FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________
Commission File No. 0-11682
S & K FAMOUS BRANDS, INC.
................................................................................
(Exact name of registrant as specified in its charter)
Virginia 54-0845694
............................... ....................................
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11100 West Broad Street, P. O. Box 31800, Richmond, Virginia 23294-1800
................................................................................
(Address of principal executive offices)
Registrant's telephone number, including area code: (804) 346-2500
....................
Not Applicable
................................................................................
Former name, former address and former fiscal year, if changed
since last report.
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_____
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of August 1, 1998.
5,074,113 shares of Common Stock, $0.50 par value
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
S & K FAMOUS BRANDS, INC.
Statements of Income
(In thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales........................................ $ 33,852 $ 30,788 $ 70,961 $ 64,248
Cost of sales ................................... 17,872 16,407 37,189 33,980
------------ ------------ ------------ ------------
Gross profit .................................... 15,980 14,381 33,772 30,268
Other costs and expenses:
Selling, general and administrative .......... 13,588 12,434 28,100 25,822
Interest...................................... 186 129 295 212
Depreciation and amortization ................ 688 579 1,340 1,147
Other, net ................................... (38) (37) (41) (63)
------------ ------------ ------------ ------------
Income before income taxes ...................... 1,556 1,276 4,078 3,150
Provision for income taxes ...................... 591 485 1,550 1,197
------------ ------------ ------------ ------------
Net income ...................................... $ 965 $ 791 $ 2,528 $ 1,953
============ ============ ============ ============
Net income per common share:
Basic......................................... $ 0.19 $ 0.16 $ 0.50 $ 0.39
============ ============ ============ ============
Diluted....................................... $ 0.19 $ 0.15 $ 0.49 $ 0.38
============ ============ ============ ============
Weighted average common shares
outstanding - basic........................... 5,076 5,019 5,052 5,043
============ ============ ============ ============
Weighted average common shares outstanding
including dilutive potential common shares....... 5,181 5,104 5,160 5,113
============ ============ ============ ============
See Notes to Financial Statements.
2
S & K FAMOUS BRANDS, INC.
Balance Sheets
(In thousands, except per share amounts)
(unaudited)
August 1, July 26, January 31,
1998 1997 1998
-------------- ------------- --------------
Assets
Current assets:
Cash.................................................... $ 482 $ 417 $ 593
Accounts receivable..................................... 399 503 554
Merchandise inventories................................. 48,382 42,179 43,896
Prepaid income taxes.................................... 421 -- --
Other current assets.................................... 2,288 2,276 3,170
-------------- ------------- --------------
Total current assets................................ 51,972 45,375 48,213
Property and equipment, at cost:
Land and buildings...................................... 7,250 5,123 6,856
Furniture, fixtures and equipment ...................... 13,710 11,979 12,858
Leasehold improvements.................................. 14,540 12,758 13,853
-------------- ------------- --------------
35,500 29,860 33,567
Less: Accumulated depreciation and amortization........ 16,776 14,973 15,734
-------------- ------------- --------------
18,724 14,887 17,833
Other assets ............................................. 3,660 3,164 3,400
-------------- ------------- --------------
$ 74,356 $ 63,426 $ 69,446
============== ============= ==============
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt ................... $ 180 $ 180 $ 180
Accounts payable ....................................... 4,130 3,776 7,561
Accrued compensation and related items.................. 1,014 1,062 2,592
Current and deferred income taxes....................... -- 114 983
Other current liabilities............................... 1,601 1,428 1,897
-------------- ------------- --------------
Total current liabilities......................... 6,925 6,560 13,213
Industrial Development Revenue Bond....................... 1,890 2,070 1,980
Long-term debt............................................ 11,374 7,189 3,323
Deferred income taxes..................................... 1,542 1,225 1,409
Commitments
Shareholders' equity:
Preferred stock, $1 par value; authorized shares, 500;
issued and outstanding shares, none............... -- -- --
Common stock, $.50 par value, authorized shares,
10,000; issued and outstanding shares, 5,074,
4,998 and 5,014, respectively....................... 2,537 2,499 2,507
Capital in excess of par value.......................... 7,634 7,155 7,232
Notes receivable--Stock Purchase Loan Plan.............. (1,171) (1,341) (1,315)
Retained earnings....................................... 43,625 38,069 41,097
-------------- ------------- --------------
52,625 46,382 49,521
-------------- ------------- --------------
$ 74,356 $ 63,426 $ 69,446
============== ============= ==============
See Notes to Financial Statements.
3
S & K FAMOUS BRANDS, INC.
Statements of Cash Flows
Increase (Decrease) in Cash
(In thousands)
(unaudited)
Six Months Ended
-------------------------------------------
August 1, July 26,
1998 1997
----------------- ------------------
Cash flows from operating activities:
Net income...................................................... $ 2,528 $ 1,953
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization................................ 1,550 1,330
Loss on property dispositions, (net)......................... 54 43
Other........................................................ 45 101
Changes in assets and liabilities:
Accounts receivable....................................... 155 (105)
Inventories............................................... (4,486) (668)
Other current assets...................................... 882 19
Other assets.............................................. (260) (231)
Accounts payable and accrued expenses..................... (5,199) (3,066)
Income taxes and deferred income taxes.................... (892) (1,203)
----------------- ------------------
Net cash used for operating activities.......................... (5,623) (1,827)
----------------- ------------------
Cash flows from investing activities:
Capital expenditures............................................ (2,501) (1,505)
Proceeds from property dispositions............................. 6 --
----------------- ------------------
Net cash used for investing activities.......................... (2,495) (1,505)
----------------- ------------------
Cash flows from financing activities:
Net borrowings under revolving bank lines of credit............. 8,006 4,068
Proceeds from exercise of stock options......................... 234 --
Paydown of borrowings under Stock Purchase Loan Plan............ 118 --
Reduction of long-term debt..................................... (90) (90)
Repurchase of common stock...................................... (261) (766)
----------------- ------------------
Net cash provided by financing activities....................... 8,007 3,212
----------------- ------------------
Net decrease in cash............................................... (111) (120)
Cash at beginning of period........................................ 593 537
----------------- ------------------
Cash at end of period.............................................. $ 482 $ 417
================= ==================
Supplemental cash flow information:
Cash paid during the period for:
Interest..................................................... $ 261 $ 193
Income taxes................................................. 2,512 2,413
See Notes to Financial Statements.
4
S & K FAMOUS BRANDS, INC.
Notes to Financial Statements
(unaudited)
A. Accounting Policies
The accompanying unaudited interim financial statements have been prepared
by the Company in accordance with the regulations of the Securities and Exchange
Commission in regard to quarterly reporting. In the opinion of the Company, the
statements include all adjustments, consisting only of normal recurring
adjustments, which are necessary for a fair representation of the financial
position and results of operations for interim periods.
B. Interim Results of Operations
The Company's business is highly seasonal, with peak sales periods
occurring during its fourth fiscal quarter which includes the Christmas season.
The net earnings of any interim quarter are seasonally disproportionate to net
sales since administrative and certain operating expenses remain relatively
constant during the year. Consequently, interim results should not be considered
necessarily indicative of the results for the entire fiscal year.
C. Expansion
Since the end of the first quarter, the Company has opened seven new
stores totaling 24,592 square feet.
S&K Store Locations Date Opened Square Footage
- ---------------------------------- ----------------- --------------
Alabama: Foley June 27, 1998 2,800
Illinois: Decatur May 9, 1998 3,369
Tuscola August 31, 1998 3,015
South Carolina: Anderson May 23, 1998 3,036
Gaffney August 31, 1998 3,422
Tennessee: Knoxville May 22, 1998 5,400
Wisconsin: Johnson Creek May 16, 1998 3,550
The Company closed the store in Slidell, Louisiana during the second quarter,
because it had not met the Company's sales and profitability expectations. The
Company is also in the process of relocating its store located at Northland
Shopping Center in Columbus, Ohio.
5
Item 2. MANAGEMENT'S DISCUSSION AND FINANCIAL REVIEW
Information regarding forward-looking statements.
The statements contained in this quarterly report that are not historical
facts, including statements about management's expectation for fiscal 1999 and
beyond, may be forward-looking statements. The forward-looking statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Readers are
cautioned not to place undue reliance on these forward-looking statements.
Factors that could cause the Company's actual results to differ materially from
management's projections, forecasts, estimates and expectations include, but are
not limited to, those discussed in the Company's Annual Report on Form 10-K.
Three Months and Six Months Ended August 1, 1998 Compared to Three Months and
Six Months Ended July 26, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Statements of Income
as a percentage of net sales for the three months and six months ended August 1,
1998 and July 26, 1997.
Percentage of Net Sales
-------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------------------- -------------------------------
08/01/98 07/26/97 08/01/98 07/26/97
-------------- ------------ ------------ --------------
Net sales............................................ 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales ....................................... 52.8 53.3 52.4 52.9
-------------- ------------ ------------ --------------
Gross profit ........................................ 47.2 46.7 47.6 47.1
Other costs and expenses:
Selling, general and administrative .............. 40.1 40.4 39.6 40.2
Interest ......................................... 0.6 0.4 0.4 0.3
Depreciation and amortization .................... 2.0 1.9 1.9 1.8
Other, net ....................................... (0.1) (0.1) -- (0.1)
-------------- ------------ ------------ --------------
Income before incomes taxes ......................... 4.6 4.1 5.7 4.9
Provision for income taxes .......................... 1.8 1.5 2.2 1.9
-------------- ------------ ------------ --------------
Net income .......................................... 2.8 % 2.6 % 3.5 % 3.0 %
============== ============ ============ ==============
Net sales in the second quarter ended August 1, 1998 increased by 10%, or
$3.1 million, over the same period last year, and reflects the net addition of
20 new stores since July 26, 1997. For the six-month period, net sales increased
by 10%, or $6.7 million, over the same period last year. Comparable store sales
which decreased 1% in the second quarter and were even in the first six months
with last year, have been impacted by opening the majority of new stores in the
last 18 months in existing store markets. During the second quarter, the Company
opened five new stores and closed one. There were 218 stores in operation as of
August 1, 1998, compared to 198 stores at July 26, 1997.
6
Cost of sales in the second quarter of fiscal 1999 was 52.8% of net sales
compared to 53.3% of net sales for the same period last year. This .5% of net
sales decrease was primarily attributable to improved leverage of buying,
occupancy and distribution costs related to the Company's inventory. For the
six-month period, cost of sales was 52.4% of net sales compared to 52.9% last
year. This .5% of net sales reduction was primarily due to lower promotional
markdowns and improved initial mark-up this year.
Selling, general and administrative expenses in the second quarter of
fiscal 1999 were 40.1% of net sales compared to 40.4% of net sales for the
second quarter of fiscal 1998. For the six-month period, selling, general and
administrative expenses were 39.6% of net sales compared to 40.2% of net sales
last year. These decreases were due to improved expense leverage and increased
net alterations income, offset in part by higher store occupancy costs. Over the
last 18 months the Company has opened the majority of its new stores in existing
markets, resulting in greater leveraging of various selling, general and
administrative expenses.
Interest expense in the second quarter of fiscal 1999 was .6% of net sales
compared to .4% of net sales for the second quarter of fiscal 1998. For the
six-month period, interest expense was .4% of net sales compared to .3% of net
sales last year. These increases were primarily attributable to higher average
borrowings this year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operating activities, including capital
expenditures for the opening of new stores, from internally generated funds and
from bank borrowings. Through the first six months of fiscal 1999, the Company
opened 11 new S&K stores, closed four stores (one of which was a relocation) and
remodeled ten others. By Thanksgiving 1998, the Company plans to have opened 10
to 14 additional new stores and to have remodeled several others. The Company
believes that its sources of liquidity and capital resources will continue to be
sufficient to fund its operations and capital expenditures.
Operating activities during the first six months of fiscal years 1999 and
1998 used net cash of $5.6 million and $1.8 million, respectively. This
fluctuation was primarily attributable to the timing of inventory purchases.
Net cash used in investing activities in fiscal years 1999 and 1998 was
primarily for the purpose of store expansion and remodelings. Capital
expenditures for the first six months of fiscal years 1999 and 1998 approximated
$2.5 million and $1.5 million, respectively. In the first six months of fiscal
1999, the Company opened 11 new stores and remodeled ten others. For the same
period last year, the Company opened eight new stores and remodeled 10 others.
Financing activities for the first six months of fiscal years 1999 and
1998 provided net cash of approximately $8.0 million and $3.2 million,
respectively. Financing activities primarily relate to fluctuations in the
borrowing levels under the Company's revolving credit agreements which have an
aggregate borrowing capacity of $30.0 million. Additionally, the Company used
approximately $261,000 and $766,000 in fiscal years 1999 and 1998, respectively,
for the repurchase of its common stock. As of August 1, 1998, the Company had
net unused commitments of approximately $19.4 million under its revolving credit
agreements.
OTHER MATTERS
Year 2000
Since 1997, the Company has been following a plan designed to ensure that
all of its computer systems will be Year 2000 compliant in advance of December
31, 1999. This plan incorporates the Company's mainframe hardware and backoffice
systems, personal computers, point of sale equipment, distribution center
systems, phone and security systems and other non-critical applications.
Ensuring Year 2000 compliance is currently expected to require replacement of
certain hardware and modifications to existing software costing approximately
$100,000. The Company has tested Year 2000 changes as system modifications have
been completed and brought in line. The Year 2000 issue may impact vendors that
provide products or services to the Company. The Company has circulated a
business partner survey which will assist it in assessing vendors' readiness and
enable the Company to prepare contingency plans if needed.
7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the Company's shareholders was held on May 28,
1998.
(b) & (c) At the annual meeting, the shareholders elected eight directors and
ratified the selection of independent accountants. The results of the
voting were as follows:
Election of Directors
Director For Withheld Abstain
------------------------ ------------- -------- -------
Stuart C. Siegel 4,891,173 7,665 0
Robert L. Burrus, Jr. 4,886,773 12,065 0
Donald W. Colbert 4,891,173 7,665 0
Selwyn S. Herson 4,888,173 10,665 0
Andrew M. Lewis, Ph.D. 4,888,573 10,265 0
Steven A. Markel 4,888,173 9,665 0
Troy A. Peery, Jr. 4,888,173 10,665 0
Marshall B. Wishnack 4,888,173 10,665 0
Ratification of PricewaterhouseCoopers LLP as Independent Accountants
For Against Abstain
--------- ------- -------
4,895,118 1,600 2,120
The SEC has adopted Rule 14a-4(c) under the Securities Exchange
Act of 1934, as amended, which regulates when proxies may confer discretionary
authority to vote on shareholder proposals which have not been included in the
Company's proxy statement for its annual meeting. The persons named in the
Company's proxy for the 1999 Annual Meeting of Shareholders will be entitled to
exercise the discretionary voting power conferred by such proxy under the
circumstances specified in Rule 14a-4(c), including with respect to proposals
received by the Company after February 24, 1999.
8
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) a. Financial Data Schedule (quarter ended August 1,
1998)
b. Amended and restated Financial Data Schedules for
fiscal years ended January 1998, 1997 and 1996 and
for the related three quarters of fiscal years 1998
and 1997.
(b) There were no reports filed on Form 8-K during the three months
ended August 1, 1998.
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.
S & K FAMOUS BRANDS, INC.
-------------------------
(Registrant)
Date: September 2, 1998 /s/ Robert E. Knowles
----------------- -----------------------------
Robert E. Knowles
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer)
Date: September 2, 1998 /s/ Janet L. Jorgensen
----------------- -----------------------------
Janet L. Jorgensen
Vice President and Controller
(Principal Accounting Officer)
9