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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 MAY 4, 2002
COMMISSION FILE NO. 1-6695
--------------------------
JO-ANN STORES, INC.
(Exact name of Registrant as specified in its charter)
OHIO 34-0720629
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5555 DARROW ROAD, HUDSON, OHIO 44236
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 656-2600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares of Class A Common Stock outstanding at June 11, 2002: 10,051,011
Shares of Class B Common Stock outstanding at June 11, 2002: 8,952,987
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JO-ANN STORES, INC.
FORM 10-Q INDEX
FOR THE QUARTER ENDED MAY 4, 2002
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Page Numbers
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of May 4, 2002 and February 2, 2002 3
Consolidated Statements of Operations for the Thirteen Weeks
Ended May 4, 2002 and May 5, 2001 4
Consolidated Statements of Cash Flows for the Thirteen Weeks
Ended May 4, 2002 and May 5, 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Page 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JO-ANN STORES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MAY 4, FEBRUARY 2,
2002 2002
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS,
EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Current assets:
Cash and temporary cash investments $ 19.8 $ 21.1
Inventories 400.1 369.0
Prepaid expenses and other current assets 47.9 48.1
-------- --------
Total current assets 467.8 438.2
Property, equipment and leasehold improvements, net 203.9 210.1
Goodwill, net 26.5 26.5
Other assets 18.2 18.9
-------- --------
Total assets $ 716.4 $ 693.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 142.4 $ 123.1
Accrued expenses 75.4 82.3
-------- --------
Total current liabilities 217.8 205.4
Long-term debt 223.5 223.7
Deferred income taxes 23.6 23.6
Other long-term liabilities 8.4 8.2
Shareholders' equity:
Common stock:
Class A, stated value $0.05 per share; issued and outstanding
10,013,152 and 9,825,802, respectively 0.6 0.6
Class B, stated value $0.05 per share; issued and outstanding
8,822,536 and 8,806,211, respectively 0.5 0.5
Additional paid-in capital 100.8 99.7
Unamortized restricted stock awards (0.5) (0.6)
Retained earnings 181.6 172.9
Accumulated other comprehensive loss (2.7) (3.0)
-------- --------
280.3 270.1
Treasury stock, at cost (37.2) (37.3)
-------- --------
Total shareholders' equity 243.1 232.8
-------- --------
Total liabilities and shareholders' equity $ 716.4 $ 693.7
======== ========
See notes to consolidated financial statements
Page 3
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN WEEKS ENDED
-------------------------------
MAY 4, MAY 5,
2002 2001
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT
SHARE AND PER SHARE DATA)
Net sales $ 372.4 $ 328.9
Cost of sales 191.6 177.8
--------- ---------
Gross margin 180.8 151.1
Selling, general and administrative expenses 151.2 143.5
Depreciation and amortization 9.2 9.7
--------- ---------
Operating profit (loss) 20.4 (2.1)
Interest expense 6.4 7.2
--------- ---------
Income (loss) before income taxes 14.0 (9.3)
Income tax provision (benefit) 5.3 (3.5)
--------- ---------
Income (loss) before extraordinary item 8.7 (5.8)
Extraordinary item, loss related to early retirement of debt,
net of tax benefit of $0.4 million -- (0.6)
--------- ---------
Net income (loss) $ 8.7 $ (6.4)
========= =========
Basic net income (loss) per common share:
Before extraordinary item $ 0.46 $ (0.32)
========= =========
As reported $ 0.46 $ (0.35)
========= =========
Diluted net income (loss) per common share:
Before extraordinary item $ 0.43 $ (0.32)
========= =========
As reported $ 0.43 $ (0.35)
========= =========
Weighted average shares outstanding (millions):
Basic 18.7 18.3
========= =========
Diluted 20.0 18.3
========= =========
See notes to consolidated financial statements
Page 4
JO-ANN STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THIRTEEN WEEKS ENDED
-------------------------------------
MAY 4, MAY 5,
2002 2001
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
Net cash flows from operating activities:
Net income (loss) $ 8.7 $ (6.4)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 9.2 9.7
Extraordinary item, net of tax -- 0.6
Changes in operating assets and liabilities:
Increase in inventories (31.1) (25.7)
Decrease in prepaid expenses and other current assets 0.2 0.7
Increase (decrease) in accounts payable 19.3 (16.1)
Decrease in accrued expenses (6.9) (14.6)
Other, net 1.2 1.2
-------- --------
Net cash provided by (used for) operating activities 0.6 (50.6)
Net cash flows used for investing activities:
Capital expenditures (2.9) (45.0)
Other, net -- (0.9)
-------- --------
Net cash used for investing activities (2.9) (45.9)
Net cash flows provided by financing activities:
Net increase (decrease) in credit facilities (0.2) 105.9
Other, net 1.2 (3.8)
-------- --------
Net cash provided by financing activities 1.0 102.1
-------- --------
Net increase (decrease) in cash (1.3) 5.6
Cash and temporary cash investments at beginning of period 21.1 17.5
-------- --------
Cash and temporary cash investments at end of period $ 19.8 $ 23.1
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 9.9 $ 10.6
Income taxes, net of refunds 0.2 0.2
See notes to consolidated financial statements
Page 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JO-ANN STORES, INC.
NOTE 1 - BASIS OF PRESENTATION
Jo-Ann Stores, Inc. (the "Company"), an Ohio corporation, is a fabric
and craft retailer operating 951 retail stores in 49 states at May 4, 2002. The
881 traditional and 70 superstores feature a broad line of apparel, craft and
home decorating fabrics, notions, crafts, seasonal and home accessories and
floral and framing products.
The consolidated financial statements include the accounts of the
Company and its subsidiaries and have been prepared without audit, pursuant to
the rules of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures herein are adequate to make the
information not misleading. The statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
Typical of most retail companies, the Company's business is highly
seasonal with the majority of revenues and operating profits generated in the
second half of the fiscal year; therefore, earnings or losses for a particular
interim period are not indicative of full year results. In the opinion of
management, the consolidated financial statements contain all adjustments
(consisting only of normal recurring accruals) necessary for a fair statement of
results for the interim periods presented.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share are computed by dividing net income
(loss) by the weighted average number of shares outstanding during the period.
Diluted earnings per share include the effect of the assumed exercise of
dilutive stock options under the treasury stock method. Stock options have not
been included in the earnings per common share calculation for the thirteen
weeks ended May 5, 2001, as their inclusion would be anti-dilutive.
NOTE 3 - STORE CLOSING CHARGES
As part of the Company's previously announced turnaround plan, the
Company undertook a comprehensive review of its existing store base. During
fiscal years 2001 and 2002, a total of 144 traditional stores were identified
for closing. In addition, the Company identified four etc superstores to either
downsize or buyout the remaining lease obligations. A total of $26.4 million in
pre-tax charges were recorded for these 148 store closings (the "Store Closing
Charges") in fiscal years 2001 and 2002. The Store Closing Charges included
asset write-downs associated with the identified stores, and the estimated
closing costs for stores whose closings were expected to be completed in the
next twelve months. Through the end of the first quarter of fiscal 2003, 87 of
the 148 stores identified for closing have been closed, and the Company
estimates that 30 to 40 additional stores will be closed during the balance of
fiscal year 2003 as part of this turnaround initiative. The balance of the
stores identified for closing are expected to close in fiscal 2004.
Page 6
Summarized below is a reconciliation of the activity in the Store
Closing Charges liability balance for the first quarter of fiscal 2003. The
Company believes that the remaining reserve balance at May 4, 2002 is adequate
to cover the remaining obligations associated with the Store Closing Charges.
NONCANCELABLE
Dollars in millions LEASE OBLIGATIONS OTHER TOTAL
------------------- ---------------- -----------------
Balance - February 2, 2002........... $9.6 $1.2 $10.8
Cash payments........................ (0.3) (0.7) (1.0)
------------------- ---------------- -----------------
Balance - May 4, 2002................ $9.3 $0.5 $ 9.8
=================== ================ =================
NOTE 4 - FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company is subject to risk resulting from interest rate
fluctuations, as interest on the Company's Credit Facility is based on variable
rates. The Company's objective in managing its interest rate exposure is to
limit the impact of interest rate changes on earnings and cash flows. Interest
rate swaps are primarily utilized to achieve this objective, effectively
converting a portion of its variable-rate exposures to fixed interest rates.
In accordance with SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities", the Company has reviewed and designated all of its
interest rate swap agreements as cash flow hedges and now recognizes the fair
value of its interest rate swap agreements on the balance sheet. Changes in the
fair value of these agreements are recorded in other comprehensive income (loss)
and reclassified into earnings as the underlying hedged item affects earnings.
Other comprehensive income (loss) includes the effects of derivative
transactions accounted for under SFAS No. 133, net of related tax. Comprehensive
income (loss) consists of the following:
THIRTEEN WEEKS ENDED
------------------------------
MAY 4, MAY 5,
Dollars in millions 2002 2001
-------------- --------------
Net income (loss) $8.7 $(6.4)
Cumulative effect of change in accounting principle -- (1.7)
Other comprehensive income (loss) 0.3 (0.8)
-------------- --------------
Comprehensive income (loss) $9.0 $(8.9)
============== ==============
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets" ("SFAS No. 142"). SFAS No. 142 establishes accounting standards for
intangible assets and goodwill. The Company adopted SFAS No 142 on February 3,
2002. Application of the non-amortization provision of SFAS No. 142 will result
in a reduction in amortization expense of approximately $0.7 million per year.
The Company performed the first of the required impairment tests of goodwill and
based upon the transition impairment test performed on recorded goodwill, no
impairment to goodwill exists and the Company will not record a charge in
connection with the adoption of this standard.
Page 7
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED)
The Company's 10-3/8% senior subordinated notes and Credit Facility are
fully and unconditionally guaranteed, on a joint and several basis, by the
wholly-owned subsidiaries of the Company. The senior subordinated notes are
subordinated to the Company's Credit Facility. Summarized consolidating
financial information of the Company (excluding its subsidiaries) and the
guarantor subsidiaries as of May 4, 2002 and May 5, 2001 are as follows:
CONSOLIDATING BALANCE SHEETS
MAY 4, 2002
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------- ---------- ------------ ------------ ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and temporary cash investments $ 16.5 $ 3.3 $ -- $ 19.8
Inventories 161.9 238.2 -- 400.1
Prepaid expenses and other current assets 35.8 12.1 -- 47.9
-------- -------- -------- --------
Total current assets 214.2 253.6 -- 467.8
Property, equipment and leasehold improvements,
net 63.1 140.8 -- 203.9
Goodwill, net -- 26.5 -- 26.5
Other assets 16.6 1.6 -- 18.2
Investment in subsidiaries 11.7 -- (11.7) --
Intercompany receivable 419.0 -- (419.0) --
-------- -------- -------- --------
Total assets $ 724.6 $ 422.5 $ (430.7) $ 716.4
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 133.2 $ 9.2 $ -- $ 142.4
Accrued expenses 105.4 (30.0) -- 75.4
-------- -------- -------- --------
Total current liabilities 238.6 (20.8) -- 217.8
Long-term debt 223.5 -- -- 223.5
Deferred income taxes 14.6 9.0 -- 23.6
Other long-term liabilities 4.8 3.6 -- 8.4
Intercompany payable -- 419.0 (419.0) --
Shareholders' equity:
Common stock 1.1 -- -- 1.1
Additional paid-in capital 100.8 -- -- 100.8
Unamortized restricted stock awards (0.5) -- -- (0.5)
Retained earnings 181.6 11.7 (11.7) 181.6
Accumulated other comprehensive loss (2.7) -- -- (2.7)
-------- -------- -------- --------
280.3 11.7 (11.7) 280.3
Treasury stock, at cost (37.2) -- -- (37.2)
-------- -------- -------- --------
Total shareholders' equity 243.1 11.7 (11.7) 243.1
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 724.6 $ 422.5 $ (430.7) $ 716.4
======== ======== ======== ========
Page 8
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING BALANCE SHEETS
FEBRUARY 2, 2002
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------- ----------- ------------ ------------ ------------
(Dollars in millions)
ASSETS
Current assets:
Cash and temporary cash investments $ 17.5 $ 3.6 $ -- $ 21.1
Inventories 152.8 216.2 -- 369.0
Prepaid expenses and other current assets 35.8 12.3 -- 48.1
-------- -------- -------- --------
Total current assets 206.1 232.1 -- 438.2
Property, equipment and leasehold improvements,
net 64.7 145.4 -- 210.1
Goodwill, net -- 26.5 -- 26.5
Other assets 17.3 1.6 -- 18.9
Investment in subsidiaries 3.6 -- (3.6) --
Intercompany receivable 418.0 -- (418.0) --
-------- -------- -------- --------
Total assets $ 709.7 $ 405.6 $ (421.6) $ 693.7
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 122.7 $ 0.4 $ -- $ 123.1
Accrued expenses 111.2 (28.9) -- 82.3
-------- -------- -------- --------
Total current liabilities 233.9 (28.5) -- 205.4
Long-term debt 223.7 -- -- 223.7
Deferred income taxes 14.6 9.0 -- 23.6
Other long-term liabilities 4.7 3.5 -- 8.2
Intercompany payable -- 418.0 (418.0) --
Shareholders' equity:
Common stock 1.1 -- -- 1.1
Additional paid-in capital 99.7 -- -- 99.7
Unamortized restricted stock awards (0.6) -- -- (0.6)
Retained earnings 172.9 3.6 (3.6) 172.9
Accumulated other comprehensive loss (3.0) -- -- (3.0)
-------- -------- -------- --------
270.1 3.6 (3.6) 270.1
Treasury stock, at cost (37.3) -- -- (37.3)
-------- -------- -------- --------
Total shareholders' equity 232.8 3.6 (3.6) 232.8
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 709.7 $ 405.6 $ (421.6) $ 693.7
======== ======== ======== ========
Page 9
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED MAY 4, 2002 AND MAY 5, 2001
MAY 4, 2002
---------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------- --------- ------------ ------------ ------------
(Dollars in millions)
Net sales $ 205.1 $ 279.6 $ (112.3) $ 372.4
Cost of sales 116.9 187.0 (112.3) 191.6
-------- -------- -------- --------
Gross margin 88.2 92.6 -- 180.8
Selling, general and administrative expenses 75.9 75.3 -- 151.2
Depreciation and amortization 3.4 5.8 -- 9.2
-------- -------- -------- --------
Operating profit 8.9 11.5 -- 20.4
Interest expense 2.9 3.5 -- 6.4
-------- -------- -------- --------
Income before income taxes 6.0 8.0 -- 14.0
Income tax provision (benefit) 5.4 (0.1) -- 5.3
-------- -------- -------- --------
Income before equity income 0.6 8.1 -- 8.7
Equity income from subsidiaries 8.1 -- (8.1) --
-------- -------- -------- --------
Net income $ 8.7 $ 8.1 $ (8.1) $ 8.7
======== ======== ======== ========
MAY 5, 2001
---------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------- --------- ------------ ------------ ------------
(Dollars in millions)
Net sales $ 179.0 $ 357.0 $ (207.1) $ 328.9
Cost of sales 109.3 275.6 (207.1) 177.8
-------- -------- -------- --------
Gross margin 69.7 81.4 -- 151.1
Selling, general and administrative
expenses 75.3 68.2 -- 143.5
Depreciation and amortization 4.1 5.6 -- 9.7
-------- -------- -------- --------
Operating profit (loss) (9.7) 7.6 -- (2.1)
Interest expense 4.5 2.7 -- 7.2
-------- -------- -------- --------
Income (loss) before income taxes (14.2) 4.9 -- (9.3)
Income tax benefit (3.4) (0.1) -- (3.5)
-------- -------- -------- --------
Income (loss) before equity income and (10.8) 5.0 -- (5.8)
extraordinary item
Equity income from subsidiaries 5.0 -- (5.0) --
-------- -------- -------- --------
Income (loss) before extraordinary (5.8) 5.0 (5.0) (5.8)
item
Extraordinary item, net of tax benefit (0.6) -- -- (0.6)
-------- -------- -------- --------
Net income (loss) $ (6.4) $ 5.0 $ (5.0) $ (6.4)
======== ======== ======== ========
Page 10
NOTE 6 - CONSOLIDATING FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS
THIRTEEN WEEKS ENDED MAY 4, 2002 AND MAY 5, 2001
MAY 4, 2002
---------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------- ------------ ------------ ------------
(Dollars in millions)
Net cash provided by (used for) operating activities $ 0.1 $ 0.5 $ -- $ 0.6
Net cash flows used for investing activities:
Capital expenditures (2.1) (0.8) -- (2.9)
Other, net -- -- -- --
-------- -------- -------- --------
Net cash used for investing activities (2.1) (0.8) -- (2.9)
Net cash flows provided by financing activities:
Net increase in credit facilities (0.2) -- -- (0.2)
Other, net 1.2 -- -- 1.2
-------- -------- -------- --------
Net cash provided by financing activities 1.0 -- -- 1.0
-------- -------- -------- --------
Net increase (decrease) in cash (1.0) (0.3) -- (1.3)
Cash and temporary cash investments at beginning of
period 17.5 3.6 -- 21.1
-------- -------- -------- --------
Cash and temporary cash investments at end of period $ 16.5 $ 3.3 $ -- $ 19.8
======== ======== ======== ========
MAY 5, 2001
---------------------------------------------------------
GUARANTOR
PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------- ------------ ------------ ------------
(Dollars in millions)
Net cash provided by (used for) operating activities $ (92.7) $ 42.1 $ -- $ (50.6)
Net cash flows used for investing activities:
Capital expenditures (3.5) (41.5) -- (45.0)
Other, net (0.2) (0.7) -- (0.9)
-------- -------- -------- --------
Net cash used for investing activities (3.7) (42.2) -- (45.9)
Net cash flows provided by financing activities:
Net increase in credit facilities 105.9 -- -- 105.9
Other, net (3.8) -- -- (3.8)
-------- -------- -------- --------
Net cash provided by financing activities 102.1 -- -- 102.1
-------- -------- -------- --------
Net increase (decrease) in cash 5.7 (0.1) -- 5.6
Cash and temporary cash investments at beginning of
period 13.8 3.7 -- 17.5
-------- -------- -------- --------
Cash and temporary cash investments at end of period $ 19.5 $ 3.6 $ -- $ 23.1
======== ======== ======== ========
Page 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED MAY 4, 2002 AND MAY 5, 2001
Net sales for the first quarter of fiscal 2003 increased 13.2%, or
$43.5 million, to $372.4 million from $328.9 million in the prior year. Sales
from stores open one year or more ("same-store sales") increased 13.5% compared
with a same-store sales decrease of 2.0% for the prior year first quarter.
Same-store sales generated virtually all of the overall sales increase for the
quarter. At May 4, 2002, 70 superstores were in operation compared with 61
superstores at May 5, 2001. The higher number of etc stores operating
year-over-year generated a sales increase that was largely offset by lower sales
in traditional stores due to planned closings.
By store format, our same-store sales performance for traditional
stores increased 13.2%. This was driven by a 50% increase in customer traffic
with the balance of the increase due to a higher average ticket. Same-store
sales for superstores increased 14.6% for the quarter, which was driven by a 55%
increase in customer traffic with the balance of the increase due to a higher
average ticket. Management attributes the improvement in same-store sales to an
improved inventory in-stock position on key basic items and advertised items in
its stores. In addition, trends in the sewing and crafting industry continue to
be strong, as evidenced not only by the Company's increased same-store sales but
that of its major competitors as well.
As a percent of net sales, gross margin was 48.5% for the first quarter
of fiscal 2003 compared with 45.9% for the same quarter a year earlier, an
increase of 2.6%. This increase was driven by higher realized selling margins in
a majority of our product categories, as well as improvements in store shrink
expense rates. Improvement in store shrink accounted for 1.6% of the overall
improvement.
Selling, general and administrative ("SG&A") expenses were $151.2
million in the first quarter of fiscal 2003 versus $143.5 million in the prior
year first quarter. As a percentage of sales, SG&A expenses decreased 3.0% to
40.6% of net sales versus 43.6% for the first quarter of fiscal 2002. This
decrease was due to positive expense leverage realized in both store and
non-store expenses, with strong cost controls complementing the favorable impact
of improved same-store sales growth.
Depreciation and amortization expense decreased $0.5 million to $9.2
million from $9.7 million. This decrease is attributable to a slowdown in our
capital expenditures and the elimination of amortization of goodwill under
Statement of Financial Accounting Standard No. 142 "Goodwill and Other
Intangible Assets". The elimination of goodwill amortization will result in an
annual reduction in amortization of $0.7 million.
Operating profit for the first quarter of fiscal 2003 was $20.4
million, compared to an operating loss of $2.1 million for the first quarter of
fiscal 2002.
Interest expense in the first quarter of fiscal 2003 decreased $0.8
million to $6.4 million from $7.2 million in the first quarter of fiscal 2002.
The decrease is due to the impact of lower average borrowings. Average
borrowings under the Company's Credit Facility, for the first quarter of fiscal
2003, decreased $48.6 million, to $71.6 million from $120.2 million in the prior
year first quarter. The decrease in average borrowings is due to improved
operating performance and inventory reduction driven by our inventory
productivity initiatives.
Our effective income tax rate of 38.0% for the first quarter of fiscal
2003 was consistent with the rate for the first quarter of fiscal 2002.
Page 12
In the first quarter of the prior year, we entered into a new $365
million senior secured credit facility. Deferred finance charges written-off
under the prior senior credit facility totaled $0.6 million after-tax, or $0.03
per diluted share, and were recorded as an extraordinary item.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our credit facility, coupled with cash on hand and cash
from operations, will be sufficient to cover our working capital, capital
expenditure and debt service requirement needs for the foreseeable future.
Cash, including temporary cash investments, decreased $1.3 million
during the first quarter of fiscal 2003 to $19.8 million as of May 4, 2002.
Net cash provided by operating activities was $0.6 million, compared
with net cash used by operating activities of $50.6 million in the first quarter
of fiscal 2002. Inventories, net of payables support, increased $11.7 million,
compared with an increase of $41.8 million in the first quarter of the prior
year.
Net cash used for investing activities totaled $2.9 million compared
with $45.9 million in the first quarter of fiscal 2002. Capital expenditures for
the first quarter of fiscal 2002 totaled $45.0 million and included
approximately $40.0 million related to the unwind of a synthetic lease facility,
used to finance the construction of our West Coast distribution center, that was
replaced by our new Credit Facility. Capital expenditures during the first
quarter of fiscal 2003 totaled $2.9 million and related to store projects and
systems development. Capital spending for the full year fiscal 2003 is
anticipated to be approximately $15 to $20 million. This capital spending level
will represent our lowest capital spending budget in six years, as we refrain
from new store growth and continue to focus on debt reduction. We have no
material commitments in connection with these planned capital expenditures.
During the first quarter of fiscal 2003, we did not open or relocate any
stores, and closed eight smaller or under-performing traditional stores. For the
balance of fiscal 2003, we expect to relocate six traditional stores and close
30 to 40 additional traditional stores.
Net cash provided by financing activities was $1.0 million compared with
$102.1 million in the first quarter of fiscal 2002, reflecting approximately a
$120 million reduction in borrowings under our Credit Facility between quarters,
due to our improved operating performance and continued focus on inventory
management. We expect to reduce our year-end debt levels in fiscal 2003 by
approximately $40 to $50 million.
BUSINESS OUTLOOK
We estimate we will generate net income during fiscal 2003 of between
$1.40 to $1.50 per share. Our actual results in the second through fourth
quarters are highly dependent on the sales and margin performance we are able to
achieve. As a result, our estimates are subject to further refinement which we
will provide in future quarterly reports, or as appropriate based on
developments during the year.
Our earnings per share estimates for fiscal 2003 were developed using
the following major assumptions, which we have previously communicated to the
public:
- Same-store sales growth for the balance of the fiscal year of
approximately 3% to 4%, versus an 8.2% same-stores sales
increase in the second through fourth quarters of the prior
fiscal year. Coupled with the Company's 13.5% same-store sales
increase in the first quarter, this
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assumption would result in approximately a 5% to 6% same-store
sales increase for the full fiscal year 2003.
- Operating margins that are expected to improve approximately
150 basis points over the balance of the year, predominantly
from improvements in the gross margin rate. The margin rate
improvement will be concentrated in the second and third
quarters, which is when the substantial majority of clearance
sales associated with our SKU Reduction Initiative occurred
last year. These clearance sales were recorded at a zero gross
margin.
SEASONALITY AND INFLATION
Our business exhibits seasonality, which is typical for most retail
companies. Our sales are much stronger in the second half of the year than the
first half of the year. Net earnings are highest during the months of September
through December when sales volumes provide significant operating leverage.
Capital requirements needed to finance our operations fluctuate during the year
and reach their highest levels during the second and third fiscal quarters as we
increase our inventory in preparation for our peak selling season.
We believe that inflation has not had a significant effect on net sales
or on net income. There can be no assurance, however, that our operating results
will not be affected by inflation in the future.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not historical
facts are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans," "estimates,"
"expects," "believes," and similar expressions as they relate to us are intended
to identify such forward-looking statements. Our actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, changes in customer demand, changes in trends in the fabric
and craft industry, seasonality, the availability of merchandise, changes in the
competitive pricing for products, and the impact of our and our competition's
store openings and closings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use derivative financial instruments at various times to manage the
risk associated with interest rate fluctuations. The Company is subject to risk
resulting from interest rate fluctuations, as interest on the Company's credit
facility is based on variable rates. The Company's objective in managing its
interest rate exposure is to limit the impact of interest rate changes on
earnings and cash flows. Interest rate swaps are primarily utilized to achieve
this objective, effectively converting a portion of its variable-rate exposures
to fixed interest rates (See Note 4 - Fair Value of Derivative Financial
Instruments).
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various litigation matters in the ordinary course
of our business. We are not currently involved in any litigation which we
expect, either individually or in the aggregate, will have a material adverse
effect on our financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Not Applicable.
b) Reports on Form 8-K
On May 29, 2002, the Company filed a Current Report on Form 8-K,
under Item 4, to report the decision to no longer engage Arthur
Andersen, LLP as the Company's independent public accountant and
engage Ernst & Young, LLP to serve as the Company's independent
public accountant for fiscal year 2003, which ends on February
1, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JO-ANN STORES, INC.
DATE: June 17, 2002 /s/ Alan Rosskamm
---------------------------
By: Alan Rosskamm
President and Chief Executive Officer
/s/ Brian P. Carney
---------------------------
By: Brian P. Carney
Executive Vice President and Chief Financial
Officer
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