred 378 335 ------- ------- NET INCOME $ 482 $ 427 ======= ======= RETAINED EARNINGS BEGINNING OF PERIOD 9,251 2,222 ------- ------- RETAINED EARNINGS END OF PERIOD $ 9,733 $ 2,649 ======= ======= EARNINGS PER SHARE $ 482 $ 427 ======= ======= Weighted average common stock outstanding 1,000 1,000 ======= ======= See notes to condensed consolidated financial statements CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS PEEBLES INC. & SUBSIDIARIES (in thousands) (Unaudited) Three-Month Period Ended ------------------------- April 29, May 1, 2000 1999 -------- ------- OPERATING ACTIVITIES Net income $ 482 $ 427 Adjustments to reconcile net income to net Cash used in operating activities: Depreciation 1,922 1,557 Amortization 921 921 Changes in operating assets and liabilities: Accounts receivable 5,809 3,756 Merchandise inventories (11,655) (7,966) Accounts payable 366 (3,573) Other assets and liabilities (3,616) (1,860) -------- -------- NET CASH USED IN OPERATING ACTIVITIES (5,771) (6,738) INVESTING ACTIVITIES Purchase of property and equipment (686) (2,854) Other (26) (92) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (712) (2,946) FINANCING ACTIVITIES Proceeds from revolving line of credit 97,267 102,567 Reduction in revolving line of credit and long-term debt (91,504) (92,838) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 5,763 9,729 -------- -------- (DECREASE) INCREASE IN CASH AND CASH (720) 45 EQUIVALENTS Cash and cash equivalents beginning of period 1,008 64 -------- -------- CASH AND CASH EQUIVALENTS END OF PERIOD $ 288 $ 109 ======== ======== See notes to condensed consolidated financial statements NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PEEBLES INC. & SUBSIDIARIES April 29, 2000 (in thousands) NOTE A-ORGANIZATION AND BASIS OF PRESENTATION NATURE OF OPERATIONS: Peebles Inc. and subsidiaries ("Peebles" or the "Company") operate retail department stores offering predominately fashion merchandise for the entire family and selected home accessories. At April 29, 2000, the Company was operating 121 stores located primarily in small and medium sized communities which typically do not have a mall-based department store. The stores serve communities in 15 states, located primarily in the Southeast and Mid-Atlantic. CONSOLIDATION: The consolidated financial statements include the accounts of Peebles Inc. and its wholly owned subsidiaries, Carlisle Retailers, Inc. and Ira A. Watson Co., (together "Peebles" or the "Company"). All significant intercompany balances and transactions have been eliminated. The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended April 29, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ended February 3, 2001, due to the seasonal nature of the business of Peebles. The balance sheet at January 29, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended January 29, 2000. NOTE B-LONG-TERM DEBT Long-term debt consisted of the following: April 29, 2000 May 1, 1999 -------------- ------------ Senior Revolving Facility $ 43,000 $ 44,500 Senior Term Note A 9,000 12,000 Senior Term Note B 58,800 59,400 Swingline Facility 1,040 3,354 Other 300 500 -------- -------- 112,140 119,754 Less current maturities: 3,700 3,700 -------- -------- Long-term debt $ 108,440 $ 116,054 ======== ======== The total amount available under the Senior Revolving Facility (the "Revolver") and the Swingline Facility is determined by a defined asset based formula with maximum borrowings limited to $75,000, less outstanding amounts under letters of credit. At April 29, 2000, the total amount available to borrow was $64,043, of which $44,040 was in use. NOTE C-INCOME TAXES Differences between the effective rate of income taxes and the statutory rate arise principally from the state income taxes and non-deductible amortization related to certain purchase accounting adjustments. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands) RESULTS OF OPERATIONS The following management's discussion and analysis provides information with respect to the results of operations for the three-month period (or "Fiscal Quarter") ended April 29, 2000 in comparison with the Fiscal Quarter ended May 1, 1999. The consolidated operations of the Company for the Fiscal Quarter ended April 29, 2000 include the results of 121 stores open the entire three-month period. In the prior year comparable period ended May 1, 1999, 117 stores were in operation the entire three- month period, and 2 new store locations were opened during the Fiscal Quarter. The Company defines a comparable store as having operations for the entire twelve-month period in both the current and previous fiscal years. For fiscal 2000, 117 stores will have had operations for the entire twelve- month periods ending February 3, 2001 and ended January 29, 2000. Three-Month Period Ended --------------------------- April 29, May 1, May 2, (dollars in thousands) 2000 1999 1998 ------- ------- ------ Net sales $63,363 $64,422 $51,013 % (decrease) increase (1.6)% 26.3% 13.0% Comparable stores % (decrease) increase in net sales: (3.6)% (2.6)% 6.2% Stores in operation at period period end 121 119 88 Operations as a Percentage of Net Sales: --------------------------- Cost of sales 60.2% 60.6% 61.2% Selling, general & administrative expenses 30.1 30.6 29.0 Depreciation and amortization 3.9 3.3 3.7 ---- ---- ---- Operating Income 5.8 5.5 6.1 Interest Expense 4.4 4.3 4.3 Provision for income taxes .6 .5 .7 ---- ---- ---- Net Income .8% .7% 1.1% ==== ==== ==== Net sales were adversely affected by three primary factors in the first Fiscal Quarter: a) strong December and January sales which significantly reduced the clearance merchandise which typically drives February and early March sales; b) miserable rainy and unseasonably cold weather throughout March and April in a majority of the Company's markets; and c) Mother's Day falling two full weeks after the close of the Fiscal Quarter in the current year versus only one week in the prior year. As temperatures quickly warmed in May and with Mother's Day sales strong, total net sales for the sixteen-week periods ended May 20, 2000 and May 22, 1999 were $81,889 and $81,314, an increase of .7%. Net sales at comparable stores for the sixteen-week periods ended May 20, 2000 and May 22, 1999 were $79,358 and $80,049, a decrease of only .9%. Cost of sales as a percentage of net sales continued to benefit from lower inventory levels of clearance merchandise and the maturation of the significant number of store locations opened in fiscal 1999 and 1998. New and acquired store locations, especially those in markets new to the Company, typically run a higher cost of sales percentage relative to mature stores due to heavier promotions and the lack of comparable sales history. After approximately 24 to 36 months of operation, a new location generally attains the Company's mature store average cost of sales. Selling, general and administrative expenses, exclusive of depreciation and amortization, were 30.1%, 30.6% and 29.0% as a percentage of net sales in the first Fiscal Quarter of 2000, 1999 and 1998, respectively. New and acquired stores are planned to have a higher expense structure than mature stores for the first 12 to 18 months of operation as advertising and payroll expenses are increased to achieve a market presence. In addition, newer stores typically have higher occupancy costs than mature stores. In addition, the Company began operating a second distribution center in June 1998 upon the completion of the Watson Merger and continues to leverage that expense with economies of scale. Depreciation and amortization expenses as a percentage of net sales increased for the Fiscal Quarter ended April 29, 2000 in comparison to the first Fiscal Quarter of 1999, primarily due to the depreciation of fiscal 1999 capital expenditures required in the 31 store locations opened during the twelve-month period from May 2, 1998 to May 1, 1999. Capital expenditures totaled $9,151, $13,394 and $10,226 for fiscal years 1999, 1998 and 1997 respectively. Interest expense increased slightly as a percentage of sales in comparing the 2000 and 1999 first Fiscal Quarters. Lower average borrowings in 2000 were offset by higher interest rates and lower sales. The effective income tax rate is 44.0% for the first Fiscal Quarters of 2000 and 1999. The effective tax rate differs from the statutory rate primarily due to state income taxes and nondeductible amortization relating to certain acquisition related assets. As a result of the changes discussed above, net income for the three-month periods ended April 29, 2000 and May 1, 1999 was $482 and $427, respectively, or .8% and .7% of net sales, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash requirements are for capital expenditures in connection with the new store expansion and remodeling program and for working capital needs. The Company's primary sources of funds are cash flow from continuing operations, borrowings under the Credit Agreement and trade accounts payable. Merchandise inventory levels typically build throughout the first Fiscal Quarter and again in the fall, peaking during the Christmas selling season. Accounts receivable peak during December and January, decrease during the first and second Fiscal Quarters, and begin building again in third Fiscal Quarter. Capital expenditures for existing stores typically occur evenly throughout the first three Fiscal Quarters of each year, but can vary by Fiscal Quarter based on new and acquired stores. During the first Fiscal Quarter of 2000, operating activities used cash of $5,771, compared to $6,738 in the prior year comparable period. Merchandise purchases were greater in the first Fiscal Quarter of 2000 in comparison to the prior year for inventory levels to reach plan. With a greater amount of Spring imported merchandise, primarily in support of the Company's private label program, paid for via letters of credit in the fourth Fiscal Quarter of 1999, accounts payable provided cash of $366 in the first Fiscal Quarter of 2000 versus using cash of $3,573 in the comparable prior year period. In addition, cash provided by the reduction in accounts receivable totaled $5,809 in the first Fiscal Quarter of the current year, compared to $3,756 in the prior year. The Company's working capital at April 29, 2000 and May 1, 1999 was $92,194 and $85,946, respectively. Capital expenditures are the primary use of cash in investing activities. In the current Fiscal Quarter, capital expenditures were $686, down significantly in comparison to $2,854 in the comparable prior year period. Stores opened in the third and fourth Fiscal Quarters of 1998, particularly those acquired in the Watson Merger, required a greater amount of capital expenditures in the First Fiscal Quarter of the prior year. In addition, the Company opened 2 new store locations and completed several remodeling/space reallocations during the three-month period ended May 1, 1999. In the first Fiscal Quarter of the current year, capital expenditures were for planned remodeling/space reallocations at existing stores and routine fixture upgrades. The Company currently plans to open a total of 5 new store locations in fiscal 2000. The Company has signed non-cancelable leases for 4 new store locations planned to open in the third and fourth Fiscal Quarters. Based on historical experience, the Company estimates that the cost of opening a new store will include capital expenditures of approximately $425 for leasehold improvements and fixtures and approximately $425 for initial inventory, approximately one-third of which is normally financed through vendor credit. Accounts receivable for new stores typically build to 15% of net sales or approximately $300 within 24 months of the store opening. The Company may also incur capital expenditures to acquire existing stores. The Company finances its operations, capital expenditures, and debt service payments with funds available under its Revolver. The maximum amount available under the Revolver is $75 million less amounts outstanding under letters of credit. The actual amount available is determined by an asset-based formula. In the three-month periods ended April 29, 2000 and May 1, 1999, the Company drew a net $5,763 and $9,729, respectively, primarily for inventory and capital expenditures. The Company believes the cash flow generated from operating activities together with funds available under the Revolver will be sufficient to fund its investing activities and the debt service of the Credit Agreement. SEASONALITY AND INFLATION As a retailer offering predominately soft-apparel and selected home accessories, the Company's business is seasonal, although less heavily weighted in the fourth quarter than retailers with comparable offerings of merchandise. Over the past four fiscal years, quarterly sales as a percentage of total sales have been consistent at approximately 20%, 23%, 24% and 33% for the first through fourth quarters, respectively. Peebles' positioning of its stores in small to medium sized communities with limited competition, along with the Company's less-promotional, every day fair value, pricing strategy, produces operations less dependent on the fourth quarter. However, the third and fourth quarters are generally bolstered by the back-to-school and Christmas holiday selling seasons. The Company does not believe that inflation has had a material effect on its results of operations during the past three fiscal years. Peebles uses the retail inventory method applied on a LIFO basis in accounting for its inventories. Under this method, the cost of products sold reported in the financial statements approximates current costs and thus reduces the likelihood of a material impact that increases costs. However, there can be no assurance that the Company's business will not be impacted by inflation in the future. MARKET RISK The Company's interest expense is affected by changes in short- term interest on the debt outstanding under the Credit Agreement. The Credit Agreement bears interest at rates based on both the LIBOR and prime lending rates (the "Borrowing Rates"). Assuming: i) the Borrowing Rates vary by 100 basis points from their current levels at any given fiscal month, and ii) the Company maintains an aggregate outstanding debt balance subject to these rates of $112,140 during the fiscal month of variance, interest expense would vary by approximately $94 for that fiscal month. YEAR 2000 TECHNOLOGICAL ISSUES The Company experienced no significant disruptions in either information technology systems or non-information systems as a result of the date change to the year 2000. The Company continues to monitor these systems to ensure any latent date- related matters that may arise are properly addressed. Costs associated with the evaluation and modification of information and non-information systems were expensed as incurred and were not material to the financial position or results of operations of the Company. FORWARD-LOOKING STATEMENTS Certain statements in this quarterly report on Form 10-Q are forward-looking, based on the Company's evaluation of historical information and judgments on future events, based on the best information available at the time. Underlying these statements are risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. These risks and uncertainties include, but are not limited to: i) consumer demand for the Company's soft-apparel merchandise; ii) competitive and consumer demographic shifts within the Company's markets; iii) the Company's access to, and cost of, capital; iv) the Company's ability to locate and open new store locations on a timely and profitable basis; v) the Company's ability to continue to integrate acquired stores into Peebles' overall operations on a timely basis; and vi) the successful management of inventory levels, related costs and selling, general and administrative costs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this item is provided under the caption "Market Risk" under Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits 27. Financial Data Schedule b. Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEEBLES INC. Date: June 7, 2000 By /s/ Michael F. Moorman ------------------------- Michael F. Moorman President and Chief Executive Officer (Principal Executive Officer) By /s/ E. Randolph Lail ---------------------- E. Randolph Lail Chief Financial Officer, Senior Vice President-Finance, Treasurer and Secretary (Principal Financial Officer)