Certain statements contained herein with respect to factors which may affect future earnings, including management’s beliefs and assumptions based on information currently available, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements that are not historical facts involve risks and uncertainties, and results could vary materially from the descriptions contained herein.
Overview
The following is a discussion of the financial condition as of April 30, 2007 and January 31, 2007 and results of operations of the Company as of and for the periods ended April 30, 2007 and 2006. This discussion should be read in conjunction with the Financial Statements of the Company and the related notes included in the Company’s annual report on Form 10-K for fiscal year ended January 31, 2007.
The Company’s principal business activities include the operation of full-service travel centers and restaurants that offer brand name food and gasoline, and a unique variety of Southwestern merchandise to the traveling public in New Mexico and Arizona.
The Company’s gross retail sales include merchandise, retail gasoline sales, restaurant sales and wholesale gasoline sales. Each of the Company’s travel center locations retail a variety of unique Southwestern souvenirs and gifts. Ten of the twelve retail operations retail gasoline. Five of the Company’s twelve locations have full-service restaurants that operate under the Dairy Queen/Brazier or Dairy Queen brand names. The merchandise, gasoline and restaurant retail sales are all a part of the Company’s ongoing retail business and have been aggregated.
The Company wholesales gasoline to three independent third party locations. The wholesale gasoline does not meet the operating segment definition criteria of paragraph 10(b) of FAS 131, Disclosures about Segments of an Enterprise and Related Information, as the Company does not review wholesale gasoline operating results for decision making about resource allocation. Therefore, wholesale gasoline sales have been aggregated with the Company’s business activities.
The discussion of results of operations, which follows, compares such selected operating data for the interim periods presented.
Results of Operations
The following table presents certain income and expense items derived from the Statements of Operations for the three months ended April 30, 2007 and 2006 (unaudited and amounts in thousands, except for earnings per share):
| | | 2007 | | 2006 | |
Selected Statement of Operations Data: | | | | | |
(in thousands, except per share data) | | | | | |
| | | | | | |
| Gross sales from continuing operations | | $ | 6,726 | | $ | 6,685 | |
| | | | | | | | |
| Income from continuing operations | | $ | 53 | | $ | 130 | |
| | | | | | | | |
| Loss from discontinued operations | | $ | (45 | ) | $ | (58 | ) |
| | | | | | | | |
| Net income | | $ | 8 | | $ | 72 | |
| | | | | | | | |
| Earnings per share, continuing operations | | $ | 0.012 | | $ | 0.028 | |
| | | | | | | | |
| Loss per share, discontinued operations | | $ | (0.010 | ) | $ | (0.012 | ) |
| | | | | | | | |
| Earnings per share, net income | | $ | 0.002 | | $ | 0.016 | |
Comparison of the Three Months Ended April 30, 2007 and April 30, 2006
Gross sales from continuing operations at the Company’s travel centers increased by 0.6% to $6.726 million for the three months ended April 30, 2007, from $6.685 million for the three months ended April 30, 2006. Merchandise sales from continuing operations decreased 2.1% to $2.187 million for the three months ended April 30, 2007, from $2.235 million for the three months ended April 30, 2006. The decrease is primarily due to weather related conditions that slowed overall highway traffic during the first quarter causing a loss in sales. There was a decrease in general merchandise sales, a decrease in t-shirt sales partially offset by an increase in firework sales, convenience store sales, moccasin and sandal sales. Retail gasoline sales from continuing operations increased 0.04% to $2.443 million for the three months ended April 30, 2007, from $2.442 million for the same period in 2006. The slight increase is due an increase in the average retail price per gallon of $0.05 partially offset by a decrease in gallons sold of approximately 14,000 gallons and decreased highway traffic due to weather conditions. The average gallon of gasoline retailed for $2.79 for the three months ended April 30, 2007 compared to $2.74 for the three months ended April 30, 2006. Restaurant sales from continuing operations decreased 1.8% to $607,000 for the three months ended April 30, 2007, from $618,000 for the three months ended April 30, 2006. The decrease is primarily due weather related conditions that slowed overall highway traffic as well as increases in cost not reflected in retail prices until mid-way through the first quarter. Wholesale gasoline sales to independent retailers increased 7.1% to $1.489 million for the three months ended April 30, 2007, from $1.390 million for the three months ended April 30, 2006. The increase is primarily due to market price increases that were partially offset by one independent location in the prior period not present in the current period as a result of de-branding.
Cost of goods sold for continuing operations increased 1.6% to $4.586 million for the three months ended April 30, 2007, from $4.513 million for the three months ended April 30, 2006. Merchandise cost of goods from continuing operations decreased 4.2% to $770,000 for the three months ended April 30, 2007, from $804,000 for the three months ended April 30, 2006. The decrease is primarily related to the decrease in sales due to the weather related conditions that slowed overall highway traffic as well as adjustments decreasing standard markup estimates that the Company uses to record cost of goods. Retail gasoline cost of goods from continuing operations increased 0.5% to $2.164 million for the three months ended April 30, 2007, from $2.154 million for the three months ended April 30, 2006. The increase corresponds to increases in overall market prices during the period and is partially offset by a decrease in gallons sold and decreased highway traffic due to weather conditions. Restaurant cost of goods from continuing operations decreased 0.6% to $170,000 for the three months ended April 30, 2007, from $171,000 for the three months ended April 30, 2006. The decrease is directly related to the decrease in sales caused by weather related conditions that slowed overall highway traffic. Wholesale gasoline cost of goods increased 7.1% to $1.482 million for the three months ended April 30, 2007, from $1.384 million for the three months ended April 30, 2006. The increase is primarily due to market price increases that were partially offset by one independent location in the prior period not present in the current period as a result of de-branding. Cost of goods sold as a percentage of net revenues increased to 68.7% for the three months ended April 30, 2007, as compared to 68.0% for the three months ended April 30, 2006. The increase is primarily due to due to the increase in wholesale gasoline cost of goods.
Gross profit from continuing operations decreased 1.5% to $2.091 million for the three months ended April 30, 2007, from $2.122 million for the three months ended April 30, 2006. The decrease is related to the decrease in merchandise sales from continuing operations due to related to weather conditions that slowed overall highway traffic.
General and administrative expenses for continuing operations consist primarily of salaries, bonuses and commissions for travel center personnel, property costs and repairs and maintenance. General and administrative expenses also include executive and administrative compensation and benefits, accounting, legal and investor relations fees. General and administrative expenses increased 5.2% to $1.815 million for the three months ended April 30, 2007, from $1.725 million for the three months ended April 30, 2006. The increase is due to increases in personnel related costs, general repair and maintenance that includes repair and maintenance related to overall weather conditions such as snow removal and wind damage as well as an increase in weed and trash clean up at the retail locations, utilities also related to the unusual winter weather, and costs associated with the Company’s inventory bar-coding project partially offset by decreases in sign repair and maintenance as a result of the winter weather limiting the Company’s ability to travel to billboard locations and the loss of one of the Company’s sign repair contractor vendors, freight as a result of volume purchasing and decreases in overall insurance.
Depreciation and amortization expense for continuing operations increased 4.9% to $194,000 for the three months ended April 30, 2007, from $185,000 for the three months ended April 30, 2006. The increase is associated with certain asset additions in the first quarter offset by some assets becoming fully depreciated.
The above factors contributed to an overall decrease in operating income from continuing operations of 61.3% to $82,000 for the three months ended April 30, 2007, compared to operating income from continuing operations of $212,000 for the three months ended April 30, 2006.
Non-operating income (expense) includes interest income, gains and losses from the sale of assets, rental income and interest expense. Interest income increased 58.8% to $27,000 for the three months ended April 30, 2007, compared to interest income of $17,000 for the three months ended April 30, 2006. The increase is due to better interest rates in the current period as well as interest earned on additional notes receivable in the current period that were not present in the prior period. Gains from the sale of assets increased to $28,000 for the three months ended April 30, 2007 from $3,000 for the three months ended April 30, 2006. The gain of $28,000 for the three months ended April 30, 2007 is due to installment payments received related to notes receivable that include deferred gains of approximately $4,900, an earnest deposit of $25,000 that was forfeited due to a purchase agreement closing date expiring, partially offset by a loss of approximately $1,700 on the sale of equipment. The gain of $3,000 for the three months ended April 30, 2006 is due to the sale of equipment and installment payments received related to notes receivable that include deferred gains. Rental income was $47,000 for the three months ended April 30, 2007 compared to $43,000 for the three months ended April 30, 2006. Interest expense decreased 7.3% to $76,000 for the three months ended April 30, 2007, from $82,000 for the three months ended April 30, 2006. The decrease is primarily due to the Company’s change in terms agreements on September 29, 2006 with its primary lender that resulted in a lower interest rate.
Income from continuing operations before income taxes decreased 49.3% to $110,000 for the three months ended April 30, 2007, compared to income before income taxes of $217,000 for the three months ended April 30, 2006. As a percentage of net revenues, income before income taxes was 1.6% for the three months ended April 30, 2007, compared to 3.3% for the three months ended April 30, 2006.
Income tax expense for continuing operations decreased 34.5% to $57,000 for the three months ended April 30, 2007, compared to income tax expense for continuing operations of $87,000 for the three months ended April 30, 2006. The decrease is a result of lower income from continuing operations before income taxes. In addition, income tax expense in the current period was impacted by permanent tax deductions that increased income tax expense in relation to income from continuing operations.
The foregoing factors contributed to income from continuing operations of $53,000 for the three months ended April 30, 2007, compared to net income from continuing operations of $130,000 for the three months ended April 30, 2006.
Discontinued operations include the property, fixtures and equipment for the two retail locations that the Company has listed for sale as well as the retail location sold subsequent to the quarter ending April 30, 2007. There was a loss of $93,000 for discontinued operations for the three months ended April 30, 2007 compared to a loss of $97,000 for the three months ended April 30, 2006. There is an income tax benefit of $48,000 for the three months ended April 30, 2007 compared to an income tax benefit of $39,000 for the three months ended April 30, 2006. The net loss from discontinued operations for the three months ended April 30, 2007 is $45,000 compared to a net loss from discontinued operations for the three months ended April 30, 2006 of $58,000.
The foregoing factors contributed to net income for the three months ended April 30, 2007 of $8,000 compared to net income of $72,000 for the three months ended April 30, 2006.
Liquidity and Capital Resources
At April 30, 2007, the Company had working capital of $5.009 million compared to working capital of $5.052 million at January 31, 2007 (“working capital” is the excess of total current assets over total current liabilities). At April 30, 2007, the Company had a current ratio of 3.5:1; compared to a current ratio of 3.7:1 as of January 31, 2007 (“current ratio” is the ratio of current assets to current liabilities). The decrease in working capital is due to a decrease in cash of $407,000, an increase in accounts payable of $337,000, a decrease in income taxes of $79,000, and a decrease in prepaid expenses of $53,000, offset by an increase in marketable securities of $328,000, an increase accounts receivable of $44,000, an increase in inventory of $261,000 a decrease in accrued liabilities of $189,000, and a decrease in deferred revenue of $18,000. The decrease in cash is due to lower cash balances at the end of April 30, 2007 as a result of purchasing merchandise in preparation for the Company’s summer peak season that typically begins in the second quarter and capital expenditures as well as a decrease in net income. The decrease in net income is primarily due to weather conditions during the first quarter that decreased highway traffic causing a decrease in sales. The increase in accounts payable is primarily due to merchandise purchasing as the Company prepares for summertime sales as well as timing of electronic fund transfers related to the Company’s wholesale gasoline sales. The decrease in income taxes is a result of deferred tax assets and liabilities recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing current assets and liabilities and their respective tax bases. The decrease in prepaid expenses is due to a decrease in prepaid insurance as it nears the June 1, 2007 renewal date and prepaid rent. The increase in marketable securities, which consist of twelve month certificates of deposit, is due to more certificates with maturity dates greater than three months in the current period. The increase in accounts receivable is due to timing of electronic fund transfers related to the Company’s wholesale gasoline sales. The increase in inventory is due to merchandise increases at the Company’s central warehouse and retail locations as the Company prepares for summertime sales which typically occurs in the second quarter, an increase in handmade jewelry purchases received in the Company’s central vault as of April 30, 2007 also in preparation for summertime sales, that have not yet been transferred to the retail locations and an increase in gasoline inventory as a result of higher physical balances and higher market prices. The decrease in accrued liabilities is due to decreases in accrued salaries and wages plus the related payroll taxes, as discretionary bonuses were accrued through January 31, 2007 to be paid the following fiscal year partially offset by an increase in property taxes that were paid in December 2006 and have been accruing since that time. The decrease in deferred revenue is a result of outdoor advertising billboard revenue as the Company had several annual contracts that did not begin until August 1, 2006.
The Company’s travel center operations are subject to seasonal fluctuations. The first quarter of the fiscal year is typically the weakest. Throughout the Company’s fiscal year, revenues and earnings may experience substantial fluctuations from quarter to quarter. These fluctuations could result in periods of increased or decreased cash flow as well as increased or decreased net income.
Net cash provided by operating activities was $80,000 for the three months ended April 30, 2007, compared to $589,000 for the three months ended April 30, 2006. Net cash provided by operating activities for the three months ended April 30, 2007 is primarily attributable to depreciation and amortization expense of $206,000 offset by changes in operating assets and liabilities, net of $44,000, a decrease in deferred income taxes of $69,000 and the gain on sale of assets of $28,000. Net cash provided by operating activities for the three months ended April 30, 2006 was primarily attributable to net income of $72,000 adjusted for depreciation and amortization expense of $217,000 and changes in operating assets and liabilities of $296,000 partially offset the gain on sales of assets of $3,000.
Net cash used in investing activities for the three months ended April 30, 2007 was $435,000 primarily consisting of an increase in marketable securities of $328,000, $157,000 used for purchases of property and equipment partially offset by the proceeds from the sale of property and equipment of $28,000 and payments from notes receivable of $17,000. Net cash provided by investing activities for the three months ended April 30, 2006 was $57,000, primarily consisting of a decrease in marketable securities of $221,000 partially offset by $179,000 used for purchases of property and equipment.
Net cash used by financing activities for the three months ended April 30, 2007 was $52,000, which consisted of payments on long-term debt. For the three months ended April 30, 2006, net cash used in financing activities was $125,000 which consisted of payments on long-term debt.
The Company’s business and cash flow from operations rely on revenues generated from the sale of gasoline. During the quarter ended April 30, 2007, retail gasoline sales from continuing operations accounted for approximately 36.3% of the Company’s gross sales. To the extent that the availability of gasoline was restricted for any reasons, including due to storms, political issues, pipeline disruption, war, act or threats of terrorism in the United States or abroad, the Company’s gross sales would be affected, thereby reducing the amount of net cash that would be provided by operating activities. It is impossible to foresee or predict the exact economic effect on cash flows that any such restriction would have.
