FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 1, 1995
Commission File Number 1-1011
MELVILLE CORPORATION
(Exact Name of registrant as specified in its charter)
NEW YORK 04-1611460
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
One Theall Road, Rye, New York 10580
(Address of principal executive offices) (Zip Code)
(914) 925-4000
(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 outstanding of the issuer's Common Stock:
Class Outstanding at April 29, 1995
----- -----------------------------
Common Stock, $1 par value 104,860,147
INDEX
Page No
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Part I. -- Financial Information
Consolidated Condensed Statements of Operations --
First Quarter Ended April 1, 1995 and April 2, 1994 3
Consolidated Condensed Balance Sheets --
As of April 1, 1995, December 31, 1994 and April 2, 1994 4 - 6
Consolidated Condensed Statements of Cash Flows --
First Quarter Ended April 1, 1995 and April 2, 1994 7
Notes to Consolidated Condensed Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 11
Review by Independent Auditors 12
Exhibit I -- Report of Review by Independent Auditors 13
Part II. -- Other Information 14
2
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ and shares in thousands, except per share data)
First Quarter Ended
--------------------------
April 1, April 2,
1995 1994
----------- -----------
Net sales $ 2,492,042 $ 2,379,839
Cost of goods sold, buying
and warehousing costs 1,687,278 1,579,617
----------- -----------
804,764 800,222
----------- -----------
Store operating, selling, general
and administrative expenses 781,025 742,043
Depreciation and amortization 58,915 51,335
----------- -----------
839,940 793,378
----------- -----------
Operating (loss) profit (35,176) 6,844
Interest expense, net 8,614 4,096
----------- -----------
(Loss) earnings before income taxes
and minority interests (43,790) 2,748
Income tax (benefit) provision (19,467) 898
----------- -----------
(Loss) earnings before minority interests (24,323) 1,850
Minority interests in net earnings 2,125 4,355
----------- -----------
Net loss $ (26,448) $ (2,505)
=========== ===========
Net loss per share of common stock $ (0.29) $ (0.06)
=========== ===========
Dividends per share of common stock $ 0.38 $ 0.38
=========== ===========
Weighted average common shares outstanding 105,209 105,351
=========== ===========
See accompanying notes to consolidated condensed financial statements.
3
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of April 1, 1995, December 31, 1994 and April 2, 1994
($ in thousands)
April 1, December 31, April 2,
1995 1994 1994
(Unaudited) (Unaudited)
----------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 88,255 $ 117,035 $ 113,239
Accounts receivable (net of allowance
for doubtful accounts of $15,852 at
April 1, 1995, $18,858 at
December 31, 1994 and $26,387 at
April 2, 1994) 222,235 229,833 236,805
Inventories:
Finished goods 2,325,505 2,131,041 2,043,314
Work-in-process 1,507 645 1,771
Raw materials and supplies 14,548 6,557 7,483
----------- ----------- -----------
Total inventories 2,341,560 2,138,243 2,052,568
Prepaid expenses 172,029 165,388 198,336
----------- ----------- -----------
Total Current Assets 2,824,079 2,650,499 2,600,948
----------- ----------- -----------
Property, plant, equipment, leasehold
improvements and leased property under capital
leases, at cost 2,274,570 2,231,841 1,968,857
Less accumulated depreciation and
amortization 742,709 704,919 653,336
----------- ----------- -----------
Net property, plant, equipment, leasehold
improvements and leased property
under capital leases 1,531,861 1,526,922 1,315,521
----------- ----------- -----------
Goodwill (net of accumulated amortization
of $98,816 at April 1, 1995,
$94,987 at December 31, 1994
and $84,795 at April 2, 1994) 445,174 448,427 438,414
Deferred charges and other assets 112,055 109,641 111,788
----------- ----------- -----------
Total Assets $4,913,169 $4,735,489 $4,466,671
=========== =========== ===========
See accompanying notes to consolidated condensed financial statements.
(Continued)
4
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of April 1, 1995, December 31, 1994 and April 2, 1994
($ and shares in thousands, except per share data)
April 1, December 31, April 2,
1995 1994 1994
(Unaudited) (Unaudited)
---------- ---------- ----------
LIABILITIES
Current Liabilities:
Accounts payable $ 721,595 $ 660,691 $ 631,082
Accrued expenses 445,897 659,502 421,008
Notes payable 760,200 200,000 494,000
Federal income taxes payable 2,126 102,008 6,142
Other current liabilities 13,588 20,541 10,469
---------- ---------- ----------
Total Current Liabilities 1,943,406 1,642,742 1,562,701
---------- ---------- ----------
Long-term debt 331,280 331,340 341,707
Deferred income taxes 85,038 81,702 86,758
Other long-term liabilities 147,841 188,126 171,399
Minority interests in subsidiaries 110,769 108,644 98,326
REDEEMABLE PREFERRED STOCK
Cumulative preferred stock, Series B,
$4.00 dividend, par value $100, redeemable
at par plus accrued dividends; authorized
and issued 17 shares with 4 held
in treasury as of April 1, 1995,
December 31, 1994 and April 2, 1994 1,330 1,330 1,330
See accompanying notes to consolidated condensed financial statements.
(Continued)
5
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED BALANCE SHEETS
As of April 1, 1995, December 31, 1994 and April 2, 1994
($ and shares in thousands, except per share data)
April 1, December 31, April 2,
1995 1994 1994
(Unaudited) (Unaudited)
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Preference stock, $1.00 par value,
authorized 50,000 shares; Series
One ESOP Convertible, liquidation
value $53.45; 6,360 shares issued
and outstanding at April 1, 1995,
6,379 at December 31, 1994 and
6,499 at April 2, 1994 $ 339,942 $ 340,948 $ 347,346
Guaranteed ESOP Obligation (321,096) (328,096) (328,570)
Common stock, par value $1.00, authorized
300,000 shares; issued 111,460 at April 1,
1995, 111,454 at December 31, 1994 and
111,291 at April 2, 1994; outstanding,
104,823 at April 1, 1995, 105,642 at
December 31, 1994 and 105,359 at
April 2, 1994, net of shares held in
treasury 111,460 111,454 111,291
Capital surplus 48,390 48,122 42,357
Retained earnings 2,428,020 2,494,383 2,321,678
Cumulative translation adjustment (4,039) (1,421) --
Common stock in treasury, at cost; 6,637
shares at April 1, 1995, 5,812 at
December 31, 1994, and 5,932 at
April 2, 1994 (309,172) (283,785) (289,652)
---------- ---------- ----------
Total Shareholders' Equity 2,293,505 2,381,605 2,204,450
---------- ---------- ----------
Total Liabilities and Equity $4,913,169 $4,735,489 $4,466,671
========== ========== ==========
See accompanying notes to consolidated condensed financial statements.
6
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
First Quarter Ended
-----------------------
April 1, April 2,
1995 1994
--------- ---------
Net Cash Used in Operating Activities $(357,782) $(231,969)
--------- ---------
Cash Flows from Investing Activities:
Additions to property, plant, equipment
and leasehold improvements (63,005) (64,290)
Proceeds from sale or disposal of assets 9,674 57,822
--------- ---------
Net Cash Used in Investing Activities (53,331) (6,468)
--------- ---------
Cash Flows from Financing Activities:
Increase in notes payable 560,200 404,000
Decrease in book overdrafts (101,374) (92,389)
Dividends paid (40,141) (40,136)
Repurchase of common stock (26,309) --
Decrease in long-term debt and obligations under
capital leases (7,840) (1,203)
Other (2,203) 433
--------- ---------
Net Cash Provided by Financing Activities 382,333 270,705
--------- ---------
Net (decrease) increase in cash and cash equivalents (28,780) 32,268
Cash and cash equivalents at beginning of year 117,035 80,971
--------- ---------
Cash and Cash Equivalents at End of Period $ 88,255 $ 113,239
========= =========
See accompanying notes to consolidated condensed financial statements.
7
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position
of the Company as of April 1, 1995 and April 2, 1994 and the results of
operations and cash flows for the three month periods then ended. Because of
the seasonality of the specialty retailing business, operating results of the
Company on a quarterly basis may not be indicative of operating results for
the full year.
2. Certain reclassifications have been made to the consolidated condensed
financial statements of prior periods to conform to the current period
presentation.
3. Primary earnings (loss) per share is computed by dividing net earnings
(loss), after deducting net preferred dividends on redeemable preferred stock
and Series One ESOP Convertible Preference Stock ("ESOP Preference Stock"),
by the weighted average number of common shares outstanding during the
period.
Fully diluted earnings (loss) per share is computed based upon the assumed
conversion of the ESOP Preference Stock into common stock. Net earnings
(loss) utilized in the calculation is adjusted for the difference between the
current dividend on the ESOP Preference Stock and the common stock, and for
certain non-discretionary expenses based on net earnings. The conversion of
the ESOP Preference Stock and adjustments described above are anti-dilutive
and, therefore, fully diluted earnings (loss) per share has not been
presented.
4. The components of net interest expense are as follows:
First Quarter Ended
-------------------
April 1, 1995 April 2, 1994
------------- -------------
($ in thousands)
- ----------------
Interest expense $ 8,749 $ 4,325
Interest income (135) (177)
Capitalized interest -- (52)
------- -------
Interest expense, net $ 8,614 $ 4,096
======= =======
8
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the First Quarter Ended April 1, 1995 and April 2, 1994
Consolidated net sales for the quarter ended April 1, 1995 were $2.49
billion, an increase of 4.7% over consolidated net sales of $2.38 billion for
the quarter ended April 2, 1994. Same store sales increased 0.4% over the prior
year's period compared to an increase of 5.2% in 1994.
Operating results for the quarter were unfavorably impacted by the timing
of the Palm and Easter Sunday selling periods, which occur in the second quarter
of 1995 as compared to the first quarter of 1994. In addition, the current
year's accounting period had one less selling day than the prior year's quarter,
which ended on April 2, 1994. For the year to date period ended April 15, 1995,
which included the Palm and Easter Sunday selling periods in both years,
consolidated retail sales increased 7.7% and same store sales increased 3.2%
over the comparable period last year.
For the first quarter of 1995, the Company reported a consolidated net loss
of $26.4 million compared to a consolidated net loss of $2.5 million for the
first quarter of 1994. The consolidated net loss per share was $0.29 for the
current year period as compared to a $0.06 net loss per share last year.
For the quarter ended April 1, 1995, net sales for the prescription drugs,
health and beauty care segment increased 9.4% from the prior year period while
same store sales increased 7.4%, as compared to an increase of 7.0% in 1994.
Sales in both front store and pharmacy businesses were very strong, especially
in third party prescription and private label merchandise sales. Gross margin as
a percentage of net sales for this segment declined for the quarter, reflecting
the impact of the proportionate increase in the lower margined pharmacy
business. This segment's share of consolidated net sales in the first quarter of
1995 and 1994 was 45.3% and 43.3%, respectively.
Net sales for the apparel segment decreased 1.1% in the first quarter of
1995 compared to the prior year period. Same store sales decreased 6.8% compared
to an increase of 3.0% in 1994, reflecting the timing of Easter and
disappointing results at Marshalls, which continues to be adversely affected by
increased competition. Same store sales at Wilsons improved, with positive
trends evident in its basics and accessories categories. Sales at Bob's
increased significantly due to the rapid expansion of the chain. Higher
markdowns taken in this segment as compared to last year resulted in a decrease
in gross margin. For the first quarter of 1995, this segment represented 27.5%
of consolidated net sales as compared to 29.1% in the same period last year.
Net sales for the footwear segment, which is especially impacted by the
Easter holiday, decreased by 3.4% for the quarter ended April 1, 1995 compared
to the same period in 1994. This segment reported a 5.9% decrease in same store
sales during the first quarter of 1995 as compared to a 3.0% increase for the
comparable prior year period, which included Easter. Footaction experienced
strong sales growth due to the popularity of several new athletic shoe styles.
Sales declines were noted, however, at Meldisco and Thom McAn due to the shift
in the holiday calendar. Gross margin as a percentage of net sales improved as
higher initial markon was achieved at all businesses in the segment, coupled
with lower markdowns at Meldisco and Footaction. For the first quarter of 1995,
this segment represented 14.7% of consolidated net sales, compared to 16.0% for
the first quarter of 1994.
(Continued)
9
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales in the toys and home furnishings segment increased 12.8% in the
first quarter of 1995 as compared to the prior year period, despite the timing
of the Easter selling period. Same store sales increased 0.7% for the quarter
compared to an increase of 6.4% in the first quarter of last year. Sales growth
in this segment occurred principally due to strong video software and male
action figure sales at Kay-Bee and continued expansion at Linens 'n Things.
Gross margin as a percentage of net sales declined from the prior year due to
higher markdowns at Kay-Bee and Linens 'n Things, offset by improvements at This
End Up. This segment's net sales for the first quarter of 1995 represented 12.5%
of the consolidated total as compared to 11.6% in 1994.
Cost of goods sold, buying and warehousing costs as a percentage of
consolidated net sales was 67.7% in the first quarter of 1995, compared to 66.4%
in 1994. The increase resulted primarily from a change in sales mix toward lower
margined categories, offset in part by lower markdowns.
Store operating, selling, general and administrative expenses were 31.3% of
consolidated net sales for the first quarter of 1995 compared to 31.2% in the
prior year quarter. The increase was due primarily to the absence of holiday
sales, which hampered the Company's ability to fully leverage its fixed costs
despite its strong expense control efforts. Depreciation and amortization
expense as a percentage of consolidated net sales was 2.4% for the first quarter
of 1995 as compared to 2.2% in the 1994 quarter, also reflecting the effect of
the timing of holiday sales.
Net interest expense totalled $8.6 million for the first quarter of 1995 as
compared to $4.1 million in the first quarter of 1994. The increase in 1995
reflected the higher level of short-term borrowings as well as increased
interest rates.
Minority interests in net earnings for the first quarter of 1995 were 0.1%
of consolidated net sales versus 0.2% in the first quarter of 1994 and are based
on the profitability of the related operations.
The Company's effective tax rate for the quarter was 44.5%, compared to
32.7% in the first quarter of 1994. The higher effective tax rate in 1995 is due
to the relative mix of our businesses and the incomparability of earnings
between the two periods.
Financial Condition and Liquidity
Inherent in the seasonality of the specialty retailing business are
cyclical buildups of inventory prior to peak selling periods, the most
significant of which are Christmas, Palm and Easter Sundays, and Back-to-School.
Although the Company finances its growth in operations and working capital
requirements primarily through internally generated funds, short-term borrowings
are also used to finance these seasonal inventory buildups. The short-term
borrowings reach a peak in the Fall with the inventory buildup in anticipation
of the Christmas selling season.
For the three months ended April 1, 1995, cash and cash equivalents
decreased $28.8 million to $88.3 million as compared to an increase of $32.3
million to $113.2 million for the first three months of 1994. The Company had
short term borrowings of $760.2 million outstanding at April 1, 1995 and $494.0
million at April 2, 1994. The increase in the level of short-term borrowings was
due primarily to the seasonal inventory buildup, as well as maintenance of
higher inventories for new stores and an expansion to larger store formats at
several divisions.
Net accounts receivable decreased by $7.6 million for the three months
ended April 1, 1995 as compared to a decrease of $7.2 million for the three
months ended April 2, 1994. The decrease in 1995 reflected the timing of holiday
sales and the related effect on charge card receivables and the timing of
payments from third party payors and landlords.
(Continued)
10
MELVILLE CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended April 1, 1995, inventories increased $203.3
million to $2.3 billion. For the three months ended April 2, 1994, inventories
increased $193.8 million to $2.1 billion. The larger increase in 1995 is
attributed to the pre-holiday inventory buildup, as well as the relatively
higher stock levels required for the Company's new stores and larger store
formats and lower LIFO reserves.
Prepaid expenses increased $6.6 million in the first three months of 1995
as compared to a decrease of $2.0 million in 1994. The increase in 1995 is due
mostly to higher levels of prepaid interest related to increased commercial
paper borrowings. The decrease in 1994 was due primarily to decreased deferred
taxes related to the utilization of reserves established in connection with the
strategic realignment charge recorded in the fourth quarter of 1992.
The decrease in accounts payable and accrued expenses was $152.7 million
for the three months ended April 1, 1995, as compared to a decrease of $65.6
million in 1994. The larger decrease in 1995 was primarily due to the timing of
payments and lower tax accruals resulting from an increased taxable loss.
Capital additions of $63.0 million and $64.3 million in the first three
months of 1995 and 1994, respectively, represented expenditures primarily for
improvements to new and existing leased store locations, store equipment,
information systems and distribution and office facilities.
11
REVIEW BY INDEPENDENT AUDITORS
The April 1, 1995 and April 2, 1994 consolidated condensed financial statements
included in this filing on Form 10-Q have been reviewed by KPMG Peat Marwick
LLP, independent auditors, in accordance with established professional standards
and procedures for such a limited review.
The report of KPMG Peat Marwick LLP, commenting on their review, is included
herein as Part I -- Exhibit 1.
12
Part 1 - Exhibit 1
Independent Auditors' Review Report
The Board of Directors and Shareholders of
Melville Corporation:
We have reviewed the consolidated condensed balance sheets of Melville
Corporation and subsidiary companies as of April 1, 1995 and April 2, 1994, and
the related consolidated condensed statements of operations and cash flows for
the first quarter periods ended April 1, 1995 and April 2, 1994. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with general accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Melville Corporation and subsidiary
companies as of December 31, 1994 and the related consolidated statements of
earnings, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated February 16, 1995. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of December 31, 1994, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/S/ KPMG Peat Marwick LLP
New York, New York
April 25, 1995
13
Part II. -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K
a)
EXHIBIT INDEX
Exhibit
-------
11 Computation of Per Share Earnings
15 Letter re: Unaudited Interim Financial Information
27 Financial Data Schedules
b) Reports on Form 8-K -- There were no reports on Form 8-K filed for the
three months ended April 1, 1995.
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.
MELVILLE CORPORATION
(REGISTRANT)
----------------------------
Gary L. Crittenden
Senior Vice President
Corporate Development and
Acting Chief Financial Officer
Date:
---------------
14
Part II. -- OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K
a)
EXHIBIT INDEX
Exhibit
-------
11 Computation of Per Share Earnings
15 Letter re: Unaudited Interim Financial Information
27 Financial Data Schedule
b) Reports on Form 8-K -- There were no reports on Form 8-K filed for the
three months ended April 1, 1995.
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.
MELVILLE CORPORATION
(REGISTRANT)
/S/ GARY L. CRITTENDEN
-----------------------
Gary L. Crittenden
Senior Vice President
Corporate Development and
Acting Chief Financial Officer
Date: May 12, 1995
14