banking, legal, professional and other costs aggregating $4.1 million were expensed in the thirteen week period ended August 29, 2009.
Interest expense was $0.4 million or 0.4% of net sales for the thirteen weeks ended August 28, 2010 as compared to $0.6 million or 0.8% of net sales for the thirteen weeks ended August 29, 2009. For the thirteen weeks ended August 28, 2010 interest expense was a result of borrowings on the Company’s revolving credit facility. During the prior year period, interest expense was due to borrowing against the cash surrender value of officers’ life insurance policies and borrowings on the Company’s revolving credit facility.
As a result of the above-noted items, the loss before income taxes for the thirteen weeks ended August 28, 2010 was $18.1 million as compared to a loss of $12.9 million for the same period last year.
For the thirteen week period ended August 28, 2010 the effective income tax rate was 39.8% as compared to 38.7% for the comparable period a year ago. The difference between the effective income tax rate and the federal statutory rate is primarily state income taxes and to a lesser extent permanent differences in the deductibility of expenses for book and tax. The reason for the increase in the effective income tax rate is due to changes in the amount of permanent differences in deductibility of expenses for book and tax purposes.
Net sales increased by $96.8 million or 76% to $223.5 million during the twenty-six weeks ended August 28, 2010. Sales were $126.7 million in the comparable period last year. This increase was primarily the result of having a full six months of sales in 2010 from the Filene’s stores which had been acquired in mid-June 2009. This contributed $91.5 million of the sales increase. Comparable store sales increased 14% and contributed $15.3 million of the sales increase in the twenty-six weeks ended August 28, 2010. Comparable store sales in the prior year period decreased 22%. The increase in comparable store sales was primarily the result of being in a better inventory position this year than last year. The Company’s comparable store sales computation only includes stores that have been owned and operated by the Company for a period of at least twelve months. Partially offsetting the above sales increases, was the loss of $10.0 million of sales resulting from the closing of 8 stores during the current and past fiscal years. During the twenty-six weeks ended August 28, 2010, two stores closed.
Gross profit increased by $41.7 million to $90.9 million during the twenty-six weeks ended August 28, 2010 from $49.2 million during the twenty-six weeks ended August 28, 2009. Gross profit as a percent of net sales increased by 180 basis points to 40.7% during the twenty-six weeks ended August 28, 2010 from 38.9% during the comparable prior year period. This increase was primarily due to the acquisition of Filene’s which had a higher gross profit rate than the Syms stores results last year.
SG&A increased $23.7 million to $69.0 million for the twenty-six weeks ended August 28, 2010 as compared to $45.3 million for the twenty-six weeks ended August 29, 2009 primarily as a result of the Filene’s acquisition. As percentage of net sales, SG&A decreased approximately 480 basis points to 30.9% of net sales during the twenty-six weeks ended August 28, 2010 from 35.7% of net sales in the comparable prior year period. SG&A as a percentage of net sales decreased primarily as a result of the Filene’s acquisition and the related leveraging of expenses over a larger sales base.
Advertising expense for the twenty-six weeks ended August 28, 2010 was $4.2 million or 1.9% of net sales as compared to $1.9 million or 1.5% of net sales for the twenty-six weeks ended August 29, 2009. Advertising expense for the twenty-six week period ending August 28, 2010 increased primarily due to the acquisition of Filene’s.
Occupancy costs (net) were $29.7 million or 13.3% of net sales for the twenty-six weeks ended August 28, 2010 as compared to $16.1 million or 12.7% of net sales for the twenty-six weeks ended August 29, 2009 with the increase primarily related to the Filene’s acquisition. Included as a reduction of net occupancy cost is rental income from third parties on real estate holdings incidental to the Company’s retail operations. For the twenty-six week period ended August 28, 2010 and August 29, 2009, rental income was $1,080,000 and $1,181,000, respectively.
Depreciation and amortization expense was $6.9 million or 3.1% of net sales for the twenty-six weeks ended August 28, 2010 as compared to $5.0 million or 3.9% of net sales for the twenty-six weeks ended August 29, 2009. For the twenty-six weeks ended August 28, 2010 versus the same period last year, depreciation and amortization expense increased primarily as a result of the Filene’s acquisition and due to capital expenditure additions during the current and past fiscal years.
In conjunction with the acquisition of Filene’s in June 2009, the Company preliminarily determined that the fair values of assets acquired exceeded the purchase price by approximately $9.4 million, resulting in a bargain purchase gain, based upon valuations of inventory, fixed assets, equipment and intangible assets net of deferred taxes, customer obligations and other adjustments. Acquisition costs of $4.6 million, including investment banking, legal, professional and other costs, were expensed in the twenty-six weeks ended August 29, 2009.
Interest expense was $0.6 million or 0.3% of net sales for the twenty-six weeks ended August 28, 2010 as compared to $0.9 million or 0.7% of net sales for the twenty-six weeks ended August 29, 2009. For the twenty-six weeks ended August 28, 2010 interest expense was a result of borrowings on the Company’s revolving credit facility. During the prior year period, interest expense was due to borrowings against the cash surrender value of officers’ life insurance policies and borrowings on the Company’s revolving credit facility.
As a result of the above-noted items, the loss before income taxes for the twenty-six weeks ended August 28, 2010 was $19.6 million as compared to a loss of $15.0 million for the same period last year.
For the twenty-six week period ended August 28, 2010, the effective income tax rate was 40.0% as compared to 33.8% for the comparable period a year ago. The difference between the effective income tax rate and the federal statutory rate is primarily state income taxes and to a lesser extent permanent differences in the deductibility of expenses for book and tax. The reason for the increase in the effective income tax rate is due to changes in the amount of permanent differences in deductibility of expenses for book and tax purposes. In addition, in the twenty-six week period ended August 29, 2009, the Company recorded certain income tax expense adjustments related to prior years.
Liquidity and Capital Resources
Working capital as of August 28, 2010 was $51.5 million, an increase of $4.7 million as compared to $46.8 million as of August 29, 2009. This increase in working capital is primarily attributable to lower accounts payable and higher inventory partially offset by lower cash.
Net cash used by operating activities totaled $13.9 million for the twenty-six weeks ended August 28, 2010 as compared to net cash provided by operating activities of $10.5 million for the twenty-six weeks ended August 29, 2009. The use of cash this year was the result of an increase in inventory and net loss partially offset by an increase in accounts payable.
Net cash used by investing activities was $1.6 million for the twenty-six weeks ended August 28, 2010, comprised of capital expenditures for property and equipment of $8.0 million, partially offset by the proceeds from the sale of land, building and other assets of two former store locations. Net cash used by investing activities for the twenty-six weeks ended August 29, 2009 was $44.3 million, comprised of $39.3 million for the purchase of Filene’s and $4.9 million for capital expenditures for property and equipment.
Net cash provided by financing activities was $16.3 million for the twenty-six weeks ended August 28, 2010, as compared to net cash provided by financing activities of $40.0 million for the twenty-six weeks ended August 29, 2009. The cash provided this year was the result of net borrowings on our credit facility partially offset by the purchase of treasury shares.
The Company had an unsecured $40 million, revolving credit facility with Israel Discount Bank (“IDB”) through June 4, 2009, the agreement for which contained various financial covenants and ratio requirements. There were no borrowings under this facility during its term and the Company was in compliance with its covenants during the period in which this facility was available. Effective June 5, 2009
13
the Company revised this facility to a secured $40 million, revolving credit facility with the same bank and in connection with the acquisition of Filene’s, borrowed $24.0 million under this facility. On August 27, 2009 the Company entered into a $75 million, secured, revolving credit facility with Bank of America which replaced the IDB facility, and expires on August 27, 2012. In connection with the new Bank of America facility, the Company incurred and capitalized approximately $1.1 million of deferred financing costs, which are being amortized over the term of the agreement. This facility calculates availability to borrow utilizing a formula which considers accounts receivable, inventory and certain real estate and bears interest at various rates depending on availability under formula, currently Prime +2.25% or LIBOR +3.25%. The Company is in compliance in all respects with the Bank of America facility at August 28, 2010. As of August 28, 2010, approximately $26.0 million is outstanding under this facility. Each of the Company’s loan facilities have had sub-limits for letters of credit which when utilized, reduce availability under the facility. At August 28, 2010 and August 29, 2009 the Company had outstanding letters of credit of $6.6 million and $0, respectively.
The U.S. economy is continuing to experience weakness across virtually every sector. Such continued weakness could negatively affect the Company’s cash, sales and/or operating performance and, further, could limit additional capital if needed and increase operating and financing costs. Management believes that existing cash, internally generated funds, trade credit and funds available from the revolving credit facility will be sufficient for anticipated working capital and capital expenditure requirements for the fiscal year ending February 26, 2011.
Impact of Inflation and Changing Prices
Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on sales or results of operations.
Recent Accounting Pronouncements
See Note 7 of Notes to Consolidated Condensed Financial Statements for a description of the Recent Accounting Pronouncements including the respective dates of adoption and the effects on Results of Operations and Financial Condition.
| |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The Company’s operations are not currently subject to material market risks for interest rates, foreign currency rates or other market price risks.
| |
Item 4. | Controls and Procedures |
a) Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of the end of the fiscal quarter ended August 28, 2010. Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective as of the end of the fiscal quarter ended August 28, 2010 to ensure that information that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose information otherwise required to be set forth in the Company’s periodic reports.
b) Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter covered by this quarterly report on Form 10Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
14
| |
Part II. | Other Information |
| | |
| |
Item 1. | LEGAL PROCEEDINGS |
| |
| The Company is a party to routine legal proceedings incidental to its business. Some of the actions to which the Company is a party are covered by insurance and are being defended or reimbursed by the Company’s insurance carriers. |
| |
Item 1a. | RISK FACTORS |
| |
| In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended February 27, 2010 (Fiscal 2009), which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may also materially adversely affect the Company’s business, financial condition and/or operating results. |
| |
Item 6. | EXHIBITS |
(a) Exhibits filed with this Form 10-Q
| | |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| 32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| 32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
15
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.
| | | | |
| | SYMS CORP |
| | | |
| Date: October 7, 2010 | By | /s/ Marcy Syms | |
| | | | |
| | | MARCY SYMS |
| | | CHIEF EXECUTIVE OFFICER |
| | | (Principal Executive Officer) |
| | | |
| Date: October 7, 2010 | By | /s/ Seth L. Udasin | |
| | | | |
| | | SETH L. UDASIN |
| | | SENIOR VICE PRESIDENT |
| | | CHIEF FINANCIAL and ADMINISTRATIVE |
| | | OFFICER |
| | | (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
| |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
16
