DUTY FREE INTERNATIONAL,INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA-9 YEARS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
1995 (1) 1994 1993 (2) 1992 (3) 1991 1990 1989 1988 (4) 1987 (4)
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EARNINGS STATEMENT DATA:
NET SALES $501,761 $376,436 $361,823 $346,635 $262,962 $258,944 $229,687 $141,978 $29,925
NET SALES INCREASE PERCENTAGE 33.3% 4.0% 4.4% 31.8% 1.6% 12.7% 61.8% N/A N/A
GROSS PROFIT 200,374 147,740 146,425 138,749 93,820 83,512 62,788 39,706 14,146
GROSS PROFIT - % OF NET SALES 39.9% 39.2% 40.5% 40.0% 35.7% 32.3% 27.3% 28.0% 47.3%
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES 177,895 113,365 101,401 95,406 67,194 59,985 45,121 31,492 11,053
SELLING,GENERAL AND
ADMINISTRATIVE EXPENSES -
% OF NET SALES 35.5% 30.1% 28.0% 27.5% 25.6% 23.2% 19.6% 22.2% 36.9%
RESTRUCTURING EXPENSES 7,571 ------- ------- ------- ------- ------- ------- ------- -------
REVALUATION OF INTANGIBLE ASSETS 46,002 ------- ------- ------- ------- ------- ------- ------- -------
OPERATING INCOME (LOSS) (26,722) 39,535 49,647 47,577 29,715 26,221 19,984 9,528 3,748
OPERATING INCOME (LOSS)-
% OF NET SALES -5.3% 10.5% 13.7% 13.7% 11.3% 10.1% 8.7% 6.7% 12.5%
OPERATING INCOME (LOSS)
PERCENTAGE CHANGE N/A -20.4% 4.4% 60.1% 13.3% 31.2% 109.7% N/A N/A
EARNINGS ( LOSS) BEFORE
INCOME TAXES (31,149) 43,082 49,786 48,765 32,542 26,200 19,301 8,815 3,362
EFFECTIVE INCOME TAX RATE -20.4% 36.4% 39.0% 35.7% 31.6% 33.3% 32.1% 43.3% 47.6%
NET EARNINGS (LOSS) (24,802) 27,393 30,373 31,364 22,268 17,483 13,101 5,001 1,762
NET EARNINGS (LOSS) -- % OF NET SALE -4.9% 7.3% 8.4% 9.0% 8.5% 6.8% 5.7% 3.5% 5.9%
EARNINGS (LOSS) PER SHARE ($0.91) $1.01 $1.08 $1.19 $0.85 $0.78 $0.71 $0.30 $0.17
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 27,224 27,204 28,142 26,462 26,314 22,385 18,562 16,556 10,126
DIVIDENDS PER COMMON SHARE $0.20 $0.20 $0.15 ------- ------- ------- $0.025 ------- -------
RETURN ON STOCKHOLDERS' EQUITY -11.5% 12.5% 14.3% 17.7% 17.6% 22.3% 37.5% 28.0% 31.4%
1995 1994 1993 1992 1991 1990 1989 1988 1987
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WORKING CAPITAL $113,996 $204,118 $90,630 $119,353 $103,209 $98,844 $29,348 $21,121 $5,647
CURRENT RATIO 2.7 7.0 3.3 3.9 3.1 3.3 1.5 1.4 2.3
TOTAL ASSETS 387,142 387,600 255,819 269,911 200,557 173,153 103,867 83,689 21,616
LONG-TERM OBLIGATIONS 118,891 121,821 9,629 11,797 14,054 14,253 8,379 7,257 10,443
STOCKHOLDERS' EQUITY 201,151 231,861 207,343 216,447 137,875 115,830 41,183 28,737 6,954
NUMBER OF SHARES OUTSTANDING 27,244 27,238 27,122 28,429 26,269 26,262 18,512 18,512 12,000
PERCENT OF TOTAL DEBT
TO TOTAL CAPITALIZATION 37.1% 34.2% 4.1% 5.2% 13.7% 15.7% 23.8% 35.8% 57.0%
BOOK VALUE PER SHARE $7.38 $8.51 $7.64 $7.61 $5.25 $4.41 $2.22 $1.55 $0.58
(1) INFLIGHT SALES GROUP LIMITED WAS PURCHASED ON MAY 1, 1994.
(2) EXPENSES INCURRED IN EFFECTING THE MERGER OF UETA, INC.
AND DUTY FREE INTERNATIONAL WERE $4,389,000, OR $0.16 PER SHARE,
WHICH WERE CHARGED TO THE FINANCIAL RESULTS IN THE FIRST
QUARTER OF FISCAL 1993.
(3) THE COMPANY ACQUIRED 16 DUTY FREE STORES AND RELATED
BUSINESSES ALONG THE WESTERN UNITED STATES/CANADA BORDER ON
FEBRUARY 1, 1991.
(4) UETA WAS FORMED IN MAY 1987. THE FINANCIAL INFORMATION FOR
FISCAL 1988 INCLUDES PARTIAL YEAR RESULTS FOR UETA
AND FISCAL 1987 DOES NOT INCLUDE UETA.
DUTY FREE INTERNATIONAL,INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS,EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH YEAR
FISCAL 1995:
NET SALES $83,243 $137,241 $144,856 $136,421 $501,761
GROSS PROFIT 30,448 55,872 58,747 55,307 200,374
RESTRUCTURING EXPEN 7,571 7,571
REVAULATION OF INTA 46,002 46,002
NET EARNINGS (LOSS) 2,170 4,053 (34,538) 3,513 (24,802)
EARNINGS (LOSS) PER $0.08 $0.15 ($1.27) $0.13 ($0.91)
FISCAL 1994: $77,914 $99,252 $104,605 $94,665 $376,436
NET SALES 30,205 40,093 41,568 35,874 147,740
GROSS PROFIT -------
RESTRUCTURING EXPEN -------
REVAULATION OF INTA 5,082 7,955 8,095 6,261 27,393
NET EARNINGS $0.19 $0.29 $0.30 $0.23 $1.01
EARNINGS PER SHARE
DFI DUTY FREE INTERNATIONAL AT-A-GLANCE
[MAP]
INTERNATIONAL LOCATIONS
Caribbean
Hong Kong
Puerto Rico
Singapore
United Kingdom
COMPANY PROFILE
Founded in 1983, Duty Free International, Inc. is the leading operator of duty
free and retail stores along the United States' Canadian and Mexican borders
and in international airports throughout the United States. We are also a
prime
concessionaire and supplier of merchandise to international airlines' inflight
duty free shops. Additionally, DFI is the largest supplier of duty free
merchandise to U.S.-based foreign diplomats and a major supplier to merchant
and cruise ships from ports in the Northeast United States and Miami.
We sell quality brand-name merchandise such as liquor, tobacco products,
cosmetics, fragrances and luxury items at prices 20 to 60 percent below retail
prices for the same merchandise found in our travel and expatriate customers'
destination countries.
Through our AIRPORT, BORDER, DIPLOMATIC and WHOLESALE, and INFLIGHT
operating
divisions, DFI currently serves travelers at 160 duty free shops and retail
operations in locations throughout the United States, Puerto Rico, the U.S.
Virgin Islands, Aruba, St. Maarten, Bonaire and Curacao. Our standard and
specialty retail businesses include shops featuring American-made merchandise;
natural personal care products boutiques; regional sports-theme shops; branded
athletic footwear and apparel shops; gourmet food and confection shops;
convenience stores; news and gift shops; book stores; currency exchanges and
gas stations.
Headquartered in Ridgefield, Connecticut, Duty Free International employs more
than 2,000 people and has been publicly-held since 1989.
1
LETTER TO SHAREHOLDERS
[PHOTO]
DEAR FELLOW SHAREHOLDERS:
During fiscal 1995, Duty Free International once again achieved substantial
sales growth. These results were achieved despite the continued presence of
adverse economic factors impacting Northern border sales and earnings. We
undertook a number of management initiatives to offset regional and divisional
weaknesses going forward which clearly demonstrate our continued commitment to
diversification and maximizing value. These included continued expansion in
our
Airport division, the addition of our new Inflight division, de-emphasis of
the
wholesale aspect of our Diplomatic and Wholesale division, and an overall
comprehensive restructuring effort designed to maximize profitability. We also
changed the method of evaluating the recoverability of intangible assets.
OPERATING RESULTS
For the fiscal year ended January 29, 1995, net sales totaled
$501,761,000,
a 33 percent increase over the prior year's sales of $376,436,000. Net
earnings for the fiscal year, excluding the after-tax effects of our
restructuring plan and the intangible assets revaluations, were $14,133,000,
or
$.52 per share, compared with $27,393,000 or $1.01 per share for the prior
year.
For the fourth quarter ended January 29, 1995, net sales were
$136,421,000,
up 44 percent from $94,665,000 for the same period in 1994. Net earnings for
the quarter decreased to $3,513,000 or $.13 per share, from $6,261,000 or $.23
per share for the same period a year ago.
As of January 29, 1995, total assets were $387,142,000, working capital
totaled $113,996,000, and total stockholders' equity was $201,151,000. Total
debt to total capitalization at fiscal year-end was 37.1 percent.
THE YEAR IN REVIEW
In the second quarter, we completed our purchase of Inflight Services
Group Limited, a leading concessionaire, operator and supplier of onboard duty
free merchandise to international airlines through its wholesale program and
onboard concessions. Inflight is also a major supplier of international
airlines' first class and premium class amenity kits.
The new division has already proven profitable, and was almost entirely
responsible for DFI's net sales growth during the past year. As additional
consolidation, economies of scale and synergies are realized, we expect this
division to continue to strongly impact DFI's profitability going forward.
During the third quarter, we instituted a series of management initiatives
designed to improve DFI's profitability. Following a comprehensive assessment
of each of DFI's operating businesses and their administrative functions, we
began a program of store and business closures, and workforce reductions
expected to be completed in early fiscal 1996.
When fully implemented, 23 stores and business locations, which had been
generating approximately $14,500,000 in sales annually, will be closed. These
include seven Airport, 14 Northern Border and two Diplomatic and Wholesale
division operations. These closings are expected to reduce our workforce, and
lower direct operating costs by approximately $7,400,000 annually. A pre-tax
charge to earnings of $7,571,000 was taken during the third quarter ended
October 31, 1994 as a result of these actions.
We believe this restructuring, when completed, will bring DFI near-term
improvements in profitability and enable us to focus DFI's considerable
resources on those markets which we believe offer prospects for growth and
financial returns in line with our requirements. We will continue to monitor
DFI's operating costs and seek out expense savings opportunities as we
endeavor
to make DFI a more efficient company. Among these efforts was a recently
completed warehousing consolidation arising from the Inflight acquisition
which
will, along with other expense reductions in our Inflight Division, yield
approximately $1,000,000 of annual savings as compared with the current
existing cost base.
Additionally, we adopted a discounted cash flow method of evaluating the
recoverability of intangible assets at the same time recognizing that the
projected profit and cash flow from certain acquired businesses will
2
be below expectations set by DFI management at the time of the acquisitions.
The result was a write-down of asset value and a one-time, pre-tax charge to
earnings of $46,002,000 which was taken during the third quarter. The fiscal
year 1996 pre-tax amortization charge associated with the assets written down
would have been $3,500,000. While not impacting DFI's cash position, the
write-down will create a more appropriate and conservative balance sheet
valuation of remaining goodwill and other intangible assets.
A total pre-tax charge against earnings of $53,573,000 ($38,935,000
after-tax), resulting from the closures and new accounting method for valuing
intangible assets, was taken during DFI's third quarter.
LOOKING AHEAD
We believe the management initiatives described above and our plans to
capitalize on these and other efforts give us ample reason to be excited and
confident in our ability to continue to grow and enhance shareholder value.
At the airports we'll continue to increase our presence through strategic
alliances with major companies and expand our existing portfolio of retail
formats to maintain and broaden our appeal to airport authorities. Together
with one of our equity partners, we were the successful bidder for the lease
to operate the duty free shops at Logan International Airport in Boston,
Massachusetts. Two duty free shops were opened on March 1, 1995 and a third
shop is planned to open later in 1995. Through another of our equity
partnerships, we've designed and stocked 12 stores in the new Denver
International Airport in Colorado, which opened on February 28, 1995.
In our Border division, we are well-positioned for a rebound in the
Canadian economy, and improvement in the value of the Canadian dollar, with
leaner, financially stronger stores on the Northern border. Along the Southern
border, we have revamped stores and products to meet anticipated growth in the
numbers of customers and greater demographic mix resulting from the North
American Free Trade Agreement (NAFTA). We have also responded to the late
1994,
and continuing devaluation of the Mexican peso and resulting reduction in
sales
volumes with significant expense and working capital reduction programs
designed to lessen the adverse effect on our profits and cash flow.
Our newly-completed 100,000 square foot distribution center in Miami
enables us to more aggressively pursue additional cruise business and build on
our 10 retail store presence on the passenger piers in the port of Miami.
We're
focused on increasing our market share of duty free supply to cruise lines,
particularly those serving Caribbean routes, and seeking opportunities at
additional ports as cruise markets expand.
Additionally, we have begun a marketing campaign to educate Americans and
foreign visitors of the value of duty free shopping -- especially in these
economically-trying times. Increased awareness of the cost savings associated
with duty free shopping will help us achieve our goal of attracting customers
of all economic levels and encourage the highest possible average transaction
spend at each of our many and varied locations. Most importantly, we'll
continue to foster a corporate environment that encourages creativity and
risk-taking, which we believe yields improved financial performance.
Our intention is to maintain and further our position in the travel
industry to be recognized by customers and competitors alike as the leader in
duty free and travel retailing. Our goal is as simple as ever: to be a billion
dollar company that consistently achieves superior financial returns. Our
confidence in achieving this goal is matched only by our gratitude to our
shareholders, employees, customers and vendors for your continued support. Our
unwavering commitment to you is to merit this loyalty and reward it with
consistent, strong performance in the years ahead.
Sincerely,
Alfred Carfora
President and Chief Executive Officer
March 15, 1995
3
AIRPORT DIVISION: FENTON HILL AMERICAN LTD.
HQ: British Airways Building/
John F. Kennedy International Airport, New York
LOCATIONS: 80 duty free and retail stores
MARKETS: 14 international airports,
the Caribbean and South Florida
As in years past, the Airport division, operating under the name Fenton Hill
American Limited, continued its record of solid sales growth and expansion,
and
contributed substantially to our fiscal 1995 sales. With total sales of $92.9
million -- a 21 percent increase over fiscal 1994 sales -- Fenton Hill
accounted for 18 percent of overall sales. During the past year we recognized
strong sales input from our late 1993 and early 1994 acquisition of 10
Caribbean locations.
Fenton Hill's fine results stem directly from our commitment to focused
diversification which is successfully implemented through our portfolio
approach to airport retailing. The portfolio approach combines a wide variety
of retailing concepts in an attractive manner which is especially appealing to
airport management and domestic and foreign travelers.
Our retail mix currently includes duty free shops, specialty stores such
as
The Athlete's Foot (branded athletic-wear), Bodyography (natural personal care
products) and The Sports Section (regional sports-theme shops), standard news
and gift shops and bookstores.
Additionally, through a number of equity partnerships and strategic
alliances, we are able to participate in duty free and retail concessions in a
number of other international airports. Chicago Aviation Partners, our joint
venture with McDonald's Corporation, last year developed and now manages all
the concession space at the new international terminal at Chicago's O'Hare
Airport. In affiliation with another venture partner we've designed and
stocked
12 stores which opened in February 1995 in the new Denver International
Airport. And, in March 1995, we, and our venture partners, opened two new duty
free shops in Boston's Logan International Airport, with a third store
scheduled to open later in fiscal 1996. Given the success of relationships
like these, we'll continue to explore new opportunities with existing partners
and other innovative approaches.
Percent of Fiscal 1995
Consolidated Net Sales
18%
4
INFLIGHT DIVISION: INFLIGHT DUTY FREE SHOP, INC.
HQ: New York, New York
LOCATIONS: 64 international
airline fleets
MARKETS: 21 onboard duty free concessions; 14 wholesale accounts from 48
operations bases in Europe, the United States, Asia/Pacific and Latin America
and the Caribbean; 29 amenity kit supplier accounts.
During the second quarter of fiscal 1995, we acquired Inflight Sales Group
Limited. A fitting complement to our existing businesses, Inflight is a
leading
concessionaire, operator and supplier of onboard duty free merchandise to
international airlines through onboard concessions and a wholesale program,
and
a major supplier of international airlines' first class and premium class
amenity kits.
We believe Inflight's purchase price -- $60 million in cash, $10 million
in
notes and additional payments as earnings goals are achieved -- has already
been more than justified. The new division was profitable as soon as the
acquisition was completed, and with just three quarters of sales, it
contributed a substantial $121.9 million or 24 percent of consolidated fiscal
1995 sales and was almost entirely responsible for total company net sales
growth during the past year.
Inflight's three business areas contribute significantly to the division's
performance. Thirty percent of the division's sales derive from the
manufacture
and marketing of amenity kits for international airlines' first class and
premium class passengers.
Another 20 to 30 percent of sales are obtained from the division's
wholesale program which provides merchandise for duty free programs which
airlines run on their international flights. The carrier runs all promotions,
manages the program and even owns the inventory which is bought from Inflight.
The remaining 30 to 50 percent of sales come from the division's
concession program through which Inflight fully operates airlines' on-board
duty free concession. We purchase products and manage every aspect of duty
free sales service on the airlines' flights, including magazine and videotape
promotions. With a percentage of total sales paid in royalties to the
airline, this program provides airlines with a risk-free means of
incrementally
increasing their earnings.
Inflight has exclusive distribution agreements for various parts of the
world with many well-recognized names in the luxury products industry,
including Chanel, Christian Dior, Hermes, Mont Blanc, Yves Saint Laurent,
Elizabeth Arden and Lancaster. Additionally, it maintains warehouse and
station
locations throughout the U.S., Pacific Rim, Europe and South America.
We're confident that Inflight will continue to contribute handsomely to
our
overall business as air travel and airline competition grows, and as it is
more
thoroughly absorbed into our operations.
Percent of Fiscal 1995
Consolidated Net Sales
24%
5
BORDER SOUTH DIVISION: UETA, INC.
HQ: San Antonio, Texas
LOCATIONS: 30 duty free stores
MARKETS: 14 border crossings in Arizona, California and Texas
During the past year, UETA once again delivered on the promise we perceived
when we purchased it two years ago, contributing a whopping 29 percent of
consolidated sales. UETA's total sales were $144.6 million, an increase of 14
percent over fiscal 1994 performance -- despite a fall-off in sales toward
year-end as a result of the devaluation in the peso.
To ensure its continued solid contribution, we maintained a number of
strategies introduced during fiscal 1994 which were found to be successful. We
continued our marketing and advertising programs targeted to Mexicans working
in U.S./Mexican border plants. To better meet the purchase needs of a broader
demographic mix, we've adjusted inventories and created an enhanced value line
of products which include private label liquor and five-pack cigarette
cartons.
Our store upgrade program, now completed, has given a consistent visual image
to all UETA stores.
Going forward, our intention is to meet the impact of the devalued peso
head-on. Marketing and promotion programs have been adjusted, and expense
reductions of approximately $3,800,000 annually have been effected. We'll
apply
the important lessons we've learned from the ond belief.
\s\ Spring M. Ciccarello
-----------------------------
Notary Public
My Commission Expires: 3/9/97