We have reviewed the consolidated balance sheets of Linens ‘n Things, Inc. and subsidiaries as of September 29, 2001 and September 30, 2000, and the related consolidated statements of operations for the thirteen and thirty-nine week periods then ended and the related consolidated statements of cash flows for the thirty-nine week periods ended September 29, 2001 and September 30, 2000. These consolidated financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Linens ‘n Things, Inc. and subsidiaries as of December 30, 2000 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 31, 2001 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 30, 2000, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
LINENS ’N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere in this document.
Results of Operations
Thirteen Weeks Ended September 29, 2001 Compared with Thirteen Weeks Ended September 30, 2000
Net sales increased 14.3% to $468.9 million for the thirteen weeks ended September 29, 2001, up from $410.4 million for the same period in 2000, primarily as a result of new store openings since September 30, 2000. Comparable store net sales for the thirteen weeks ended September 29, 2001 declined 4.8% as compared with an increase of 4.0% for the same period last year. The decline in comparable store net sales in the third quarter of fiscal 2001 can be primarily attributed to a decline in consumer traffic due to the slowing economy and the impact from the terrorist attacks of September 11, 2001 through the end of the quarter.
During the thirteen weeks ended September 29, 2001, the Company opened 25 stores, compared with opening 23 stores during the same period last year. At September 29, 2001, the Company operated 329 stores, compared with 267 stores, at September 30, 2000. Store square footage increased 24.1% to 11,485,000 at September 29, 2001 compared with 9,255,000 at September 30, 2000.
In addition to the cost of inventory sold, the Company includes its buying and distribution expenses in its cost of sales. Buying expenses include all direct and indirect costs to procure merchandise. Distribution expenses include the cost of operating the Company’s distribution centers and freight expense related to transporting merchandise. Gross profit for the thirteen weeks ended September 29, 2001 was $190.2 million or 40.6% of net sales, compared with $166.1 million or 40.5% of net sales, for the same period last year. The increase in gross profit as a percent of net sales was primarily due to improved mark-on as a result of product mix and the increased penetration of the Company’s proprietary product. In addition, freight expense as a percentage of net sales declined from the prior year as a result of a reduction in the volume of inventory receipts in response to sales trends.
The Company’s selling, general and administrative (“SG&A”) expenses consist of store selling expenses, occupancy costs, advertising expenses and corporate office expenses. SG&A expenses for the thirteen weeks ended September 29, 2001 were $165.4 million, or 35.3% of net sales, compared with $135.6 million, or 33.0% of net sales, for the same period last year. The Company experienced de-leveraging in its operating expenses, primarily occupancy costs, reflecting decreased sales volume. However, this increase was partially offset by the leverage of corporate office expenses.
Operating profit for the thirteen weeks ended September 29, 2001 was $24.8 million, or 5.3% of net sales, compared with $30.5 million, or 7.4% of net sales, for the same period last year.
The Company incurred net interest expense of $1.0 million (including amortization of commitment fees in connection with the Company’s $150 million credit agreement) for the thirteen weeks ended September 29, 2001, compared with $0.7 million for the same period in fiscal 2000. The higher interest expense is primarily due to an increase in short-term borrowings to fund the Company’s operations.
The Company’s income tax expense for the thirteen weeks ended September 29, 2001 was $9.1 million as compared with $11.4 million for the same period last year. The Company’s effective tax rate was 38.2% for the thirteen weeks ending September 29, 2001 as compared with 38.3% for the same period in fiscal 2000.
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LINENS ’N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the factors described above, net income for the thirteen weeks ended September 29, 2001 was $14.7 million, or $0.36 per share on a fully diluted basis, compared with $18.4 million, or $0.45 per share on a fully diluted basis, for the same period last year.
Thirty-Nine Weeks Ended September 29, 2001 Compared with Thirty-Nine Weeks Ended September 30, 2000
Net sales increased 14.8% to $1,235.9 million for the thirty-nine weeks ended September 29, 2001, up from $1,077.0 million for the same period in 2000, primarily as a result of new store openings since September 30, 2000. Comparable store net sales for the thirty-nine weeks ended September 29, 2001 declined 3.5% as compared with an increase of 4.3% for the same period last year. The decline in comparable store net sales can be primarily attributed to a decline in consumer traffic as a result of the slowing economy.
During the thirty-nine weeks ended September 29, 2001, the Company opened 48 stores and closed two stores, compared with opening 40 stores and closing three stores during the same period last year.
Gross profit for the thirty-nine weeks ended September 29, 2001 was $503.1 million, or 40.7% of net sales, compared with $434.1 million, or 40.3% of net sales, for the same period last year. The increase in gross profit as a percentage of net sales was principally due to improved mark-on as a result of product mix and the increased penetration of the Company’s proprietary product. In addition, freight expense as a percentage of net sales declined from the prior year as a result of a reduction in the volume of inventory receipts in response to sales trends.
SG&A expenses for the thirty-nine weeks ended September 29, 2001 were $461.5 million, or 37.3% of net sales, compared with $383.5 million, or 35.6% of net sales, for the same period last year. This increase as a percentage of net sales is attributable to the de-leveraging in the Company’s operating expenses primarily occupancy costs, reflecting decreased sales volume. However, the increase was partially offset by the leverage of corporate office expenses.
The Company recorded a charge of $4.0 million in the second quarter of fiscal 2001 in connection with the claims arising in a class action lawsuit in California regarding overtime pay for certain managers, as well as for accrued vacation pay on behalf of certain former employees. On October 24, 2001, the court gave preliminary approval to the settlement that had been reached in the case.
Operating profit for the thirty-nine weeks ended September 29, 2001 was $37.6 million, or 3.0% of net sales, compared with $50.5 million, or 4.7% of net sales, for the same period last year.
The Company had net interest expense of $2.8 million (including the amortization of commitment fees in connection with the Company’s $150 million credit agreement) for the thirty-nine weeks ended September 29, 2001, compared with $1.2 million of net interest expense for the same period in 2000. The higher interest expense is primarily due to an increase in short-term borrowings to fund the Company’s operations.
The Company’s income tax expense for the thirty-nine weeks ended September 29, 2001 was $13.3 million as compared with $18.9 million for the same period last year. The Company’s effective tax rate was 38.2% for the thirty-nine weeks ending September 29, 2001 compared to 38.3% for the same period last year.
As a result of the factors described above, net income for the thirty-nine weeks ended September 29, 2001 was $21.5 million, or $0.52 per share on a fully diluted basis, compared with $30.4 million, or $0.75 per share on a fully diluted basis, for the same period last year.
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LINENS ’N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company’s capital requirements are primarily investments in new stores, new store inventory purchases and seasonal working capital. These requirements are funded through a combination of internally generated cash from operations, credit extended by suppliers and short-term borrowings.
The Company has available a $150 million senior revolving credit facility expiring October 20, 2003. This agreement allows for up to $40 million in borrowings from uncommitted lines of credit.
Net cash used in operating activities for the thirty-nine weeks ended September 29, 2001 was $31.1 million compared with net cash provided by operating activities of $0.8 million for the same period last year. The net cash used in operating activities in fiscal 2001 was primarily attributed to the timing of vendor payments impacted by a slight decline in inventory turn.
Net cash used in investing activities during the thirty-nine weeks ended September 29, 2001 was $78.0 million compared with $61.0 million for the same period last year. The increase in net cash used in investing activities was due to capital expenditures related to incremental new stores opened and scheduled to open in fiscal 2001 compared with the same period last year.
Net cash provided by financing activities during the thirty-nine weeks ended September 29, 2001 was $79.2 million compared with $20.5 million for the same period last year. The increase in net cash provided by financing activities was primarily the result of an increase in short-term borrowings to fund the Company’s operations.
Management currently believes that the Company’s cash flows from operations, credit extended by suppliers, the revolving credit facility and the uncommitted lines of credit will be sufficient to fund currently anticipated capital expenditures and working capital requirements in the foreseeable future.
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LINENS ’N THINGS, INC. AND SUBSIDIARIES MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Inflation
The Company does not believe that its operating results have been materially affected by inflation during the preceding three years. There can be no assurance, however, that the Company’s operating results will not be affected by inflation in the future.
Seasonality
The Company’s business is subject to substantial seasonal variations. Historically, the Company has realized a significant portion of its net sales and net income for the year during the third and fourth quarters. The Company’s quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings. The Company believes this is the general pattern associated with its segment of the retail industry and expects this pattern will continue in the future. Consequently, comparisons between quarters are not necessarily meaningful and the results for any quarter are not necessarily indicative of future results.
Forward-Looking Statements
The foregoing contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The statements were made a number of times and have been identified by such forward-looking terminology as “expect,” “believe,” “may,” “will,” “intend,” “plan,” “target” and similar statements or variations of such terms. All of our “outlook” information constitutes forward-looking information. All such forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and involve certain significant risks and uncertainties including levels of sales, store traffic, acceptance of product offerings and fashions, the success of our new business concepts and seasonal concepts, the success of our new store openings, competitive pressures from other home furnishings retailers, the success of the Canadian expansion, availability of suitable future store locations, schedule of store expansion, the impact of the bankruptcies and consolidations in our industry, the impact on consumer confidence and consumer spending as a result of acts of terrorism and war, and the impact of a slowing consumer economy. These and other important factors that may cause actual results to differ materially from such forward-looking statements are included in the “Risk Factors” section of the Company’s Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on May 29, 1997, and may be contained in subsequent reports filed with the Securities and Exchange Commission. You are urged to consider all such factors. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved. The Company assumes no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to the Company’s operations result primarily from changes in interest rates and foreign exchange rates. The Company does not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
The Company’s financial instruments include cash and cash equivalents and short-term borrowings. The Company’s obligations are short-term in nature and generally have less than a 30-day commitment. The Company is exposed to interest rate risks primarily through borrowings under the Credit Agreement. Interest on all borrowings is based upon several alternative rates as stipulated in the Credit Agreement, including a fixed rate plus LIBOR based rate. The Company believes that its interest rate risk is minimal as a hypothetical 10 percent increase or decrease in interest rates in the associated debt’s variable rate would not materially affect the Company’s results from operations and cash flows. The Company does not use derivative financial instruments in its investment portfolio.
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Foreign Currency Risk
The Company enters into some purchase obligations outside of the United States, which are predominately settled in U.S. dollars and therefore has only minimal exposure to foreign currency exchange risks. The Company does not hedge against foreign currency risks and believes that foreign currency exchange risk is immaterial.
In addition, the Company operated nine stores in Canada as of September 29, 2001. The Company believes its foreign currency translation risk is minimal, as a hypothetical 10% strengthening or weakening of the U.S. dollar relative to the Canadian dollar would not materially affect the Company’s results from operations and cash flow.
Since fiscal year end 2000, there have been no material changes in market risk exposures.
PART II - OTHER INFORMATIONItem 1. Legal Proceedings -
The Company was named as a defendant in California litigation in which the court certified the case as a class action on behalf of certain managers of Company stores located in California seeking overtime pay as well as certain former employees seeking accrued vacation pay. On October 24, 2001, the court gave preliminary approval to the settlement that had been reached in the case. The Company has admitted no liability in connection with this settlement. In the second quarter of fiscal 2001, the Company had recorded a charge of $4.0 million related to the payments, attorneys’ fees, and expenses of implementing the settlement.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
Exhibit
Number Description
10.17 Increase Supplement
15 Letter re unaudited interim financial information
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated August 10, 2001, concerning an employment agreement with a certain executive officer of the Company.
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SIGNATURE
| | Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
| | | LINENS ’N THINGS, INC.
(Registrant) |
| | | By:_________________________________ |
| | | William T. Giles
Senior Vice President,
Chief Financial Officer
(Duly authorized officer and
principal financial officer) |
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