1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1999
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
233 Broadway, New York, New York 10279-0003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 553-2000
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 December 1, 1999: 137,502,104
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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................................5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......9-14
Part II. Other Information
Item 1. Legal Proceedings........................................15
Item 6. Exhibits and Reports on Form 8-K.........................15
Signature................................................16
Index to Exhibits........................................17-19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VENATOR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
Oct. 30, Oct. 31, Jan. 30,
1999 1998 1999
(Unaudited) (Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents ........................................................ $ 63 $ 147 $ 193
Merchandise inventories .......................................................... 863 1,112 837
Net assets of discontinued operations ............................................ 85 220 97
Assets held for disposal ......................................................... 179 -- --
Other current assets ............................................................. 174 136 148
------- ------- -------
1,364 1,615 1,275
Property and equipment, net ......................................................... 882 916 974
Deferred taxes ...................................................................... 354 332 358
Intangible assets, net .............................................................. 164 188 183
Other assets ........................................................................ 87 94 86
------- ------- -------
$ 2,851 $ 3,145 $ 2,876
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt .................................................................. $ 300 $ 371 $ 250
Accounts payable ................................................................. 354 386 245
Accrued liabilities .............................................................. 237 266 296
Current portion of reserve for discontinued operations ........................... 87 217 167
Current portion of long-term debt and obligations
under capital leases ........................................................... 208 20 6
------- ------- -------
1,186 1,260 964
Long-term debt and obligations
under capital leases ............................................................. 313 508 511
Other liabilities ................................................................... 341 375 363
Shareholders' equity
Common stock and paid-in capital ................................................. 335 327 328
Retained earnings ................................................................ 862 860 897
Accumulated other comprehensive loss ............................................. (186) (185) (187)
------- ------- -------
Total shareholders' equity .......................................................... 1,011 1,002 1,038
------- ------- -------
$ 2,851 $ 3,145 $ 2,876
======= ======= =======
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share amounts)
Thirteen weeks ended Thirty-nine weeks ended
---------------------- -----------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
---- ---- ---- ----
Sales .................................................. $ 1,178 $ 1,122 $ 3,320 $ 3,223
Costs and expenses
Cost of sales ........................................ 848 840 2,430 2,324
Selling, general and administrative expenses ......... 256 302 762 827
Depreciation and amortization ........................ 47 38 138 108
Restructuring charge ................................. 3 -- 55 --
Interest expense, net ................................ 17 18 45 35
Other income ......................................... (5) -- (36) (19)
------- ------- ------- -------
1,166 1,198 3,394 3,275
------- ------- ------- -------
Income (loss) from continuing operations
before income taxes ............................... 12 (76) (74) (52)
Income tax expense (benefit) ........................... 5 (36) (29) (26)
------- ------- ------- -------
Income (loss) from continuing operations ............... 7 (40) (45) (26)
Income (loss) from discontinued operations, net
of income tax expense (benefit) of $6, $7,
and $(14) respectively ............................ -- 6 10 (26)
Loss on disposal of discontinued operations, net of tax
expense of $52 .................................... -- (121) -- (121)
------- ------- ------- -------
Net income (loss) ...................................... $ 7 $ (155) $ (35) $ (173)
======= ======= ======= =======
Basic earnings per share:
Income (loss) from continuing operations .......... $ 0.05 $ (0.29) $ (0.33) $ (0.19)
Income (loss) from discontinued operations ........ -- (0.85) 0.07 (1.08)
------- ------- ------- -------
Net income (loss) ................................. $ 0.05 $ (1.14) $ (0.26) $ (1.27)
======= ======= ======= =======
Weighted-average common shares outstanding ............. 137.4 135.6 137.1 135.4
Diluted earnings per share:
Income (loss) from continuing operations .......... $ 0.05 $ (0.29) $ (0.33) $ (0.19)
Income (loss) from discontinued operations ........ -- (0.85) 0.07 (1.08)
------- ------- ------- -------
Net income (loss) ................................. $ 0.05 $ (1.14) $ (0.26) $ (1.27)
======= ======= ======= =======
Weighted-average common shares assuming dilution ....... 138.4 135.6 137.1 135.4
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in millions)
Thirteen weeks ended Thirty-nine weeks ended
--------------------------- ------------------------------
Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
----------- ------------ ----------- ---------------
Net income (loss)........................................... $ 7 $ (155) $ (35) $ (173)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment:
Translation adjustment arising during the period, net
of deferred tax expense of $2, $37, $1 and $41,
respectively............................................ 3 41 1 41
Less: reclassification adjustment for gains included in
net income (loss), net of deferred tax expense of $149... -- (149) - (149)
------- -------- ------ ---------
Net foreign currency translation adjustment................. 3 (108) 1 (108)
Minimum pension liability adjustments, net of
deferred tax expense of $2............................... - 2 - 2
------- -------- ------ ---------
Comprehensive income (loss)................................. $ 10 $ (261) $ (34) $ (279)
======= ======== ====== =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Thirty-nine weeks ended
--------------------------
Oct. 30, Oct. 31,
1999 1998
---------- -----------
From Operating Activities:
Net loss..................................................................... $ (35) $ (173)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities of continuing operations:
Restructuring charge....................................................... 55 -
(Income) loss from discontinued operations, net of tax .................... (10) 26
Loss on disposal of discontinued operations, net of tax.................... - 121
Depreciation and amortization.............................................. 138 108
Gains on sales of assets and investments................................... (36) (19)
Deferred income taxes...................................................... (28) (38)
Change in assets and liabilities, net of acquisition:
Merchandise inventories.................................................. (130) (356)
Accounts payable and other accruals...................................... 45 146
Other, net............................................................... (58) 57
------ -------
Net cash used in operating activities of continuing operations............... (59) (128)
------ -------
From Investing Activities:
Proceeds from sales of assets and investments ............................... 29 22
Capital expenditures......................................................... (122) (395)
Payments for business acquired, net of cash acquired......................... - (29)
------ -------
Net cash used in investing activities of continuing operations............... (93) (402)
------ -------
From Financing Activities:
Increase in short-term debt.................................................. 50 371
Reduction in long-term debt and capital lease obligations.................... - (2)
Issuance of common stock..................................................... 6 10
------ -------
Net cash provided by financing activities of continuing operations........... 56 379
------ -------
Net Cash provided by (used in) Discontinued Operations.......................... (30) 214
Effect of exchange rate fluctuations
on Cash and Cash Equivalents................................................. (4) 3
------- -------
Net change in Cash and Cash Equivalents......................................... (130) 66
Cash and Cash Equivalents at beginning of year.................................. 193 81
------ -------
Cash and Cash Equivalents at end of interim period.............................. $ 63 $ 147
====== =======
Cash paid during the period:
Interest..................................................................... $ 41 $ 32
Income taxes................................................................. $ 19 $ 14
See Accompanying Notes to Condensed Consolidated Financial Statements.
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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 January
30, 1999, as filed with the Securities and Exchange Commission (the "SEC") on
April 30, 1999. 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
thirty-nine weeks ended October 30, 1999 are not necessarily indicative of the
results expected for the year.
1999 Restructuring
During the second quarter of 1999, the Registrant approved a
restructuring 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.
Restructuring charges of $64 million pre-tax ($39 million after-tax) were
recorded in the second quarter. Major components of the charge included
leasehold and real estate disposition costs ($24 million), fixed asset and other
asset impairments ($19 million), inventory markdowns ($12 million) and other
exit costs ($9 million). The inventory markdowns of $12 million were included in
cost of sales while the remaining $52 million restructuring charge was included
in operating expenses. In the third quarter of 1999, the Registrant recorded an
additional charge in connection with the restructuring of approximately $3
million before-tax ($2 million after-tax) related to fixed assets and real
estate disposition costs.
The Registrant entered into an agreement during the second quarter to
sell up to 51 of the 87 Weekend Edition stores, and also expects to sell a
substantial portion of the other businesses to be exited. The remaining
businesses will be liquidated and all dispositions are expected to be complete
by the end of the second quarter of 2000. The current portion of the $37 million
reserve balance at October 30, 1999 is included in accrued liabilities ($25
million), and the balance in other liabilities ($12 million).
On November 2, 1999, the Registrant announced that it had signed a
definitive agreement to sell the assets of its Afterthoughts retail chain for
approximately $250 million. On November 8, 1999, the Registrant announced that
it had registered with the Australian Securities and Investments Commission a
public offering of 100 percent of its holding in Colorado Group, Ltd., its
Australian athletic and specialty footwear format for gross proceeds of
approximately $75 million.
The inventory, fixed assets and other long-lived assets of all
businesses to be exited of $179 million at the lower of cost or net realizable
value have been reclassified as assets held for disposal in the Condensed
Consolidated Balance Sheet as of October 30, 1999.
Sales and net loss for all businesses held for disposal for the
thirteen and thirty-nine weeks ended October 30, 1999 and October 31, 1998,
respectively are presented below.
Thirteen weeks ended Thirty-nine weeks ended
----------------------- -------------------------
(in millions) Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
-------- -------- -------- --------
Sales................................................... $ 110 $ 94 $ 320 $ 269
====== ====== ======= ======
Net loss................................................ $ (3) $ (1) $ (13) $ (11)
====== ====== ======= ======
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Segment Information
Sales and operating results for the Registrant's reportable segments
for the thirteen and thirty-nine weeks ended October 30, 1999 and October 31,
1998, respectively, are presented below. Operating results reflect income (loss)
from continuing operations before income taxes, excluding corporate expense
(income) and net interest expense.
Sales:
(in millions) Thirteen weeks ended Thirty-nine weeks ended
----------------------------- -------------------------------
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
------------- ------------- ------------- -------------
Global Athletic Group................................... $ 1,001 $ 945 $ 2,825 $ 2,730
Northern Group.......................................... 97 97 252 256
All Other............................................... 80 80 243 237
-------- -------- --------- ---------
$ 1,178 $ 1,122 $ 3,320 $ 3,223
======== ======== ========= =========
Operating Results:
(in millions) Thirteen weeks ended Thirty-nine weeks ended
-------------------------------- -----------------------------
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
------------- ------------- ------------- -------------
Global Athletic Group................................... $ 35 $ (16) $ (4) $ 66
Northern Group.......................................... 1 (10) (21) (26)
All Other............................................... (4) (4) (2) 3
----- ------- ------ ---------
Operating profit (loss)........................... 32 (30) (27) 43
Corporate expense (income)........................ 3 28 2 60
Interest expense, net............................. 17 18 45 35
----- ------- ------ ---------
Income (loss) from continuing operations
before income taxes.................................. $ 12 $ (76) $ (74) $ (52)
===== ======= ====== =========
Operating results for the Global Athletic Group for the thirty-nine
weeks ended October 30, 1999 include a restructuring charge of $64 million
related to the businesses to be exited. Operating results for the All Other
category for the thirteen and thirty-nine weeks ended October 30, 1999 include a
restructuring charge of $3 million.
Short-Term Debt
Outstanding borrowings under the Registrant's revolving credit
agreement amounted to $300 million at October 30, 1999. The facility available
at that date of $373 million was reduced to $366 million on November 5, 1999 as
a result of the sale of certain assets. If additional assets are sold or debt or
equity is issued, the revolving credit agreement may be reduced to $350 million,
and will, in any event, be reduced to $300 million by February 15, 2000. Under
the terms of the agreement, the Registrant is required to satisfy certain
financial and operating covenants, which include: maximum ratio of total debt to
earnings before interest, taxes, depreciation and amortization; minimum fixed
charge coverage ratio; minimum tangible net worth, and limits on capital
expenditures. In addition, the Registrant is required to fund the repayment of
the $200 million 7.0 percent debentures, which are due in June 2000, by February
15, 2000. This facility is unsecured relating to the Registrant's inventory;
however, it does include collateralization of certain properties as defined in
the agreement. The agreement also restricts consolidations or mergers with third
parties, investments and acquisitions, payment of dividends and stock
repurchases, and requires borrowings under the agreement to be reduced to not
more than $50 million for a period of at least 15 consecutive days during the
fourth quarter of each year.
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Discontinued Operations
In the third quarter of 1998, the Registrant announced that it was
exiting its International General Merchandise segment and completed the sale of
its 357 store German general merchandise business for $563 million. The
Registrant recorded a net gain of $174 million before-tax, or $39 million
after-tax. The reserve balance of $41 million at October 30, 1999 represents the
costs associated with the disposal of the remaining business of the
International General Merchandise segment, which is expected to be completed in
the fourth quarter of 1999.
The Registrant also announced in the third quarter of 1998 that it was
exiting its Specialty Footwear segment and recorded a net charge to earnings of
$234 million before-tax, or $155 million after-tax for the loss on disposal of
the segment. In the second quarter of 1999, the Registrant recorded a reduction
to the reserve of $17 million before-tax, or $10 million after-tax, reflecting
favorable results from real estate disposition compared to original estimates.
Net disposition activity of approximately $42 million charged to the reserve for
the period from January 30, 1999 to October 30, 1999 represented the payments
for leasehold and real estate disposition expenses, severance and benefit costs
and other related expenses, offset by gains from disposals of real estate. The
reserve balance of $62 million at October 30, 1999 primarily reflects leasehold
obligations, $37 million of which is expected to be utilized within twelve
months and the remaining $25 million thereafter.
In 1997, the Registrant announced that it was exiting its Domestic
General Merchandise segment. Net disposition activity for the thirty-nine weeks
ended October 30, 1999 was approximately $26 million, which included payments
for leasehold and real estate disposition expenses, offset by gains from planned
disposals of real estate. The remaining reserve balance of $9 million at October
30, 1999 consists principally of real estate disposition costs.
The following is a summary of the net assets of discontinued operations:
(in millions) Oct. 30, Oct. 31, Jan. 30,
1999 1998 1999
------- -------- --------
International General Merchandise
Assets .................................... $ 45 $ 57 $ 47
Liabilities ............................... 9 13 11
---- ---- ----
Net assets of discontinued operations ..... $ 36 $ 44 $ 36
---- ---- ----
Specialty Footwear
Assets .................................... $ 52 $190 $ 63
Liabilities ............................... 11 26 17
---- ---- ----
Net assets of discontinued operations ..... $ 41 $164 $ 46
---- ---- ----
Domestic General Merchandise
Assets .................................... $ 16 $ 46 $ 23
Liabilities ............................... 8 34 8
---- ---- ----
Net assets of discontinued operations ..... $ 8 $ 12 $ 15
---- ---- ----
Total net assets of discontinued operations $ 85 $220 $ 97
==== ==== ====
The assets of the International General Merchandise and Specialty
Footwear segments consist primarily of inventory and fixed assets. The assets of
the Domestic General Merchandise segment primarily include fixed assets and
deferred tax assets. Liabilities primarily reflect accounts payable and other
accrued liabilities.
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1991 Restructuring and 1993 Repositioning Reserves
In connection with the 1991 restructuring and 1993 repositioning
programs, the Registrant recorded adjustments of $4 million and $10 million,
respectively, in selling, general and administrative expenses for the thirteen
and thirty-nine weeks ended October 30, 1999. The adjustments primarily
reflect sublease and other income relating to owned and leased properties. The
remaining reserve balance of $11 million at October 30, 1999 will be required
to satisfy future lease obligations and cancellations.
Earnings Per Share
Basic earnings per share is computed as net income (loss) 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
assuming dilution follows:
Thirteen weeks ended Thirty-nine weeks ended
--------------------------- ----------------------------
(in millions) Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
----------- ----------- ------------ -----------
Weighted-average common shares outstanding.................... 137.4 135.6 137.1 135.4
Incremental common shares issuable............................ 1.0 - - -
----------- ----------- ------------ -----------
Weighted-average common shares assuming dilution.............. 138.4 135.6 137.1 135.4
=========== =========== ============ ===========
Incremental common shares were not included in the computation for the
year-to-date period ended October 30, 1999 or the quarter and year-to-date
periods ended October 31, 1998, since their inclusion in periods when the
Registrant reported a loss from continuing operations would be antidilutive.
Antidilutive options were not included in the computation of diluted earnings
per share and would not have a material impact on diluted earnings per share.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss was comprised of foreign currency
translation adjustments of $143 million, $142 million, and $144 million, at
October 30, 1999, October 31, 1998, and January 30, 1999, respectively, and
minimum pension liability adjustments of $43 million at each balance sheet date
presented.
Reclassifications
Certain balances in prior periods have been reclassified to conform
with the presentation adopted in the current period. As discussed above, the
inventory, fixed assets and other long-lived assets of all businesses to be
exited have been reclassified as assets held for disposal in the Condensed
Consolidated Balance Sheet as of October 30, 1999.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which was
effective for fiscal quarters of fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB No. 133, an
Amendment of FASB Statement No. 133," which defers the implementation of SFAS
No. 133 by one year. The statement will now be effective for the Registrant in
2001. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Registrant is in the
process of evaluating SFAS No. 133 to determine its impact on the consolidated
financial statements.
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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, Randy River Canada, Foot Locker
Outlets, Colorado, Team Edition, Going To The Game, Weekend Edition, Burger King
franchises, Afterthoughts and Garden Centers.
RESULTS OF OPERATIONS
Sales of $1,178 million for the third quarter of 1999 increased 5.0
percent from sales of $1,122 million for the third quarter of 1998, reflecting
an increase of 4.3 percent in comparable-store sales. Sales for the thirty-nine
weeks ended October 30, 1999 increased 3.0 percent to $3,320 million as compared
with $3,223 million for the thirty-nine weeks ended October 31, 1998, reflecting
an increase of 1.4 percent in comparable-store sales. Excluding the effect of
foreign currency fluctuations and sales from businesses disposed and held for
disposal, sales increased 4.2 percent and 2.0 percent for the third quarter and
year-to-date periods of 1999, respectively, as compared with the corresponding
prior-year periods.
Gross margin, as a percentage of sales, increased by approximately 290
basis points to 28.0 percent in the third quarter of 1999 and declined from 27.9
percent to 26.8 percent for the thirty-nine weeks ended October 30, 1999, as
compared with the corresponding prior-year periods. The increase in the third
quarter reflects reduced markdown activity in 1999 as compared to the 1998 third
quarter when the Registrant embarked on an aggressive inventory reduction
program, offset by increased occupancy costs. The decline for the thirty-nine
weeks principally reflects increased occupancy costs of the Global Athletic
Group and inventory markdowns of $12 million in the second quarter of 1999
associated with the Registrant's restructuring plan to exit non-core businesses.
Excluding the inventory markdowns of $12 million, gross margin declined by
approximately 70 basis points on a year-to-date basis.
Selling, general and administrative expenses ("SG&A") of $256 million
improved by approximately 520 basis points to 21.7 percent of sales in the third
quarter of 1999 as compared with the corresponding prior-year period. SG&A of
$762 million for the thirty-nine weeks ended October 30, 1999, improved by
approximately 270 basis points to 23.0 percent of sales. These improvements
reflect the Registrant's successful cost cutting initiatives at both the
corporate and divisional levels. The Registrant expects to reduce its full-year
1999 corporate and divisional operating expenses by $100 million, compared to
1998. The Registrant expects to further cut corporate expenses to one percent of
sales by 2001.
In connection with its 1999 restructuring plan to exit non-core
businesses, the Registrant recorded restructuring charges of $64 million pre-tax
($39 million after-tax) in the second quarter and an additional charge of $3
million pre-tax ($2 million after-tax) in the third quarter. Inventory markdowns
of $12 million were included in cost of sales while the remaining $52 million
restructuring charge was included in operating expenses.
Depreciation and amortization of $47 million and $138 million for the
thirteen and thirty-nine weeks ended October 30, 1999 increased by 23.7 percent
and 27.8 percent, respectively, as compared with the corresponding prior-year
periods. The increase reflects depreciation and amortization of assets included
in the 1998 capital expenditure program, which concentrated on new store
openings and remodeling of existing facilities, and also included management
information systems.
Interest expense, net of interest income, increased $10 million for the
thirty-nine weeks ended October 30, 1999, as compared with the corresponding
prior-year period. The increase reflects $7 million incremental interest expense
attributable to higher interest rates and fees, and increased levels of average
short-term borrowing during the first half of 1999. Interest expense, net of
interest income, of $17 million for the third quarter of 1999 declined from the
corresponding period a year earlier as a result of higher short-term borrowings
in the third quarter of 1998. Interest income of $6 million for the thirty-nine
weeks ended October 30, 1999 primarily related to income tax refunds in the
first quarter of 1999, whereas the corresponding prior-year period included
interest income of $9 million, $7 million of which related to a franchise tax
settlement in the second quarter of 1998.
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Corporate income, included in other income, of $36 million for the
thirty-nine weeks ended October 30, 1999, reflects real estate gains of $28
million related to the sale of eleven properties, and the recognition of $8
million of the deferred gain recorded on the 1998 sale of the corporate
headquarters. This compares with other income of $19 million recorded in the
comparable period last year relating to the sale of the Registrant's Garden
Centers nursery business.
The Registrant reported net income for the 1999 third quarter of $7
million or $0.05 per diluted share. Excluding net income for businesses disposed
and held for disposal and related restructuring charges, net income was $12
million, or $0.09 per diluted share for the quarter. For the 1999 year-to-date
period, the Registrant reported a net loss of $35 million or $0.26 per diluted
share, which includes income from discontinued operations of $10 million
after-tax, or $0.07 per diluted share, reflecting favorable results from
Specialty Footwear real estate dispositions compared to original estimates.
Excluding income from discontinued operations and net income for businesses
disposed and held for disposal and related restructuring charges, net income was
$9 million, or $0.07 per diluted share for the 1999 year-to-date period. The
Registrant reported a net loss for the thirteen and thirty-nine weeks ended
October 31, 1998 of $155 million and $173 million, respectively, or $1.14 and
$1.27 per diluted share, which includes a $115 million and $147 million loss
from discontinued operations, respectively.
STORE COUNT
The following table summarizes store count by segment, after
reclassification for businesses disposed and held for disposal. During the
thirty-nine weeks ended October 30, 1999, the Registrant remodeled or relocated
238 stores, 51 of which related to the businesses held for disposal.
Jan. 30, Oct. 30, Oct. 31,
1999 Opened Closed 1999 1998
-------- ------ ------ -------- --------
Global Athletic Group ................. 3,835 97 224 3,708 3,776
Northern Group ........................ 940 16 24 932 914
Disposed and held for disposal ........ 1,227 111 75 1,263 1,274
----- ----- ----- ----- -----
Total .............................. 6,002 224 323 5,903 5,964
----- ----- ----- ----- -----
SALES
The following table summarizes sales by segment, after reclassification
for businesses disposed and held for disposal. The disposed and held for
disposal category represents all businesses sold or closed or held for disposal
other than the discontinued segments, and are therefore included in continuing
operations.
Thirteen weeks ended Thirty-nine weeks ended
-------------------------- -------------------------
(in millions) Oct. 30, Oct.31, Oct. 30, Oct. 31,
1999 1998 1999 1998
---------- ------ ------- -------
Global Athletic Group ................. $ 971 $ 931 $2,748 $2,694
Northern Group ........................ 97 97 252 256
Disposed and held for disposal ........ 110 94 320 273
------ ------ ------ ------
Total sales ........................ $1,178 $1,122 $3,320 $3,223
====== ====== ====== ======
Global Athletic Group sales increased by 4.3 percent and by 2.0 percent
for the 1999 third quarter and year-to-date periods, as compared with the
corresponding prior-year periods, reflecting comparable-store sales increases of
5.5 percent and 1.6 percent, respectively. These increases were primarily
attributable to improved sales performance at remodeled and relocated stores,
coupled with stronger sales performance of high-end athletic footwear, primarily
running and basketball.
Excluding the impact of foreign currency fluctuations, Northern Group
sales declined by 1.7 percent for the thirty-nine weeks ended October 30, 1999
and were essentially flat for the quarter. Comparable-store sales declined by
3.9 percent and by 5.4 percent for the third quarter and year-to-date periods,
respectively, reflecting an improvement over trends in the first half of 1999.
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OPERATING RESULTS
Operating results reflect income (loss) from continuing operations
before income taxes, excluding corporate expense (income) 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 Thirty-nine weeks ended
------------------------- ---------------------------
(in millions) Oct. 30, Oct. 31, Oct. 30, Oct. 31,
1999 1998 1999 1998
----------- ---------- ---------- ------------
Global Athletic Group......................... $ 40 $ (15) $ 83 $ 72
Northern Group................................ 1 (10) (21) (26)
Disposed and held for disposal................ (9) (5) (89) (3)
----------- ---------- ---------- ------------
Total operating profit (loss).............. $ 32 $ (30) $ (27) $ 43
=========== ========== ========== ============
The Global Athletic Group reported an operating profit of $40 million
for the third quarter of 1999, a significant improvement over the operating loss
reported in the corresponding prior-year period. Operating profit for the
thirty-nine weeks ended October 30, 1999 increased by 15.3 percent as compared
with the corresponding prior-year period. These increases reflect improved sales
performance and reduced markdown activity in both the domestic and international
Foot Locker formats, offset, in part, by increased occupancy costs and
additional depreciation and amortization of remodeled stores.
The Northern Group's operating results improved for both the thirteen
and thirty-nine weeks ended October 30, 1999 as compared with the corresponding
prior-year periods, primarily as a result of decreased markdown activity in the
third quarter of 1999.
Operating results for businesses disposed and held for disposal for the
thirteen and thirty-nine weeks ended October 30, 1999 include restructuring
charges of $3 million and $67 million, respectively. Operating results for the
thirty-nine weeks ended October 31, 1998 include the $19 million gain on the
sale of the Garden Centers nursery business.
SEASONALITY
The Registrant's businesses are seasonal in nature. Historically, the
greatest proportion of sales and net income is generated in the fourth quarter
and the lowest proportions of sales and net income are generated in the first
and second quarters, reflecting seasonal buying patterns. As a result of these
seasonal sales patterns, inventory generally increases in the third quarter in
anticipation of strong fourth quarter sales.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant's primary sources of cash have been from operations,
borrowings under the revolving credit agreement, financing real estate with
operating leases, and proceeds from the sale of non-strategic assets. The
principal use of cash has been to finance inventory requirements, which are
generally at their peak during the third and fourth quarters; capital
expenditures related to store openings, store remodeling and management
information systems; and to fund other general working capital requirements.
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Operating activities of continuing operations reduced cash by $59
million for the thirty-nine weeks ended October 30, 1999, as compared with a
reduction of $128 million in the corresponding prior-year period. These amounts
reflect the loss from continuing operations reported by the Registrant in those
periods, adjusted for non-cash items and working capital changes. The change in
cash used for merchandise inventories and accounts payable primarily reflects
the additional inventory purchases in 1998 related to the opening of new
larger-size athletic formats, coupled with a 15.5 percent decline in inventories
per square foot in 1999. Merchandise inventories, excluding businesses held for
disposal, of $863 million at October 30, 1999 declined by $157 million from
$1,020 million at October 31, 1998. Management believes inventories are at
appropriate levels for the upcoming holiday selling season.
Net cash used in investing activities of continuing operations was $93
million and $402 million for the thirty-nine weeks of 1999 and 1998,
respectively. Capital expenditures of $122 million for the thirty-nine weeks
ended October 30, 1999 primarily related to store remodelings as compared with
$395 million for the corresponding prior-year period. Planned capital
expenditures of $175 million for 1999 include expenditures for 350 new and
remodeled stores, management information systems, logistics and other support
facilities. Proceeds from real estate disposition activities amounted to $29
million in 1999, which reflected the sale of eleven properties. In the first
quarter of 1998, cash used for the acquisition of Athletic Fitters of $29
million was partially offset by $22 million cash proceeds received from the sale
of the Garden Centers nursery business. On November 2, 1999, the Registrant
announced that it had signed a definitive agreement to sell the assets of its
Afterthoughts retail chain for approximately $250 million. This transaction
closed on December 1, 1999, and a gain of approximately $87 million after-tax
will be recorded in the fourth quarter. On November 8, 1999, the Registrant
announced that it had registered with the Australian Securities and Investments
Commission a public offering of 100 percent of its holding in Colorado Group,
Ltd., its Australian athletic and specialty footwear format for gross proceeds
of approximately $75 million. This transaction closed on December 6, 1999, and
the Registrant received gross proceeds of approximately $75 million in
connection with the offering and will record an after-tax gain of approximately
$8 million in continuing operations related to the Colorado athletic format in
the fourth quarter.
Financing activities for the Registrant's continuing operations
contributed $56 million in cash for the thirty-nine weeks ended October 30, 1999
and $379 million in cash for the corresponding prior-year period. Outstanding
borrowings under the Registrant's revolving credit agreement were $300 million
and $371 million at October 30, 1999 and October 31, 1998, respectively, and
have been classified as short-term debt. The facility available at October 30,
1999 of $373 million was reduced to $366 million on November 5, 1999, and was
further reduced on November 24, 1999 to $358 million, as a result of the sale of
certain assets. As a result of the sale of the Registrant's Afterthoughts
division on December 1, 1999, the revolving credit agreement was reduced to $350
million, and will be reduced to $300 million by February 15, 2000. The
Registrant incurred incremental interest expense for the thirty-nine weeks of
1999 as compared with 1998, due to higher interest rates and fees, and increased
levels of average short-term borrowings during the first half of 1999.
Management believes current domestic and international credit facilities and
cash provided by operations and the sale of its non-core businesses will be
adequate to finance its working capital requirements and support the development
of its short-term and long-term strategies. The Registrant expects to fund the
repayment of its $200 million 7.0 percent debentures due in June 2000 through
asset sales and/or future financing on or before February 15, 2000, as required
by its revolving credit agreement.
Net cash of $30 million used in discontinued operations in 1999
primarily reflects real estate disposition expenses charged to the Specialty
Footwear and Domestic General Merchandise reserves. Net cash provided by
discontinued operations of $214 million in 1998 represents the after-tax net
proceeds from the sale of the German general merchandise operations of $360
million, offset by the discontinuance of the Specialty Footwear segment, as well
as further utilization of the Domestic General Merchandise reserve.
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YEAR 2000 READINESS DISCLOSURE
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits, rather than four, to define the applicable year.
Mistaking "00" for the year 1900 could result in miscalculations and errors and
cause significant business interruptions for the Registrant, as well as for the
government and most other companies. The Registrant has instituted a plan to
assess its state of readiness for Y2K, to remediate those systems that are
non-compliant and to assure that material third parties will be Y2K compliant.
State of Readiness
The Registrant has assessed all operating and application systems
(including point of sale) for Y2K readiness, giving the highest priority to
those information technology applications (IT) systems that are considered
critical to its business operations. Those applications considered most critical
to the Registrant's business operations have been remediated. The necessary
enhancements to the point of sale equipment are complete and all stores have
been upgraded with the Y2K remediated release of store systems software. Code
changes have been made to the merchandising and logistics legacy systems, and
remediation is complete. In July, the Registrant performed a test of its Y2K
compliant (and recently upgraded) operating software on an isolated processor,
and the Registrant considered the results of the test to be satisfactory.
In-house certification testing of all application software using the upgraded
operating system infrastructure was completed in the third quarter.
Apart from the Y2K issue, the Registrant has developed and installed
throughout its businesses beginning in 1997 an information computer system
("ECLIPSE"), which has been installed in most divisions for the finance and
human resources functions. The ECLIPSE project was undertaken for business
reasons unrelated to Y2K. However, the installation of ECLIPSE eliminates the
need to reprogram or replace certain existing software for Y2K compliance.
The Registrant has compiled a comprehensive inventory of its non-IT
systems, which include those systems containing embedded chip technology
commonly found in buildings and equipment connected with a building's
infrastructure. Management has established the priority of systems identified as
non-compliant and any changes required to the non-IT systems have been
implemented. Investigations of the embedded chip systems indicate that Y2K will
not affect systems such as heating, ventilation and security in most store
locations.
Material Third Parties
The Registrant purchased approximately 44 percent of its 1998
merchandise from one major vendor. As a result, the Registrant's ability to
operate could be materially affected by the non-compliance of this key supplier.
Management has determined through several meetings and interviews that this
vendor's Y2K readiness program is substantially complete. Electronic Data
Interchange software was successfully tested with this vendor, as well as other
key vendors, and joint contingency plans have been developed for distribution
and order entry. Management does not expect the state of readiness of other
vendors to have a material adverse impact on the Registrant's ability to
operate. The level of compliance of the Registrant's major providers of banking
services and transportation has been assessed and management believes the
related risks to be minimal. The Registrant is subject to general Y2K risk
relating to telecommunications and utilities.
Y2K Costs
The Registrant is utilizing both internal and external resources to
address the Y2K issue. Internal resources reflect the reallocation of IT
personnel to the Y2K project from other IT projects. In the opinion of
management, the deferral of such other projects will not have a significant
adverse effect on continuing operations. The total direct cost, excluding
ECLIPSE, to remediate the Y2K issue is estimated to be approximately $5.2
million, of which $3.0 million was spent in 1998 and a further $1.8 million
through the end of the third quarter of 1999. All costs, excluding ECLIPSE, are
being expensed as incurred and are funded through operating cash flows. The
Registrant's Y2K costs are based on management's best estimates and may be
updated, as additional information becomes available. Management does not expect
the total Y2K remediation costs to be significant to its results of operations
or financial condition.
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16
Contingency Plan/Risks
The Registrant's contingency plans for those areas that might be
affected by Y2K are substantially complete. Contingency store operating
procedures have been distributed to store managers to be used in the event of
foreseeable business interruptions. Joint contingency plans have been developed
with the Registrant's key vendor to provide for a smooth flow of inventory from
this vendor. Certain IT and other personnel will be available throughout the
millennium date change to correct any issues that may arise. Although the full
consequences are unknown, the failure of either the Registrant's critical
systems or those of its material third party suppliers to be Y2K compliant would
result in the interruption of the Registrant's business, which could have a
significant adverse effect on its results of operations or financial condition.
However, if any business interruptions occur in January 2000, and they are
promptly corrected, management expects it would not significantly impact the
Registrant's results of operations or financial position. Typically, at that
time of year, after the holiday season, there is lower customer demand and
borrowing requirements are not at their peak. In addition, successful inventory
and working capital management, along with the contingency plans for store
operations, will help mitigate the risks associated with the Y2K issue. However,
some business disruptions may occur even with defensive contingency plans.
IMPACT OF EUROPEAN MONETARY UNION
The European Union is comprised of fifteen member states, eleven of
which adopted a common currency, the "euro," effective January 1, 1999. From
that date 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 will be 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 July 1, 2002.
The Registrant has reviewed the impact of the euro conversion on its
information systems, accounting systems, vendor payments and human resources.
Modifications required to be made to the point of sale hardware and software
will be facilitated by the Y2K remediation.
The adoption of a single European currency will lead to greater product
pricing transparency and a more competitive environment. The Registrant will
display the euro equivalent price of merchandise as a customer service during
the transition period, as will many retailers, until the official euro
conversion in 2002. 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 such things as
future capital expenditures, expansion, strategic plans, growth of the
Registrant's business and operations, Y2K and euro related actions and other
such matters are forward-looking statements. These forward-looking statements
are based on many assumptions and factors including effects of currency
fluctuations, 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 Y2K and euro issues. Any changes in such assumptions or
factors could produce significantly different results.
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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
material effect on the Registrant's consolidated financial position 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 17 through 19. The exhibits which are in this report immediately
follow the index.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K dated August 18, 1999 (date
of earliest event reported) reporting sales and earnings for the second
quarter ended July 31, 1999.
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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: December 14, 1999 /s/ Bruce Hartman
----------------------------
BRUCE HARTMAN
Senior Vice President
and Chief Financial Officer
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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).
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20
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 % Debentures due 2022
(incorporated herein by reference to Exhibit
4 to the Registrant's Form 8-K dated January
16, 1992).
4.6 Purchase Agreement dated June 1, 1995 and
Form of 7% Notes due 2000 (incorporated
herein by reference to Exhibits 1 and 4,
respectively, to the Registrant's Form 8-K
dated June 7, 1995).
4.7 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 Employment Agreement with Roger N. Farah
dated as of August 16, 1999
10.2 Employment Agreement with Dale W. Hilpert
dated as of August 16, 1999
11 *
12 Computation of Ratio of Earnings to Fixed
Charges.
13 *
15 Letter re: Unaudited Interim Financial
Statements.
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21
Exhibit No. in Item 601
of Regulation S-K Description
- ----------------------- -----------
16 *
17 *
18 *
19 *
20 *
21 *
22 *
23 *
24 *
25 *
26 *
27.1 Financial Data Schedule -
October 30, 1999 (which is
submitted electronically to
the SEC for information
only and not filed).
99 Independent Accountants' Review Report.
* Not applicable
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22
Exhibits filed with this Form 10-Q:
Exhibit No. Description
----------- -----------
10.1 Employment Agreement with Roger N. Farah
dated as of August 16, 1999
10.2 Employment Agreement with Dale W. Hilpert
dated as of August 16, 1999
12 Computation of Ratio of Earnings to Fixed
Charges.
15 Letter re: Unaudited Interim Financial
Statements.
27.1 Financial Data Schedule - October 30, 1999.
99 Independent Accountants' Review Report.