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 August 4, 2001
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number 0-14970
COST PLUS, INC.
(Exact name of registrant as specified in its charter)
California 94-1067973
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
200 4th Street, Oakland, California 94607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 893-7300
Former name, former address and former fiscal year, N/A
if changed 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 past 90 days.
Yes X No___
-----
The number of shares of Common Stock, $0.01 par value, outstanding on September
7, 2001 was 21,436,500.
COST PLUS, INC.
FORM 10-Q
For the Quarter Ended August 4, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
Balance Sheets as of August 4, 2001,
February 3, 2001 and July 29, 2000 3
Statements of Operations
for the three and six months ended
August 4, 2001 and July 29, 2000 4
Statements of Cash Flows
for the six months ended August 4, 2001
and July 29, 2000 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-9
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 9
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 10
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURE PAGE 11
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COST PLUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts, unaudited)
August 4, February 3, July 29,
2001 2001 2000
--------------- --------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,669 $ 38,815 $ 16,964
Merchandise inventories 120,383 109,829 95,352
Other current assets 12,997 11,107 9,593
--------------- --------------- ---------------
Total current assets 148,049 159,751 121,909
Property and equipment, net 84,199 78,694 70,322
Other assets, net 14,277 14,420 12,187
--------------- --------------- ---------------
Total assets $ 246,525 $ 252,865 $ 204,418
=============== =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,598 $ 31,592 $ 17,586
Income taxes payable -- 9,933 --
Accrued compensation 5,670 8,506 7,109
Other current liabilities 11,817 11,719 11,535
--------------- --------------- ---------------
Total current liabilities 45,085 61,750 36,230
Capital lease obligations 13,263 13,474 13,655
Other long-term obligations 9,057 8,520 7,735
Shareholders' equity:
Preferred stock, $.01 par value: 5,000,000 shares
authorized; none issued and outstanding -- -- --
Common stock, $.01 par value: 67,500,000 shares
authorized; issued and outstanding 21,433,448,
21,005,337 and 20,847,758 shares 214 210 208
Additional paid-in capital 129,602 122,349 119,118
Retained earnings 49,304 46,562 27,472
--------------- --------------- ---------------
Total shareholders' equity 179,120 169,121 146,798
--------------- --------------- ---------------
Total liabilities and shareholders' equity $ 246,525 $ 252,865 $ 204,418
=============== =============== ===============
See notes to condensed consolidated financial statements.
3
COST PLUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
Three Months Ended Six Months Ended
------------------------------------ -------------------------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Net sales $ 112,101 $ 92,765 $ 225,016 $ 185,003
Cost of sales and occupancy 74,759 61,132 150,413 121,579
---------------- ---------------- ---------------- ----------------
Gross profit 37,342 31,633 74,603 63,424
Selling, general and administrative
expenses 33,736 28,373 67,910 57,030
Store preopening expenses 945 790 2,011 2,034
---------------- ---------------- ---------------- ----------------
Income from operations 2,661 2,470 4,682 4,360
Net interest expense 188 95 187 127
---------------- ---------------- ---------------- ----------------
Income before income taxes 2,473 2,375 4,495 4,233
Income taxes 964 926 1,753 1,651
---------------- ---------------- ---------------- ----------------
Net income $ 1,509 $ 1,449 $ 2,742 $ 2,582
================ ================ ================ ================
Net income per share
Basic $ 0.07 $ 0.07 $ 0.13 $ 0.13
Diluted $ 0.07 $ 0.07 $ 0.13 $ 0.12
Weighted average shares outstanding
Basic 21,381 20,743 21,239 20,655
Diluted 21,907 21,564 21,751 21,462
See notes to condensed consolidated financial statements.
4
COST PLUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Six Months Ended
-------------------------------------
August 4, July 29,
2001 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,742 $ 2,582
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 7,667 6,227
Change in assets and liabilities:
Merchandise inventories (10,554) (3,950)
Other assets 599 (2,256)
Accounts payable (3,994) (8,475)
Income taxes payable (9,933) (9,237)
Other liabilities (2,213) 81
--------------- ---------------
Net cash used in operating activities (15,686) (15,028)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,911) (9,519)
--------------- ---------------
Net cash used in investing activities (12,911) (9,519)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (199) (336)
Proceeds from the issuance of common stock 4,650 3,436
--------------- ---------------
Net cash provided by financing activities 4,451 3,100
--------------- ---------------
Net decrease in cash and cash equivalents (24,146) (21,447)
Cash and cash equivalents:
Beginning of period 38,815 38,411
--------------- ---------------
End of period $ 14,669 $ 16,964
=============== ===============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 47 $ 190
=============== ===============
Cash paid for taxes $ 3,468 $ 10,629
=============== ===============
See notes to condensed consolidated financial statements.
5
COST PLUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended August 4, 2001 and July 29, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared from the records of the Company without audit and, in the
opinion of management, include all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the Company's financial
position at August 4, 2001 and July 29, 2000; the interim results of
operations for the three and six months ended August 4, 2001 and July 29,
2000; and changes in cash flows for the six months then ended. The balance
sheet at February 3, 2001, presented herein, has been derived from the
audited financial statements of the Company for the fiscal year then ended.
Accounting policies followed by the Company are described in Note 1 to the
audited consolidated financial statements for the fiscal year ended
February 3, 2001. 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 for purposes of the interim condensed consolidated financial
statements. Such financial statements should be read in conjunction with
the audited consolidated financial statements, including notes thereto, for
the fiscal year ended February 3, 2001.
The results of operations for the three and six month periods herein
presented are not necessarily indicative of the results to be expected for
the full year.
2. STOCK OPTION PLANS
In June 2001, pursuant to a vote of its shareholders, the Company amended
its 1995 Stock Option Plan to increase the number of shares available for
grant by 350,000 to a total of 5,068,006 shares, less the aggregate number
of shares issued or subject to options outstanding under the 1994 Stock
Option Plan.
3. IMPACT OF NEW ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted
for under the purchase method and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement
of intangible assets acquired outside of a business combination and the
accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite
useful lives be amortized and that goodwill and intangible assets with
indefinite lives will not be amortized, but rather be tested at least
annually for impairment. The Company will adopt SFAS No. 142 for its fiscal
year beginning February 3, 2002 and the effects of the adoption of SFAS No.
142 is not expected to have a significant impact on the Company's financial
position or results of operations.
6
COST PLUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES
The following is a reconciliation of the weighted average number of shares
(in thousands) used in the Company's basic and diluted per share
computations.
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
August 4, July 29, August 4, July 29,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Basic shares 21,381 20,743 21,239 20,655
Effect of dilutive stock options 526 821 512 807
--------------- --------------- --------------- ---------------
Diluted shares 21,907 21,564 21,751 21,462
=============== =============== =============== ===============
Options to purchase common stock were outstanding but were not included in the
computation of diluted earnings per share because the effect would be
antidilutive. For the three months ended August 4, 2001 and July 29, 2000, these
options totaled 241,049 and 259,624 and for the six months ended August 4, 2001
and July 29, 2000, were 281,049 and 259,624.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
AN ASTERISK "*" DENOTES A FORWARD-LOOKING STATEMENT REFLECTING CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS AND
SHAREHOLDERS OF COST PLUS, INC. (THE "COMPANY" OR "COST PLUS") SHOULD CAREFULLY
REVIEW THE CAUTIONARY STATEMENTS SET FORTH IN THIS FORM 10-Q, INCLUDING,
"FACTORS THAT MAY AFFECT FUTURE RESULTS" BEGINNING ON PAGE 9 HEREOF. THE
COMPANY MAY FROM TIME TO TIME MAKE ADDITIONAL WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS, INCLUDING STATEMENTS CONTAINED IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IN ITS REPORTS TO SHAREHOLDERS. THE
COMPANY DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT THAT MAY BE
MADE FROM TIME TO TIME BY OR ON BEHALF OF THE COMPANY.
Results of Operations
The three months (second quarter) and six months (year-to-date) ended August 4,
2001 as compared to the three months and six months ended July 29, 2000.
Net Sales. Net sales increased $19.3 million, or 20.8%, to $112.1 million in
the second quarter of fiscal 2001 from $92.8 million in the second quarter of
fiscal 2000. Year-to-date, net sales were $225.0 million compared to $185.0
million for the same period of fiscal 2000, an increase of $40.0 million, or
21.6%. The increase in net sales, for the three and six months of fiscal 2001,
was primarily attributable to new store sales. At August 4, 2001, the Company
operated 137 stores compared to 113 stores as of July 29, 2000. Comparable
store sales decreased 0.5% in the second quarter, due primarily to a decreased
customer count while year-to-date comparable sales increased 2.0% due to a
larger transaction size.
Gross Profit. As a percentage of net sales, second quarter gross profit was
33.3% in fiscal 2001 compared to 34.1% in fiscal 2000. Year-to-date gross
profit, as a percentage of net sales, was 33.2% this fiscal year compared to
34.3% last fiscal year. The decrease in the gross profit percentage in the
second quarter primarily resulted from a decrease in merchandise margin
percentage and an increase in occupancy costs of new stores. New stores
generally have higher occupancy costs, as a percentage of sales, until they
reach maturity.* The decrease in gross profit percentage year-to-date was
primarily due to a decrease in merchandise margin. The decrease in merchandise
margin for the second quarter and year-to-date was primarily due to a higher
percentage of consumables in the sales mix to stimulate foot traffic, clearance
markdowns on outdoor furniture from a soft consumer response to this category
and an increase in fuel and transportation costs.
Selling, General and Administrative ("SG&A") Expenses. As a percentage of net
sales, SG&A expenses decreased to 30.1% in the second quarter of fiscal 2001
from 30.6% in the second quarter of the prior fiscal year. Year-to-date, SG&A
expenses decreased to 30.2% in the current fiscal year from 30.8% last fiscal
year. The decrease in the SG&A rates resulted primarily from leveraging store
payroll, advertising and corporate overhead expenses against higher net sales
and an expanding base of stores.
Store Preopening Expenses. Store preopening expenses, which include grand
opening advertising and preopening merchandise setup expenses, were $945,000 in
the second quarter of fiscal 2001 and $790,000 in the second quarter of the
prior fiscal year. Expenses vary depending on the particular store site and
whether it is located in a new or existing market. The Company opened five
stores in the second quarter of fiscal 2001 compared to four in the prior fiscal
year. Year-to-date, store preopening expenses were $2.0 million in fiscal 2001
and $2.0 million in fiscal 2000, as a result of opening ten stores in both
fiscal 2001 and fiscal 2000.
Net Interest Expense. Net interest expense for the second quarter, which
includes interest on capital leases and interest expense net of interest income,
was $188,000 for fiscal 2001 and $95,000 for fiscal 2000. For the six months,
net interest expense was $187,000 in fiscal 2001 compared to $127,000 in fiscal
2000. The increase in net interest expense primarily was due to a lower yield
on short-term investments due to a significant reduction in the prime rate.
Income Taxes. The Company's effective tax rate was 39.0% in fiscal 2001 and
fiscal 2000.
8
Factors That May Affect Future Results
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Christmas season. Due to the importance of the Christmas selling season, the
fourth quarter of each fiscal year has historically contributed, and the Company
expects it will continue to contribute, a disproportionate percentage of the
Company's net sales and most of its net income for the entire fiscal year.* Any
factors negatively affecting the Company during the Christmas selling season in
any year, including unfavorable economic conditions, could have a material
adverse effect on the Company's financial condition and results of operations.
The Company generally experiences lower sales and earnings during the first
three quarters and, as is typical in the retail industry, may incur losses in
these quarters. The results of operations for interim periods are not
necessarily indicative of the results for a full fiscal year. In addition, the
Company makes decisions regarding merchandise well in advance of the season in
which it will be sold, particularly for the Christmas selling season.
Significant deviations from projected demand for products could have a material
adverse effect on the Company's financial condition and results of operations,
either by lost sales due to insufficient inventory or lost gross margin due to
the need to mark down excess inventory. The Company's quarterly results of
operations may also fluctuate based upon such factors as the number and timing
of store openings and related store preopening expenses, the amount of sales
contributed by new and existing stores, the mix of products sold, the timing and
level of markdowns, store closings, refurbishments or relocations, competitive
factors, changes in fuel and other shipping costs, increases in utility costs in
California and other states where the Company has operations and general
economic conditions.
Liquidity and Capital Resources
The Company's primary uses for cash are to fund operating expenses, inventory
requirements and new store expansion. Historically, the Company has financed
its operations primarily from internally generated funds and borrowings under
the Company's revolving credit facilities. The Company believes that the
combination of its cash and cash equivalents, internally generated funds and
available borrowings under its revolving line of credit will be sufficient to
finance its working capital and capital expenditures requirements for at least
the next 12 months.*
Net cash used in operating activities in the first half of fiscal 2001 totaled
$15.7 million, an increase of $658,000 from the prior fiscal year. This
increase resulted primarily from increased inventory balances due to new stores,
the addition of the bedroom and bathroom furnishings category and the conversion
of our beverage inventory to central replenishment for California stores. The
increase in inventory was partially offset by higher accounts payable balances
in the current year.
Net cash used in investing activities, primarily for new stores and distribution
infrastructure, totaled $12.9 million for the first half of fiscal 2001 compared
to $9.5 million in the prior fiscal year. This increase is primarily due to
capital expenditures for improvements made in fiscal 2001 to the Company's
distribution infrastructure. The Company estimates that fiscal 2001 capital
expenditures will approximate $30.2 million.*
Net cash provided by financing activities was $4.5 million in the first half of
fiscal 2001 and $3.1 million in the first half of fiscal 2000 and was primarily
related to proceeds from the issuance of common stock in connection with the
Company's stock option and stock purchase plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There are no material changes to our market risk as disclosed in the Company's
report on Form 10-K filed for the fiscal year ended February 3, 2001.
9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2001 Annual Meeting of Shareholders held on June 26, 2001, the
shareholders voted on the following proposals:
Proposal 1. To elect seven directors for the ensuing year and until their
successors are elected.
Proposal 2. To approve an amendment to the Company's 1995 Stock Option Plan
to increase the shares reserved for issuance thereunder by
350,000 shares.
Proposal 3. To ratify and approve the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the fiscal year ending
February 2, 2002.
2001 ANNUAL MEETING ELECTION RESULTS
Proposal 1 - Election of Directors
Name For Withheld
---- --- --------
Murray H. Dashe 18,797,701 216,032
Joseph H. Coulombe 18,816,866 196,867
Danny W. Gurr 18,797,401 216,332
Barry J. Feld 18,795,489 218,244
Kim D. Robbins 18,819,801 193,932
Fredric M. Roberts 18,797,701 216,032
Thomas D. Willardson 18,797,551 216,182
Proposals 2 and 3
Broker
Proposal For Against Abstain Non-Votes
-------- --- ------- ------- ---------
2. Amendment to the 1995 15,231,926 3,734,562 47,245 0
Stock Option Plan
3. Appointment of Deloitte
& Touche LLP 18,807,260 201,765 4,708 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 1995 Stock Option Plan, as amended.
10.2 Employment Severance Agreement, dated August 29, 2001, between
the Company and John J. Luttrell.
(b) Reports on Form 8-K
On August 24, 2001, the Company filed a current report on Form 8-K
dated August 19, 2001, reporting the promotion of John Luttrell to
Senior Vice President, Chief Financial Officer, replacing John
Hoffner, who left the Company on August 24, 2001, to join Jack-in-the-
Box as Executive Vice President, Chief Financial Officer.
10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COST PLUS, INC.
-----------------------------
Registrant
/s/ John J. Luttrell
--------------------------------
Date: September 11, 2001 By: John J. Luttrell
Senior Vice President,
Chief Financial Officer,
Duly Authorized Officer
11