UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
--------- --------
Commission file number
0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1100630
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3375 Mitchell Lane
Boulder, Colorado 80301-2244
(Address of principal executive offices, including zip code)
(303) 440-5220
(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 ( )
As of November 9, 2000, there were 23,146,539 shares outstanding of the
Registrant's Common Stock (par value $0.001 per share).
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheet
September 30, 2000 (Unaudited) and January 1, 2000 3
Consolidated Statement of Operations and Comprehensive Income (Unaudited)
Three and Nine Months Ended September 30, 2000 and October 2, 1999 4
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 30, 2000 and October 2, 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WILD OATS MARKETS, INC.
Consolidated Balance Sheet
(in thousands, except share data)
September 30, January 1,
2000 2000
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 11,378 $ 21,877
Accounts receivable (less allowance 2,910 2,159
for doubtful accounts of $321 and
$259, respectively)
Inventories 55,447 51,412
Income tax receivable 333 520
Prepaid expenses and other current assets 2,250 2,424
Deferred income taxes 1,344 1,775
------------ -----------
Total current assets 73,662 80,167
Property and equipment, net 173,803 156,156
Long-term equity investment 228 1,500
Intangible assets, net 117,493 108,734
Deposits and other assets 4,012 4,072
------------ -----------
$ 369,198 $ 350,629
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 49,406 $ 48,048
Accrued liabilities 18,757 30,381
Current portion of debt and capital leases 12,375 22,709
------------ -----------
Total current liabilities 80,538 101,138
Long-term debt and capital leases 113,631 80,328
Deferred income taxes 4,660 1,185
Other long-term obligations 6,212 2,591
------------ -----------
205,041 185,242
------------ -----------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000
shares authorized; no shares issued and
outstanding
Common stock, $0.001 par value; 60,000,000
shares authorized; 23,119,994 and 22,992,437
shares issued and outstanding 23 23
Additional paid-in capital 149,720 148,307
Retained earnings 14,287 16,656
Accumulated other comprehensive income 127 401
------------ -----------
Total stockholders' equity 164,157 165,387
------------ -----------
$ 369,198 $ 350,629
============ ===========
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
WILD OATS MARKETS, INC.
Consolidated Statement of Operations and Comprehensive Income
(in thousands, except per-share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, October 2, September 30, October, 2
2000 1999 (1) 2000 1999 (1)
Sales $ 207,201 $ 186,522 $ 631,214 $ 519,372
Cost of goods sold and occupancy costs 144,947 128,557 436,098 360,257
----------- ----------- ----------- -----------
Gross profit 62,254 57,965 195,116 159,115
Operating expenses:
Direct store expenses 48,412 40,076 142,609 111,045
Selling, general and administrative
expenses 8,348 7,388 24,546 20,375
Pre-opening expenses 1,018 650 2,916 2,262
Restructuring charges 645 22,701 11,538
----------- ----------- ----------- -----------
Income from operations 4,476 9,206 2,344 13,895
Interest expense, net 2,315 1,696 6,071 2,654
----------- ----------- ----------- -----------
Income (loss) before income taxes 2,161 7,510 (3,727) 11,241
Income tax expense (benefit) 1,086 2,628 (1,356) 2,926
----------- ----------- ----------- -----------
Net income (loss) before cumulative
effect of change in accounting principle
Cumulative effect of change in accounting
principle, net of tax 1,075 4,882 (2,371) 8,315
----------- ----------- ----------- -----------
(281)
Net income (loss) 1,075 4,882 (2,371) 8,034
----------- ----------- ----------- -----------
Other comprehensive income (loss):
Foreign currency translation
adjustment, net (202) 216 (270) 640
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 873 $ 5,098 $ (2,641) $ 8,674
============ =========== =========== ============
Basic net income (loss) per common share:
Net income (loss) before cumulative
effect of change in accounting $ 0.05 $ 0.21 $ (0.10) $ 0.36
principle
Cumulative effect of change in accounting
principle, net of tax (0.01)
----------- ----------- ----------- -----------
Net income (loss) $ 0.05 $ 0.21 $ (0.10) $ 0.35
============ =========== =========== ============
Diluted net income (loss) per common share:
Net income (loss) before cumulative
effect of change in accounting $ 0.05 $ 0.21 $ (0.10) $ 0.35
principle
Cumulative effect of change in accounting
principle, net of tax (0.01)
----------- ----------- ----------- -----------
Net income (loss) $ 0.05 $ 0.21 $ (0.10) $ 0.34
============ =========== =========== ============
Average common shares outstanding 23,102 22,884 23,048 22,759
Dilutive effect of stock options 312 732 595
----------- ----------- ----------- -----------
Average common shares outstanding,
assuming dilution 23,414 23,616 23,048 23,354
============ =========== =========== ============
(1) Restated for poolings of interests.
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
WILD OATS MARKETS, INC.
Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended
September 30, October 2,
2000 1999(1)
Cash Flows from Operating Activities
Net income (loss) $ (2,371) $ 8,034
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 18,691 25,027
Restructuring charges 22,701 2,157
Gain on Sale of Assets (529)
Deferred tax benefit 1,577 464
Change in assets and liabilities (net of acquisitions):
Inventories (4,466) (6,110)
Receivables and other assets (1,345) (743)
Accounts payable 1,393 8,900
Accrued liabilities (9,681) 1,785
---------- ----------
Net cash provided by operating activities 25,970 39,514
---------- ----------
Cash Flows from Investing Activities
Capital expenditures (46,296) (38,249)
Proceeds from sale of assets 3,227
Payment for purchase of acquired entities, net of cash acquired (16,791) (65,555)
Long-term equity investment (38)
---------- ----------
Net cash used by investing activities (59,898) (103,804)
---------- ----------
Cash Flows from Financing Activities
Net borrowings under line-of-credit agreement 24,495 80,000
Proceeds from notes payable and long-term debt 1,334
Repayments on notes payable, long-term debt & capital leases (1,802) (5,536)
Proceeds from issuance of common stock, net 745 1,849
Distributions to stockholders of pooled businesses (4,534)
---------- ----------
Net cash provided by financing activities 23,438 73,113
---------- ----------
Effect of exchange rate changes on cash (9) 428
---------- ----------
Net increase (decrease) in cash and cash equivalents (10,499) 9,251
Cash and cash equivalents at beginning of period 21,877 11,389
---------- ----------
Cash and cash equivalents at end of period $ 11,378 $ 20,640
========== ==========
Non-Cash Investing and Financing Activities
Stock received in exchange for services $ 750
=========
Non-cash adjustment to purchase price for Nature's acquisition $ 2,090
==========
(1) Restated for poolings of interests.
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
WILD OATS MARKETS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The consolidated balance sheet as of September 30, 2000, the
consolidated statement of operations for the three and nine months
ended September 30, 2000 and October 2, 1999, as well as the
consolidated statement of cash flows for the nine months ended
September 30, 2000 and October 2, 1999 have been prepared without an
audit. In the opinion of management, all adjustments, consisting only
of normal, recurring adjustments necessary for a fair presentation
thereof, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
financial statements and notes thereto included in the Company's 1999
Annual Report to Stockholders. The results of operations for interim
periods presented are not necessarily indicative of the operating
results for the full year.
2. New Accounting Pronouncements
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of
Start-Up Activities. SOP 98-5 provides guidance on how entities should
account for pre-opening costs, pre-operating costs, organization costs
and start-up costs. SOP 98-5 requires that the costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998, and the initial application
should be reported as a cumulative effect of a change in accounting
principle. The Company adopted SOP 98-5 in fiscal 1999 and recorded
approximately $281,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of 1999. The Company
expects SOP 98-5 to have no material effect on its ongoing results of
operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an
asset or liability measured at its fair value. FAS No. 133 also
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued FAS No. 137 which defers the
effective date of FAS No. 133 to fiscal years beginning after June 15,
2000. The Company will adopt FAS No. 137 in the first quarter of fiscal
2001, but does not expect such adoption to materially affect financial
statement presentation.
3. Business Combination
In May 2000, the Company acquired the operations of two existing
natural foods supermarkets in Escondido and Hemet, California. The
purchase price for this acquisition aggregated $13.7 million in cash.
The acquisition was accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $12.7
million was allocated to goodwill, which is being amortized on a
straight-line basis over 40 years.
-6-
4. Earnings Per Share
Earnings per share are calculated in accordance with the provisions of
FAS No. 128, Earnings Per Share. FAS No. 128 requires the Company to
report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted-average number of
common shares outstanding and all dilutive potential common shares
outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period). Antidilutive stock options of
1,492,808 and 136,056 for the nine months ended September 30, 2000 and
October 2, 1999, respectively, were not included in the earnings per
share calculations.
5. Restructuring Charges
During the three months ended July 1, 2000, the Company's management
made certain decisions relating to the strategic repositioning of the
Company's operations which resulted in a pretax restructuring charge of
$22.7 million. These decisions included (1) the closure of three stores
during the second quarter of 2000 ($4.7 million); (2) the planned sale
or closure of seven stores during the remainder of 2000 ($9.9 million);
(3) exit costs of previously closed or abandoned sites ($5.6 million);
and (4) the discontinuation of e-commerce activities ($2.5 million).
Components of the restructuring charge consist primarily of abandonment
of fixed and intangible assets ($15.3 million); non-cancelable lease
obligations into the year 2003 ($5.3 million); and write-down of the
Company's long-term equity investment in an e-commerce business partner
due to asset impairment ($2.1 million). Substantially all of the
restructuring charges are non-cash expenses. In conjunction with the
restructuring charge, the Company recorded a liability of $4.9 million
for non-cancelable lease obligations, of which $4.2 million remained as
of September 30, 2000.
Subsequent to September 30, 2000, the Company's management made
certain decisions relating to the strategic repositioning of the
Company's operations which will result in additional pre-tax
restructuring charges of approximately $20 million in the fourth
quarter. These decisions included the planned sale or closure of as
many as eight additional stores during the remainder of 2000 and into
2001. Components of the restructuring charges will consist primarily
of the abandonment of fixed and intangible assets (approximately $15
million) and noncancelable lease obligations through the year 2002
(approximately $5 million). Substantially all of the restructuring
charges will be non-cash expenses.
6. Long-Term Debt
As of August 1, 2000, the Company renewed and extended its credit
facility from $120.0 million to $157.5 million. The facility may be
further increased to $170.0 million, assuming available bank
commitments. The facility, as increased and amended, consists of two
separate lines of credit, one as a revolving line of $111.2 million
and the remainder as a term loan, each with a three-year term expiring
in 2003. The revolving line bears interest, at the Company's option,
at the prime rate or LIBOR plus 1.4%. The term loan bears interest at
a rate determined by the type of interest rate protection instrument
the Company purchases. The credit agreement includes certain financial
and other covenants, as well as restrictions on payments of dividends.
As of September 30, 2000, the Company was in violation of one
financial covenant. In order to allow the Company and its lenders to
complete an amendment to the credit facility, the Company obtained a
waiver of the violation of the covenant through December 1, 2000, from
all necessary lenders in exchange for a short-term limit on borrowings
not to exceed $132 million and other short-term restrictions. The
Company is currently negotiating an amendment to certain of the
financial covenants in exchange for payment of an amendment fee and an
increase in interest rates. The amendment, when negotiated, may also
contain an additional covenant for capital expenditures. As of
September 30, 2000, there were $73.4 million in borrowings outstanding
under the revolving facility and $46.3 million in borrowings
outstanding under the term loan.
-7-
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
This report on Form 10-Q contains certain forward-looking statements
regarding our future results of operations and performance. Important factors
that could cause differences in results of operations include, but are not
limited to, the success of the Company's currently proposed strategic
repositioning, the availability and integration of acquisitions, the timing and
execution of new store openings, relocations, remodels, sales and closures, the
timing and impact of promotional and advertising campaigns, the impact of
competition, changes in product supply, changes in management information needs,
changes in customer needs and expectations, governmental and regulatory actions,
and general industry or business trends or events, changes in economic or
business conditions in general or affecting the natural foods industry in
particular, and competition for and the availability of sites for new stores and
potential acquisition candidates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cautionary Statement Regarding
Forward-Looking Statements."
Overview
Store openings, closings, remodels, relocations and acquisitions. In the
third quarter of 2000, we opened four new stores in Laguna Niguel, California;
Cincinnati and Cleveland, Ohio; and Portland, Oregon, closed two stores in Santa
Barbara, California and San Antonio, Texas (a Vitamin Expo vitamin store), and
sold three stores in West Hollywood, California; Norwalk, Connecticut; and Santa
Fe, New Mexico for an aggregate purchase price of approximately $2.0 million. To
date in the fourth quarter of 2000, we have opened one new store in Bend, Oregon
and closed five stores in Mission Viejo, California; Framingham, Massachusetts;
Madison, New Jersey; Santa Fe, New Mexico; and San Antonio, Texas. We plan to
open one additional store in the remainder of 2000 and may close or sell as many
as seven stores, as previously announced.
As has been our past practice, we will continue to evaluate the
profitability, strategic positioning, impact of potential competition on and
sales growth potential of all of our stores on an ongoing basis. We may, from
time to time, make decisions regarding closures, disposals, relocations or
remodels in accordance with such evaluations. As a result of such evaluations,
in the third quarter of 2000 we closed two stores and sold three stores. To date
in the fourth quarter, we have closed five stores identified for closure as part
of our strategic repositioning, and are considering the sale or closure of as
many as seven more stores in the fourth quarter of 2000 and/or first half of
2001.
In the second quarter of 2000, the Company undertook an assessment of its
inventory of operating and vacant properties as part of a strategic
repositioning of the Company. We made certain decisions related to the strategic
repositioning of our operations which identified as many as eight stores to be
sold or closed and resulted in a pre-tax restructuring charge of $22.7 million.
In conjunction with the restructuring charge, the Company recorded a liability
of $4.9 million for noncancelable lease obligations, of which $4.2 million
remained as of September 30, 2000. In the fourth quarter of 2000, as part of
such ongoing strategic repositioning, the Company has further determined that it
will close or sell up to an additional eight stores whose performance does not
meet Company expectations. As a result of this decision to close or sell
additional stores, the Company expects to record an additional pre-tax
restructuring charge of approximately $20 million in the fourth quarter of 2000.
As the result of recent research, the Company has expanded the scope of its
strategic repositioning and plans to spend up to $20 million in the fourth
quarter of 2000 and through the year 2001 for additional staff training,
advertising, store and corporate office level staffing and other strategic
initiatives designed to improve our store sales results.
-8-
Our results of operations have been and will continue to be affected by,
among other things, the number, timing and mix of store openings, acquisitions,
relocations or closings. New stores build their sales volumes and refine their
merchandise selection gradually and, as a result, generally have lower gross
margins and higher operating expenses as a percentage of sales than more mature
stores. We anticipate that the new stores opened in 2000 will experience
operating losses for the first six to 12 months of operation, in accordance with
historical trends. Further, acquired stores, while generally profitable as of
the acquisition date, generate lower gross margins and store contribution
margins than our company average due in part to their substantially lower volume
purchasing discounts and to a merchandise mix that may favor lower gross margin
categories. Over time, typically six months, as we sell through the acquired
inventories and are able to realize our volume purchase discounts, we expect
that the gross margin and store contribution margin of the acquired stores will
improve.
Other factors that could cause acquired stores to perform at lower than
expected levels include, among other things, turnover of regional and store
management, disruption of advertising, changes in product mix and delays in the
integration of purchasing programs. Given our current high concentration of
stores acquired or added to our store base in 1999, including the Henry's
Marketplace(R), Nature's, Wild Harvest, and Sun Harvest stores, the Company is
experiencing integration difficulties with some acquired stores that are having
a negative impact on our consolidated results of operations. We expect that
these stores will take substantially longer to show gross margin and store
contribution margin improvements. As part of the Company's strategic
repositioning, we plan to increase advertising expenditures and staffing at some
of our acquired stores to change prior practices that may have contributed to
weaker than expected performance from such stores.
We are actively upgrading, remodeling or relocating many of our older
stores. We remodeled 14 of our older stores during the first nine months of 2000
and plan to remodel or remerchandise as many as seven of our older stores in the
remainder of 2000 with several remodels extending into 2001. Remodels and
relocations typically cause short-term disruption in sales volume and related
increases in certain expenses as a percentage of sales, such as payroll. Delays
in the completion of some remodels has resulted in greater sales disruption than
we had previously anticipated and higher than budgeted costs. Remodels on
average take between 90 and 120 days to complete. We cannot predict whether
sales disruptions and the related impact on earnings may be greater in time or
volume than projected in certain remodeled or relocated stores.
Comparable store sales results. Sales of a store are deemed to be
comparable commencing in the thirteenth full month of operations for new,
relocated and acquired stores. A variety of factors affect our comparable store
sales results, including, among others:
o the opening of stores by us or by our competitors in markets where we
have existing stores
o the relative proportion of new or relocated stores to mature stores
o the timing of advertising and promotional events
o store remodels
o our ability to effectively execute our operating plans, including our
strategic repositioning
o changes in consumer preferences for natural food products
o availability of produce and other seasonal merchandise
o general economic conditions.
Past increases in comparable store sales may not be indicative of future
performance.
-9-
Our comparable store sales results have been negatively affected in the
past by, among other factors, planned cannibalization, which is the loss of
sales at an existing store when we open a new store nearby, resulting from the
implementation of our store clustering strategy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Store format and
clustering strategy." We expect that comparable store sales results will
continue to be negatively affected in 2000 by planned cannibalization due to the
opening of new or relocated stores in several of our existing markets,
including, among others, Phoenix, Arizona; San Diego, California; Kansas City
and St. Louis, Missouri; Portland, Oregon; Albuquerque, New Mexico; Nashville,
Tennessee and Salt Lake City, Utah. For certain stores opened in the second half
of 1999 and in the first three quarters of 2000, we have experienced a higher
degree of cannibalization than in the past in markets where we expected higher
demand for additional stores. As a result of this higher degree of
cannibalization, as well as reduced levels of marketing, delays in remodels,
increased competition in some regions and other factors, comparable store sales
decreased 3% in the third quarter of 2000. We expect comparable store sales
percentage results to decrease further for the remainder of 2000. Certain
stores, such as the Henry's Marketplace(R) format stores, which depend heavily
on produce sales, are more susceptible to sales fluctuations resulting from the
availability and price of certain produce items. In addition, certain stores
faced greater than expected competition both from other natural foods grocery
stores and from increased natural foods offerings in conventional and gourmet
grocery stores, which negatively affected comparable store sales results during
the third quarter. There can be no assurance that comparable store sales for any
particular period will not decrease in the future.
Store format and clustering strategy. We operate two store formats:
supermarket and urban. The supermarket format is generally 15,000 to 35,000
gross square feet, and typically generates higher sales and store contribution
than the urban format stores, which are generally 8,000 to 15,000 gross square
feet. Our profitability has been and will continue to be affected by the mix of
supermarket and urban format stores opened, acquired or relocated and whether
stores are being opened in markets where we have an existing presence. We expect
to focus primarily on opening, acquiring or relocating supermarket format stores
in the future but will consider additional urban stores when appropriate
opportunities arise. As part of our announced strategic repositioning, we intend
to increase the size of our stores over time to an average size of 28,000 to
30,000 square feet. In addition, we have pursued a strategy of clustering stores
in each of our markets to increase overall sales, reduce operating costs and
increase customer awareness. In the past, when we have opened a store in a
market where we have an existing presence, our sales and operating results have
declined at certain of our existing stores in that market. However, over time,
we believe the affected stores generally will achieve store contribution margins
comparable to prior levels on the lower base of sales. Certain new stores opened
in 1999 and in the first three quarters of 2000 have caused a greater degree of
cannibalization than previously expected, and at this time it does not appear
that the store contribution margins at the older, affected stores in these
regions will rebound to their prior levels. In certain existing markets the
sales and operating results trends for other stores may continue to experience
temporary declines related to the clustering of stores. We are currently
reevaluating our clustering strategy in response to greater than expected sales
cannibalization in certain existing markets where we have recently opened new
stores.
We are currently making revisions to our store format and design,
including, among other things, expanding the average size of our suburban format
stores to an average of 28,000 to 30,000 square feet, expanding our selections
of gourmet and crossover products, housewares, gift items, beer and wine, bakery
and floral and redesigning store layouts and signage. We are considering
expanding the Henry's Marketplace(R) farmers' market-style store format as a
second, parallel store format. We believe this format, which is currently
concentrated in the metropolitan San Diego, California area, appeals to a more
value-conscious customer.
-10-
Pre-opening expenses. Pre-opening expenses include labor, rent, utilities,
supplies and certain other costs incurred prior to a store's opening.
Pre-opening expenses have averaged approximately $250,000 to $350,000 per store
historically, although the amount per store may vary depending on the store
format and whether the store is the first to be opened in a market, or is part
of a cluster of stores in that market.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Accounting for Costs of Start-Up Activities.
Statement of Position 98-5 requires that pre-opening costs be expensed as
incurred. Statement of Position 98-5 is effective for fiscal years beginning
after December 15, 1998, and the initial application should be reported as a
cumulative effect of a change in accounting principle. We adopted Statement of
Position 98-5 in fiscal 1999 and recorded approximately $281,000 as a cumulative
effect of a change in accounting principle, net of taxes, during the first
quarter of 1999.
Results of Operations
The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
Three Months Ended Nine Months Ended
Sept 30, 2000 Oct 2, Sept 30, 2000 Oct 2,
1999 1999
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 70.0 68.9 69.1 69.4
------ ------ ------ ------
Gross margin 30.0 31.1 30.9 30.6
Direct store expenses 23.4 21.5 22.6 21.4
Selling, general and administrative expenses 4.0 4.0 3.9 3.9
Pre-opening expenses 0.5 0.3 0.5 0.4
Restructuring charges 0.3 3.6 2.2
------ ------ ------ ------
Income from operations 2.2 4.9 0.4 2.7
Interest expense, net 1.1 0.9 1.0 0.5
------ ------ ------ ------
Income (loss) before income taxes 1.0 4.0 (0.6) 2.2
Income tax expense (benefit) 0.5 1.4 (0.2) 0.6
------ ------ ------- ------
Net income (loss) before cumulative effect 0.5 2.6 (0.4) 1.6
Of change in accounting principles
Cumulative effect of change in accounting 0.1
Principle, net of taxes ------ ------ ------- ------
Net income (loss) 0.5% 2.6% (0.4)% 1.5%
======= ======= ======== =======
Sales
Sales for the three months ended September 30, 2000, increased 11.1% to $207.2
million from $186.5 million for the same period in 1999. Sales for the nine
months ended September 30, 2000 increased 21.5% to $631.2 million from $519.4
million for the same period in 1999. The increase was primarily due to the
opening of nine new stores and relocation of three existing stores in the first
nine months of 2000, as well as the inclusion of 17 acquired stores, eight
stores opened, and five stores relocated in 1999. Comparable store sales
decreased by 3% for the third quarter of 2000, as compared to a 4% increase for
the same period in 1999, as a result of many factors, including higher than
expected cannibalization of sales by new stores in several regions due to the
implementation of our clustering strategy, reduced levels of marketing, delays
in remodels and, in certain regions, increased competition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Comparable Store Sales Results."
-11-
Gross Profit
Gross profit for the three months ended September 30, 2000, increased 7.4% to
$62.3 million from $58.0 million for the same period in 1999. Gross profit for
the nine months ended September 30, 2000 increased 22.6% to $195.1 million from
$159.1 million for the same period in 1999. The increase in gross profit is
primarily attributable to the increase in number of stores operated by the
Company. As a percentage of sales, gross profit for the third quarter of 2000
decreased to 30.0% from 31.1% in the same period in 1999. The decrease is
primarily attributed to acquisition integration difficulties in Portland, Boston
and Texas. Gross profit as a percentage of sales for the nine months ended
September 30, 2000 increased to 30.9% from 30.6% for the same period in 1999.
The increase is attributed to the maturation of the Company's store base and the
Company's increasing volume purchase discounts, as well as implementation of
loss prevention policies.
Direct Store Expenses
Direct store expenses for the three months ended September 30, 2000, increased
20.7% to $48.4 million from $40.1 million for the same period in 1999. Direct
store expenses for the nine months ended September 30, 2000 increased 28.5% to
$142.6 million from $111.0 million for the same period in 1999. The increase in
direct store expenses is attributable to the increase in the number of stores
operated by the Company. As a percentage of sales, direct store expenses for the
three months ended September 30, 2000 increased to 23.4% from 21.5% for the same
period in 1999. As a percentage of sales, direct store expenses for the nine
months ended September 30, 2000 increased to 22.6% from 21.4% for the same
period in 1999. The increase is attributed to the increased number of acquired
and newly-opened stores in late 1999, as well as significant investments that
the Company has made in employee benefit programs, particularly expanded health
insurance offerings.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2000, increased 13.0% to $8.3 million from $7.4 million for the
same period in 1999. Selling, general and administrative expenses for the nine
months ended September 30, 2000 increased 20.5% to $24.5 million from $20.4
million for the same period in 1999. The increase in selling, general and
administrative expenses is primarily the result of additions to the Company's
corporate and regional staffs to support the Company's growth. As a percentage
of sales, selling, general and administrative expenses for the three months
ended September 30, 2000 remained unchanged at 4.0% for the same period in 1999.
As a percentage of sales, selling, general and administrative expenses for the
nine months ended September 30, 2000 remained unchanged at 3.9% for the same
period in 1999. As part of the Company's expanded strategic repositioning, we
expect to spend additional funds on marketing at the national level, as well as
increased corporate and regional support staffs. As a result of these increased
expenditures, we expect that selling, general and administrative expenses will
increase during the fourth quarter of 2000 and in 2001.
Pre-Opening Expenses
Pre-opening expenses for the three months ended September 30, 2000, increased
42.9% to $1.0 million from $700,000 for the same period in 1999. Pre-opening
expenses for the nine months ended September 30, 2000, increased 26.1% to $2.9
million from $2.3 million for the same period in 1999. As a percentage of sales,
pre-opening expenses for the three months ended September 30, 2000 increased to
0.5% from 0.3% for the same period in 1999. As a percentage of sales,
pre-opening expenses for the nine months ended September 30, 2000 increased to
0.5% from 0.4% for the same period in 1999. The increase in pre-opening costs is
the result of the timing of new store openings.
-12-
Restructuring Charges
During the second quarter of 2000, we made certain decisions relating to the
strategic repositioning of our operations which resulted in a pre-tax
restructuring charge of $22.7 million. These decisions included (1) the closure
of three stores during the second quarter of 2000 ($4.7 million); (2) the
planned sale or closure of seven stores during the remainder of 2000 ($9.9
million); (3) exit costs of previously closed or abandoned sites ($5.6 million);
and (4) the discontinuation of e-commerce activities ($2.5 million). Components
of the restructuring charge consist primarily of abandonment of fixed and
intangible assets ($15.3 million); non-cancelable lease obligations into the
year 2003 ($5.3 million); and write-down of the Company's long-term equity
investment in an e-commerce business partner due to asset impairment ($2.1
million). Substantially all of the restructuring charges are non-cash expenses.
In conjunction with the restructuring charge, the Company recorded a liability
of $4.9 million for noncancelable lease obligations of which $4.2 million
remained as of September 30, 2000. In the fourth quarter of 2000, the Company
expanded its strategic repositioning and, as part of such expansion, decided to
close or sell up to an additional eight stores which did not meet expectations.
This decision will result in an additional pre-tax restructuring charge in the
fourth quarter of 2000 of approximately $20 million for abandonment of fixed and
intangible assets and non-cancelable lease obligations through the year 2002.
See "Notes to Consolidated Financial Statements - Note 5 - Restructuring
Charges" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Store openings, closings, remodels, relocations and
acquisitions."
Interest Expense, Net
Net interest expense for the three months ended September 30, 2000, increased
35.3% to $2.3 million from $1.7 million for the same period in 1999. Net
interest expense for the nine months ended September 30, 2000 increased 125.9%
to $6.1 million from $2.7 million for the same period in 1999. As a percentage
of sales, net interest expense for the three months ended September 30, 2000,
increased to 1.1% from 0.9% for the same period in 1999. As a percentage of
sales, net interest expense for the nine months ended September 30, 2000
increased to 1.0% from 0.5% for the same period in 1999. The increase is
primarily attributable to increased borrowings on our line of credit to fund
acquisitions, new stores, relocations and remodels. Interest expense may
increase in the future as a result of increased borrowing and/or an expected
increase in the interest rate under our revolving line of credit. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" below.
Liquidity and Capital Resources
Our primary sources of capital have been cash flow from operations, trade
payables, bank indebtedness, and the sale of equity securities. Primary uses of
cash have been the financing of new store development, new store openings,
relocations, remodels, and acquisitions.
Net cash provided by operating activities was $26.0 million during the
first nine months of 2000 as compared to $39.5 million during the same period in
1999. Cash provided by operating activities decreased during this period
primarily due to a decrease in net income, before depreciation and amortization
expense, and a decrease in accrued liabilities offset by an increase due to the
restructuring charge during the second quarter of 2000. We have not required
significant external financing to support inventory requirements at our existing
and new stores because we have been able to rely on vendor financing for most of
the inventory costs, and we anticipate that vendor financing will continue to be
available for the new store openings.
Net cash used by investing activities was $59.9 million during the first
nine months of 2000 as compared to $103.8 million during the same period in
1999. The decrease is due to the acquisition of 13 stores in the first nine
months of 1999, as compared to the acquisition of two stores in the first nine
months of 2000, partially offset by increased expenditures in the third quarter
of 2000 for new store construction and remodels.
Net cash provided by financing activities was $23.4 million during the
first nine months of 2000 as compared to $73.1 million during the same period in
1999. The decrease reflects lower incremental borrowings under our revolving
line of credit to fund fewer store acquisitions during the first nine months of
2000.
-13-
In the third quarter of 2000, we renewed and increased our existing
revolving credit facility to $157.5 million, which may be further increased at
our request to $170.0 million, assuming available bank commitments. The facility
as increased and amended has two separate lines of credit, a revolving line for
$111.2 million and the remainder in a term loan facility, each with a three-year
term expiring in 2003. The revolving line bears interest, at our option, at
prime rate or LIBOR plus 1.4%. The term loan bears interest at a rate determined
by the type of interest rate protection instrument that the Company purchases.
The credit agreement includes certain financial and other covenants, as well as
restrictions on payments of dividends. As of September 30, 2000, we were in
violation of one financial covenant. In order to allow the company and its
lenders to complete an amendment to the credit facility, we obtained a waiver of
the violation of the covenant through December 1, 2000, from all necessary
lenders under the credit facility, in exchange for a short-term limitation on
borrowings not to exceed $132 million and other short-term restrictions. We are
currently negotiating an amendment to certain of the financial covenants under
the credit facility in exchange for payment of an amendment fee and for an
increase in our current interest rate. The amendment, when negotiated, may also
contain an additional covenant for capital expenditures. As of September 30,
2000, there were $73.4 million in borrowings outstanding under the revolving
facility and $46.3 million in borrowings outstanding under the term loan.
We spent approximately $46.3 million during the first nine months of 2000
for new store construction, development, remodels and maintenance capital
expenditures, exclusive of acquisitions, and anticipate that we will spend $50
to $55 million in 2000 for new store construction, equipment, leasehold
improvements, remodels and maintenance capital expenditures and relocations of
existing stores, exclusive of acquisitions. Our average capital expenditures to
open a leased store, including leasehold improvements, equipment and fixtures,
have ranged from approximately $2.0 million to $3.0 million historically,
excluding inventory costs and initial operating losses. We anticipate that our
average capital expenditures will be $2.5 to $3.5 million in the future, partly
because of increases in the size of new stores and partly because our new store
prototype requires more expensive fixturing. Several stores previously projected
to open in 2000 have been delayed to periods in 2000 later than originally
planned or into 2001 because of delays in landlord turnover of sites and receipt
of permits. Delays in opening new stores may result in increased capital
expenditures and increased pre-opening costs for the site, as well as lower than
planned sales for the Company.
We have an inventory of closed stores with non-cancelable leases for which
we are actively pursuing subtenants. There could be a negative impact on future
cash flows if we are unable to offset the lease costs of these closed stores.
The cost of initial inventory for a new store has historically been
approximately $500,000 to $600,000 and is projected to increase to $600,000 to
$800,000 in the future as a function of the increase in average store size and
the introduction of certain new categories of merchandise, including beer and
wine and housewares; however, we obtain vendor financing for most of this cost.
Pre-opening costs currently are approximately $250,000 to $350,000 per store and
are expensed as incurred. The amounts and timing of such pre-opening costs will
depend upon the availability of new store sites and other factors, including the
location of the store and whether it is in a new or existing market for us, the
size of the store, and the required build-out at the site. Costs to acquire
future stores, if any, are impossible to predict and could vary materially from
the cost to open new stores. There can be no assurance that actual capital
expenditures will not exceed anticipated levels. We believe that cash generated
from operations and funds available under our credit facility will be sufficient
to satisfy the Company's cash requirements, exclusive of additional
acquisitions, through 2000.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded on the balance sheet as either an asset or liability measured at its
fair value. FAS No. 133 also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. In June 1999, the FASB issued FAS No. 137 which defers the
effective date of FAS No. 133 to fiscal years beginning after June 15, 2000. The
Company will adopt FAS No. 137 in the first quarter of fiscal 2001, but does not
expect such adoption to materially affect financial statement presentation.
-14-
Cautionary Statement Regarding Forward-Looking Statements
This Report on Form 10-Q contains "forward-looking statements," within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve
known and unknown risks. Such forward-looking statements include statements as
to the Company's plans to open, acquire or relocate additional stores, the
anticipated performance of such stores, the impact of competition, the amount of
restructuring charges taken in the second and fourth quarters of 2000, the
sufficiency of funds to satisfy the Company's cash requirements through 2000,
our expectations for comparable store sales, our plans for expanding store
format, other elements of our strategic repositioning, levels of
cannibalization, expected levels of direct store expenses, selling, general and
administrative expenses, pre-opening expenses and capital expenditures and other
statements containing words such as "believes," "anticipates," "estimates,"
"expects," "may," "intends" and words of similar import or statements of
management's opinion. These forward-looking statements and assumptions involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, market performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Important factors that could cause
such differences include, but are not limited to, the success of the Company's
proposed strategic repositioning plan, the availability and integration of
acquisitions, the timing and execution of new store openings, relocations,
remodels, sales and closures, the timing and impact of promotional and
advertising campaigns, the impact of competition, changes in product supply,
changes in management information needs, changes in customer needs and
expectations, governmental and regulatory actions, and general industry or
business trends or events, changes in economic or business conditions in general
or affecting the natural foods industry in particular, competition for and the
availability of sites for new stores and potential acquisition candidates, and
factors such as timing of closures and sales of stores. The Company undertakes
no obligation to update any forward-looking statements in order to reflect
events or circumstances that may arise after the date of this Report.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company's exposure to interest rate changes is primarily related to
its variable rate debt issued under its $157.5 million revolving credit
facility. The facility has two separate lines of credit, a revolving line in the
amount of $111.2 million and a term loan in the amount of $46.3 million, each
with a three-year term expiring in 2003. Both bear interest, at our option, at
the prime rate or LIBOR plus 1.4%. As of September 30, 2000, there were $73.4
million in borrowings outstanding under the $111.2 million revolving line of
this facility and $46.3 million in borrowings outstanding under the $46.3
million term note. Because the interest rates on these facilities are variable,
based upon the bank's prime rate or LIBOR, the Company's interest expense and
net income are affected by interest rate fluctuations. If interest rates were to
increase or decrease by 100 basis points, the result, based upon the existing
outstanding debt as of September 30, 2000, would be an annual increase or
decrease of approximately $1.2 million in interest expense and a corresponding
decrease or increase of approximately $761,000 in the Company's net income after
taxes.
-15-
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1998, the Company filed Wild Oats Markets, Inc. v. Plaza
Acquisition, Inc. in United States District Court for the Northern District of
Illinois, Eastern Division, seeking recovery of $300,000 in tenant improvement
allowances owed to the Company by our landlord for the build-out of the
Company's Buffalo Grove, Illinois store. The landlord counterclaimed for $1
million in damages, alleging that we breached covenants requiring construction
to be completed by a certain date and other operating covenants. After the
Company closed the Buffalo Grove store in May 1999, the landlord increased its
counterclaim, including damages for accelerated rent resulting from an alleged
breach of a continuous operations clause in the lease, and diminution in value
of the shopping center. The Company asserted several defenses to the
counterclaim. The court decided that the acceleration of rent clause of the
lease was enforceable, although no determination of damages, if any, was made.
The landlord has presented its expert's report, measuring total damages at $7.4
million, and the Company has filed its own expert's report, asserting that there
are no material damages incurred by the landlord. Trial has been set for
November of 2000.
In February 2000, the Company was named as defendant in Cornerstone III,
LLC v. Wild Oats Markets, Inc., a suit filed in U.S. District Court for the
Eastern District of Missouri by a former landlord who alleged a breach of lease
by the Company. The parties reached a settlement of all claims on September 18,
2000 and the suit was dismissed with prejudice.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
The second paragraph of Note 6 to the Company's financial statements
included in this report is hereby incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
10.1 Amended and Restated Credit Agreement dated as of August 1, 2000 and
August 31, 2000 between the Registrant, Wells Fargo Bank National
Association, as Agent, and certain other lenders specified therein.
27.1 Financial Data Schedule (third quarter 2000)
27.2 Restated Financial Data Schedule (third quarter 1999)
(b) Reports on Form 8-K.
None.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 14th day of November 2000.
Wild Oats Markets, Inc.
By /s/ Mary Beth Lewis
Mary Beth Lewis
Executive Officer, Vice President of Finance, and
Chief Financial Officer
(Principal Financial and Accounting Officer)
-17-