UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-11735
99 CENTS ONLY STORES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2411605
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4000 UNION PACIFIC AVENUE, 90023
CITY OF COMMERCE, CALIFORNIA (zip code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (323) 980-8145
NONE
Former name, address and fiscal year, if change since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the last 90 days. |X|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Common Stock, No Par Value, 51,842,404 Shares as of September 30, 2001
Item 2: Results of Operations
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99 CENTS ONLY STORES
BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash...................................................................... $ 10,783 $ 9,034
Short-term investments.................................................... 122,469 109,430
Accounts receivable, net of allowance for doubtful accounts of $152 and
$113 as of September 30, 2001 and December 31, 2000, respectively....... 5,430 3,569
Inventories............................................................... 68,215 63,693
Other..................................................................... 4,051 2,663
------------ ----------
Total current assets.................................................... 210,948 188,389
PROPERTY AND EQUIPMENT, at cost:
Land...................................................................... 21,189 17,781
Building and improvement.................................................. 19,628 17,357
Leasehold improvements.................................................... 45,957 34,026
Fixtures and equipment.................................................... 26,433 19,533
Transportation equipment.................................................. 2,599 2,250
Construction in progress.................................................. 11,730 5,091
------------ ----------
127,536 96,038
Less-Accumulated depreciation and amortization............................ (37,148) (28,636)
------------ ----------
90,388 67,402
OTHER ASSETS:
Deferred income taxes..................................................... 12,841 12,841
Long-term investments in marketable securities............................ - 2,867
Other long-term investments............................................... 1,353 -
Deposits.................................................................. 315 308
Other..................................................................... 7,919 5,478
------------ ----------
22,428 21,494
------------ ----------
$323,764 $277,285
============ ==========
The accompanying notes are an integral part of these balance sheets.
Page 2
99 CENTS ONLY STORES
BALANCE SHEETS
(Amounts In Thousands, Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable........................................................... $ 10,178 $ 12,622
Accrued expenses:
Payroll and payroll-related............................................. 1,970 2,530
Sales tax............................................................... 2,006 2,802
Other................................................................... 476 340
Workers compensation...................................................... 3,377 2,764
Income taxes payable...................................................... 6,960 552
------------- -----------
Total current liabilities 24,967 21,610
------------- -----------
LONG-TERM LIABILITIES:
Deferred rent............................................................. 2,232 2,142
------------- -----------
Total long-term liabilities 2,232 2,142
------------- -----------
COMMITMENTS AND CONTINGENCIES: - -
SHAREHOLDERS' EQUITY:
Preferred stock, no par value
Authorized-1,000,000 shares
Issued and outstanding-none............................................... - -
Common stock, no par value
Authorized-100,000,000 shares
Issued and outstanding 51,842,404 at September 30, 2001 and 51,303,075
at December 31, 2000.................................................. 149,458 138,487
Retained earnings......................................................... 147,107 115,046
------------- -----------
296,565 253,533
------------- -----------
$323,764 $277,285
============= ===========
The accompanying notes are an integral part of these balance sheets.
Page 3
99 CENTS ONLY STORES
STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
--------- --------- ---------- ----------
NET SALES:
99 Cents Only Stores..................................... $130,799 $98,096 $363,534 $282,066
Bargain Wholesale (includes sales to an affiliate of
$1,165 for the three months ended September 30, 2001
and $4,185 for the nine months ended September 30,
2001)................................................. 13,223 11,336 41,831 36,115
---------- --------- ---------- ----------
144,022 109,432 405,365 318,181
COST OF SALES.............................................. 87,751 66,992 247,845 194,624
---------- --------- ---------- ----------
Gross profit............................................ 56,271 42,440 157,520 123,557
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating expenses...................................... 36,329 27,061 100,985 77,057
Depreciation and amortization........................... 3,179 2,206 8,703 6,195
---------- --------- ---------- ----------
39,508 29,267 109,688 83,252
---------- --------- ---------- ----------
Operating income........................................ 16,763 13,173 47,832 40,305
OTHER (INCOME) EXPENSE:
Interest income......................................... (937) (1,158) (3,364) (2,643)
Interest expense........................................ - 185 - 555
Other................................................... (360) - (1,080) -
---------- --------- ---------- ----------
(1,297) (973) (4,444) (2,088)
---------- --------- ---------- ----------
Income from continuing operations before provisions
for income taxes...................................... 18,060 14,146 52,276 42,393
PROVISION FOR INCOME TAXES................................. 6,892 5,571 20,215 16,723
---------- --------- ---------- ----------
Income from continuing operations........................ 11,168 8,575 32,061 25,670
(Loss) from discontinued operation....................... - (1,050) (1,050)
---------- --------- ---------- ----------
NET INCOME................................................. $11,168 $7,525 $32,061 $24,620
========== ========= ========== ==========
EARNINGS PER COMMON SHARE FROM CONTINUING OPERATIONS:
Basic................................................... $0.22 $0.17 $0.62 $0.51
Diluted................................................. $0.21 $0.16 $0.61 $0.49
LOSS PER COMMON SHARE FROM DISCONTINUED OPERATION:
Basic................................................... - ($0.02) - ($0.02)
Diluted................................................. - ($0.02) - ($0.02)
NET EARNINGS PER COMMON SHARE:
Basic................................................... $0.22 $0.15 $0.62 $0.49
Diluted................................................. $0.21 $0.14 $0.61 $0.47
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic................................................... 51,759 51,051 51,497 50,542
Diluted................................................. 52,790 52,189 52,333 51,886
The accompanying notes are an integral part of these financial statements.
Page 4
99 CENTS ONLY STORES
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(Amounts in Thousands)
(Unaudited)
SEPTEMBER 30,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $32,061 $24,620
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 8,703 6,195
Loss from discontinued operations.............................. - 1,050
Tax benefit from exercise of non qualified employee stock
options...................................................... 3,925 8,059
Other.......................................................... (191) (149)
Changes in assets and liabilities associated with operating
activities:
Accounts receivable............................................ (1,861) (691)
Inventories.................................................... (4,522) (10,148)
Other assets................................................... (3,836) (1,382)
Accounts payable............................................... (2,444) (1,384)
Accrued expenses............................................... (1,220) (1,836)
Worker's compensation.......................................... 613 369
Income taxes................................................... 6,408 (3,036)
Deferred rent.................................................. 90 110
--------- ---------
Net cash provided by operating activities........................... 37,726 21,777
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (31,498) (21,828)
Purchases of short-term investments.............................. (13,039) (16,007)
Sale of long-term investments and other.......................... 1,514 4,091
Net asset of discontinued operations............................. - (8,031)
--------- ---------
Net cash used in investing activities........................ (43,023) (41,775)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligation............................. - (75)
Proceeds from exercise of stock options.......................... 7,046 12,422
--------- ---------
Net cash provided by financing activities.................... 7,046 12,347
--------- ---------
NET INCREASE (DECREASE) IN CASH..................................... 1,749 (7,651)
CASH, beginning of period........................................... 9,034 7,984
--------- ---------
CASH, end of period................................................. $10,783 $333
========= =========
The accompanying notes are an integral part of these financial statements.
Page 5
99 CENTS ONLY STORES
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
However, certain information and footnote disclosures normally included in
financial statements prepared in conformity with accounting principles generally
accepted in the United States have been omitted or condensed pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). These
statements should be read in conjunction with the Company's December 31, 2000
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K filed March 22, 2001. In the opinion of management, these
interim financial statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations for each of the periods presented. The
results of operations and cash flows for such periods are not necessarily
indicative of results to be expected for the full year.
CONCENTRATION OF OPERATIONS
The Company's 117, 99 Cents Only Stores are primarily located in Southern
California and Central California except for five 99 Cents Only Stores located
in Las Vegas, Nevada, and four in Phoenix, Arizona. The Company's current retail
expansion plans for the 99 Cents Only Stores include planned new stores in these
geographic regions. Consequently, the Company's results of operations and
financial condition are substantially dependent upon general economic trends and
various environmental factors in those regions.
2. EARNINGS PER COMMON SHARE
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly "basic" earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding for the period. "Diluted" earnings per share is computed by dividing
net income by the total of the weighted average number of shares outstanding
plus the dilutive effect of outstanding stock options (applying the treasury
stock method).
The table below is a reconciliation of the basic weighted average number of
shares outstanding and the diluted weighted average number of shares outstanding
for the three and the nine months ended September 30, 2001 and 2000 (amounts in
thousands):
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-------- -------- -------- --------
Weighted average number of common shares
outstanding-Basic............................... 51,759 51,051 51,497 50,542
Dilutive effect of outstanding stock options...... 1,031 1,138 836 1,344
------ ------ ------ ------
Weighted average number of common shares
outstanding-Diluted............................. 52,790 52,189 52,333 51,886
------ ------ ------ ------
3. SHORT-TERM INVESTMENTS
Investments in debt and equity securities are recorded as required by SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper, primarily with short-term maturities. The
Company generally holds investments until maturity and has not experienced any
significant gain or loss from the
Page 6
sales of its investments. Any premium or discount recognized in connection with
the purchase of an investment is amortized over the term of the investment. As
of September 30, 2001 and December 31, 2000, the fair value of investments
approximated the carrying values and were invested as follows (amounts in
thousands):
(UNAUDITED)
MATURITY MATURITY
-------- --------
SEPTEMBER WITHIN 1 1 YEAR OR DEC. 31, WITHIN 1 1 YEAR OR
30, 2001 YEAR MORE 2000 YEAR MORE
---------- --------- ---------- --------- --------- ---------
Municipal Bonds...... $ 86,968 $ 86,968 $ - $ 65,621 $ 62,754 $2,867
Federal Bonds ....... 1,494 1,494 -
Corporate Securities. 8,875 8,875 - 2,000 2,000 -
Commercial Paper..... 25,132 25,132 - 44,676 44,676 -
-------- -------- -------- -------- -------- --------
$122,469 $122,469 $ - $112,297 $109,430 $2,867
-------- -------- -------- -------- -------- --------
4. NEW AUTHORITATIVE PRONOUNCEMENTS
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in 2001
and it did not have a material impact on the Company's financial reporting or
results of operations.
In July 2001, the FASB approved two final statements: SFAS No. 141,
"Business Combinations" which provides guidance on the accounting for business
combinations and SFAS 142, "Goodwill and Other Intangible Assets", which defines
when and how goodwill and other intangible assets are amortized. These
statements will be effective on January 1, 2002. We are currently reviewing
these standards to determine the impact on our results of operations and
financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within those fiscal years. Management does not expect
that the adoption of SFAS 144 will have an impact on the Company's financial
position or results of operations.
5. RELATED-PARTY TRANSACTIONS
Effective September 30, 2000, the Company sold its discontinued operation,
Universal International, Inc., to a company owned 100% by Dave and Sherry Gold,
both significant shareholders of 99 Cents Only Stores (see note 12 of the 99
Cents Only Stores Annual Report on Form 10-K). Mr. Gold is also the Chief
Executive Officer and a director of the Company. The Company provides certain
services and leases real property to Universal. From January 1, 2001 to
September 30, 2001, the Company received payments of $2.5 million, included in
operating expenses, and $1.1 million, included in other income, under a Services
Agreement and Lease Agreement, respectively, related to this transaction.
6. OPERATING SEGMENTS
The Company has two business segments, retail operations and wholesale
distribution. The retail segment includes 99 Cents Only Stores retail stores.
The majority of the product offerings include recognized brand-name consumable
merchandise, regularly available for reorder. Bargain Wholesale sells the same
merchandise at prices generally below normal wholesale levels to local, regional
and national distributors and exporters.
The accounting policies of the segments are described in the summary of
significant accounting policies noted in the Company's Annual Report on Form
10-K for the year ended
Page 7
December 31, 2000. The Company evaluates segment performance based on the net
sales and gross profit of each segment. Management does not track segment data
or evaluate segment performance on additional financial information. As such,
there are no separately identifiable segment assets nor is there any separately
identifiable statements of income data (below gross profit) to be disclosed.
The Company accounts for inter-segment transfer at cost through its
inventory accounts.
At September 30, 2001, the Company had no customers representing more than
4.5% of Bargain Wholesale's net sales. Substantially all of the Company's net
sales were to customers located in the United States.
Reportable segment information for the three months and nine months ended
September 30, 2001 follows (amounts in thousands):
THREE MONTHS ENDED
SEPTEMBER 30 RETAIL WHOLESALE TOTAL
-------- --------- --------
2001
Net sales............. $130,799 $13,223 $144,022
Gross margin.......... 53,709 2,562 56,271
2000
Net sales............. $98,096 11,336 $109,432
Gross margin.......... 40,089 2,351 42,440
NINE MONTHS ENDED
SEPTEMBER 30 RETAIL WHOLESALE TOTAL
-------- --------- --------
2001
Net sales............. $363,534 $41,831 $405,365
Gross margin.......... 149,426 8,094 157,520
2000
Net sales............. $282,066 36,115 $318,181
Gross margin.......... 115,573 7,984 123,557
7. STATEMENTS OF CASH FLOW
The Company prepares its statements of cash flows using the indirect method
as prescribed by the Statement of Financial Accounting Standards Board No. 95.
The Company considers all investments with original maturities of three months
or less to be cash equivalents. Cash payments for income taxes for the nine
months ended September 30, 2000 and 2001 were $12,010 and $16,725 respectively.
Cash payments for interest taxes for the nine months ended September 30,
2000 were $555. There were no cash payments for interest expense for the nine
month period ended September 30, 2001.
Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company has been engaged since 1976 in the purchase and sale of
name-brand, close-out and regularly available general merchandise. Since that
time, the Company has sold its merchandise on a wholesale basis through its
Bargain Wholesale division. On August 13, 1982, the Company opened its first 99
Cents Only Stores retail location and as of September 30, 2001, the Company
operated a chain of 117 deep-discount 99 Cents Only Stores. The Company's growth
during the last four years has come primarily from new store openings. The
Company opened thirteen, eighteen and twenty stores in 1998, 1999 and 2000,
respectively (eleven, fourteen and twenty respectively, net of relocated
stores). In 2001 the Company opened nineteen new 99 Cents Only Stores, including
one relocation, through September 30, 2001, seven in Southern California, five
in Central California, three in Las Vegas, Nevada and four in Phoenix, Arizona.
The Company plans to open six additional 99 Cents Only Stores during the fourth
quarter of 2001.
Bargain Wholesale's growth over the three years ended December 31, 2000 and
the first nine months of 2001 was primarily attributable to an increased focus
on domestic accounts and expansion into new geographic markets. The Company
generally realizes a lower gross profit margin on Bargain Wholesale's net sales
compared to 99 Cents Only Stores retail net sales. However, Bargain Wholesale
complements the Company's retail operations by allowing the Company to purchase
in larger volumes at more favorable pricing and to generate additional net sales
with relatively small incremental increases in operating expenses.
As part of its strategy to expand retail operations, the Company has at
times opened larger new stores in close proximity to existing stores where the
Company determined that the trade area could support a larger facility. In some
of these situations, the Company retained its existing store so long as it
continued to contribute store-level operating income. While this strategy was
designed to increase revenues and store-level operating income, it has had a
negative impact on comparable store net sales as some customers migrated from
the existing store to the larger new store. The Company believes that this
strategy has impacted its historical comparable sales growth.
The Company has made in this Form 10-Q forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 concerning the Company's operations, expansion
plans, economic performance, financial condition, store openings, purchasing
abilities, sales per square foot and comparable store net sales trends and
capital requirements. Such forward-looking statements may be identified by the
use of words such as "believe", "anticipate," "intend" and "expect" and
variations thereof. Such forward-looking statements are subject to various risks
and uncertainties, certain of which are beyond the Company's control. Actual
results could differ materially from those currently anticipated due to a number
of factors. Some of those factors include: (i) the Company's ability to open new
stores on a timely basis and operate them profitably, (ii) the orderly operation
of the Company's receiving and distribution process, (iii) inflation, consumer
confidence and other general economic factors, (iv) the availability of adequate
inventory and capital resources, (v) the risk of a disruption in sales volume in
the fourth quarter and other seasonal factors, (vi) dependence on key personnel
and control of the Company by existing shareholders, (vii) increased competition
from new entrants into the deep-discount retail industry, (viii) the Company's
ability to locate suitable real estate for new stores, open new stores and
operate them profitably in new regions such as Nevada and Arizona and (ix) the
economic effects of the September 11, 2001 terrorist attacks in the United
States. The Company does not ordinarily make projections of its future operating
results and undertakes no obligation to publicly update or revise any
forward-looking statements,
Page 9
whether as a result of new information, future events or otherwise.
Readers of this report should carefully read the risk factors included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000 and in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS
SEPTEMBER 30, 2000
NET SALES: Net sales increased $34.6 million, or 31.6%, to $144.0 million in the
2001 period from $109.4 million in the 2000 period. Retail sales increased $32.7
million to $130.8 million in the 2001 period from $98.1 million in the 2000
period. The retail net sales increase was primarily attributable to the net
effect of nineteen new stores opened in the first nine months of 2001, the full
third quarter effect of four new stores opened in the third quarter of 2000 and
the 9.3% increase in same store sales. Bargain Wholesale net sales were $13.2
million in the 2001 period (including $1.2 million in net sales and $0.1 million
in gross margin to Universal International,Inc.), as compared to $11.3 million
in the same period of 2000.
GROSS PROFIT: Gross profit increased approximately $13.9 million, or 32.8%, to
$56.3 million in the 2001 period from $42.4 million in the 2000 period. The
increase in the gross profit dollars was primarily due to higher net sales
volume. Overall gross profit margin as a percentage of net sales was 39.1% in
2001 versus 38.8% in 2000. The gross profit margin was higher primarily as a
result of favorable merchandise cost factors and product category mix factors
for the retail sales.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $10.2 million, or 34.8%,
to $39.5 million in the 2001 period from $29.3 million in the 2000 period. As a
percentage of net sales, total SG&A increased to 27.4% in 2001 from 26.7% in
2000. The majority of this increase was a result of the California minimum wage
increase in January 2001 (partially offset by $0.9 million in management fees
earned for administrative services provided to Universal under the services
agreement). Additional cost increases included retail store utility costs, costs
associated with systems improvements and infrastructure, pre-opening costs for
four stores opened in the last month of the quarter, an increase in costs
associated with credit card sales and an increase in depreciation expense.
OPERATING INCOME: Operating income was $16.8 million in 2001, an increase of
$3.6 million, or 27.3% over the third quarter of 2000. Operating margin was
11.7% in 2001 versus 12.0% in 2000.
INTEREST INCOME (EXPENSE): Interest income was $0.9 million in 2001 compared to
$1.2 million in 2000. The decrease is reflective of a decrease in overall
interest rates. Interest income is earned on the Company's cash balances and
short-term and long-term investments. Interest (expense) relates to interest
paid in 2000 on the Company's capitalized lease on its current warehouse
facility. The Company acquired this building in December 2000 and therefore no
interest expense was incurred in 2001. During 2001 and 2000, the Company had no
bank debt.
OTHER INCOME: Other income of $0.4 million represents rental income from a
building lease to Universal (see note 5 of notes to financial statements above).
PROVISION FOR INCOME TAXES: The provision for income taxes was $6.9 million in
the 2001 period compared to $5.6 million in 2000. The effective rate of the
provision for income taxes was approximately 38.2% in 2001 versus 39.4% in 2000.
This variance results from available tax credits and tax-free interest income
earned.
NET INCOME FROM CONTINUING OPERATIONS: Net income from continuing operations
increased $2.6 million to $11.2 million in 2001, or $0.21 per diluted share,
from $8.6 million in
Page 10
the 2000 period, or $0.16 per diluted share. Net income from continuing
operations as a percentage of sales was 7.8% in 2001 and 7.9% in 2000.
LOSS FROM DISCONTINUED OPERATION: In September 2000 the Company sold its
interest in Universal International, Inc. and incurred an additional charge of
$1.1 million for the loss on the sale of Universal (see note 5 to the financial
statements above).
NET INCOME: As a result of the items discussed above, net income increased $3.7
million to $11.2 million in 2001, or $0.21 per diluted share from $7.5 million
in the 2000 period, or $0.14 per diluted share. Net income as a percentage of
sales was 7.8% in 2001 and 6.9% in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
NET SALES: Net sales increased $87.2 million, or 27.4%, to $405.4 million in the
2001 period from $318.2 million in the 2000 period. Retail sales increased $81.4
million to $363.5 million in the 2001 period from $282.1 million in the 2000
period. The retail net sales increase was attributable to the net effect of
nineteen net new stores opened in 2001, the full nine months effect of 20 net
new stores opened in 2000, and a 5.9% increase in comparable same store sales
for the nine-month period. Bargain Wholesale net sales were $41.8 million in the
first nine months of 2001 and $36.1 million for the same period in 2000.
Included in the wholesale sales for the nine months ended September 30, 2001 are
$4.2 million of shipments to Universal at a 10% gross margin.
GROSS PROFIT: Gross profit increased approximately $33.9 million, or 27.4%, to
$157.5 million in the 2001 period from $123.6 million in the 2000 period. The
increase in gross profit was primarily due to higher net sales volume. The gross
profit margin as a percentage of net sales was 38.9% in both the 2001 and 2000
period. The year to date retail gross margin was 41.1% versus 41.0% in 2000. The
change in the retail gross profit margin is due to product category sales mix.
SELLING, GENERAL AND ADMINISTRATIVE: SG&A increased by $26.5 million, or 31.8%,
to $109.7 million in the 2001 period from $83.3 million in the 2000 period. As a
percentage of net sales, total SG&A increased to 27.1% from 26.2% in 2000. This
increase was a result of the California minimum wage increase in January 2001
(partially offset by $2.5 million in management fees earned for administrative
services provided to Universal under the services agreement). Additional cost
increases included retail store utility costs, pre-opening costs for four stores
opened in the last month of the period and an increase in costs associated with
credit card sales.
OPERATING INCOME: Operating income increased $7.5 million, or 18.6%, to $47.8
million in 2001 from $40.3 million in 2000. Operating margin was 11.8% in 2001
versus 12.7% in 2000.
INTEREST INCOME (EXPENSE): Interest income was $3.4 million in 2001 compared to
$2.6 million in 2000. The increase is attributable to increases in cash and
marketable securities. Interest income is earned on the Company's cash balances
and short-term and long-term investments. Interest (expense) relates to interest
paid in 2000 on the Company's capitalized lease on its current warehouse
facility. The Company acquired this building in December 2000 and therefore no
interest expense was incurred in 2001. During 2001 and 2000, the Company had no
bank debt.
OTHER INCOME: Other income of $1.1 million represents rental income from a
building lease to Universal (see note 5 of notes to financial statements above).
PROVISION FOR INCOME TAXES: The provision for income taxes for the nine months
ended September 30, 2001, was $20.2 million compared to $16.7 million in 2000.
The effective rate of the provision for income taxes was approximately 38.6% in
2001 and 39.4% in 2000. This variance results from available tax credits and
tax-free interest income earned.
Page 11
NET INCOME FROM CONTINUING OPERATIONS: Net income from continuing operations
increased $6.4 million to $32.1 million in 2001, or $0.61 per diluted share,
from $25.7 million in the 2000 period, or $0.49 per diluted share. Net income
from continuing operations as a percentage of sales was 7.9% in 2001 and 8.1% in
2000.
LOSS FROM DISCONTINUED OPERATION: In September 2000 the Company sold its
interest in Universal International, Inc. and incurred an additional charge of
$1.1 million for the loss on the sale of Universal (see note 5 of notes to the
financial statements above).
NET INCOME: As a result of the items discussed above, net income increased $7.5
million, or 30.5%, to $32.1 million or $0.61 per diluted share in 2001, from
$24.6 million or $0.47 per diluted share in the 2000 period. Net income as a
percentage of sales was 7.9% in 2001 and 7.7% in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations principally from cash provided by
operations, and has not generally relied upon external sources of financing. The
Company's capital requirements result primarily from purchases of inventory,
expenditures related to store openings and the working capital requirements for
new and existing stores. The Company takes advantage of close-out and other
special situation opportunities which frequently results in large volume
purchases, and as a consequence, its cash requirements are not constant or
predictable during the year and can be affected by the timing and size of its
purchases.
The Company maintains cash and short-term investments with highly qualified
financial institutions. At various times such amounts may be in excess of
insured limits.
As of September 30, 2001, the Company owned the land and buildings for 14
of its 117 99 Cents Only Stores retail store locations, a main warehouse and
distribution center in Los Angeles, California (where corporate headquarters are
located) and a distribution warehouse in Minnesota, which is currently leased to
Universal. The Company may acquire other locations in the future. Available cash
not immediately needed for such purposes has been invested in short-term
investment grade securities.
Net cash provided by operations was $37.7 million for the nine-month period
ended September 30, 2001. Inventories increased $4.5 million. Other assets
increased $3.8 million. The Company's accounts payable and accrued expenses for
the nine-month period ended September 30, 2001 decreased by $2.4 million and
$1.2 million, respectively. In the nine-month period ended September 30, 2000
cash provided by operations was $21.8 million, inventories increased $10.1
million, trade receivables increased $0.7 million and payables and accrued
expenses decreased $3.2 million.
Net cash used in investing activities was $43.0 million in 2001, consisting
of expenditures for property and equipment of $31.5 million and an increase of
$13.0 million in marketable securities. In 2000, net cash used in investing
activities was $41.8 million, including capital expenditures of $21.8 million,
an increase of $8.0 million in net assets of a discontinued operation and a
$16.0 million purchase of short-term securities. Cash proceeds from financing
activities were $7.0 million in 2001, which represent proceeds from the exercise
of employee stock options. In 2000, proceeds from the exercise of stock options
were $12.4 million.
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective in 2001
and it did not have a
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material impact on the Company's financial reporting or results of operations.
The Company currently plans to open new 99 Cents Only Stores at a targeted
annual rate of 25%. The Company's cash needs for new store openings are expected
to total approximately $26 million in 2001. Pre-opening expenses are not
capitalized by the Company. The Company believes that its total capital
expenditure requirements, including new store openings and existing store
refurbishment will increase to approximately $35 million in 2002. Total capital
expenditures in 2001 are currently expected to be incurred primarily for new
store openings, improvements to existing stores and information systems. The
Company believes that cash flow from its operations will be sufficient to meet
operating needs, capital spending requirements and its stock repurchase program
for at least the next twelve months. The Company did not repurchase any shares
of its stock during the nine months ended September 30, 2001.
RISK FACTORS
INFLATION
The Company's ability to provide quality merchandise at the 99 cents price
point is subject to certain economic factors, which are beyond the Company's
control, including inflation. Inflation could have a material adverse effect on
the Company's business and results of operations, especially given the
constraints on the Company to pass on any incremental costs due to price
increases or other factors. The Company believes that it will be able to respond
to ordinary price increases resulting from inflationary pressures by adjusting
the number of items sold at the single price point (e.g., two items for 99 cents
instead of three items for 99 cents) and by changing its selection of
merchandise. Nevertheless, a sustained trend of significantly increased
inflationary pressure could require the Company to abandon its single price
point of 99 cents per item, which could have a material adverse effect on the
Company's business and results of operations. See also "We are vulnerable to
uncertain economic factors and changes in the minimum wage" for a discussion of
additional risks attendant to inflationary conditions.
WE DEPEND ON NEW STORE OPENINGS FOR FUTURE GROWTH
Our operating results depend largely on our ability to open and operate new
stores successfully and to manage a larger business profitably. In 1998, 1999
and 2000, we opened thirteen, eighteen and twenty 99 Cents Only Stores,
respectively (eleven stores in 1998 and fourteen stores in 1999, respectively,
net of relocated stores). As of September 30, 2001, we opened 19 stores,
including one relocation, and we expect to open six additional stores in 2001.
We currently plan to open new stores over the next several years at a rate of
approximately 25% per year. Our strategy depends on many factors, including our
ability to identify suitable markets and sites for our new stores, negotiate
leases with acceptable terms, refurbish stores, appropriately upgrade our
financial and management information systems and controls and manage our
operating expenses. In addition, we must be able to continue to hire, train,
motivate and retain competent managers and store personnel. Many of these
factors are beyond our control. As a result, we cannot assure you that we will
be able to achieve our expansion goals. Any failure by us to achieve our
expansion goals on a timely basis, obtain acceptance in markets in which we
currently have limited or no presence, attract and retain management and other
qualified personnel, appropriately upgrade our financial and management
information systems and control or manage operating expenses could adversely
affect our future operating results and our ability to execute our business
strategy.
We also cannot assure you that when we open new stores we will improve our
results of operations. A variety of factors, including store location, store
size, rental terms, the level of store sales and the level of initial
advertising influence if and when a store becomes profitable. Assuming that our
planned expansion occurs as anticipated, our store base will include a
relatively high proportion of stores with relatively short
Page 13
operating histories. We cannot assure you that our new stores will achieve the
sales per saleable square foot and store-level operating margins currently
achieved at our existing stores. If our new stores on average fail to achieve
these results, our planned expansion could produce a decrease in our overall
sales per saleable square foot and store-level operating margins. Increases in
the level of advertising and pre-opening expenses associated with the opening of
new stores could also contribute to a decrease in our operating margins.
Finally, the opening of new stores in existing markets has in the past and may
in the future reduce retail sales of existing stores in those markets,
negatively affecting comparable store sales.
OUR OPERATIONS ARE MAINLY CONCENTRATED IN SOUTHERN AND CENTRAL CALIFORNIA
All but nine of our 117 99 Cents Only Stores are currently located in
Southern and Central California. The Company currently has five stores in Las
Vegas, Nevada and four stores in Phoenix, Arizona. In addition, our year 2002
retail expansion plan includes additional new stores in these regions.
Accordingly, our results of operations and financial condition largely depend
upon trends in the Southern California economy, Las Vegas, Nevada and Phoenix,
Arizona. For example, this region experienced an economic recession in the early
1990s. Although this recession had no material effect on our business, between
1989 and 1993 most California counties, particularly Los Angeles, recorded a
significant decline in retail spending. Retail spending could decline in the
future. In addition, Southern California historically has been vulnerable to
certain natural disasters and other risks, such as earthquakes, fires, floods
and civil disturbance. At times, these events have disrupted the local economy.
These events could also pose physical risks to our properties.
WE COULD EXPERIENCE DISRUPTIONS IN RECEIVING AND DISTRIBUTION
Our success depends upon whether our receiving and shipment schedules are
organized and well managed. As we continue to grow, we may face unexpected
demands on our warehouse operations that could cause delays in delivery of
merchandise to or from our warehouses to our stores. A fire, earthquake,
blackout or other disaster at our warehouses or stores could hurt our business,
financial condition and results of operations, particularly because much of our
merchandise consists of closeouts and other irreplaceable products. Although we
maintain standard property and business interruption insurance, we do not have
earthquake insurance on our properties.
Although we try to limit our risk of exposure to potential product
liability claims, we do not know if the limitations in our agreements are
enforceable. We maintain insurance covering damage from use of our products. If
any product liability claim is successful and large enough, our business could
suffer.
WE DEPEND UPON OUR RELATIONSHIPS WITH OUR SUPPLIERS AND THE AVAILABILITY OF
CLOSE-OUT AND SPECIAL-SITUATION MERCHANDISE
Our success depends in large part on our ability to locate and purchase
quality close-out and special-situation merchandise at attractive prices. This
helps us maintain a mix of name-brand and other merchandise at the 99 cents
price point. We cannot be certain that such merchandise will continue to be
available in the future. Further, we may not be able to find and purchase
merchandise in quantities necessary to accommodate our growth. Additionally, our
suppliers sometimes restrict the advertising, promotion and method of
distribution of their merchandise. These restrictions in turn may make it more
difficult for us to quickly sell these items from our inventory.
Although we believe our relationships with our suppliers are good, we do
not have long-term agreements with any supplier. As a result, we must
continuously seek out buying opportunities from our existing suppliers and from
new sources. We compete for these opportunities with other wholesalers and
retailers, discount and deep-discount chains,
Page 14
mass merchandisers, food markets, drug chains, club stores and various
privately-held companies and individuals. Although we do not depend on any
single supplier or group of suppliers and believe we can successfully compete in
seeking out new suppliers, a disruption in the availability of merchandise at
attractive prices could impair our business.
WE PURCHASE IN LARGE VOLUMES AND OUR INVENTORY IS HIGHLY CONCENTRATED
To obtain inventory at attractive prices, we take advantage of large volume
purchases, close-outs and other special situations. As a result, our inventory
levels are generally higher than other discount retailers. At December 31, 1998,
1999 and 2000, we recorded net inventory of $49.6 million, $53.9 million and
$63.7 million, respectively. At September 30, 2001 net inventory was $68.2
million.
We periodically review the net realizable value of our inventory and make
adjustments to its carrying value when appropriate. The current carrying value
of our inventory reflects our belief that we will realize the net values
recorded on our balance sheet. However, we may not be able to do so. If we sell
large portions of our inventory at amounts less than their carrying value or if
we write down a significant part of our inventory, our cost of sales, gross
profit, operating income and net income could suffer greatly during the period
in which such event or events occur.
WE FACE STRONG COMPETITION
We compete in both the acquisition of inventory and sale of merchandise
with other wholesalers, discount and deep-discount stores, single price point
merchandisers, mass merchandisers, food markets, drug chains, club stores and
other retailers. Our industry competitors also include many privately held
companies and individuals. At times, these competitors are also customers of our
Bargain Wholesale division. In the future, new companies may also enter the
deep-discount retail industry. Additionally, we currently face increasing
competition for the purchase of quality close-out and other special-situation
merchandise. Some of our competitors have substantially greater financial
resources and buying power than us. Our capability to compete will depend on
many factors including our ability to successfully purchase and resell
merchandise at lower prices than our competitors. We cannot assure you that we
will be able to compete successfully against our current and future competitors.
WE ARE VULNERABLE TO UNCERTAIN ECONOMIC FACTORS AND CHANGES IN THE MINIMUM WAGE
Our ability to provide quality merchandise at our 99 cents price point
could be hindered by certain economic factors beyond our control, including but
not limited to:
- increases in inflation;
- increases in operating costs, including costs of utilities;
- increases in employee health care costs;
- increases in prevailing wage levels; and
- decreases in consumer confidence levels.
In January 2001 California enacted a minimum wage increase of $0.50 per
hour with an additional $0.50 increase required in January 2002. The Company
believes that annual total payroll expenses could increase approximately 4.0%
over this two-year period as a result. Because we provide consumers with
merchandise at a 99 cents fixed price point, we typically cannot pass on cost
increases to our customers. However the Company believes that the increased
minimum wage will result in incremental customer spending in our stores.
Page 15
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND PURCHASES
Although international sales historically have not been important to our
consolidated net sales, they have contributed to growth in Bargain Wholesale's
net sales. In addition, some of the inventory we purchase is manufactured
outside the United States. There are many risks associated with doing business
internationally. Our international transactions may be subject to risks such as:
- political instability;
- currency fluctuations;
- exchange rate controls;
- changes in import and export regulations; and
- changes in tariff and freight rates.
The United States and other countries have also proposed various forms of
protectionist trade legislation. Any resulting changes in current tariff
structures or other trade policies could lead to fewer purchases of our products
and could adversely affect our international operations.
WE COULD ENCOUNTER RISKS RELATED TO TRANSACTIONS WITH OUR AFFILIATES
We currently lease 12 of our 99 Cents Only Stores and a parking lot for one
of these stores from certain members of the Gold family and their affiliates.
Our annual rental expense for these facilities totaled approximately $2.2
million, $1.9 million, $1.9 million in 1998, 1999 and 2000 respectively, and
$1.6 million for the nine months ended September 30, 2001. We believe that our
lease terms are just as favorable to us as they would be for an unrelated party.
Under our current policy, we enter into real estate transactions with our
affiliates only for the renewal or modification of existing leases and on
occasions where we determine that such transactions are in our best interests.
Moreover, the independent members of our Board of Directors must unanimously
approve all real estate transactions between us and our affiliates. They must
also determine that such transactions are equivalent to a negotiated
arm's-length transaction with a third party. We cannot guarantee that we will
reach agreements with the Gold family on renewal terms for the properties we
currently lease from them. Also, even if we agree to such terms, we cannot be
certain that our independent directors will approve them. If we fail to renew
one of these leases, we could be forced to relocate or close the leased store.
Any relocations or closures we experience will be costly and could adversely
affect our business.
WE RELY HEAVILY ON OUR MANAGEMENT TEAM
Our success depends substantially on David Gold and Eric Schiffer, our
Chief Executive Officer and President, respectively. We also rely on the
continued service of our executive officers and other key management,
particularly Helen Pipkin, our Senior Vice President of Wholesale Operations. We
have not entered into employment agreements with any of our executive officers
and we do not maintain key person life insurance on them. As we continue to
grow, our success will depend on our ability to identify, attract, hire, train,
retain and motivate other highly skilled management personnel. Competition for
such personnel is intense, and we may not be able to successfully attract,
assimilate or retain sufficiently qualified candidates.
OUR OPERATING RESULTS MAY FLUCTUATE AND MAY BE AFFECTED BY SEASONAL BUYING
PATTERNS
Historically, our highest net sales and operating income have occurred
during the fourth quarter, which includes the Christmas and Halloween selling
seasons. During 1999 and 2000, we generated approximately 31.8% and 29.6%,
respectively, of our net sales and approximately 36.2% and 32.7%, respectively,
of our operating income during the fourth
Page 16
quarter. Accordingly, any decrease in net sales during the fourth quarter could
reduce our profitability and impair our results of operations for the entire
year.
In addition to seasonality, many other factors may cause our results of
operations to vary significantly from quarter to quarter. Some of these factors
are beyond our control. These factors include:
- the number of new stores and timing of new store openings;
- the level of advertising and pre-opening expenses associated with new
stores;
- the integration of new stores into our operations;
- general economic health of the deep-discount retail industry;
- changes in the mix of products sold; - unexpected increases in
shipping costs;
- ability to successfully manage our inventory levels;
- changes in our personnel;
- fluctuations in the amount of consumer spending; and
- the amount and timing of operating costs and capital expenditures
relating to the growth of our business.
WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS
Under various federal, state and local environmental laws and regulations,
current or previous owners or occupants of property may become liable for the
costs of removing any hazardous substances found on the property. These laws and
regulations often impose liability without regard to fault. We currently lease
all but 13 of our stores. In December 2000, the Company exercised its option to
purchase its main warehouse and distribution facility in the Los Angeles area
(where our executive offices are located) for $10.5 million. However, in the
future we may be required to incur substantial costs for preventive or remedial
measures associated with the presence of hazardous materials. In addition, we
operate one underground diesel storage tank and one above-ground propane storage
tank at our main warehouse. Although we have not been notified of, and are not
aware of, any current environmental liability, claim or non-compliance, we could
incur costs in the future related to our leased properties and our storage
tanks.
In the ordinary course of our business, we sometimes handle or dispose of
commonplace household products that are classified as hazardous materials under
various environmental laws and regulations. We have adopted policies regarding
the handling and disposal of these products, and we train our employees on how
to handle and dispose of them. We cannot assure you that our policies and
training will successfully help us avoid potential violations of these
environmental laws and regulations in the future.
ANTI-TAKEOVER EFFECT; WE ARE CONTROLLED BY OUR EXISTING SHAREHOLDERS
In addition to some governing provisions in our Articles of Incorporation
and Bylaws, we are also subject to certain California laws and regulations which
could delay, discourage or prevent others from initiating a potential merger,
takeover or other change in our control, even if such actions would benefit our
shareholders and us. Moreover, as of September 1, 2001, David Gold, our Chairman
and Chief Executive Officer, and members of his immediate family and certain of
their affiliates beneficially own 19,803,814 shares of our voting stock or 38.2%
of the outstanding shares. As a result, they have the ability to influence all
matters requiring the vote of our shareholders, including the election of our
directors and most of our corporate actions. They can also control our policies
and potentially prevent a change in our control. This could adversely affect the
voting and other rights of our other shareholders and could depress the market
price of our common stock.
Page 17
OUR STOCK PRICE COULD FLUCTUATE WIDELY
The market price of our common stock has risen substantially since our
initial public offering on May 23, 1996. Trading prices for our common stock
could fluctuate significantly due to many factors, including:
- the depth of the market for our common stock;
- changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
- variations in our operating results;
- conditions or trends in our industry or in the industries of any of
our significant clients;
- additions or departures of key personnel; and
- future sales of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk for its investments in
marketable securities. At September 30, 2001, the Company had $122.5 million in
marketable securities maturing at various dates through August 2002. The
Company's investments are comprised primarily of investment grade federal and
municipal bonds and commercial paper. The Company generally holds investments
until maturity. Any premium or discount recognized upon the purchase of an
investment is amortized over the term of the investment.
Page 18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in claims, proceedings and
litigation arising from its business. The Company does not believe that any such
claim, proceeding or litigation, either alone or in the aggregate, will have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
Page 19
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 thereto duly authorized.
99 CENTS ONLY STORES
Date: October 26, 2001
/S/ ANDREW A. FARINA
---------------------------
Andrew A. Farina
Chief Financial Officer
(Duly Authorized Officer)
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