99 CENTS ONLY STORES(R) REPORTS EARNINGS PER SHARE OF $.12 FOR THE FOURTH
QUARTER ENDED DECEMBER 31, 2004, AND $.39 FOR 2004.
CITY OF COMMERCE, CA - June 29, 2005 -- 99 Cents Only Stores(R) (NYSE:NDN -
News) reports unaudited fourth quarter 2004 diluted earnings per share of $0.12
on net income of $8.7 million compared to fourth quarter unaudited 2003 restated
diluted earnings per share of $0.21 on net income of $15.3 million. Diluted
earnings per share for the year 2004 was $0.39 on net income of $27.8 million
compared to 2003 restated diluted earnings per share of $0.81 on net income of
$58.7 million.
As the Company has previously announced, in response to views expressed by
the Chief Accountant of the Securities and Exchange Commission ("SEC") in a
February 7, 2005 letter to the American Institute of Certified Public
Accountants, the Company will be restating its financial statements for 2002,
2003, and the first three quarters of 2004 for its accounting for operating
lease rent holidays and for leasehold improvements funded by landlord incentives
or allowances under operating leases (tenant improvement allowances). In
addition, as previously reported, the Company has completed its analysis of
useful lives used to depreciate certain building and leasehold improvements, and
has determined that a restatement of these prior period financial statements is
required to reflect adjustments to these useful lives to periods longer than
initially assigned in order to properly reflect the economic lives of these
assets. This adjustment to the useful lives will result in a restatement of
accumulated depreciation and depreciation expense for 2002, 2003, and the first
three quarters of 2004.
The net impact, after-tax, of these restatements will be to increase
previously reported net income in 2002 and 2003 by $1.8 million and $2.2
million, respectively, and to increase previously reported net income for the
first three quarters of 2004 by $0.9 million, $0.9 million, and $0.8 million,
respectively. The net effect of these restatements will be to increase
previously reported net income for the nine months ended September 30, 2004 by
$2.6 million and increase diluted earnings per share by $0.04.
Eric Schiffer, CEO of the Company said, "We are pleased to get these
restatement issues, which resulted in an increase to earnings for all prior
periods, behind us. However, earnings per share for the fourth quarter of 2004
was negatively impacted by several factors, including a $10.1 million addition
to our California workers' compensation reserve due to an actuarial adjustment,
and the continued lower than expected sales volume in our Texas stores. In the
second quarter of 2005, we took what we believe are significant steps intended
to help control our California workers' compensation costs, including hiring an
experienced Director of Risk Management and switching third party workers'
compensation claims administrators. In 2004, all stores, excluding Texas, open
for a full year averaged sales of $4.8 million per store, while Texas stores
averaged $2.2 million. Average sales per sellable square foot for all stores,
excluding Texas, averaged $293 while Texas averaged $101. One of our highest
2005 priorities is improving the performance of our Texas stores."
Retail sales for the fourth quarter of 2004 were $255.1 million, an
increase of $19.1 million, or 8.1%, from the fourth quarter of 2003. Total 2004
fourth quarter sales including wholesale sales were $265.9 million, an increase
of $18.4 million, or 7.5%, from the fourth quarter of 2003. The increase in
retail sales is primarily due to the increase in the number of stores.
The fourth quarter 2004 total gross margin was 41.0%, compared to 40.7% for
the fourth quarter of 2003. Retail gross margin for the fourth quarter of 2004
was 41.9%, compared to 41.7% for the fourth quarter of 2003.
Operating expenses, including depreciation, for the fourth quarter of 2004
were $98.9 million, an increase of $22.0 million, or 28.6%, from the fourth
quarter of 2003. The increase is primarily due to higher store operating costs
(mainly labor and occupancy) as a result of the increase in the number of
stores, an increase of $4.8 million in California self-insured workers'
compensation expense, an increase in distribution and transportation costs of
$2.6 million, and increased external auditor and professional fees, including
Sarbanes Oxley compliance efforts, of $1.0 million.
Net income in the fourth quarter of 2004 was $8.7 million, a decrease of
$6.7 million, or 43.5%, compared to the fourth quarter of 2003. The decrease is
due primarily to operating expenses, including those discussed above, increasing
proportionately more than revenues.
Retail sales for 2004 were $929.9 million, an increase of $113.5, or 13.9%,
from 2003. Total 2004 sales including wholesale were $972.2 million, an increase
of $109.7, or 12.7%, from 2003. For all 99 Cents Only Stores, including Texas
stores, open all of 2004, the average net sales per sellable square foot was
$270 and the average net sales per store was $4.6 million.
Retail gross margin for 2004 was 39.9% compared to 41.2% in 2003. The
total 2004 gross margin was 39.0% compared to 40.1% in 2003. The retail gross
margin declined primarily due to an increase in average product cost resulting
from a shift in product mix, and an increase in shrinkage/spoilage as a result
of the Company's expanded offerings of fresh produce.
Operating expenses, including depreciation, for 2004 were $340.5 million,
an increase of $85.7 million, or 33.6%, from 2003. The increase is primarily due
to higher store operating costs (mainly labor and occupancy) as a result of an
increase in the number of stores, increased distribution and transportation
costs of $12.6 million, increased legal costs of $8.3 million (which includes a
settlement payment of $4.9 million related to a previously disclosed class
action lawsuit involving overtime and other wage and hour claims), an increase
in the Company's California self-insured workers' compensation expense of $11.2
million, increased advertising costs of $1.8 million, and increased external
auditor and professional fees, including external costs for Sarbanes-Oxley
compliance efforts, of $2.1 million.
Net income for 2004 was $27.8 million, a decrease of $30.9 million, or
52.6%, from 2003 net income of $58.7 million. The decrease is due primarily to a
decline in the gross margin, in addition to operating expenses, including those
discussed above, increasing proportionately more than revenues.
SARBANES-OXLEY STATUS
- ---------------------
Management has substantially completed its assessment of the internal
controls over financial reporting for the year ended December 31, 2004. Based on
the work performed on the internal controls, management did not complete the
necessary testing of the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004, and therefore, the Company's
independent registered public accounting firm was unable to complete its audit
of management's assessment. In addition, as a result of its internal review,
management has identified certain material weaknesses as defined by the Public
Company Accounting Oversight Board's Auditing Standard No. 2, including material
weaknesses related to: (i) the identification, evaluation, design, documentation
and application of accounting policies and procedures, (ii) management
information systems and technology, (iii) the preparation of account analyses,
account summaries, and account reconciliations, (iv) merchandise inventory
management and costs, (v) property and equipment management and recording and
classification of property and equipment, and (vi) several material weaknesses
related to the
control environment. Consequently, management has concluded that the Company's
internal control over financial reporting was ineffective as of December 31,
2004. As a result, the Company has been advised by its independent registered
public accounting firm that it will disclaim an opinion on management's
assessment because of the scope limitation and express an adverse opinion on the
effectiveness of internal control over financial reporting as of December 31,
2004 because of material weaknesses. The Company is actively addressing the
material weaknesses identified by its review. Management's report on the
Company's internal control over financial reporting and a summary of the
Company's remediation plans will be included in the Form 10-K.
2005 AND BEYOND
- ---------------
Eric Schiffer, CEO of the Company said, "Our team has five primary
objectives to accomplish during 2005. They are to strengthen our financial and
management controls in order to comply with all aspects of the Sarbanes-Oxley
Act, increase store shelf in-stock positions, improve our Texas store
performance, complete implementation of our HighJump warehouse management system
in California for major functional areas, and begin implementation of a
company-wide merchandising system."
The Company has slowed its store opening growth rate in 2005 to
approximately 5%, which is significantly below its historical growth. This was
done to help allow the Company to focus on its five primary objectives and to
implement additional improvements in its systems infrastructure, business
processes, and internal controls to help enable the Company to support its
existing stores and to establish a foundation for future accelerated growth. It
is anticipated that these improvement efforts will continue into 2006. The
Company plans to increase its store opening growth rate to approximately 10% in
2006. In 2007, the Company plans to accelerate the store opening growth rate to
15-20%. After 2007, the Company currently plans to continue to open stores at a
15-20% growth rate as it expands into new markets as part of its strategy to
become one of the nation's premier deep-discount retailers.
Eric Schiffer said, "We anticipate growth to come primarily from opening
new stores in existing markets in 2005 and 2006, and thereafter by also
expanding into new markets. For the remainder of 2005, we do not currently plan
to open additional stores in Texas as we analyses further our Texas store
operations. We believe that there is potential for continued growth in Texas,
and are presently determining the best strategy to maximize our operating
results and growth potential in that market.
We are also focused on building and strengthening our management team. Our
Company is pleased to announce the hiring of an experienced retail human
resources executive, Delores Gilmore, as Vice President of Human Resources. We
are committed to hiring a highly qualified Chief Financial Officer, and the
search firm of Spencer Stuart is actively engaged in this effort. In the
interim, our Company has retained Jeff Kniffin, an experienced financial
executive as interim Chief Financial Officer. Additionally, our Company has
recently hired experienced executives and managers to strengthen its supply
chain, information technology, and finance functions.
We believe our retail format and strategy continue to be very viable with
significant expansion opportunities in the western United States and beyond, and
that the 2004 earnings downturn from 2003 is due in significant part to our
Company outgrowing its systems and management infrastructure and business
processes. These issues, together with other factors, including the lower than
expected Texas store sales, have resulted in operating expenses increasing
faster than revenues. Our team is focused on addressing these issues.
Our Company remains profitable and debt free with a strong cash position,
and was profitable in the first quarter of 2005. We continue to focus our
management team on improving overall execution while building a foundation to
support future growth. We look forward to discussing the results of our
operations and our primary objectives, as well as merchandising and systems
initiatives on our earnings call today."
The Company expects to file its 2004 Form 10-K within a few weeks of this
earnings release. The Company plans to announce its earnings for the first
quarter of 2005 by early August, after its independent registered public
accounting firm completes its first quarter review, and file its 2005 first
quarter Form 10-Q shortly thereafter. The Company plans to announce its sales
for the second quarter of 2005 on Friday, July 8, announce its second quarter
earnings by early September, and file its 2005 second quarter Form 10-Q shortly
thereafter. It is the Company's policy to have it's independent registered
public accounting firm complete its limited quarterly review procedures prior to
releasing quarterly results, and therefore additional time may be needed which
could delay these earnings release dates.
A conference call to discuss this earnings release is scheduled for today,
June 30, 2005 at 11:00 A.M. Pacific Time. If you would like to participate in
this conference call, please phone the Link conference call operator at
1-206-315-1857 about nine minutes before the call is scheduled to begin. A
recorded version of the call will be made available about four hours after
completion of the call and will remain on-line for 7 days. To access the
recorded version, dial 1-913-383-5767, PASSCODE: 4071
99 Cents Only Stores, the nation's oldest existing one-price retailer,
operates 224 retail stores in California, Texas, Arizona and Nevada and a
wholesale division called Bargain Wholesale. The Company's newest store will
open today Thursday June 30, in Pomona, California. 99 Cents Only Stores
emphasizes name-brand consumables priced at an excellent value in attractively
merchandised stores, where nothing is ever over 99 cents.
We have included statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act and Section 27A
of the Securities Act. The words "expect," "estimate," "anticipate," "predict,"
"believe" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this release and include statements regarding the intent, belief or
current expectations of 99 Cents Only Stores (the "Company"), its directors or
officers with respect to, among other things, (a) trends affecting the financial
condition or results of operations of the Company, (b) the business and growth
strategies of the Company, and (c) the status of the Company's Sarbanes Oxley
compliance efforts and filings with the Securities and Exchange Commission. The
shareholders of the Company and other readers are cautioned not to put undue
reliance on such forward-looking statements. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
actual results may differ materially from those projected in this release for
the reasons, among others, discussed in the reports and other documents the
Company files from time to time with the Securities and Exchange Commission,
including the risk factors contained in the Section - "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Company's
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date hereof.
99 CENTS ONLY STORES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 TWELVE MONTHS ENDED DECEMBER 31
2004 2003 2004 (A) 2003
-------------------- ------------------ -------------------- -------------------
(AS RESTATED) (AS RESTATED)
------------------
Net sales:
99 Cents Only Stores $255,089 95.9% $236,016 95.4% $929,896 95.7% $ 816,348 94.7%
Bargain Wholesale 10,823 4.1% 11,452 4.6% 42,277 4.3% 46,112 5.3%
-------- ---------- -------- -------- -------- ---------- --------- --------
Total Sales 265,912 100.0% 247,468 100.0% 972,173 100.0% 862,460 100.0%
Cost of sales 156,816 59.0% 146,772 59.3% 592,575 61.0% 516,686 59.9%
-------- ---------- -------- -------- -------- ---------- --------- --------
Gross profit 109,096 41.0% 100,696 40.7% 379,598 39.0% 345,774 40.1%
Selling, general and administrative
Operating expenses 90,692 34.1% 71,252 28.8% 312,263 32.1% 235,428 27.3%
Depreciation & amortization 8,164 3.1% 5,636 2.3% 28,246 2.9% 19,391 2.2%
-------- ---------- -------- -------- -------- ---------- --------- --------
Total selling, general & administrative 98,856 37.2% 76,888 31.1% 340,509 35.0% 254,819 29.5%
-------- ---------- -------- -------- -------- ---------- --------- --------
Operating income 10,240 3.8% 23,808 9.6% 39,089 4.0% 90,955 10.6%
Interest & other income (expense) net 601 0.2% 822 0.3% 3,263 0.3% 4,457 0.5%
Income before income tax provision 10,841 4.0% 24,630 9.9% 42,352 4.3% 95,412 11.1%
Provision for income taxes 2,183 0.8% 9,314 3.8% 14,521 1.5% 36,710 4.3%
-------- -------- -------- -------- ---------- --------- --------
Net income $ 8,658 3.2% $ 15,316 6.1% $ 27,831 2.8% $ 58,702 6.8%
======== ========== ======== ======== ======== ========== ========= ========
Basic earnings per share $ 0.12 $ 0.21 $ 0.39 $ 0.82
======== ======== ======== =========
Diluted earnings per share $ 0.12 $ 0.21 $ 0.39 $ 0.81
======== ======== ======== =========
Weighted average number of
Common shares outstanding:
Basic 69,507 72,044 70,627 71,348
Diluted 69,768 72,779 71,016 72,412
99 CENTS ONLY STORES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, DECEMBER 31,
2004 2003
------------- --------------
(AS RESTATED)
--------------
ASSETS:
Cash and cash equivalents $ 884 $ 318
Short-term investments 92,645 145,670
Accounts receivables, net 3,463 2,245
Income tax receivable - 841
Deferred income tax 28,845 16,780
Inventories 155,836 107,409
Other current assets 5,946 2,717
-----------------------------
Total current assets 287,619 275,980
Property and equipment, net 247,919 217,768
Long-term investments 50,764 52,789
Other assets 13,902 17,177
-----------------------------
Total assets $ 600,204 $ 563,714
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 39,094 $ 27,903
Accrued expenses 22,131 12,963
Workers' compensation 36,445 16,319
Income tax payable 2,495 -
Current portion of capitalized lease 37 40
-----------------------------
Total current liabilities 100,202 57,225
Deferred rent 8,097 5,868
Deferred compensation 2,847 2,114
Capitalized lease obligation 774 1,553
------------- --------------
Total non-current liabilities 11,718 9,535
Shareholders' equity 488,284 496,954
-----------------------------
Total liabilities and shareholders' equity $ 600,204 $ 563,714
============= ==============
A. The first three quarters for 2004 have been restated for the adjustments
discussed above.
NOTE TO EDITORS: 99 CENTS ONLY STORES(R) NEWS RELEASES AND INFORMATION AVAILABLE
ON THE INTERNET AT WWW.99ONLY.COM
CONTACT: 99 Cents Only Stores(R), City of Commerce, California, Jeff Kniffin,
CFO, 323/881-1239 --99 Cents--