1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 5, 2001
Commission file no. 1-10299
VENATOR GROUP, INC.
-------------------
(Exact name of registrant as specified in its charter)
New York 13-3513936
- --------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
112 W. 34th Street, New York, New York 10120
- -------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 720-3700
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---- ----
Number of shares of Common Stock outstanding at June 1, 2001: 139,471,607
-----------
2
VENATOR GROUP, INC.
-------------------
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets ............................ 1
Condensed Consolidated Statements
of Operations ............................................... 2
Condensed Consolidated Statements
of Comprehensive Income (Loss) .............................. 3
Condensed Consolidated Statements
of Cash Flows ............................................... 4
Notes to Condensed Consolidated
Financial Statements ........................................ 5-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 10-13
Part II. Other Information
Item 1. Legal Proceedings ................................................ 14
Item 6. Exhibits and Reports on Form 8-K ................................. 14
Signature ........................................................ 15
Index to Exhibits ................................................ 16-18
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(in millions, except shares)
May 5, April 29, February 3,
2001 2000 2001
----------- ----------- ---------
(Unaudited) (Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents ....................................................... $ 29 $ 54 $ 109
Restricted cash ................................................................. -- 90 --
Merchandise inventories ......................................................... 786 731 730
Assets held for disposal ........................................................ 32 46 31
Net assets of discontinued operations ........................................... 58 56 37
Other current assets ............................................................ 113 118 93
------- ------- -------
1,018 1,095 1,000
Property and equipment, net ........................................................ 656 729 684
Deferred taxes ..................................................................... 236 316 234
Goodwill, net ...................................................................... 141 149 143
Other assets ....................................................................... 169 143 171
------- ------- -------
$ 2,220 $ 2,432 $ 2,232
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt ................................................................. $ -- $ 101 $ --
Accounts payable ................................................................ 280 237 264
Accrued liabilities ............................................................. 196 216 222
Current portion of repositioning and restructuring reserves ..................... 11 34 13
Current portion of reserve for discontinued operations .......................... 55 23 76
Current portion of long-term debt and obligations
under capital leases .......................................................... 54 93 54
------- ------- -------
596 704 629
Long-term debt and obligations
under capital leases ............................................................ 258 312 259
Other liabilities .................................................................. 318 275 331
Shareholders' equity
Common stock and paid-in capital: 139,231,072;
137,841,865 and 138,690,560 shares, issued respectively ....................... 354 341 351
Retained earnings ............................................................... 742 959 705
Accumulated other comprehensive loss ............................................ (47) (157) (41)
Less: Treasury stock at cost: 214,625; 261,667 and 199,625
shares, respectively .......................................................... (1) (2) (2)
------- ------- -------
Total shareholders' equity ......................................................... 1,048 1,141 1,013
------- ------- -------
$ 2,220 $ 2,432 $ 2,232
======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
-1-
4
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended
-------------------------
May 5, April 29,
2001 2000
------- -------
Sales ........................................................................................... $ 1,072 $ 1,044
Costs and Expenses
Cost of sales ................................................................................. 746 733
Selling, general and administrative expenses .................................................. 231 238
Depreciation and amortization ................................................................. 38 37
Interest expense, net ......................................................................... 4 8
Other income .................................................................................. -- (10)
------- -------
1,019 1,006
------- -------
Income from continuing operations before income taxes ........................................... 53 38
Income tax expense .............................................................................. 21 15
------- -------
Income from continuing operations ............................................................... 32 23
Loss from discontinued operations, net of income tax benefit of $6 .............................. -- (9)
Income on disposal of discontinued operations, net of income tax benefit of $5 .................. 5 --
Cumulative effect of accounting change, net of income tax benefit of $1 ......................... -- (1)
------- -------
Net income ...................................................................................... $ 37 $ 13
======= =======
Basic earnings per share:
Income from continuing operations .......................................................... $ 0.23 $ 0.17
Income (loss) from discontinued operations ................................................. 0.04 (0.06)
Cumulative effect of accounting change ..................................................... -- (0.01)
------- -------
Net income ................................................................................. $ 0.27 $ 0.10
======= =======
Weighted-average common shares outstanding ................................................. 138.6 137.6
Diluted earnings per share:
Income from continuing operations .......................................................... $ 0.23 $ 0.17
Income (loss) from discontinued operations ................................................. 0.04 (0.06)
Cumulative effect of accounting change ..................................................... -- (0.01)
------- -------
Net income ................................................................................. $ 0.27 $ 0.10
======= =======
Weighted-average common shares outstanding assuming dilution ............................... 139.7 138.5
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
5
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
----------------------------------------------------------------
(Unaudited)
(in millions)
Thirteen weeks ended
--------------------
May 5, April 29,
2001 2000
------ ---------
Net income ................................................................................................. $ 37 $ 13
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments arising during the period ...................................... (7) (15)
Change in fair value of derivatives accounted for as hedges,
net of deferred tax expense of $- .................................................................... 1 --
---- ----
Comprehensive income (loss) ................................................................................ $ 31 $ (2)
==== ====
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
6
VENATOR GROUP, INC.
-------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(in millions)
Thirteen weeks ended
--------------------------
May 5, April 29,
2001 2000
---------- ----------
From Operating Activities:
Net income ...................................................................................... $ 37 $ 13
Adjustments to reconcile net income to net cash used in
operating activities of continuing operations:
Income on disposal of discontinued operations, net of tax ..................................... (5) --
Loss from discontinued operations, net of tax ................................................. -- 9
Cumulative effect of accounting change, net of tax ............................................ -- 1
Depreciation and amortization ................................................................. 38 37
Gains on sales of assets and investments ...................................................... -- (6)
Gains on sales of real estate ................................................................. -- (4)
Deferred income taxes ......................................................................... (8) (2)
Change in assets and liabilities:
Merchandise inventories ..................................................................... (59) (39)
Accounts payable and other accruals ......................................................... (20) (7)
Repositioning and restructuring reserves .................................................... (3) (16)
Other, net .................................................................................. (14) 7
----- -----
Net cash used in operating activities of continuing operations .................................. (34) (7)
----- -----
From Investing Activities:
Proceeds from sales of real estate .............................................................. -- 2
Capital expenditures ............................................................................ (12) (17)
----- -----
Net cash used in investing activities of continuing operations .................................. (12) (15)
----- -----
From Financing Activities:
Cash restricted for repayment of long-term debt ................................................. -- (90)
Increase in short-term debt ..................................................................... -- 30
Reduction in long-term debt and capital lease obligations ....................................... (2) (13)
Issuance of common stock ........................................................................ 3 2
----- -----
Net cash provided by (used in) financing activities of continuing operations .................... 1 (71)
----- -----
Net Cash used in Discontinued Operations ........................................................... (38) (16)
Effect of exchange rate fluctuations
on Cash and Cash Equivalents .................................................................... 3 1
----- -----
Net change in Cash and Cash Equivalents ............................................................ (80) (108)
Cash and Cash Equivalents at beginning of year ..................................................... 109 162
----- -----
Cash and Cash Equivalents at end of interim period ................................................. $ 29 $ 54
===== =====
Cash paid during the period:
Interest ........................................................................................ $ 1 $ 2
Income taxes .................................................................................... $ 6 $ 16
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
7
VENATOR GROUP, INC.
-------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Registrant's Form 10-K for the year ended February
3, 2001, as filed with the Securities and Exchange Commission (the "SEC") on
April 23, 2001. Certain items included in these statements are based on
management's estimates. In the opinion of management, all material adjustments,
which are of a normal recurring nature, necessary for a fair presentation of the
results for the interim periods have been included. The results for the thirteen
weeks ended May 5, 2001 are not necessarily indicative of the results expected
for the year. As discussed below, all financial statements have been restated to
reflect the discontinuance of the Northern Group, the change in method of
accounting for layaway sales and the reclassification of shipping and handling
fees to revenue.
Derivative Financial Instruments
Effective February 4, 2001, the Registrant adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and its related amendment, Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative
financial instruments be recorded in the Consolidated Balance Sheets at their
fair values. Changes in fair values of derivatives will be recorded each period
in earnings or other comprehensive income (loss), depending on whether a
derivative is designated and effective as part of a hedge transaction and, if it
is, the type of hedge transaction. The effective portion of the gain or loss on
the hedging derivative instrument will be reported as a component of other
comprehensive income (loss) and will be reclassified to earnings in the period
in which the hedged item affects earnings. To the extent derivatives do not
qualify as hedges, or are ineffective, their changes in fair value will be
recorded in earnings immediately, which may subject the Registrant to increased
volatility. The adoption of SFAS No. 133 in 2001 did not have a material impact
on the Registrant's consolidated earnings and reduced accumulated other
comprehensive loss by approximately $1 million after-tax.
The Registrant operates internationally and utilizes certain derivative
financial instruments to mitigate its foreign currency exposures, primarily
related to forecasted transactions. For a derivative to qualify as a hedge at
inception and throughout the hedged period, the Registrant formally documents
the nature and relationships between the hedging instruments and hedged items,
as well as its risk-management objectives, strategies for undertaking the
various hedge transactions and method of assessing hedge effectiveness.
Additionally, for hedges of forecasted transactions, the significant
characteristics and expected terms of a forecasted transaction must be
specifically identified, and it must be probable that each forecasted
transaction will occur. If it were deemed probable that the forecasted
transaction would not occur, the gain or loss would be recognized in earnings
immediately. No such gains or losses were recognized in earnings during the
quarter ended May 5, 2001. Derivative financial instruments qualifying for hedge
accounting must maintain a specified level of effectiveness between the hedging
instrument and the item being hedged, both at inception and throughout the
hedged period. The Registrant does not hold derivative financial instruments for
trading or speculative purposes.
The Registrant enters into contracts in order to hedge the foreign currency
risk associated with third-party and intercompany forecasted transactions. The
primary currencies to which the Registrant is exposed are the Euro and the
British Pound. For forward foreign exchange contracts designated as cash flow
hedges of inventory, the effective portion of gains and losses is deferred as a
component of accumulated other comprehensive loss and is recognized as a
component of cost of sales when the related inventory is sold. The effective
portion of gains and losses associated with other forward contracts is deferred
as a component of accumulated other comprehensive loss until the underlying
hedged transaction is reported in earnings. The changes in fair value of
forward contracts and option contracts that do not qualify as hedges are
recorded in earnings.
During the quarter ended May 5, 2001, ineffectiveness related to cash flow
hedges was not material. The Registrant is hedging forecasted transactions for
no more than the next twelve months and expects all derivative-related amounts
reported in accumulated other comprehensive loss to be reclassified to earnings
within twelve months.
-5-
8
During the quarter ended May 5, 2001, the change in accumulated
comprehensive loss due to both the changes in fair value of derivative financial
instruments designated as hedges and the reclassification to earnings was not
material.
During the quarter ended May 5, 2001, the Registrant recorded a loss of
approximately $1 million for the changes in fair value of derivative
instruments not designated as hedges, which was offset by a foreign exchange
gain related to the underlying transactions.
Revenue Recognition
In the fourth quarter of 2000, the Registrant changed its method of
accounting for sales under its layaway program, in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
effective as of the beginning of the year. Under the new method, revenue from
layaway sales is recognized when the customer receives the product, rather than
when the initial deposit is paid. The cumulative effect of the change was a $1
million after-tax charge, or $0.01 per diluted share. The impact on each of the
quarters in 2000 was not material.
Revenue was restated in the fourth quarter of 2000, in accordance with
Emerging Issues Task Force Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs," to include shipping and handling fees for all periods
presented. Shipping and handling fees of $7 million were reclassified to sales
from selling, general and administrative expenses for the first quarter of 2000
and the associated costs of $5 million were reclassified from selling, general
and administrative expenses to cost of sales.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss comprised foreign currency translation
adjustments of $48 million, $155 million, and $41 million at May 5, 2001, April
29, 2000 and February 3, 2001, respectively. As of May 5, 2001, accumulated
other comprehensive loss also reflected a $1 million gain reflecting the fair
value of derivatives, in accordance with the adoption of SFAS No. 133.
Accumulated other comprehensive loss included a minimum pension liability
adjustment of $2 million at April 29, 2000.
Discontinued Operations
On January 23, 2001, the Registrant announced that it was exiting its 694
store Northern Group segment. The Registrant is in the process of liquidating
the 324 stores in the United States and is attempting to sell the 370 stores in
Canada. The Registrant recorded a charge to earnings of $252 million before-tax,
or $294 million after-tax, in the fourth quarter of 2000 for the loss on
disposal of the segment. Major components of the charge included expected cash
outlays for lease buyouts and real estate disposition costs of $68 million,
severance and personnel related costs of $23 million and operating losses and
other exit costs from the measurement date through the expected date of disposal
of $24 million. Non-cash charges included the realization of a $118 million
currency translation loss, resulting from the movement in the Canadian dollar
during the period the Registrant held its investment in the segment and asset
write-offs of $19 million. The Registrant also recorded a tax benefit for the
liquidation of the Northern U.S. stores of $42 million, which was offset by a
valuation allowance of $84 million to reduce the deferred tax assets related to
the Canadian operations to an amount that is more likely than not to be
realized.
In the first quarter of 2001, the Registrant recorded a tax benefit of $5
million as a result of the implementation of tax planning strategies related
to the discontinuance of the Northern Group. Net disposition activity of $25
million in the first quarter of 2001 included operating losses of $17 million,
a $3 million interest expense allocation based on intercompany debt balances,
severance of $1 million and other costs of $4 million. Of the remaining reserve
balance of $90 million at May 5, 2001, $44 million is expected to be utilized
within twelve months and the remaining $46 million thereafter. The net loss
from discontinued operations for the thirteen weeks ended April 29, 2000,
includes sales of $70 million and a $1 million interest expense allocation
based on intercompany debt balances.
In 1998, the Registrant exited both its International General Merchandise
and Specialty Footwear segments. In 1997, the Registrant announced that it was
exiting its Domestic General Merchandise segment. The remaining reserve balances
totaled $33 million as of May 5, 2001, $11 million of which is expected to be
utilized within twelve months.
-6-
9
Disposition activity related to the reserves is presented below:
NORTHERN GROUP
- --------------
(in millions)
Balance Net Balance
2/3/2001 Usage 5/5/2001
-------- ----- --------
Real estate & lease liabilities $ 68 $-- $ 68
Severance & personnel 23 (1) 22
Operating losses & other costs 24 (24) --
-------- ----- --------
Total $115 $(25) $ 90
======== ===== ========
INTERNATIONAL GENERAL MERCHANDISE
- ---------------------------------
(in millions)
Balance Net Balance
2/3/2001 Usage 5/5/2001
-------- ----- --------
The Bargain Shop! $7 $ -- $7
======== ===== ========
SPECIALTY FOOTWEAR
- ------------------
(in millions)
Balance Net Balance
2/3/2001 Usage 5/5/2001
-------- ----- --------
Real estate & lease liabilities $ 9 $(1) $ 8
Operating losses & other costs 3 -- 3
-------- ----- --------
Total $12 $(1) $11
======== ===== ========
DOMESTIC GENERAL MERCHANDISE
- ----------------------------
(in millions)
Balance Net Balance
2/3/2001 Usage 5/5/2001
-------- ----- --------
Real estate & lease liabilities $16 $(2) $14
Inventory liquidation & other costs 2 (1) 1
-------- ----- --------
Total $18 $(3) $15
======== ===== ========
The following is a summary of the net assets of discontinued operations:
INTERNATIONAL DOMESTIC
NORTHERN GENERAL SPECIALTY GENERAL
(in millions) GROUP MERCHANDISE FOOTWEAR MERCHANDISE TOTAL
- ------------- ----- ----------- -------- ----------- -----
5/5/2001
Assets $ 77 $-- $ 2 $ 9 $ 88
Liabilities 27 -- 1 2 30
----- ----------- -------- ----------- -----
Net assets of discontinued operations $ 50 $-- $ 1 $ 7 $ 58
===== =========== ======== =========== =====
4/29/2000
Assets $ 98 $ 5 $ 4 $ 11 $118
Liabilities 55 2 1 4 62
----- ----------- -------- ----------- -----
Net assets of discontinued operations $ 43 $ 3 $ 3 $ 7 $ 56
===== =========== ======== =========== =====
2/3/2001
Assets $ 64 $-- $ 3 $ 8 $ 75
Liabilities 33 -- 1 4 38
----- ----------- -------- ----------- -----
Net assets of discontinued operations $ 31 $-- $ 2 $ 4 $ 37
===== =========== ======== =========== =====
The Northern Group's assets comprise inventory, fixed assets and other
current assets. The Northern Group's liabilities comprise accounts payable,
restructuring reserves and other accrued liabilities. The assets of the
Specialty Footwear and Domestic General Merchandise segments consist primarily
of fixed assets and deferred tax assets and liabilities reflect accrued
liabilities.
-7-
10
Restructuring Programs
1999 Restructuring
Total restructuring charges of $96 million before-tax were recorded in 1999
for the Registrant's restructuring program. In the second quarter of 1999, the
Registrant announced its plan to sell or liquidate eight non-core businesses:
The San Francisco Music Box Company, Randy River Canada, Foot Locker Outlets,
Colorado, Team Edition, Going to the Game!, Weekend Edition and Burger King
franchises. In the fourth quarter of 1999, the Company announced a further
restructuring plan, which included an accelerated store closing program in the
United States and Asia, corporate headcount reduction and a distribution center
shutdown.
In the first quarter of 2000, the Registrant recorded an additional
restructuring charge of $5 million related to its non-core businesses.
Throughout 2000, the disposition of Randy River Canada, Foot Locker Outlets,
Colorado, Going to the Game!, and Weekend Edition and the accelerated store
closing programs were essentially completed. In the third quarter of 2000,
management decided to continue to operate Team Edition as a manufacturing
business, primarily as a result of the resurgence of the screen print business.
In connection with the disposition of several of its non-core businesses,
the Registrant reduced sales support and corporate staff by over 30 percent,
reduced divisional staff and consolidated the management of Kids Foot Locker and
Lady Foot Locker into one organization. As of May 5, 2001, 6 of the originally
planned 400 positions have yet to be eliminated. In addition, the Registrant
closed its Champs Sports distribution center in Maumelle, Arkansas and
consolidated its operations with the Foot Locker facility located in Junction
City, Kansas. In the first quarter of 2000, the Registrant recorded a reduction
to the corporate reserve of $5 million, which related to the agreement to
sublease its Maumelle distribution center and sell the associated fixed assets,
which had been impaired in 1999, for proceeds of approximately $3 million.
The remaining reserve balance at May 5, 2001 totaled $10 million, $9
million of which is expected to be utilized within twelve months. Disposition
activity related to the reserves is presented below:
NON-CORE BUSINESSES
- -------------------
(in millions)
Balance Net Balance
2/3/2001 Usage 5/5/2001
-------- ----- --------
Real estate $ 4 $(1) $ 3
Severance 2 -- 2
Other disposition costs 3 -- 3
-------- ----- --------
Total $ 9 $(1) $ 8
======== ===== ========
CORPORATE OVERHEAD AND LOGISTICS
- --------------------------------
(in millions)
Balance Net Balance
2/3/2001 Usage 5/5/2001
-------- ----- --------
Severance $2 $ -- $2
======== ===== ========
TOTAL RESTRUCTURING RESERVES
- ----------------------------
(in millions)
Balance Net Balance
2/3/2001 Usage 5/5/2001
-------- ----- --------
Real estate $ 4 $(1) $ 3
Severance 4 -- 4
Other disposition costs 3 -- 3
-------- ----- --------
Total $11 $(1) $10
======== ===== ========
Included in the consolidated results of operations are sales of $17 million
and $28 million and operating losses of $3 million and $7 million for the first
quarter of 2001 and 2000, respectively, for the above non-core businesses and
under-performing stores, excluding Team Edition.
-8-
11
Inventory, fixed assets and other long-lived assets of all businesses to be
exited have been valued at the lower of cost or net realizable value. These
assets, totaling $32 million, $46 million and $31 million, have been
reclassified as assets held for disposal in the Consolidated Balance Sheets as
of May 5, 2001, April 29, 2000 and February 3, 2001, respectively. The assets of
Team Edition have not been reflected as assets held for disposal as of May 5,
2001 and February 3, 2001 as management has decided to retain its operations.
1993 Repositioning and 1991 Restructuring
In the first quarter of 2001, disposition activity reduced the reserve
balance by approximately $2 million. The remaining reserve balance of $4 million
comprises future lease obligations of $3 million and other facilities-related
costs of $1 million.
Segment Information
Sales and operating results for the Registrant's reportable segments for
the thirteen weeks ended May 5, 2001 and April 29, 2000, respectively, are
presented below. Operating results reflect income from continuing operations
before income taxes, excluding corporate expense, corporate gains and net
interest expense.
Sales:
(in millions) Thirteen weeks ended
--------------------
May 5, April 29,
2001 2000
-------- --------
Global Athletic Group:
Retail stores ......................................... $ 977 $ 962
Direct to Customers ................................... 78 64
-------- --------
1,055 1,026
All Other (1) ............................................ 17 18
-------- --------
Total sales .............................................. $ 1,072 $ 1,044
======= ========
Operating Results:
(in millions) Thirteen weeks ended
---------------------
May 5, April 29,
2001 2000
-------- ---------
Global Athletic Group:
Retail Stores ......................................... $ 73 $ 64
Direct to Customers ................................... 4 (3)
-------- ---------
77 61
All Other (1) ............................................ (3) (9)
-------- ---------
Operating profit ................................... 74 52
Corporate expense, net (2) ......................... 17 6
Interest expense, net .............................. 4 8
-------- ---------
Income from continuing operations before income taxes .... $ 53 $ 38
======== =========
(1) All formats presented as "All Other" were either disposed or held for
disposal at May 5, 2001. First quarter 2000 includes a restructuring charge
of $5 million.
(2) First quarter 2000 includes a $5 million reduction of the 1999
restructuring charge.
-9-
12
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur from common
shares issuable through stock-based compensation including stock options,
restricted stock awards and other convertible securities. A reconciliation of
weighted-average common shares outstanding to weighted-average common shares
outstanding assuming dilution follows:
Thirteen weeks ended
---------------------
(in millions) May 5, April 29,
2001 2000
------- ---------
Weighted-average common shares outstanding ..................... 138.6 137.6
Incremental common shares issuable ............................. 1.1 0.9
------- ---------
Weighted-average common shares outstanding assuming dilution ... 139.7 138.5
======= =========
Options to purchase 3.9 million shares of common stock with an exercise
price greater than the average market price which were outstanding at May 5,
2001, were not included in the computation of diluted earnings per share.
Subsequent Event
On May 30, 2001, the Registrant announced that it intends to offer, subject
to market conditions, approximately $125 million of subordinated convertible
notes due 2008 ($150 million if an option for an additional $25 million is
exercised in full). The notes will be convertible into the Registrant's common
stock at the option of the holder, at a conversion price of $15.806 per share.
The offering closed on June 8, 2001. The net proceeds of the proposed offering
will be used for working capital and general corporate purposes and to reduce
reliance on bank financing. Simultaneously with this offering, the Registrant
amended and restated its $300 million revolving credit agreement to a reduced
$190 million three-year facility.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
References included herein to businesses disposed and held for disposal
relate to The San Francisco Music Box Company, Foot Locker Outlets, Going To The
Game!, Randy River Canada, Burger King franchises and Foot Locker Asia. As
discussed in the footnotes to the Condensed Consolidated Financial Statements,
the Registrant discontinued its Northern Group segment in the fourth quarter of
2000. Accordingly, prior year financial statements have been restated to present
this business segment as a discontinued operation.
RESULTS OF OPERATIONS
Sales of $1,072 million for the first quarter of 2001 increased 2.7 percent
from sales of $1,044 million for the first quarter of 2000. The increase was
primarily attributable to the improved sales performance of ongoing formats,
offset, in part, by the reduction in sales associated with those businesses
disposed and held for disposal. Excluding the effect of foreign currency
fluctuations and sales from businesses disposed and held for disposal, sales
increased 5.0 percent as compared with the corresponding prior-year period,
reflecting an increase of 4.8 percent in comparable-store sales.
Gross margin, as a percentage of sales, of 30.4 percent in the first
quarter of 2001 improved slightly as compared with 29.8 percent in the
corresponding prior-year period. This improvement reflects management's
continued initiatives with regard to effective merchandising and promotional
activity.
Selling, general and administrative expenses ("SG&A") of $231 million
decreased by approximately 130 basis points, as a percentage of sales, to 21.5
percent in the first quarter of 2001 as compared with 22.8 percent in the
corresponding prior-year period. This decline reflects the operating
efficiencies achieved by the ongoing store-base as a result of previous
cost-cutting initiatives and restructuring programs. For the first quarter of
2000, SG&A included one-time Internet costs of approximately $4 million related
to website development.
-10-
13
Interest expense of $8 million for the thirteen weeks ended May 5, 2001
declined by 27.3 percent as compared with $11 million for the corresponding
prior-year period. This decrease reflects both the reduction in long-term debt
associated with the repayment of the $200 million 7.0 percent debentures in June
2000, and the fact that there were no short-term borrowings outstanding for the
entire first quarter of 2001. Interest income amounted to $4 million and $3
million, respectively, for the thirteen weeks ended May 5, 2001 and April 29,
2000 and included intercompany interest income related to the Northern Group
segment of $3 million and $1 million, respectively. The offsetting interest
expense was included in the loss from discontinued operations through the
measurement date for 2000 and subsequently, in 2001, was charged to the reserve
for discontinued operations.
Income from continuing operations of $32 million or $0.23 per diluted share
for the thirteen weeks ended May 5, 2001, increased by 39.1 percent, or $0.06
per diluted share, as compared with the corresponding prior-year period. The
Registrant recorded a tax benefit of $5 million, or $0.04 per diluted share, as
a result of the implementation of tax planning strategies related to the
disposal of the Northern Group segment in the first quarter of 2001. For the
thirteen weeks ended April 29, 2000, the Registrant reported net income of $13
million, or $0.10 per diluted share, which included a loss from discontinued
operations of $9 million, or $0.06 per diluted share, and a $1 million after-tax
expense, or $0.01 per diluted share, from the cumulative effect of an accounting
change.
STORE COUNT
The following table summarizes store count by segment, after
reclassification for businesses disposed and held for disposal. During the
thirteen weeks ended May 5, 2001, the Registrant remodeled or relocated 28
stores.
February 3, May 5, April 29,
2001 Opened Closed 2001 2000
----- ------ ------ ------ --------
Global Athletic Group .............................. 3,582 11 34 3,559 3,659
Disposed and held for disposal ..................... 170 12 3 179 184
----- ----- ----- ----- -----
Total ........................................... 3,752 23 37 3,738 3,843
===== ===== ===== ===== =====
SALES
The following table summarizes sales by segment, after reclassification for
businesses disposed and held for disposal.
Thirteen weeks ended
--------------------
(in millions) May 5, April 29,
2001 2000
------ ------
Global Athletic Group:
Retail Stores ........................................................... $ 977 $ 962
Direct to Customers ..................................................... 78 64
------ ------
1,055 1,026
Disposed and held for disposal ............................................... 17 18
------ ------
Total sales .................................................................. $1,072 $1,044
====== ======
Global Athletic Group sales increased by 2.8 percent as compared with the
corresponding prior-year period, reflecting a comparable-store sales increase of
4.8 percent. Sales from ongoing retail store formats increased 1.6 percent,
reflecting stronger sales performance in most formats, driven predominantly by
Foot Locker Europe and Champs Sports. Footwear product drove the strong sales
performance, particularly new marquee and exclusive athletic footwear lines, and
apparel, both branded and private label contributed to incremental sales. Direct
to Customers sales increased by 21.9 percent for the thirteen weeks ended May 5,
2001 compared with the corresponding prior-year period. Internet sales more than
doubled to $21 million for the first quarter of 2001 and catalog sales increased
by 5.6 percent to $57 million, compared with the first quarter of 2000.
-11-
14
OPERATING RESULTS
Operating results reflect income (loss) from continuing operations before
income taxes, excluding corporate expense, corporate gains and net interest
expense. The following table summarizes operating profit (loss) by segment,
after reclassification for businesses disposed and held for disposal.
Thirteen weeks ended
(in millions) May 5, April 29,
2001 2000
------ ---------
Global Athletic Group:
Retail Stores ............................... $ 73 $ 66
Direct to Customers ......................... 4 (3)
------ ---------
77 63
Disposed and held for disposal ................... (3) (6)
Restructuring charges ............................ -- (5)
------ ---------
Total operating profit ........................... $ 74 $ 52
====== =========
The Global Athletic Group reported an increase in operating profit of 22.2
percent to $77 million for the thirteen weeks ended May 5, 2001 as compared with
$63 million for the first quarter of the corresponding prior-year period.
Operating profit from ongoing retail stores for the first quarter of 2001
increased by 10.6 percent from the corresponding prior-year period. This
increase reflects improved sales, gross margin rate and operating expense
efficiencies, as operating profit, as a percentage of sales, increased from 6.9
percent in the first quarter of 2000 to 7.5 percent in the first quarter of
2001. Direct to Customers operating results improved from a loss of $3 million
in the first quarter of 2000, which included one-time Internet development and
marketing costs of approximately $4 million, to a profit of $4 million in the
first quarter of 2001.
In the first quarter of 2000, a further restructuring charge of $5 million
was recorded related to the disposition of the remaining businesses in the 1999
restructuring program.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Registrant's primary sources of cash have been from
operations, borrowings under the revolving credit agreement and proceeds from
the sale of non-strategic assets. As noted below, on June 8, 2001, the
Registrant also raised at least $125 million in cash through the issuance of
subordinated convertible notes. The Registrant generally finances real estate
with operating leases. The principal use of cash has been to finance inventory
requirements, capital expenditures related to store openings, store remodelings
and management information systems, and to fund other general working capital
requirements.
Net cash used in operating activities of continuing operations increased to
$34 million for the thirteen weeks ended May 5, 2001, as compared with $7
million in the corresponding prior-year period. These amounts reflect the income
from continuing operations reported by the Registrant in those periods, adjusted
for non-cash items and working capital changes. The increase in merchandise
inventories and accounts payable is in line with the Registrant's increased
sales volume. Merchandise inventories of $786 million at May 5, 2001 increased
by $56 million from February 3, 2001. Included in the cash flow from operations
for the thirteen weeks ended May 5, 2001 and April 29, 2000 were cash payments
of $3 million and $16 million, respectively, relating to the Registrant's
restructuring programs.
Net cash used in investing activities of continuing operations of $12
million and $15 million for the thirteen weeks ended May 5, 2001 and April 29,
2000, respectively, primarily reflected capital expenditures. Planned capital
expenditures of $150 million for 2001 comprise $110 million for new store
openings and remodeling of existing stores, and $40 million for management
information systems, logistics and other support facilities.
-12-
15
Financing activities for the Registrant's continuing operations utilized
cash of $71 million for the first quarter of 2000 compared with cash provided by
financing activities of $1 million for the first quarter of 2001. There were no
short-term borrowings outstanding for the entire first quarter of 2001, whereas
outstanding borrowings under the Registrant's revolving credit agreement
amounted to $101 million at April 29, 2000, an increase of $30 million for the
first quarter of 2000. In addition, during the first quarter of 2000, the
Registrant purchased $12 million of its $200 million 7.0 percent debentures and
set aside $90 million restricted cash to fund the repayment of the remaining
balance, as required by the revolving credit agreement. On May 30, 2001, the
Registrant announced that it intends to offer, subject to market conditions,
approximately $125 million of subordinated convertible notes due 2008 ($150
million if an option for an additional $25 million is exercised in full). The
notes will be convertible into the Registrant's common stock at the option of
the holder, at a conversion price of $15.806 per share. The offering closed on
June 8, 2001. The net proceeds of the proposed offering will be used for working
capital and general corporate purposes and to reduce reliance on bank financing.
Simultaneously with this offering, the Registrant amended and restated its $300
million revolving credit agreement to a reduced $190 million three-year
facility.
Net cash used in discontinued operations includes the Northern Group loss
from discontinued operations in 2000, the change in assets and liabilities of
the discontinued segments and disposition activity charged to the reserves for
both periods presented.
IMPACT OF EUROPEAN MONETARY UNION
The European Union comprises 15 member states, 12 of which adopted a common
currency, the "euro." From January 1, 1999 until January 1, 2002, the transition
period, the national currencies will remain legal tender in the participating
countries as denominations of the euro. Monetary, capital, foreign exchange and
interbank markets have converted to the euro, and non-cash transactions are
possible in euros. On January 1, 2002, euro bank notes and coins will be issued
and the former national currencies will be withdrawn from circulation no later
than February 28, 2002.
The Registrant has substantially completed the necessary modifications to
its information systems, accounting systems, vendor payments and human resource
systems. Plans to upgrade or modify the point of sale hardware and software are
in progress and will be finalized throughout the remainder of 2001.
The adoption of a single European currency will lead to greater product
pricing transparency and a more competitive environment. The Registrant
currently displays the euro equivalent price of merchandise, as do many
retailers. The euro conversion is not expected to have a significant effect on
the Registrant's results of operations or financial condition.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of the federal
securities laws. All statements, other than statements of historical facts,
which address activities, events or developments that the Registrant expects or
anticipates will or may occur in the future, including, but not limited to, such
things as future capital expenditures, expansion, strategic plans, growth of the
Registrant's business and operations and euro related actions and other such
matters are forward-looking statements. These forward-looking statements are
based on many assumptions and factors including, but not limited to, customer
demand, fashion trends, competitive market forces, uncertainties related to the
effect of competitive products and pricing, customer acceptance of the
Registrant's merchandise mix and retail locations, economic conditions
worldwide, effects of currency fluctuations, the ability of the Registrant to
execute its business plans effectively with regard to each of its operating
units, consumer preferences and economic conditions worldwide and the ability of
the Registrant to implement, in a timely manner, the programs and actions
related to the euro issue. Any changes in such assumptions or factors could
produce significantly different results. The Registrant undertakes no obligation
to publicly update forward-looking statements, whether as a result of new
information, future events or otherwise.
-13-
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The only legal proceedings pending against the Registrant or its
consolidated subsidiaries consist of ordinary, routine litigation,
including administrative proceedings, incident to the businesses of
the Registrant, as well as litigation incident to the sale and
disposition of businesses that have occurred in the past several
years. Management does not believe that the outcome of such
proceedings will have a significant effect on the Registrant's
consolidated financial position, liquidity, or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
An index of the exhibits that are required by this item, and which are
furnished in accordance with Item 601 of Regulation S-K, appears on
pages 16 through 18. The exhibits that are in this report immediately
follow the index.
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended
May 5, 2001.
-14-
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENATOR GROUP, INC.
-------------------
(Registrant)
Date: June 13, 2001 /s/ Bruce Hartman
---------------------------------
BRUCE HARTMAN
Senior Vice President
and Chief Financial Officer
-15-
18
VENATOR GROUP, INC.
-------------------
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
1 *
2 *
3(i)(a) Certificate of Incorporation of the Registrant, as
filed by the Department of State of the State of New
York on April 7, 1989 (incorporated herein by
reference to Exhibit 3(i)(a) to the Quarterly Report
on Form 10-Q for the quarterly period ended July 26,
1997, filed by the Registrant with the SEC on
September 4, 1997 (the "July 26, 1997 Form 10-Q")).
3(i)(b) Certificates of Amendment of the Certificate of
Incorporation of the Registrant, as filed by the
Department of State of the State of New York on (a)
July 20, 1989 (b) July 24, 1990 (c) July 9, 1997
(incorporated herein by reference to Exhibit 3(i)(b)
to the July 26, 1997 Form 10-Q) and (d) June 11, 1998
(incorporated herein by reference to Exhibit 4.2(a)
of the Registration Statement on Form S-8
(Registration No. 333-62425) previously filed with
the SEC).
3(ii) By-laws of the Registrant, as amended (incorporated
herein by reference to Exhibit 4.2 of the
Registration Statement on Form S-8 (Registration No.
333-62425) previously filed with the SEC).
4.1 The rights of holders of the Registrant's equity
securities are defined in the Registrant's
Certificate of Incorporation, as amended
(incorporated herein by reference to Exhibits 3(i)(a)
and 3(i)(b) to the July 26, 1997 Form 10-Q and
Exhibit 4.2(a) to the Registration Statement on Form
S-8 (Registration No. 333-62425) previously filed
with the SEC).
4.2 Rights Agreement dated as of March 11, 1998 ("Rights
Agreement"), between Venator Group, Inc. and First
Chicago Trust Company of New York, as Rights Agent
(incorporated herein by reference to Exhibit 4 to the
Form 8-K dated March 11, 1998).
4.2(a) Amendment No. 1 to the Rights Agreement, dated as of
May 28, 1999 (incorporated herein by reference to
Exhibit 4.2(a) to the Quarterly Report on Form 10-Q
for the quarterly period ended May 1, 1999, filed by
the Registrant with the SEC on June 4, 1999).
-16-
19
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
4.3 Indenture dated as of October 10, 1991 (incorporated
herein by reference to Exhibit 4.1 to the
Registration Statement on Form S-3 (Registration No.
33-43334) previously filed with the SEC).
4.4 Forms of Medium-Term Notes (Fixed Rate and Floating
Rate) (incorporated herein by reference to Exhibits
4.4 and 4.5 to the Registration Statement on Form S-3
(Registration No. 33-43334) previously filed with the
SEC).
4.5 Form of 8 1/2% Debentures due 2022 (incorporated
herein by reference to Exhibit 4 to the Registrant's
Form 8-K dated January 16, 1992).
4.6 Distribution Agreement dated July 13, 1995 and Forms
of Fixed Rate and Floating Rate Notes (incorporated
herein by reference to Exhibits 1, 4.1 and 4.2,
respectively, to the Registrant's Form 8-K dated July
13, 1995).
5 *
8 *
9 *
10.1 By-laws, amended as of April 11,2001.
10.2 Employment Agreement with Matthew D. Serra dated as
of February 12, 2001.
10.3 Restricted Stock Agreement with Matthew D. Serra
dated as of March 4, 2001.
10.4 Amendment to Trust Agreement dated as of November 12,
1987.
10.5 Amendment to form of Indemnification Agreement.
10.6 Nonstatutory Stock Option Agreement with J. Carter
Bacot dated as of February 12, 2001.
11 *
12 Computation of Ratio of Earnings to Fixed Charges.
13 *
15 Letter re: Unaudited Interim Financial Statements.
-17-
20
Exhibit No. in Item 601
of Regulation S-K Description
----------------- -----------
16 *
17 *
18 *
19 *
20 *
21 *
22 *
23 *
24 *
25 *
26 *
99 Independent Accountants' Review Report.
- --------------------
* Not applicable
-18-
21
Exhibits filed with this Form 10-Q:
Exhibit No. Description
----------- -----------
10.1 By-laws, amended as of April 11, 2001.
10.2 Employment Agreement with Matthew D. Serra dated as of
February 12, 2001.
10.3 Restricted Stock Agreement with Matthew D. Serra dated
as of March 4, 2001.
10.4 Amendment to Trust Agreement dated as of November 12,
1987.
10.5 Amendment to form of Indemnification Agreement.
10.6 Nonstatutory Stock Option Agreement with J. Carter
Bacot dated as of February 12, 2001.
12 Computation of Ratio of Earnings to Fixed Charges.
15 Letter re: Unaudited Interim Financial Statements.
99 Independent Accountants' Review Report.