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 October 31, 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 October 31, 1998
5,064,033 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 earnings per share)
(unaudited)
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
October 31, 1998 October 25, October 31, October 25, 1997
1997 1998
----------------- ---------------- ---------------- -----------------
Net sales $ 35,120 $ 33,705 $ 106,081 $ 97,954
Cost of sales 17,852 17,467 55,041 51,447
----------------- ---------------- ---------------- -----------------
Gross profit 17,268 16,238 51,040 46,507
Other costs and expenses:
Selling, general and administrative 15,312 14,422 43,412 40,245
Interest 239 141 533 353
Depreciation and amortization 703 614 2,043 1,761
Other, net (36) (16) (77) (79)
----------------- ---------------- ---------------- -----------------
Income before income taxes 1,050 1,077 5,129 4,227
Provision for income taxes 399 409 1,949 1,606
----------------- ---------------- ---------------- -----------------
Net income $ 651 $ 668 $ 3,180 $ 2,621
================= ================ ================ =================
Net income per common share:
Basic $ 0.13 $ 0.13 $ 0.63 $ 0.52
================= ================ ================ =================
Diluted $ 0.13 $ 0.13 $ 0.62 $ 0.51
================= ================ ================ =================
Weighted average common shares
outstanding - basic 5,067 5,006 5,057 5,031
================= ================ ================ =================
Weighted average common shares outstanding
including dilutive potential shares 5,137 5,122 5,152 5,116
================= ================ ================ =================
See notes to financial statements.
2
S & K FAMOUS BRANDS, INC.
Balance Sheets
(in thousands)
(unaudited)
October 31, October 25, January 31,
1998 1997 1998
-------------- -------------- ---------------
Assets
Current assets:
Cash $ 510 $ 387 $ 593
Accounts receivable 570 833 554
Merchandise inventories 62,790 57,336 43,896
Prepaid income taxes 503 -- --
Other current assets 2,765 2,258 3,170
-------------- -------------- ---------------
Total current assets 67,138 60,814 48,213
Property and equipment, at cost:
Land and buildings 7,169 6,022 6,856
Furniture, fixtures and equipment 13,886 12,647 12,858
Leasehold improvements 14,989 13,330 13,853
-------------- -------------- ---------------
36,044 31,999 33,567
Less: Accumulated depreciation and amortization 17,091 15,314 15,734
-------------- -------------- ---------------
18,953 16,685 17,833
Other assets 3,728 3,329 3,400
-------------- -------------- ---------------
$89,819 $80,828 $69,446
============== ============== ===============
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt $180 $180 $180
Accounts payable.. 13,442 16,792 7,561
Accrued expenses:
Compensation-related items 1,335 1,055 2,592
Current and deferred income taxes -- 82 983
Other current liabilities 1,678 1,759 1,897
-------------- -------------- ---------------
Total current liabilities 16,635 19,868 13,213
Industrial Development Revenue Bond 1,845 2,025 1,980
Long-term debt 16,546 10,532 3,323
Deferred income taxes 1,604 1,264 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, 5,012, 5,066 and 5,066,
respectively
2,532 2,506 2,507
Capital in excess of par value 7,514 7,225 7,232
Notes receivable--Stock Purchase Loan Plan (1,134) (1,328) (1,315)
Retained earnings. 44,277 38,736 41,097
-------------- -------------- ---------------
53,189 47,139 49,521
-------------- -------------- ---------------
$89,819 $80,828 $69,446
============== ============== ===============
See notes to financial statements.
3
S & K FAMOUS BRANDS, INC.
Statements of Cash Flows
Increase (Decrease) in Cash
(in thousands)
(unaudited)
Nine Months Ended
-------------------------------------------
October 31, October 25,
1998 1997
---------------- -----------------
Cash flows from operating activities: $3,180 $2,621
Net income
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization 2,359 2,035
Loss on property dispositions, net 70 104
Other 67 152
Changes in assets and liabilities:
Accounts receivable (16) (435)
Merchandise inventories (18,894) (15,825)
Other current assets 405 37
Other assets (328) (396)
Accounts payable and accrued expenses 4,521 10,288
Income taxes and deferred income taxes (910) (1,197)
---------------- -----------------
Net cash used for operating activities (9,546) (2,616)
---------------- -----------------
Cash flows from investing activities:
Capital expenditures (3,564) (4,084)
Proceeds from property dispositions 14 15
---------------- -----------------
Net cash used for investing activities (3,550) (4,069)
---------------- -----------------
Cash flows from financing activities:
Net borrowings under revolving bank lines of credit 13,156 7,360
Proceeds from exercise of stock options 242 76
Paydown of borrowings under Stock Purchase Loan Plan 145 --
Reduction of long-term debt (135) (135)
Repurchase of common stock (395) (766)
---------------- -----------------
Net cash provided by financing activities 13,013 6,535
---------------- -----------------
Net decrease in cash (83) (150)
Cash at beginning of period 593 537
================ =================
Cash at end of period $510 $387
================ =================
Supplemental cash flow information:
Cash paid during the period for:
Interest $473 $326
Income taxes 2,922 2,739
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 second quarter, the Company has opened 19 new stores
totaling 73,894 square feet as follows:
S&K Store Locations Date Opened Square Footage
---------------------------------------------- ---------------------------- ------------------------
Illinois: Moline November 23, 1998* 3,345
Tuscola August 31, 1998 3,015
Iowa: Davenport November 23, 1998* 4,117
Kansas: Topeka November 23, 1998* 4,988
Kentucky: Lexington November 2, 1998* 5,000
Louisville October 25, 1998 6,010
Maryland: Hagerstown October 17, 1998 3,000
Michigan: Auburn Hills November 12, 1998* 3,763
Kalamazoo November 23, 1998* 4,872
Saginaw October 26, 1998 4,009
Missouri: Joplin November 8, 1998* 3,600
New York: Waterloo November 23, 1998* 3,000
Ohio: Columbus October 15, 1998 3,500
Medina November 7, 1998* 3,200
South Carolina: Gaffney August 31, 1998 3,422
Tennessee: Johnson City November 23, 1998* 3,200
Texas: Austin November 9, 1998* 4,194
Tyler November 23, 1998* 3,163
Wisconsin: Madison October 25, 1998 4,496
* Opened in fourth quarter.
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 Nine Months Ended October 31, 1998 Compared to Three Months and
Nine Months Ended October 25,
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 nine months ended October
31, 1998 and October 25, 1997.
Percentage of Net Sales
----------------------------------------------------------------------
Three Months Ended Nine Months Ended
----------------------------- -------------------------------
10/31/98 10/25/97 10/31/98 10/25/97
------------- -------------- ---------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.8 51.8 51.9 52.5
----- ----- ----- -----
Gross profit 49.2 48.2 48.1 47.5
Other costs and expenses:
Selling, general and administrative 43.6 42.8 40.9 41.1
Interest 0.7 0.4 0.5 0.4
Depreciation and amortization 2.0 1.8 1.9 1.8
Other, net (0.1) -- -- (0.1)
----- ----- ----- -----
Income before income taxes 3.0 3.2 4.8 4.3
Provision for income taxes 1.1 1.2 1.8 1.6
----- ----- ----- -----
Net income 1.9% 2.0% 3.0% 2.7%
===== ===== ===== =====
Net sales in the third quarter increased by 4%, or $1.4 million, over the
same period last year and reflects the net addition of 18 new stores since
October 25, 1997. Comparable store sales decreased 3% and were impacted in part
by reduced customer traffic resulting from two major hurricanes and uncertainty
about the economy. For the nine-month period, net sales increased by 8%, or $8.1
million over the same period last year. Comparable store sales for the nine
months were down 1% due mostly to the opening of the majority of new stores over
the last 18 months in existing markets. During the quarter ended October 31,
1998, the Company opened seven new stores. There were 224 total stores in
operation as of October 31, 1998, compared to 206 stores at October 25, 1997.
Cost of sales for the third quarter of fiscal 1999 was 50.8% of net sales
compared to 51.8% of net sales for the third quarter last year. This cost
reduction as a percentage of net sales was due to taking fewer markdowns as a
percentage of net sales and due to higher capitalization of buying and
distribution costs in inventory, in part due to lower than expected sales in the
quarter. For the nine-month period, cost of sales was 51.9% of net sales
compared to 52.5% of net sales last year, and was due to taking fewer markdowns
as a percentage of net sales and to greater leverage of central office and
distribution center expenses related to buying and processing merchandise.
6
Selling, general and administrative expenses in the third quarter of
fiscal 1999 were 43.6% of net sales compared to 42.8% of net sales for the third
quarter of fiscal 1998. This increase in the quarter as a percentage of sales is
mostly attributable to incurring planned rent, advertising and store payroll
costs while sales were less than planned. For the nine-month period, selling,
general and administrative expenses were 40.9% of net sales versus 41.1% of net
sales in the same period last year. This 0.2% of net sales improvement in the
nine-month period was due to the leverage the Company experienced in the first
six months of the year in fixed expenses and due to increased alteration net
income, offset in part by higher rent expenses as a percentage of net sales.
Interest expense in the third quarter of fiscal 1999 was 0.7% of net sales
compared to 0.4% of net sales for the third quarter of fiscal 1998. For the
nine-month period, interest expense was 0.5% of net sales compared to 0.4% of
net sales last year. These increases are 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 nine months of fiscal 1999, the Company
opened 18 new S&K stores, closed five stores (two of which were relocations),
converted one store to the superstore format and remodeled 16 other stores. In
the comparable fiscal 1998 period, the Company opened 18 new stores, closed six
stores (three of which were relocations), converted one store to the superstore
format and remodeled 14 other stores. Since the end of the fiscal 1999 third
quarter, the Company has opened 12 new S&K stores. 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 nine months of fiscal years 1999 and
1998 used net cash of $9.5 million and $2.6 million, respectively. This
fluctuation is due primarily to reduced accounts payable balances resulting from
earlier payments than in the prior year on inventory purchases and due to the
timing of inventory purchases associated with new stores.
Net cash used in investing activities is primarily for the purpose of
store expansion and remodelings. Capital expenditures approximated $3.6 million
and $4.1 million during the first nine months of fiscal 1999 and 1998,
respectively. Expenditures last year were higher primarily due to the purchase
of land and construction for an owned superstore location.
Financing activities for the first nine months of fiscal years 1999 and
1998 provided net cash of $13.0 million and $6.5 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 $395,000 and $766,000 in fiscal years 1999 and 1998, respectively,
for the repurchase of its common stock. As of October 31, 1998, the Company had
net unused commitments of approximately $14.7 million available under these
agreements.
On November 30, 1998, the Company announced that its Board of Directors
approved a discretionary program to repurchase up to $2.5 million worth of
shares of the Company's outstanding common stock. The program is to be funded by
available cash balances and bank borrowings.
7
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 back
office 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 modifications to
existing software costing approximately $100,000, most of which has been spent
as of October 31, 1998, and was anticipated within the Company's budget.
The Company has tested Year 2000 changes as system modifications have been
completed and brought on line. The Company expects to have completed (tested and
installed) its required internal modifications by January 1999.
The Year 2000 issue may impact vendors that provide products or services
to the Company. The Company has circulated a business partner survey and is in
the process of evaluating responses. This survey will assist the Company in
assessing its vendors' readiness and enable the Company to prepare appropriate
contingency plans.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) There were no reports filed on Form 8-K during the three months
ended October 31, 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: December 7, 1998 /s/ Robert E. Knowles
------------------------------
Robert E. Knowles
Executive Vice President,
Chief Financial Officer,
Secretary and Treasurer
(Principal Financial Officer)
Date: December 7, 1998 /s/ Janet L. Jorgensen
------------------------------
Janet L. Jorgensen
Vice President and Controller
(Principal Accounting Officer)
8