UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the thirteen weeks ended August 3, 1996
Commission File No. 1-11161
Nine West Group Inc.
(Exact name of Registrant as specified in its charter)
Delaware 06-1093855
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9 West Broad Street
Stamford, Connecticut 06902
(Address of principal executive offices) (Zip Code)
(314) 579-8812
(Registrant's telephone number, including area code)
Indicate by check 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
Number of shares of Common Stock, $.01 par value, outstanding as of the
close of business on September 3, 1996: 35,703,702.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1 Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Income - Thirteen and
twenty-six weeks ended August 3, 1996 and July 29, 1995 3
Condensed Consolidated Balance Sheets - August 3, 1996 and
February 3, 1996 4
Condensed Consolidated Statements of Cash Flows - Twenty-six
weeks ended August 3, 1996 and July 29, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
NINE WEST GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
13 Weeks Ended 26 Weeks Ended
------------------ ------------------
August 3 July 29 August 3 July 29
1996 1995 1996 1995
(In thousands except per share data)
Net revenues......................... $420,733 $345,742 $775,801 $516,273
Cost of goods sold................... 245,112 207,260 447,389 299,472
Purchase accounting adjustments to
cost of goods sold.................. - 23,559 - 23,559
-------- -------- -------- --------
Gross profit....................... 175,621 114,923 328,412 193,242
Selling, general and
administrative expenses............. 120,838 100,100 236,657 155,088
Amortization of acquisition goodwill,
trademarks and trade names.......... 2,390 1,657 4,781 1,657
-------- -------- -------- --------
Operating income................... 52,393 13,166 86,974 36,497
Interest expense - net............... 9,881 8,559 19,848 8,650
Other income - net................... 770 517 1,238 752
-------- -------- -------- --------
Income before income taxes......... 43,282 5,124 68,364 28,599
Income tax expense................... 17,314 2,100 27,346 11,525
-------- -------- -------- --------
Net income......................... $ 25,968 $ 3,024 $ 41,018 $ 17,074
======== ======== ======== ========
Weighted average common shares and
common share equivalents:
Primary............................ 36,923 34,923 36,755 34,866
Fully diluted...................... 38,318 37,941
-------- -------- -------- --------
Primary earnings per common share
and common share equivalents........ $ 0.70 $ 0.09 $ 1.12 $ 0.49
======== ======== ======== ========
Fully diluted earnings per common
share and common share equivalents.. $ 0.70 $ 1.10
======== ========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
NINE WEST GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
August 3 February 3
1996 1996
(Unaudited)
ASSETS (In thousands except share data)
Current Assets:
Cash........................................... $ 34,208 $ 20,782
Accounts receivable - net...................... 61,089 78,867
Inventories - net.............................. 438,835 396,676
Deferred income taxes.......................... 38,519 46,088
Assets held for sale........................... 34,532 31,118
Prepaid expenses and other current assets...... 19,276 18,249
---------- ----------
Total current assets........................ 626,459 591,780
Property and equipment - net...................... 123,409 136,719
Deferred income taxes............................. 20,286 21,658
Goodwill.......................................... 208,731 233,149
Trademarks and trade names........................ 144,195 146,053
Other assets...................................... 27,584 30,733
---------- ----------
Total assets............................... $1,150,664 $1,160,092
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................... $ 109,275 $ 139,731
Accrued expenses and other current liabilities. 100,616 134,737
Current portion of long-term debt.............. 23,000 20,000
---------- ----------
Total current liabilities................... 232,891 294,468
Long-term debt.................................... 529,338 471,000
Other non-current liabilities..................... 72,413 66,298
---------- ----------
Total liabilities........................... 834,642 831,766
---------- ----------
Stockholders' Equity:
Common stock($0.01 par value, 100,000,000 shares
authorized; 35,684,810 and 35,240,052 shares
issued and outstanding, respectively).......... 356 352
Warrants......................................... - 57,600
Additional paid-in capital....................... 135,869 131,595
Retained earnings................................ 179,797 138,779
---------- ----------
Total stockholders' equity.................. 316,022 328,326
---------- ----------
Total liabilities and stockholders' equity. $1,150,664 $1,160,092
========== ==========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
NINE WEST GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
26 Weeks Ended
---------------------
August 3 July 29
(In thousands) 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 41,018 $ 17,074
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization...................... 16,338 8,834
Provision for losses on accounts receivable........ 7,548 6,416
Provision for losses on inventory.................. 3,668 (643)
Loss on disposal of property and equipment......... 196 299
Deferred income taxes.............................. 8,941 (1,614)
Changes in assets and liabilities:
Increase in balance of accounts receivable sold. 29,221 -
Accounts receivable............................. (18,991) (37,140)
Inventory....................................... (45,187) 6,556
Prepaid expenses and other assets............... (6,873) 3,216
Accounts payable................................ (30,456) 32,932
Accrued expenses and other liabilities.......... (26,257) (8,551)
--------- --------
Net cash provided (used) by operating activities...... (20,834) 27,379
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... (18,289) (18,011)
Proceeds from sale of property and equipment.......... 19,840 -
Acquisition of businesses - net of cash acquired...... (6,137) (583,473)
Acquisition purchase price settlement................. 25,000 -
Net decrease (increase) in other assets............... 5,898 (1,314)
--------- --------
Net cash provided (used) by investing activities...... 26,312 (602,798)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under financing agreements............. 85,000 30,290
Proceeds from issuance of long term debt.............. 181,270 559,810
Repayments of long-term debt.......................... (205,000) -
Repurchase of warrants................................ (67,500) -
Net proceeds from issuance of stock................... 14,178 4,321
--------- --------
Net cash provided by financing activities............. 7,948 594,421
--------- --------
NET INCREASE IN CASH.................................. 13,426 19,002
CASH, BEGINNING OF PERIOD............................. 20,782 4,358
--------- --------
CASH, END OF PERIOD................................... $ 34,208 $ 23,360
========= ========
The accompanying Notes are an integral part of the Condensed Consolidated
Financial Statements.
NINE WEST GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Nine West Group Inc. (the "Company"), its wholly-owned subsidiaries and its
controlled-interest joint ventures. The accompanying financial statements have
been prepared in accordance with generally accepted accounting principles. In
the opinion of management, such information contains all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of such periods. Certain prior year amounts have been reclassified to
conform to the current presentation. All intercompany transactions and balances
have been eliminated from the financial statements for the periods presented.
The results of operations for the 26 weeks ended August 3, 1996 are not
necessarily indicative of the results to be expected for the 52 weeks ending
February 1, 1997 ("Fiscal 1996").
On May 23, 1995, the Company consummated its acquisition (the
"Acquisition") of the footwear business (the "Footwear Group") of The United
States Shoe Corporation ("U.S. Shoe"). Financial information for the 13 and 26-
week periods ended August 3, 1996 is not comparable to financial information for
the 13 and 26-week periods ended July 29, 1995, as Footwear Group results are
only included in the 1995 periods for the 10 weeks from May 23, 1995 through
July 29, 1995.
Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as permitted by
the rules and regulations of the Securities and Exchange Commission, although
the Company believes the disclosure is adequate to make the information
presented not misleading. The accompanying unaudited financial statements
should be read in conjunction with the financial statements contained in the
Annual Report on Form 10-K of the Company for the 53 weeks ended February 3,
1996 and the Quarterly Report on Form 10-Q of the Company for the periods
subsequent thereto.
2. EARNINGS PER SHARE
Primary weighted average common shares and common stock equivalents consist
of common stock issued and outstanding of 35,656,000 and 35,529,000 and primary
common stock equivalents of 1,267,000 and 1,226,000 shares, for the 13 and 26
weeks ended August 3, 1996, respectively. For the 13 and 26 weeks ended July
29, 1995, weighted average common shares and common stock equivalents include no
common stock equivalents, as such amounts were not material during the 1995
periods.
Fully diluted earnings per share reflect an after-tax interest adjustment
of $702,000 for the 13 and 26 weeks ended August 3, 1996 and fully diluted
weighted average shares outstanding of 38,318,000 and 37,941,000 for the 13 and
26 weeks ended August 3, 1996, respectively. This adjustment reflects the
issuance in June 1996 of $185.7 million principal amount of 5-1/2% convertible
subordinated notes due 2003 (the "Notes").
3. INVENTORIES
Inventories are valued at the lower of cost or market. Approximately 69%
of inventory values were determined by using the FIFO (first in, first out)
method of valuation as of August 3, 1996; the remainder was determined by using
the weighted average cost method. Inventory is comprised of (in thousands):
Raw materials................................ $ 30,281
Work in process.............................. 3,943
Finished goods............................... 404,611
--------
Total inventory......................... $438,835
========
4. CASH FLOWS
Cash paid for income taxes was $18.6 million and $20.4 million for the 26
weeks ended August 3, 1996 and July 29, 1995, respectively. Cash paid for
interest was $19.8 million and $4.1 million for the 26 weeks ended August 3,
1996 and July 29, 1995, respectively.
5. ACQUISITION
In connection with the Acquisition, the Company assumed, and included in
the allocation of the acquisition cost, accruals for involuntary severance and
termination benefits of $8.6 million and relocation costs of $8.2 million.
These severance and relocation costs were incurred as a result of the Company's
integration plan announced during the 53-week period ended February 3, 1996
("Fiscal 1995"). The integration plan relates to the elimination of 295
administrative positions that have become duplicative through the combination of
operations and process efficiencies realized, and relocation of certain Footwear
Group functional and operational employees. Of these 295 position reductions,
approximately 226 were eliminated by August 3, 1996, with the remaining
reductions to be substantially completed during the remainder of 1996. As of
August 3, 1996, approximately $5.2 million ($3.3 million during the 26 weeks
ended August 3, 1996) of severance and termination benefits, and $5.4 million
($1.2 million during the 26 weeks ended August 3, 1996) of relocation costs had
been paid and charged against these liabilities. Any costs incurred in excess
of the liability recorded will be included in the determination of net income
when such amounts are recognized.
On June 5, 1996, the Company and U.S. Shoe consummated a settlement (the
"Settlement") of a post-closing balance sheet dispute relating to the
Acquisition. Pursuant to the Settlement, U.S. Shoe was obligated to pay the
Company $25.0 million, which has been recorded as a reduction in goodwill. In
addition, the Company and U.S. Shoe agreed that the Company would repurchase,
for a price of $67.5 million, the warrants to purchase 3.7 million of its shares
of common stock (the "Common Stock")issued by the Company to U.S. Shoe in
connection with the consummation of the Acquisition (the "Warrants"). The
Warrants were exercisable for shares of Common Stock at a price of $35.50 per
share. The net payment by the Company to U.S. Shoe of $42.5 million was
financed with borrowings under the Company's revolving credit facility.
The following unaudited pro forma condensed combined summary of operations
(the "Pro Forma Summary") gives effect to the Acquisition as if such transaction
had occurred at the beginning of the period presented. The Pro Forma Summary
has been prepared utilizing the historical financial statements of the Footwear
Group. Pro forma adjustments include the amortization of goodwill, trademarks
and trade names, additional interest expense in connection with debt incurred to
finance the Acquisition, the exclusion of operating results with respect to
discontinued brands, the elimination of operating results with respect to assets
held for sale, the elimination of expenses associated with contracts not
acquired, and the elimination of transactions between the Footwear Group and
U.S. Shoe, its former parent. The Pro Forma Summary excludes the one-time
increase in cost of goods sold attributable to the fair value of inventory over
the FIFO cost as required by the purchase method of accounting.
26 Weeks Ended
July 29, 1995
--------------
(in thousands, except per share amounts)
Net revenues...................................... $698,145
Net income........................................ 4,438
Earnings per common share......................... $ 0.13
The foregoing Pro Forma Summary should not be considered indicative of
actual results that would have occurred had the Acquisition been consummated on
the date or for the period indicated, and does not purport to be indicative of
results of operations as of any future date or for any period.
6. BUSINESS RESTRUCTURING AND INTEGRATION CHARGES
During Fiscal 1995, the Company began the implementation of its planned
business restructuring and integration activities related to the Acquisition.
While some of the costs associated with the restructuring and integration of the
Footwear Group into the Company are reflected in the allocation of the
acquisition cost of the Footwear Group, the Company incurred and accrued
expenses for restructuring and integration costs of $51.9 million in the fourth
quarter of 1995 (the "Restructuring Charge"). The major components of the
Restructuring Charge are: (1) severance and termination benefits of $7.7
million; (2) write-down of assets, principally leasehold improvements, of $14.6
million; (3) accruals for lease and other contract terminations of $7.0 million;
(4) inventory valuation adjustments of $10.4 million; and (5) other integration
and consolidation costs of $12.2 million.
The Restructuring Charge reflects plans to restructure international
sourcing operations located in Italy, Korea and the Far East, and the
consolidation and integration of various corporate and business unit operations
and support functions. In relation to the Company's restructuring of its retail
operations, the plan includes the elimination of duplicate product lines, the
closing of approximately 40 of the Company's under-performing Banister retail
stores and conversion of a number of stores to other formats during Fiscal 1996,
and the termination during 1996 of the Company's agreement with Burlington Coat
Factory for the Company's operation of 84 leased shoe departments. Total cash
outlays related to this charge are estimated at approximately $22.0 million, of
which $14.2 million has been paid through August 3, 1996, including $9.8 million
paid during the 26 weeks ended August 3, 1996. The Restructuring Charge balance
at August 3, 1996 of $14.2 million is included in accrued expenses and other
current liabilities.
During the 26 weeks ended August 3, 1996, the Company continued its planned
business restructuring and integration activities. The following table shows
the activity recorded against the major components of the Restructuring Charge
accrual through August 3, 1996:
Other
Severance Lease and Integration
and Asset Contract Inventory and
Termination Write- Termination Valuation Consolidation
(in thousands) Benefits Downs Costs Adjustments Costs Total
--------- ------- ----------- ----------- ------------ -------
1995 Provision.............. $7,650 $14,620 $7,046 $10,423 $12,161 $51,900
1995 Activity............... 836 14,620 235 - 4,253 19,944
--------- ------- ----------- ----------- ------------ -------
February 3, 1996 balance.... 6,814 - 6,811 10,423 7,908 31,956
26 weeks ended August 3,
1996 activity............. 3,039 - 2,969 7,183 4,567 17,758
--------- ------- ----------- ----------- ------------ -------
August 3, 1996 balance $3,775 $ - $3,842 $ 3,240 $ 3,341 $14,198
========= ======= =========== =========== ============ =======
In connection with the restructuring of its international sourcing
operations, the Company has substantially completed the liquidation of its
sourcing offices located in the Far East and began to source substantially all
of its Far East production through its new agency arrangement.
In connection with the restructuring of its retail operations, the Company
has completed 22 of its 40 planned Banister retail store closings through August
3, 1996. The remaining 18 planned Banister retail store closings are expected
to be substantially completed by the end of 1996. During the 26 weeks ended
August 3, 1996, the Company also closed all 84 of its leased departments
operating within Burlington Coat Factory stores.
Severance and termination benefits relate to approximately 475 employees,
420 of whom were retail store managers and sales associates, 50 were engaged in
manufacturing positions, principally related to the liquidation of the Company's
Far East office, and five were management employees. As of August 3, 1996,
approximately 370 employees had been terminated, with approximately $3.9 million
of severance and termination benefits being paid and charged against the
liability ($3.0 million during the 26 weeks ended August 3, 1996). The
remaining separations are expected to be substantially completed during the
remainder of Fiscal 1996.
7. LONG TERM DEBT
CONVERTIBLE NOTES. In June 1996, the Company issued the Notes. The Notes
are due July 15, 2003 and are convertible into common stock of the Company at a
conversion price of $60.76 per share, subject to adjustment in certain
circumstances. The Notes are redeemable, in whole or in part, at the option of
the Company, at any time on or after July 16, 1999, at declining redemption
prices plus any accrued interest. The Notes are subordinated in right of
payment to all existing and future senior indebtedness of the Company. Proceeds
from the issuance of the Notes were approximately $181.3 million (net of
underwriters' discounts of $4.4 million) and were used to repay a portion of the
indebtedness outstanding under the Company's credit agreement, as discussed
below.
CREDIT AGREEMENT. On August 2, 1996, the Company's credit agreement was
amended and restated (the "Credit Agreement") to: (1) increase the outstanding,
quarterly amortizing term loan (the "Term Loan") to $335.0 million; (2) allow
the Company to borrow up to $225.0 million on a revolving basis (the "Revolving
Loan"); and (3) reduce the interest rates and fees and make certain
modifications to the covenants thereunder. Letters of credit outstanding under
the Revolving Loan may not exceed $100.0 million at any one time. The Credit
Agreement expires on November 1, 2001.
Amounts outstanding under the Credit Agreement are secured by substantially
all assets of the Company (excluding receivables related to the Company's
accounts receivable securitization facility) and bear interest, at the Company's
option, at rates based on Citibank, N.A.'s base rate or the Eurodollar rate.
Borrowings under the Credit Agreement will become unsecured once the Company
reaches an "investment grade" rating on its long-term senior unsecured
indebtedness.
The Credit Agreement contains various operating covenants which, among
other things, impose certain limitations on the Company's ability to incur
indebtedness, merge or consolidate. The Company is also required to comply with
financial covenants relative to net worth, leverage and fixed charge coverage.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Condensed Consolidated Financial Statements of the Company and the Notes
thereto included in Item 1 of this report.
All references to "Second Quarter of 1996" and "Second Quarter of 1995" are
to the Company's 13-week periods ended August 3, 1996 and July 29, 1995,
respectively. Additionally, all references to the "first 26 weeks of 1996" and
"first 26 weeks of 1995" are to the Company's 26-week periods ended August 3,
1996 and July 29, 1995, respectively.
On May 23, 1995, the Company consummated its acquisition (the
"Acquisition") of the footwear business (the "Footwear Group") of The United
States Shoe Corporation ("U.S. Shoe"). Financial information for the 13 and 26-
week periods ended August 3, 1996 is not comparable to financial information for
the 13 and 26-week periods ended July 29, 1995, as Footwear Group results are
only included in the 1995 periods for the 10 weeks from May 23, 1995 through
July 29, 1995.
RESULTS OF OPERATIONS
Net income for the Second Quarter of 1996 was $26.0 million, or $0.70 per
share, compared to net income of $17.0 million, or $0.49 per share, for the
Second Quarter of 1995. Net income for the first 26 weeks of 1996 was $41.0
million, or $1.10 per share on a fully diluted basis, compared to net income of
$31.0 million, or $0.89 per share, for the first 26 weeks of 1995. Results for
1995 exclude the impact of a $23.6 million non-recurring increase in cost of
goods sold, attributable to the fair value of inventory over FIFO cost, recorded
as a result of the Acquisition (the "Cost of Goods Sold Adjustment"). Including
the Cost of Goods Sold Adjustment, net income for the Second Quarter of 1995 and
first 26 weeks of 1995 would have been $3.0 and $17.1 million (or $0.09 and
$0.49 per share), respectively.
The following tables set forth certain items in the Company's condensed
consolidated statements of income in millions of dollars and as a percentage of
net revenues for the Second Quarter and first 26 weeks of 1996 and 1995. For
comparative purposes, results of operations for the Second Quarter of 1995 and
first 26 weeks of 1995 exclude the Cost of Goods Sold Adjustment.
13 Weeks Ended 26 Weeks Ended
(IN MILLIONS OF DOLLARS) Aug. 3 Jul. 29 Aug. 3 Jul. 29
(Unaudited) 1996 1995 1996 1995
------ ------ ------ ------
Net revenues.......................... $420.7 $345.7 $775.8 $516.3
Cost of goods sold.................... 245.1 207.2 447.4 299.5
------ ------ ------ ------
Gross profit....................... 175.6 138.5 328.4 216.8
Selling, general and
administrative expenses.............. 120.8 100.1 236.6 155.1
Amortization of acquisition goodwill,
trademarks and trade names........... 2.4 1.7 4.8 1.6
------ ------ ------ ------
Operating income................... 52.4 36.7 87.0 60.1
Interest expense - net................ 9.9 8.5 19.8 8.7
Other income - net.................... .8 .5 1.2 .7
------ ------ ------ ------
Income before income taxes......... 43.3 28.7 68.4 52.1
Income tax expense.................... 17.3 11.7 27.4 21.1
------ ------ ------ ------
Net income......................... $ 26.0 $ 17.0 $ 41.0 $ 31.0
====== ====== ====== ======
13 Weeks Ended 26 Weeks Ended
(AS A PERCENTAGE OF NET REVENUES) Aug. 3 Jul. 29 Aug. 3 Jul. 29
(Unaudited) 1996 1995 1996 1995
------ ------ ------ ------
Net revenues.......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................... 58.3 59.9 57.7 58.0
------ ------ ------ ------
Gross profit....................... 41.7 40.1 42.3 42.0
Selling, general and
administrative expenses.............. 28.7 29.0 30.5 30.1
Amortization of acquisition goodwill,
trademarks and trade names........... 0.5 0.5 0.6 0.3
------ ------ ------ ------
Operating income................... 12.5 10.6 11.2 11.6
Interest expense - net................ 2.4 2.5 2.6 1.7
Other income - net.................... 0.2 0.2 0.2 0.2
------ ------ ------ ------
Income before income taxes......... 10.3 8.3 8.8 10.1
Income tax expense.................... 4.1 3.4 3.5 4.1
------ ------ ------ ------
Net income......................... 6.2% 4.9% 5.3% 6.0%
====== ====== ====== ======
THIRTEEN WEEKS ENDED AUGUST 3, 1996 COMPARED
TO THIRTEEN WEEKS ENDED JULY 29, 1995
NET REVENUES. Net revenues were $420.7 million in the Second Quarter of
1996 compared to $345.7 million in the Second Quarter of 1995, an increase of
$75.0 million, or 21.7%. Net revenues of the Company's wholesale division
increased by $32.0 million, or 16.2%, of which: (1) $10.2 million is
attributable to the increase in net revenues resulting from the Acquisition of
the Footwear Group, the results of operations of which, for the Second Quarter
of 1995, are included only for the 10 weeks following the consummation of the
Acquisition; and (2) $21.8 million is attributable to the increase in net
revenues of the Company's wholesale division. Sales through the Company's
retail stores increased $43.0 million, or 29.1%. The increase in net revenues
of the Company's retail division is attributable to: (1) the opening (net of
closings, excluding the Company's leased departments operating within Burlington
Cost Factory stores (the "Burlington Leased Departments")) of 107 domestic and
36 international retail stores ($18.9 million); (2) an $18.3 million increase in
net revenues resulting from the Acquisition of the Footwear Group, the results
of operations of which, for the Second Quarter of 1995 are included only for the
10 weeks following the consummation of the Acquisition; and (3) comparable store
sales increases ($5.8 million). Comparable store sales include the net revenues
of all stores open for an entire month during the comparable current year and
prior year periods. Comparable store sales (including the sales of the acquired
Footwear Group stores, had they been acquired as of the beginning of the
comparable period of the prior year) increased 2.0% for the Second Quarter of
1996. Comparable store sales, excluding the results of the Specialty Footwear
Retailing ("SFR") division, which is comprised of Banister stores and Stein Mart
leased departments, increased 8.4% during the Second Quarter of 1996. This
difference is due primarily to the significant promotional activity of the SFR
division during the Second Quarter of 1995, compared to the Second Quarter of
1996. The foregoing comparable store sales do not include the results of the 84
Burlington Leased Departments, which were closed during the first 26 weeks of
1996. During the Second Quarter of 1996, wholesale net revenues accounted for
54.7% of the Company's consolidated net revenues, while retail operations
accounted for the remaining 45.3%.
GROSS PROFIT. Gross profit was $175.6 million in the Second Quarter of
1996, an increase of $37.1 million, or 26.8%, from $138.5 million in the Second
Quarter of 1995 (excluding the Cost of Goods Sold Adjustment). Gross profit as
a percentage of net revenues increased to 41.7% in the Second Quarter of 1996
from 40.1% in the Second Quarter of 1995. The increase in gross profit as a
percentage of net revenues is primarily attributable to: (1) the overall
improvement in gross margins of the wholesale division; (2) a greater percentage
of net revenues derived from the retail operations (45.3% in the Second Quarter
of 1996 compared to 42.7% in the Second Quarter of 1995), which revenues produce
greater gross margins than wholesale revenues; and (3) significant promotional
activity of the SFR division during the Second Quarter of 1995, compared to the
Second Quarter of 1996.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses (excluding the amortization of goodwill,
trademarks and trade names related to the Acquisition) were $120.8 million in
the Second Quarter of 1996, compared to $100.1 million in the Second Quarter of
1995, an increase of $20.7 million, or 20.7%. SG&A expense expressed as a
percentage of net revenues fell to 28.7% in the Second Quarter of 1996 from
29.0% in the Second Quarter of 1995. The decrease in SG&A expense expressed as
a percentage of net revenues is due primarily to cost savings resulting from the
elimination of duplicative administrative positions, which were included in SG&A
expenses for the 10 weeks from May 23, 1995 through July 29, 1995. These cost
savings expressed as a percentage of net revenues were offset, in part, by the
increase in the percentage of net revenues contributed by the Company's retail
operations relative to its wholesale operations (the Company's retail operations
have a higher level of expenses as a percentage of net revenues than its
wholesale operations).
OPERATING INCOME. Operating income was $52.4 million, or 12.5% of net
revenues, for the Second Quarter of 1996 compared to $36.7 million, or 10.6% of
net revenues, for the Second Quarter of 1995 (excluding the Cost of Goods Sold
Adjustment). The increase in operating income as a percentage of net revenues
is attributable to the factors discussed above, offset in part by the additional
amortization of goodwill, trademarks and trade names related to the Acquisition.
Thirteen weeks of amortization is included in the Second Quarter of 1996,
compared to 10 weeks of amortization during the Second Quarter of 1995.
INTEREST EXPENSE - NET. Interest expense - net was $9.9 million in the
Second Quarter of 1996 compared to $8.5 million in the Second Quarter of 1995,
an increase of $1.4 million. The increased expense is primarily due to
Acquisition-related term loans, which were outstanding only for the period from
May 23 to July 29 during the Second Quarter of 1995, but were outstanding
during the entire Second Quarter of 1996.
TWENTY-SIX WEEKS ENDED AUGUST 3, 1996 COMPARED
TO TWENTY-SIX WEEKS ENDED JULY 29, 1995
NET REVENUES. Net revenues were $775.8 million in the first 26 weeks of
1996 compared to $516.3 million in the first 26 weeks of 1995, an increase of
$259.5 million, or 50.3%. Net revenues of the Company's wholesale division
increased by $129.7 million, or 43.6%, of which: (1) $104.5 million is
attributable to the increase in net revenues resulting from the Acquisition of
the Footwear Group, the results of operations of which, for the first 26 weeks
of 1995, are included only for the 10 weeks following the consummation of the
Acquisition; and (2) $25.2 million is attributable to the increase in net
revenues of the Company's wholesale division. Sales through the Company's
retail stores increased $129.8 million, or 59.3%. The increase in net revenues
of the Company's retail division is attributable to: (1) a $79.2 million
increase in net revenues resulting from the Acquisition of the Footwear Group,
the results of operations of which, for the first 26 weeks of 1995, are included
only for the 10 weeks following the consummation of the Acquisition; (2) the
opening (net of closings, excluding the Burlington Leased Departments) of 107
domestic and 36 international retail stores ($42.2 million); and (3) comparable
store sales increases ($8.4 million). Comparable store sales (including the
sales of the acquired Footwear Group stores, had they been acquired as of the
beginning of the comparable period of the prior year) increased 2.5% for the
first 26 weeks of 1996. Comparable store sales, excluding the results of SFR,
increased 7.3% during the first 26 weeks of 1996. This difference is due
primarily to the significant promotional activity of the SFR division during the
Second Quarter of 1995, compared to the Second Quarter of 1996. The foregoing
comparable store sales do not include the results of the 84 Burlington Leased
Departments, which were closed during the first 26 weeks of 1996. During the
first 26 weeks of 1996, wholesale net revenues accounted for 55.1% of the
Company's consolidated net revenues, while retail operations accounted for the
remaining 44.9%.
GROSS PROFIT. Gross profit was $328.4 million in the first 26 weeks of
1996, an increase of $111.6 million, or 51.5%, from $216.8 million in the first
26 weeks of 1995 (excluding the Cost of Goods Sold Adjustment). Gross profit as
a percentage of net revenues increased to 42.3% in the first 26 weeks of 1996
from 42.0% in the first 26 weeks of 1995. The increase in gross profit as a
percentage of net revenues is primarily attributable to: (1) the overall
improvement in gross margins of the wholesale division; and (2) a greater
percentage of net revenues from retail operations (44.9% in the first 26 weeks
of 1996, compared to 42.5% in the 26 weeks of 1995), which revenues produce
greater gross margins than wholesale revenues; and (3) significant promotional
activity of the SFR division during the Second Quarter of 1995, compared to the
first 26 weeks of 1996.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES. SG&A expenses (excluding the
amortization of goodwill, trademarks and trade names related to the Acquisition)
were $236.6 million in the first 26 weeks of 1996, compared to $155.1 million in
the first 26 weeks of 1995, an increase of $81.5 million, or 52.6%. SG&A
expense expressed as a percentage of net revenues rose to 30.5% in the first 26
weeks of 1996 from 30.0% in the first 26 weeks of 1995. The increase in SG&A
expense expressed as a percentage of net revenues is due primarily to: (1) the
increase in the percentage of net revenues contributed by the Company's retail
operations relative to its wholesale operations (the Company's retail operations
have a higher level of expenses as a percentage of net revenues than its
wholesale operations); and (2) higher expenses as a percentage of net revenues
experienced by the Footwear Group. These higher expenses are attributable to,
among other things, significant expenditures by the Footwear Group for
advertising, and were incurred during the full 26 weeks ended August 3, 1996,
compared to only 10 weeks during the period ended July 29, 1995. These higher
costs were offset, in part, by cost savings resulting from the elimination of
duplicative administrative positions, which were included in SG&A expenses for
the 10 weeks from May 23, 1995 through July 29, 1995.
OPERATING INCOME. Operating income was $87.0 million, or 11.2% of net
revenues, for the first 26 weeks of 1996 compared to $60.1 million, or 11.6% of
net revenues, for the first 26 weeks of 1995 (excluding the Cost of Goods Sold
Adjustment). The decrease in operating income as a percentage of net revenues
is attributable to the factors discussed above and the increase in amortization
of goodwill, trademarks and trade names related to the Acquisition. Twenty-six
weeks of amortization is included in the 1996 period, compared to 10 weeks of
amortization during the first 26 weeks of 1995.
INTEREST EXPENSE - NET. Interest expense - net was $19.8 million in the
first 26 weeks of 1996 compared to $8.7 million in the first 26 weeks of 1995,
an increase of $11.1 million. The increased expense is primarily due to
Acquisition-related term loans, which were outstanding only for the period from
May 23 to July 29 during the first 26 weeks of 1995, but were outstanding during
the entire first 26 weeks of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily upon cash flow from operations and borrowings
under the Company's credit agreement (as defined below) to finance its
operations and expansion. Cash used by operating activities was $20.8 million
for the first 26 weeks of 1996, compared to cash provided by operating
activities of $27.4 million for the first 26 weeks of 1995. This decrease in
cash flow from operations during the first 26 weeks 1996 as compared to the
first 26 weeks as of 1995 is due primarily to: (1) additional working capital
requirements as a result of the Acquisition and the Company's domestic and
international expansion; (2) $4.8 million of severance and relocation payments
made in connection with the Acquisition; and (3) $9.8 million of payments made
in connection with the restructuring and integration costs that were incurred
and accrued in the fourth quarter of 1995 (the "Restructuring Charge"). Working
capital was $393.6 million at August 3, 1996, compared to $297.3 million at
February 3, 1996. Working capital increased during the first 26 weeks of 1996
due to: (1) a $42.2 million increase in inventory to support wholesale backlog
requirements and inventory required for new stores; (2) a $30.5 million decrease
in accounts payable; and (3) a $34.1 million decrease in accrued expenses and
other current liabilities. These working capital increases were partially
offset by a $17.8 million decrease in accounts receivable attributable to the
Company's accounts receivable securitization program. Working capital may vary
from time to time as a result of seasonal requirements, the timing of factory
shipments and the Company's "open stock" and "quick response" wholesale
programs, which require an increased investment in inventories.
Total cash outlays related to the Restructuring Charge are estimated at
approximately $22.0 million, of which $9.8 million was paid during the first 26
weeks of 1996, bringing total payments through August 3, 1996 to $14.2 million.
In connection with the Acquisition, the Company assumed and included in the
allocation of the acquisition cost of the Footwear Group: (1) accruals for
involuntary severance and termination benefits of $8.6 million; and (2)
relocation costs of $8.2 million. As of August 3, 1996, approximately $5.2
million and $5.4 million of severance and termination benefits, and relocation
costs, respectively, had been charged against these liabilities ($3.3 million
and $1.2 million of severance and termination benefits, and relocation costs,
respectively, were charged during the first 26 weeks of 1996). The Company
anticipates that the remaining cash outlays relating to these actions will be
substantially completed in fiscal 1996.
On May 23, 1995, the Company entered into a $700.0 million credit agreement
providing for: (1) a $400.0 million, six and one-half year, quarterly amortizing
term loan; (2) a $150.0 million, non-amortizing term loan; and (3) the ability
to borrow up to $150.0 million on a revolving basis and through letters of
credit. Subsequent to the Acquisition, the Company consummated several
transactions that reduced borrowings under the credit agreement by an aggregate
of $272.3 million. These transactions included: (1) initial proceeds of $71.0
million from the Company's accounts receivable securitization program; (2)
proceeds of $20.0 million from the sale/leaseback transaction relating to the
Company's West Deptford, New Jersey distribution facility during the first 26
weeks of 1996; and (3) net proceeds of $181.3 million from the issuance of 5.5%
convertible subordinated notes, due July 15, 2003 (the "Notes") during the
Second Quarter of 1996.
In June 1996, the Company issued $185.7 million of Notes. The Notes are
convertible into common stock of the Company at a conversion price of $60.76 per
share, subject to adjustment in certain circumstances. The Notes are
redeemable, in whole or in part, at the option of the Company, at any time on or
after July 16, 1999, at declining redemption prices plus any accrued interest.
The Notes are subordinated in right of payment to all existing and future senior
indebtedness of the Company. Proceeds from the issuance of the Notes were
approximately $181.3 million (net of underwriter's discounts of $4.4 million)
and were used to repay as a portion of the outstanding indebtedness under the
Company's credit agreement.
On August 2, 1996, the credit agreement was amended and restated. Under
the amended and restated credit agreement (the "Credit Agreement"), the Company
has a $335.0 million quarterly amortizing term loan facility and may borrow up
to $225.0 million under a revolving credit facility, including letters of credit
up to $100.0 million. The Credit Agreement expires on November 1, 2001. As of
September 3, 1996, $335.0 million of borrowings were outstanding under the term
loan, $51.0 million of borrowings and $30.3 million of letters of credit were
outstanding on a revolving basis and $143.7 million was available for future
borrowing.
Amounts outstanding under the Credit Agreement are secured by substantially
all assets of the Company, excluding receivables related to an accounts
receivable securitization program, and bear interest, at the Company's option,
at rates based on Citibank's base rate or the Eurodollar index rate. Borrowings
under the Credit Agreement will become unsecured should the Company reach an
"investment grade" rating on its long term indebtedness. The Company has
entered into interest rate hedge agreements to reduce the impact on interest
expense from fluctuating interest rates on variable rate debt.
The Company made a $42.5 million net payment to U.S. Shoe on June 5, 1996,
in connection with the settlement of the post-closing balance sheet dispute
relating to the Acquisition and the repurchase by the Company of the Warrants
(see "Acquisitions" in the Notes to Condensed Consolidated Financial
Statements) which was financed under the Company's revolving credit facility.
The weighted average interest rate on the Company's long-term debt
outstanding (including the Notes) as of August 3, 1996 was approximately 6.32%.
Capital expenditures totaled $18.3 million and $18.0 million in the first
26 weeks of 1996 and 1995, respectively. Capital expenditures in the first 26
weeks of 1996 relate primarily to the Company's store expansion and remodeling
programs. Capital expenditures in the first 26 weeks of 1995 relate primarily
to the Company's store expansion and remodeling programs and the construction
and equipping of a 170,000 square foot addition to its West Deptford, New Jersey
distribution center, which was completed for a total cost of approximately $7.8
million. Capital expenditures with respect to warehouse expansion totaled $5.2
million in the first 26 weeks of 1995. The Company estimates that its capital
expenditures for fiscal 1996 will be between $55.0 million and $60.0 million,
primarily for the on-going expansion of its retail operations (approximately
$35.0 million), equipment for its distribution and manufacturing facilities
(approximately $5.0 million), and international expansion (approximately $5.0
million). The actual amount of the Company's capital expenditures depends, in
part, on requirements related to the integration of the Footwear Group into the
Company, the number of new stores opened, the number of stores remodeled and the
amount of any construction allowances the Company may receive from the landlords
of its new stores. The opening and success of new stores will be dependent
upon, among other things, general economic and business conditions affecting
consumer spending, the availability of desirable locations and the negotiation
of acceptable lease terms for new locations. As of September 3, 1996, the
Company had commitments for approximately $18.4 million of capital expenditures,
related to commitments as of such date to open 143 retail stores, 87 of which
are intended to be opened during the remainder of fiscal 1996.
The Company expects that its current cash balances, cash flows anticipated
to be generated from operations and availability under its revolving credit
facility will be sufficient to fund its domestic and international growth and
expansion (including planned domestic and international retail store openings),
business restructuring and integration of the Footwear Group, and other
operating cash needs for at least the next 12 months.
SEASONALITY
The Company's footwear and accessories are marketed primarily for each of
the four seasons, with the highest volume of products sold during the last three
fiscal quarters. The Company's retail operations, however, generally experience
their weakest results in the first quarter. Because the timing of shipments of
products for any season may vary from year to year, the results for any
particular quarter may not be indicative of results for the full year. The
Company has not had significant overhead and other costs generally associated
with large seasonal variations.
INFLATION
The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on the Company's revenues or
profitability. In the past, the Company has been able to maintain its profit
margins during inflationary periods.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 5, 1996, the Company consummated the Settlement of a post-closing
balance sheet dispute with U. S. Shoe, a subsidiary of Luxottica Group S.p.A..
Pursuant to the Settlement, U.S. Shoe was obligated to pay to the Company $25.0
million. In addition, the Company and U.S. Shoe agreed that the Company would
repurchase the Warrants for $67.5 million. Consequently, the Company made a net
payment of $42.5 million to U.S. Shoe, which was financed with borrowings under
the Company's credit facility.
The Company has been named as a defendant in various actions and
proceedings, including actions brought by certain terminated employees, arising
from its ordinary business activities. Although the liability that could arise
with respect to these actions cannot be accurately predicted, in the opinion of
the Company, any such liability will not have a material adverse effect on its
financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 Annual Meeting of Stockholders of the Company was held on May 28,
1996. The results of the voting with respect to each matter submitted to a vote
of stockholders at the meeting were as follows:
PROPOSAL ONE: Election of a Class III director of the Company.
For: 32,435,567
Withheld: 167,094
PROPOSAL TWO: Approval of the amendments to the Nine West Group Inc. 1994
Long-Term Performance Plan.
For: 18,496,856
Against: 13,236,662
Abstain: 18,870
Broker Non-Votes: 850,273
PROPOSAL THREE: Approval of the amendments to the Nine West Group Inc.
Incentive Bonus Plan.
For: 32,049,854
Against: 532,082
Abstain: 20,725
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Index to Exhibits
(b) Reports on 8-K:
None
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.
Nine West Group Inc.
(Registrant)
By: /s/ Robert C. Galvin
---------------------------
Robert C. Galvin
Executive Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
Date: September 17, 1996
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------ -------
* 4.2 Form of Definitive 5-1/2% Convertible Subordinated Note of the
Registrant Due 2003.
* 4.3 Form of Restricted Global 5-1/2% Convertible Subordinated Note of the
Registrant Due 2003.
* 4.4 Form of Regulation S Global 5-1/2% Convertible Subordinated Note of
the Registrant Due 2003.
* 4.5 Indenture, dated as of June 26, 1996, between the Registrant, as
issuer, and Chemical Bank, as trustee, relating to the Registrant's
5-1/2% Convertible Subordinated Notes Due 2003.
* 4.6 Note Resale Registration Rights Agreement, dated as of June 26, 1996,
by and among the Registrant and The Purchasers Named Therein.
*10.19.3 Amended and Restated Credit Agreement, dated as of August 2, 1996,
among the Registrant, the financial institutions listed on the
signature pages thereof and Citibank, N.A., as administrative agent.
*11 Computation of earnings per share.
*Filed herewith