UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MAY 2, 1998
Commission File Number
SAKS HOLDINGS, INC.
(Exact name of the registrant as specified in its charter)
Delaware 52-1685667
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12 East 49th Street, New York, New York 10017
(Address of principal executive offices) (Zip Code)
(212) 940-4048
(Registrant's telephone number, including area code)
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.
1) Yes /X/ No /-/
2) Yes/X/ No/-/
As of June 12, 1998 there were outstanding 63,993,413 shares of the issuer's
common stock, $.01 par value.
SAKS HOLDINGS, INC.
INDEX
Page
Number
Part I. Financial Information.
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of
May 2, 1998 (unaudited), May 3, 1997 (unaudited),
and January 31, 1998. 1
Condensed Consolidated Statements of Operations
(unaudited) for the three months ended May 2, 1998
and May 3, 1997. 2
Condensed Consolidated Statements of Cash Flows
(unaudited) for the three months ended May 2, 1998
and May 3, 1997. 3
Notes to Condensed Consolidated Financial Statements.
(unaudited) 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 6-9
Part II. Other Information.
Item 1. Legal Proceedings. 10
Item 2. Changes In Securities. 10
Item 3. Defaults Upon Senior Securities. 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 5. Other Information. 10
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures 10
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands) (Unaudited) (Unaudited)
May 2, May 3, January 31,
1998 1997 1998
---------- ---------- ----------
Assets:
Current assets:
Cash and cash equivalents $14,676 $ 10,369 $ 11,468
Accounts receivable, net 71,414 58,444 69,696
Inventories 619,196 495,398 543,113
Other current assets 71,538 54,828 106,128
---------- ---------- ----------
Total current assets 776,824 619,039 730,405
Property and equipment, net 961,016 837,236 941,098
Deferred income tax assets 321,491 - 323,793
Intangibles and other assets 105,035 162,922 107,099
---------- ---------- ----------
Total assets $2,164,366 $1,619,197 $2,102,395
========== ========== ==========
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable, trade $ 223,100 $ 179,209 $ 183,640
Accrued liabilities 101,364 88,023 135,888
Taxes other than income taxes 21,405 13,004 19,681
Income taxes payable 1,861 510 3,249
Current portion of capital lease obligations 4,458 5,505 4,458
---------- ---------- ----------
Total current liabilities 352,188 286,251 346,916
Long-term debt 771,841 642,041 713,591
Obligations under capital leases 113,629 112,501 114,554
Other noncurrent liabilities 42,544 37,474 47,437
---------- ---------- ----------
Total liabilities 1,280,202 1,078,267 1,222,498
Shareholders' equity 884,164 540,930 879,897
---------- ---------- ----------
Total liabilities and shareholders' equity $2,164,366 $1,619,197 $2,102,395
========== ========== ==========
See Notes to Condensed Consolidated Financial Statements
2
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
(In thousands except for per share amounts) May 2, May 3,
1998 1997
-------- --------
Net sales $582,885 $520,417
Cost of sales, including buying & occupancy 417,021 366,696
-------- --------
Gross margin 165,864 153,721
Selling, general and administrative expenses 134,394 127,344
-------- --------
Operating income 31,470 26,377
Interest expense, net 16,852 13,570
-------- --------
Income before income taxes 14,618 12,807
Income tax provision 5,919 200
-------- --------
Income before extraordinary charge and cumulative
effect of change in accounting for pre-opening costs 8,699 12,607
Extraordinary charge - loss on early extinguishment
of debt, net of taxes 0 3,352
Cumulative effect of change in accounting for pre-
opening costs, net of taxes 5,314 0
-------- --------
Net income $ 3,385 $ 9,255
======== ========
Earnings per share before extraordinary charge
and cumulative effect of change in
accounting for pre-opening
Basic $0.14 $0.20
Diluted $0.14 $0.20
Net income per share
Basic $0.06 $0.15
Diluted $0.06 $0.14
Weighted average shares outstanding
Basic 63,695 63,344
Diluted 64,082 64,330
See Notes to Condensed Consolidated Financial Statements
3
SAKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
(In thousands) May 2, May 3,
1998 1997
-------- --------
Net income $ 3,385 $ 9,255
Adjustments to reconcile net income to net cash
used in operations:
Depreciation and amortization 18,723 17,679
Extraordinary charge 0 3,352
Cumulative effect of change in accounting for
pre-opening costs 5,314 0
Income taxes 5,919 0
-------- --------
Net cash provided by operating activities before changes
in operating assets and liabilities 33,341 30,286
-------- --------
Change in operating assets and liabilities (48,458) (80,308)
-------- --------
Net cash used in operating activities (15,117) (50,022)
-------- --------
Net cash used in investing activities, principally
capital expenditures (39,882) (29,629)
-------- --------
Cash flow from financing activities:
Borrowings under revolving credit facility, net 58,250 65,200
Repayment of REMIC Certificates 0 (30,000)
Other (43) 1,865
-------- --------
Net cash provided by financing activities 58,207 37,065
Increase (decrease) during the period $ 3,208 $(42,586)
======== ========
Supplemental disclosure of cash flow information:
Interest paid $ 16,887 $ 14,870
Taxes paid 1,385 789
======== ========
Supplemental disclosure of non-cash investing
and financing activities:
Capital leases $ 0 $ 2,520
======== ========
See Notes to Condensed Consolidated Financial Statements
4
SAKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Saks Holdings,
Inc. and its subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation have been included. The retail
industry is seasonal in nature, and historically the results of operations for
interim periods may not be indicative of the results for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's consolidated financial statements
for the year ended January 31, 1998, which were previously filed.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities and disclosure of contingent
assets, and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. CHANGE IN ACCOUNTING FOR PRE-OPENING COSTS
In the first quarter of fiscal 1998, the Company implemented Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities." This
Statement requires companies to expense start-up costs, such as pre-opening
costs, as incurred. The Company would have been required to implement this
Statement for fiscal 1999, however early implementation was elected. The
Company's prior accounting policy expensed such costs over a twelve-month period
following store opening. The cumulative effect of this change in accounting for
pre-opening costs reduced net income in the 1998 first quarter by $5.3 million,
or $0.08 per diluted share.
3. INCOME TAXES
The continued improvement in operating income in fiscal 1997, as well as the
Company's estimates of future profitability, enabled the Company to record in
the fourth quarter of fiscal 1997 a tax benefit of $290 million, or $4.10 per
diluted share. This benefit reflects the elimination of the valuation allowance
related to deferred tax assets resulting in the recognition of the tax benefit
associated with the Company's
5
net operating loss carryforwards ("NOLs"). If future income is significantly
different than current estimates the deferred tax asset value may become
impaired. As a result of the NOL recognition, in the fourth quarter of 1997
the Company also began recording an income tax provision using a 41% annual
effective tax rate. The NOLs will continue to offset any future cash taxes
other than AMT liability and state income taxes in certain locations until
approximately the year 2001.
4. EXTRAORDINARY CHARGE
In February 1997, the Company re-acquired $15.0 million of its outstanding
mortgage certificates with an annual fixed interest rate of 12.36%, effectively
prepaying the mortgage certificates. The Company recorded an extraordinary
charge of $3.4 million associated with the repurchase premium and accelerated
write-off of deferred financing costs related to the repurchase.
5. COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in routine litigation incidental to
the course of its business. Management does not believe that the disposition of
such litigation will have a material adverse effect on the financial position or
results of operations of the Company.
6. IMPACT OF OTHER RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued Statement No.
132 ("SFAS 132"), "Employer Disclosure about Pensions and Other Post Retirement
Benefits." This statement significantly changes current financial statement
disclosure requirements. The most significant effects of SFAS 132 are that it:
1) standardizes the disclosure requirements for pensions and other post
retirement benefits and presents them in one footnote; 2) requires that
additional information be disclosed regarding changes in benefit obligation and
fair value of plan assets; 3) eliminates certain disclosures that are no longer
useful, including general descriptions of plans; and 4) permits the aggregation
of information about certain plans. SFAS 132 does not change the existing
measurement or recognition provisions under the existing applicable statement.
SFAS 132 is effective for fiscal 1998.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 2, 1998, COMPARED WITH THE
THREE MONTHS ENDED MAY 3, 1997
Net sales for the three months ended May 2, 1998 were $582.9 million, an
increase of $62.5 million, or 12%, over net sales of $520.4 million reported in
the three months ended May 3, 1997. Comparable sales increased 5% from the 1997
fiscal period.
Full-Line, Resort and Main Street stores net sales for the three months ended
May 2, 1998 were $490.5 million, an increase of $52.7 million, or 12.0%, from
$437.8 million for the three months ended May 3, 1997. Comparable sales for
Full-Line, Resort and Main Street stores increased 6.4% from the 1997 fiscal
period. The growth in Full-Line, Resort and Main Street stores net sales in the
first quarter of fiscal 1998 results from both the Company's real estate growth
and expansion strategy, which represents about one half of the increase, as well
as the Company's merchandise and customer focus initiatives. Off 5th's net
sales for the three month period ended May 2, 1998 were $72.0 million, an
increase of $10.8 million, or 17.6%, from $61.2 million for the three month
period of May 3, 1997. The increase is primarily a result of opening ten new
stores since the beginning of 1997. The Company closed four of its smaller Off
5th store locations in the first quarter. Comparable sales for Off 5th
decreased 2.6% from the fiscal 1997 period. This decrease primarily reflects a
decrease in sales of Off 5th's store located in Hawaii resulting from a decline
in Asian tourism and a decrease in sales of Off 5th Las Vegas location from its
grand opening in the first quarter of 1997. Folio catalog net sales for the
three month period ended May 2, 1998 were $20.4 million, a decrease of $1.0
million, or 4.7%, from $21.4 million for the three month period ended May 3,
1997. The decrease in catalog net sales is primarily a result of intentionally
reduced circulation, as unprofitable mailings to Japan were discontinued, and a
shift in the catalog mailing schedule from April to May.
Cost of sales includes the cost of merchandise and buying and occupancy costs.
Cost of sales in the three months ended May 2, 1998 was $417.0 million, an
increase of $50.3 million compared to $366.7 million in the three months ended
May 3, 1997, or a 13.7% increase. The overall increase resulted primarily from
the 12.0% increase in sales. As a percentage of net sales, cost of sales
including buying and occupancy costs was 71.5% for the three month period ended
May 2, 1998, compared to 70.5% in fiscal 1997. The increase in the cost of
sales rate was primarily due to increased occupancy costs associated with the
Company's real estate growth strategy, which has resulted in 16 new stores and 7
store expansions since the beginning of fiscal 1997. Because these costs are
relatively fixed in relation to sales, their impact on the Company's gross
margin rate is greater in the first three quarters of the year. Gross margin
was also
7
negatively affected by an increase in the markdown rate in part due to the
impact of closing four Off 5th stores which was absorbed in the first quarter of
1998.
Selling, general and administrative expenses for the three month period ended
May 2, 1998 were $134.4 million, an increase of $7.1 million, or 5.5%, from the
comparable period in fiscal 1997 primarily due to higher sales volume related
costs. As a percentage of net sales, selling, general and administrative
expenses were 23.1% for the three month period ended May 2, 1998, compared to
24.5% for the three month period ended May 3, 1997. The improvement in the
selling, general and administrative expense rate resulted from leverage from the
Company's sales growth, ongoing expense management and improved credit card
related income. Additionally, lower pre-opening expenses due to the early
implementation of the new SOP on start-up costs added to the improvement in the
rate.
Operating income was $31.5 million for the three month period ended May 2, 1998,
an increase of $5.1 million, or 19.3%, from operating income for the three month
period ended May 3, 1997.
Interest expense in the three months ended May 2, 1998 was $16.9 million, an
increase of 24.2% compared to the same period in fiscal 1997. This increase is
due to higher borrowings under the Company's bank revolving credit facility as a
result of the capital expenditures and related growth associated with the
Company's real estate strategy.
Income tax expense was $5.9 million for the three months ended May 2, 1998,
compared to $0.2 million for the three months ended May 3, 1997, which reflects
a 40.5% tax rate. Net income, before extraordinary charge and cumulative effect
of change in accounting for pre-opening costs, for the three months ended May 2,
1998 was $8.7 million or $0.14 per diluted share, which is an improvement of
$1.1 million or $0.02 per diluted share over pro forma fully-taxed net income of
$7.6 million, or $0.12 per diluted share for the three months ended May 3, 1997.
An extraordinary charge of $3.4 million, or $0.05 per diluted share, was
recorded during the three month period ended May 3, 1997, which related to the
repurchase of high cost debt.
CHANGES IN FINANCIAL CONDITION AND LIQUIDITY SINCE JANUARY 31, 1998
During the fiscal 1998 period, the Company financed its working capital needs
and capital expenditures with cash provided by operations, borrowings under its
credit facility, the continued sale of proprietary credit card receivables under
its securitization program, and utilization of lease financing and developer
contributions. The following discussion analyzes liquidity and capital
resources by operating, investing and financing activities as presented in the
Company's Consolidated Statements of Cash Flows.
Net cash used in operating activities was $15.1 million during the three months
ended May 2, 1998, compared to $50.0 million used in the three months ended May
3, 1997. This decrease was primarily attributable to the required funding in
the first quarter of fiscal 1997 of a deposit with a trust related to the
Company's accounts receivable securitization, which was released in the second
quarter of fiscal 1997, as well as a lower rate of increase in working capital
accounts. The primary items affecting working capital in the 1998 period were a
net increase in merchandise inventories, net of an increase in trade accounts
payable of $41.0 million, and a decrease in accrued liabilities of $34.5
million. The increase in merchandise inventories and trade accounts payable was
due to the addition of new stores, and an increase to support existing store
sales growth. The decrease in accrued liabilities to the first quarter reflects
the redemption of Saks First gift checks.
Net cash used in investing activities was $39.9 million during the three months
ended May 2, 1998 compared to $29.6 million in the three months ended May 3,
1997. Capital expenditures were $39.9
8
million during the three months ended May 2, 1998 and consisted principally of
construction of new stores and remodeling existing stores. Capital expenditures
in the three months ended May 3, 1997 were $31.0 million. During 1998, the
Company opened new Main Street stores in Blackhawk, CA and Santa Barbara, CA,
totaling nearly 100,000 square feet. In fiscal 1998, the Company plans to add
approximately 370,000 square feet to the core store base. In addition, the
Company opened one Off 5th store in Woodbury Common Premium Outlets in Central
Valley, NY and closed four smaller format Off 5th stores in Memphis, TN,
Gulfport, MS, Auburn, WA, and Phoenix, AZ. Proceeds from the sale and
sale-leaseback of assets were $0 million during the three months ended May 2,
1998, compared to $1.4 during the three months ended May 3, 1997.
Net cash provided by financing activities during the three months ended May 2,
1998 was $58.2 million compared to $37.1 million in the three months ended May
3, 1997. In 1998, the cash provided by financing activities was the result of
net borrowing under the credit facility. Cash provided by financing activities
in 1997 resulted from net borrowings under the credit facility, offset by the
repurchase of mortgage certificates.
The continued improvement in operating income in fiscal 1997, as well as the
Company's estimates of future profitability, enabled the Company to record in
the fourth quarter of fiscal 1997 a tax benefit of $290 million, or $4.10 per
diluted share. This benefit reflects the elimination of the valuation allowance
related to deferred tax assets resulting in the recognition of the tax benefit
associated with the Company's net operating loss carryforwards ("NOLs"). If
future income is significantly different than current estimates the deferred tax
asset value may become impaired. As a result, in the fourth quarter of 1997,
the Company also began recording an income tax provision using a 41% annual
effective tax rate. The utilization of these NOLs will continue to offset any
future cash taxes other than AMT liability and state income taxes in certain
locations until approximately the year 2001.
In June 1997, the Company entered into a $100.5 million operating lease
agreement, which can be used to finance qualified properties placed in service
by December 31, 1999. Under this agreement , the lessor has agreed to acquire
and construct new store sites in order to lease them to the Company. The lease
requires a variable rent payment related to LIBOR interest rates. The Company
has guaranteed a substantial residual value of the properties under lease. The
Company has guaranteed approximately $23.2 million at May 2, 1998. The Company
may purchase the assets under lease or elect for the properties to be sold to a
third party. At May 2, 1998, there was approximately $72.2 million available
under this lease agreement to fund capital expenditures. The initial lease term
ends in October 2001 and may be extended at the mutual consent of the lessor and
the Company.
In fiscal 1998, the Company expects capital expenditures to be approximately
$190 million as the Company continues to execute it's growth strategy. The
Company plans to add a total of one new Full-Line store, one new Resort store,
three new Main Street stores and four Off 5th stores, in addition to completing
four major expansions and one remodel. The Company's capital expenditures in
1999 and 2000 are currently anticipated to total approximately $400 million.
The Company expects that these projects will be funded by cash generated from
operations, the continued sale of receivables under the securitization program,
borrowings under the credit facility, lease financing and developer
contributions. The Company is currently evaluating various financing
alternatives including an increase in its credit facility, an increase in lease
financing, and issuance of debentures. The Company's receivable securitization
program expires in April 1999. The Company believes it will have sufficient
resources to fund its planned capital growth and operating requirements.
Inflation has not had a material impact on the Company's financial condition and
results of operations during the past three years.
9
The Company's business is seasonal, with a significant percentage of net sales
and operating income occurring in the fourth quarter. Seasonality also affects
the Company's working capital requirements and cash flow, as inventories build
in September and peak in October in anticipation of the holiday selling season.
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The potential year 2000 problem is the result
of computer programs having been written using two digits (rather than four) to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00"as the year 1900 rather
than the year 2000, which could result in miscalculations or system failures.
Based on preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations or cash flows in future periods. However, if
the Company or its vendors are unable to resolve such processing issues in a
timely manner, it could result in a material financial risk. Accordingly, the
Company plans to devote the necessary resources to resolve all significant year
2000 issues in a timely manner.
This filing contains forward-looking information, within the meaning of The
Private Securities Litigation Reform Act of 1995, regarding expectations and
estimates of future earnings, tax benefits, real estate projects, Year 2000
expense and financial reporting requirements. Such forward-looking statements
involve risks, uncertainties and other factors that may cause the actual results
to be materially different from such forward-looking statements. Such factors
include, among others, changes in consumer preferences or fashion trends, levels
of operating earnings, delays in anticipated store openings and expansions,
success in integrating distribution personnel and operations, adverse weather
conditions during peak selling seasons, changes in demographic or retail
environments, competitive influences, significant increases in paper, printing
and postage costs, changes in the Company's relationship with designers and
other resources and changes in business strategy or development plans, tax laws
or financial reporting requirements. For more details, see the Company's other
filings with the Securities and Exchange Commission.
10
SAKS HOLDINGS, INC.
PART II OTHER INFORMATION
Item 1 Legal Proceedings. Not Applicable
Item 2 Changes in Securities. Not Applicable
Item 3 Defaults Upon Senior Securities. Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders. Not Applicable
Item 5 Other Information. Not Applicable
Item 6 (a) Exhibits
Exhibit No. Exhibit
3.01* Amended and Restated Certificate of Incorporation
of Saks Holdings, Inc., as filed with the Delaware
Secretary of State on May 28, 1996.
11
3.02* Bylaws of Saks Holdings, Inc., as adopted on August
6, 1990.
11.01 Statement Re: Computation of Earnings per share.
27.01 Financial Data Schedule.
Item 6 (b) Reports on Form 8-K. Not Applicable
*Incorporated herein by reference to Saks Holdings, Inc.'s registration
statement on Form S-1 (File No. 333--2426).
SIGNATURES
Pursuant to the requirement 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.
Saks Holdings, Inc.
(Registrant)
/s/ Mark E. Hood
- -------------------------------
Mark E. Hood
Senior Vice President
Chief Financial Officer
12