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 November 3, 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 (I.R.S. Employer Identification
or organization) No.)
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 December
7, 2001 was 21,490,265.
1
COST PLUS, INC.
FORM 10-Q
For the Quarter Ended November 3, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
Balance Sheets as of November 3, 2001,
February 3, 2001 and October 28, 2000 3
Statements of Operations
for the three and nine months ended
November 3, 2001 and October 28, 2000 4
Statements of Cash Flows
for the nine months ended November 3, 2001
and October 28, 2000 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 10
PART II. OTHER INFORMATION
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)
November 3, February 3, October 28,
2001 2001 2000
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,087 $ 38,815 $ 1,210
Merchandise inventories 169,388 109,829 137,493
Other current assets 16,670 11,107 11,927
-------- -------- --------
Total current assets 189,145 159,751 150,630
Property and equipment, net 87,477 78,694 74,400
Other assets, net 13,463 14,420 12,026
-------- -------- --------
Total assets $290,085 $252,865 $237,056
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,994 $ 31,592 $ 35,606
Income taxes payable -- 9,933 --
Accrued compensation 4,755 8,506 8,680
Revolving line of credit 23,300 -- 8,400
Other current liabilities 13,594 11,719 12,710
-------- -------- --------
Total current liabilities 90,643 61,750 65,396
Capital lease obligations 13,153 13,474 13,566
Other long-term obligations 9,190 8,520 8,249
Shareholders' equity:
Preferred stock, $0.01 par value: 5,000,000 shares
authorized; none issued and outstanding -- -- --
Common stock, $0.01 par value: 67,500,000 shares
authorized; issued and outstanding 21,454,384,
21,005,337 and 20,976,664 shares 215 210 210
Additional paid-in capital 129,902 122,349 121,880
Retained earnings 46,982 46,562 27,755
-------- -------- --------
Total shareholders' equity 177,099 169,121 149,845
-------- -------- --------
Total liabilities and shareholders' equity $290,085 $252,865 $237,056
======== ======== ========
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 Nine Months Ended
----------------------- -----------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 113,544 $ 101,913 $ 338,560 $ 286,916
Cost of sales and occupancy 77,250 66,580 227,663 188,159
--------- --------- --------- ---------
Gross profit 36,294 35,333 110,897 98,757
Selling, general and administrative
expenses 38,163 32,630 106,073 89,660
Store preopening expenses 1,524 1,896 3,535 3,930
--------- --------- --------- ---------
Income (loss) from operations (3,393) 807 1,289 5,167
Net interest expense 412 344 599 471
--------- --------- --------- ---------
Income (loss) before income taxes (3,805) 463 690 4,696
Income tax provision (benefit) (1,484) 180 269 1,831
--------- --------- --------- ---------
Net income (loss) $ (2,321) $ 283 $ 421 $ 2,865
========= ========= ========= =========
Net income (loss) per share
Basic $ (0.11) $ 0.01 $ 0.02 $ 0.14
Diluted $ (0.11) $ 0.01 $ 0.02 $ 0.13
Weighted average shares outstanding
Basic 21,442 20,933 21,307 20,748
Diluted 21,442 21,711 21,726 21,551
See notes to condensed consolidated financial statements.
4
COST PLUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Nine Months Ended
-------------------------
November 3, October 28,
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 421 $ 2,865
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 11,810 9,626
Changes in assets and liabilities:
Merchandise inventories (59,559) (46,091)
Other assets (2,313) (3,468)
Accounts payable 17,402 12,011
Income taxes payable (9,933) (9,237)
Other liabilities (1,239) 3,426
--------- ---------
Net cash used in operating activities (43,411) (30,868)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20,212) (19,505)
--------- ---------
Net cash used in investing activities (20,212) (19,505)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving line of credit 23,300 8,400
Principal payments on capital lease obligations (288) (510)
Proceeds from issuance of common stock 4,883 5,282
--------- ---------
Net cash provided by financing activities 27,895 13,172
--------- ---------
Net decrease in cash and cash equivalents (35,728) (37,201)
Cash and cash equivalents:
Beginning of period 38,815 38,411
--------- ---------
End of period $ 3,087 $ 1,210
========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for interest $ 480 $ 361
========= =========
Cash paid for taxes $ 9,526 $ 11,473
========= =========
See notes to condensed consolidated financial statements.
5
COST PLUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended November 3, 2001 and October 28, 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 only of normal recurring
accruals) necessary to present fairly the Company's financial position at
November 3, 2001 and October 28, 2000; the interim results of operations for the
three and nine months ended November 3, 2001 and October 28, 2000 and the
changes in cash flows for the nine 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 generally accepted accounting
principles 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 nine month periods herein presented
are not necessarily indicative of the results to be expected for the full year.
2. IMPACT OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, Business Combinations, SFAS No.
142, Goodwill and Other Intangible Assets, SFAS No. 143, Accounting for Asset
Retirement Obligations and, in October 2001, issued SFAS No. 144, Accounting for
the Impairment of Disposal of Long-Lived Assets. The Company will adopt these
Financial Accounting Standards for its fiscal year beginning February 3, 2002
and the effects of their adoption are 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)
3. 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 Nine Months Ended
---------------------------------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
------------ ------------ ------------- -------------
Basic shares 21,442 20,933 21,307 20,748
Effect of dilutive stock - 778 419 803
------------ ------------ ------------- -------------
Diluted shares 21,442 21,711 21,726 21,551
============ ============ ============= =============
Options to purchase 1,843,688 shares of common stock were outstanding for the
three months ended November 3, 2001 but were not included in the computation of
diluted earnings per share because the effect would be antidilutive. In
addition, a portion of options to purchase common stock outstanding for the
three months ended October 28, 2000 and the nine months ended November 3, 2001
and October 28, 2000 were not included in the computation of diluted earnings
per share because their exercise price was in excess of the current market price
and their effect would be antidilutive. For the three months ended October 28,
2000, options excluded totaled 101,049 and for the nine months ended November 3,
2001 and October 28, 2000, options totaling 303,374 and 271,299, respectively,
were also excluded.
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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 (third quarter) and nine months (year-to-date) ended November
3, 2001 as compared to the three months (third quarter) and nine months
(year-to-date) ended October 28, 2000.
Net Sales. Net sales increased $11.6 million, or 11.4%, to $113.5 million in the
third quarter of fiscal 2001. Year-to-date, net sales were $338.6 million an
increase of 18.0%. The increases in net sales for the third quarter and
year-to-date were attributable to sales from new stores. Comparable store sales
decreased 7.4% in the third quarter and were down 1.4% year-to-date. The third
quarter decrease was principally a result of weakness in the economy,
temporarily exacerbated by the September 11 terrorist activities, an
under-stocked condition in stores during early August and September due to the
impeded flow of goods associated with the implementation of a new warehousing
system and the shift of one promotional sales event from late third quarter to
the pre-holiday fourth quarter. As of the end of the third quarter, the Company
operated 145 stores in 19 states compared to 122 stores in 19 states at the end
of the third quarter last year.
Gross Profit. As a percentage of net sales third quarter gross profit was 32.0%
in fiscal 2001 and 34.7% in fiscal 2000. Year-to-date gross profit as a
percentage of net sales was 32.8% this fiscal year compared to 34.4% last fiscal
year. The decrease in gross profit as a percent of sales resulted from a
decrease in merchandise margin and the impact of increased occupancy costs
relating to new stores. The merchandise margin decrease resulted from a shift in
sales mix to lower margin consumable products which stimulate foot traffic and
higher markdowns to move summer goods from inventory. In addition, increased
distribution expenses were incurred in order to relieve the temporary
under-stocked condition in stores. The increase in occupancy costs was due to
new stores which have higher occupancy costs as a percentage of net sales until
they reach maturity.
Selling, General and Administrative ("SG&A") Expenses. As a percentage of net
sales, SG&A expenses increased to 33.6% in the third quarter of fiscal 2001 from
32.0% in the third quarter of the prior fiscal year. Year-to-date, SG&A expenses
increased slightly to 31.4% in the current fiscal year from 31.2% last fiscal
year. The increase for the third quarter and year-to-date was due to the effect
of reduced sales leverage associated with the decline in comparable store sales
and increases in other store expenses, primarily utility costs.
Store Preopening Expenses. Store preopening expenses include grand opening
advertising and preopening merchandise set up expenses. Expenses vary depending
on the particular store site and whether it is located in a new or existing
market. For the third quarter of fiscal 2001, store preopening expenses were
$1.5 million compared to $1.9 million in the third quarter of the prior fiscal
year. Eight stores were opened in the third quarter compared to nine stores in
the prior year's third quarter. Year-to-date, store preopening expenses were
$3.5 million in fiscal 2001 compared to $3.9 million in fiscal 2000, with 18
stores opened year-to-date versus 19 stores for the prior year. Preopening
expenses on a year-to-date per store basis were $196,000 for fiscal 2001 and
$207,000 for fiscal 2000.
8
Net Interest Expense. Net interest expense for the third quarter, which includes
interest on short-term borrowings and interest on capital leases, net of
interest income, was $412,000 for fiscal 2001 and $344,000 for fiscal 2000.
Year-to-date, net interest expense was $599,000 in fiscal 2001 compared to
$471,000 in fiscal 2000. The increase was due to higher borrowings directly
relating to a larger investment in inventory compared with a year ago. Lower
interest rates on borrowings due to a drop in the prime rate partially offset
the increase.
Provision for Income Taxes. The Company's effective tax rate was 39.0% in fiscal
2001 and fiscal 2000.
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 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 these 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 gross sales due to insufficient inventory or lost gross margin
due to the need to mark down excess inventory*.
The Company's future quarterly results of operations may also fluctuate based
upon such factors as further terrorist attacks and the nation's response
thereto, general economic conditions, delays in the flow of merchandise, changes
in the anticipated opening of the Company's new distribution center in Virginia
in mid 2002, 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, labor market fluctuations, changes in accounting
rules and regulations and unseasonable weather 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 expenditure requirements for the next 12 months.*
Net cash used in operating activities for the nine months ending November 3,
2001 totaled $43.4 million, an increase of $12.5 million from the comparable
period of the prior fiscal year. In addition to lower than expected net income,
this increase in cash used in operating activities resulted primarily from
inventory for new stores and increased inventory due to the conversion of
beverage inventory to a central replenishment system for California stores.
Inventory per store was $1.2 million as of the end of the third quarter of
fiscal 2001, an increase of 3.6% from $1.1 million at the same period last year.
The cash used for the additional inventory was partially offset by funds
generated from higher accounts payable balances.
9
Net cash used in investing activities, totaled $20.2 million year-to-date
compared to $19.5 million in the comparable period of the prior year. This
slight increase is primarily due to capital expenditures for new stores and
improvements made to the Company's warehouse management system and
infrastructure. The Company estimates that capital expenditures will approximate
$30.2 million in fiscal 2001.*
Net cash provided by financing activities was $27.9 million year-to-date and
$13.2 million year-to-date last year, both of which were primarily due to net
borrowings under the Company's revolving line of credit. Proceeds from the
issuance of common stock in connection with the Company's stock option and stock
purchase plans were $4.9 million and $5.3 million for the current year-to-date
and prior year-to-date period.
Effective September 13, 2001, the Company amended its unsecured revolving line
of credit agreement with a bank. The amendment allows for cash borrowings and
letters of credit up to $25.0 million from January 1, 2002 through the
expiration date of June 1, 2002.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment Number 3 to Business Loan Agreement, dated September
13, 2001, between the Company and Bank of America, N.A.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the period
covered by this report.
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: December 14, 2001 By: John J. Luttrell
Senior Vice President
Chief Financial Officer
Duly Authorized Officer
11