EXHIBIT 13
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EXPECT THE UNEXPECTED
COST PLUS WORLD MARKET 2002 ANNUAL REPORT
Our Customers Do.
That's why they keep coming back to Cost Plus World Market. Our stores carry
more than 10,000 one-of-a-kind products from around the world - everything from
distinctive home furnishings, garden accessories, and artwork to gourmet foods,
coffee, and wine. And by continuously stocking new, interesting, and
reasonably priced items throughout the year, we keep our assortment fresh,
our stores intriguing, and our customers pleasantly surprised.
Overheard often in our stores: "Hey, look at what I found over here!"
Cost Plus World Market sources its products from more than 60 countries and in
every category you'll find high-quality items that you won't find anywhere else.
Whether it's a six-foot hand-carved giraffe, a new Australian Shiraz or a choice
of hardwood dining tables all priced under $500, there's always something
unexpected and delightful to be found in every corner of the store.
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More than 60% of our product assortment changes over the course of a year.
Casual. Unhurried. Fun. Not your typical store environment.
For all that's new and exciting in our stores, one thing never changes at Cost
Plus World Market: the relaxed and unhurried atmosphere that our customers love.
Like an open-air market, the product displays are colorful and inviting. And
they are arranged with a kind of organized clutter that encourages shoppers to
pick things up, rummage through the shelves, and unearth the unexpected.
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Our stores typically have more than 10,000 items in 16,000 square feet designed
for leisurely browsing.
Shopping this fun can't be this affordable. Except it is.
Great products and a fun place to shop - sounds expensive, but at Cost Plus
World Market, it's anything but. We've kept quality high and prices low since
1958, and extraordinary value is one surprise that never gets old, no matter how
often you visit our stores. It's just one more reason why our customers are so
loyal, and why we will continue surpassing their expectations for years to come.
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High quality private label and non-branded items are a key part of our eclectic
and affordable product mix.
We strive to exceed our investors' expectations as well. In 2002, we succeeded.
[PHOTO OF MURRAY H. DASHE]
MURRAY H. DASHE
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
To Our Shareholders:
2002 was a landmark year at Cost Plus World Market. In a year characterized by a
weak economy and the threat of tumultuous geopolitical events, total sales grew
21.8% to $692.3 million and net income rose 40.6% to $28.4 million, or $1.28 per
fully diluted share. Same store sales were up 5.6%, driven by strong increases
in both per-store customer traffic and average sales check. Additionally, we
opened 25 new stores and relocated one to end the year with 175 stores in 23
states.
But most importantly, we strengthened our operating efficiency at all levels of
the company. After spending the past five years investing in new information
systems and processes - and our new 500,000 square-foot distribution center
near Norfolk, Virginia - the company has now established a strong, flexible, and
scaleable operating infrastructure, and during the year 2002 we proved its
effectiveness.
Excellent Store-Level Performance Our excellent 2002 results reflect the
continuing success of Cost Plus World Market's unique retailing concept. In each
of our stores you will find a mix of high-quality home furnishings, garden
products, kitchenware, gifts, and collectibles, plus a large selection of
non-perishable gourmet food and beverage from around the world. The shopping
environment is comfortable, relaxed, and fun. We offer unsurpassed value
throughout the store.
This combination of quality products, reasonable prices and shopping that feels
like an adventure has attracted a loyal and steadily growing base of customers
who
13
have driven our comparable store sales up an average of 4.9% annually over the
past five years. As successful as we have been at executing this concept,
however, we are committed to doing better. That's why we keep our product
selection fresh by changing approximately sixty percent of our merchandise
assortment every year. It's why we continuously test new products and categories
to find products that generate excitement and enduring appeal. And it's why we
rolled out several new merchandising innovations in 2002 to help foster the
atmosphere of discovery and fun that our customers expect.
One of these, a theme-oriented promotion called "Global Spirit", featured
creative combinations of furniture and handicrafts from Europe, Asia, and
Africa. Innovative signage and product descriptions reinforced the global theme,
while the inventive displays added new excitement and drama to the stores.
"Global Spirit" was very successful, generating increased customer traffic and
strong sales results during a traditionally slow time of year for retailers.
This promotion was also noteworthy because value-oriented retailers typically
rely on price promotions, and rarely succeed in driving sales through a theme
promotion. This is especially true in a soft economy, and our success
underscores the power of our concept and the special relationship we enjoy with
our customers. We look forward to presenting similar theme-oriented promotions
in 2003 and beyond.
Strong Infrastructure for Growth In Place Clearly the appeal and uniqueness of
the Cost Plus World Market concept - coupled with the solid ability of our
employees to effectively execute a plan - is a powerful engine for continued
sales growth.
14
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STEADY NATIONAL EXPANSION
Cost Plus World Market ended fiscal 2002 with 175 stores in 23 states. We plan
to open an additional 29 net new stores in 2003, focusing mainly on the Midwest
and Southeast. With our concept proving successful in both large and mid-sized
urban markets - and with our significantly expanded distribution
infrastructure - we intend to ultimately grow to more than 450 stores
nationwide.
15
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To drive a greater share of this growth to our bottom line, we have spent the
past several years implementing new systems and processes that improve the
efficiency of all our operations, from inventory management and distribution to
real estate to product planning and purchasing. And in mid-2002, we opened the
new distribution center in Virginia. The positive effect of these efforts on our
overall productivity and profitability has been dramatic.
By the end of 2002, for example, the time needed to move merchandise from our
distribution centers to store shelves dropped by nearly 65%. Productivity within
the distribution centers is also way up: processing of individual units of
merchandise
16
FIVE YEAR COMPOUND ANNUAL GROWTH RATE
1998-2002
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Stores 20%
Net Sales 22%
Operating Income 20%
Net Income 23%
is 45% faster, and the advanced processing systems we have installed have
increased accuracy while decreasing costs.
Our improved systems and responsive inventory controls have also strengthened
our merchandising function, enabling the Planning and Allocation Group to
collaborate closely with both buying and store personnel. The result has been
more strategic, market-oriented - and ultimately, profitable - product
planning. The success of "Global Spirit" is an excellent example of how
effective this process has become.
Building a Truly National Retailer The Cost Plus World Market concept has a much
17
NET SALES
dollars in millions
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98 315.1
99 402.3
00 493.7
01 568.5
02 692.3
OPERATING INCOME
dollars in millions
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98 22.9
99 33.1
00 36.2
01 34.1
02 44.3
broader appeal and much broader potential customer base than even we would have
initially suspected. Stores opened in a variety of mid-sized markets -
including Boise, Spokane, Bakersfield and Omaha - have been very successful,
with store traffic, sales growth, average sales ticket, and customer loyalty
meeting or surpassing our goals. And in larger markets, we have found that we
can more tightly cluster our locations without significantly taking sales away
from an established store.
As we pursue both of these avenues for expanding our store base, we are applying
increasingly rigorous site-selection criteria. Cost Plus World Market has become
one of the country's leading specialty retailers; our real estate strategy has
evolved to
18
NET INCOME
dollars in millions
[GRAPHIC APPEARS HERE]
98 13.2
99 19.7
00 21.7
01 20.2
02 28.4
COMPARABLE STORE SALES
percentage increase
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98 5.5
99 8.6
00 4.6
01 0.3
02 5.6
reflect that market position. In all markets we seek premier locations with
substantial parking, adjacency to the highest-traffic thoroughfares, and
proximity to other top specialty retailers. This strategy reinforces our
position as a destination retailer, and it helps ensure we achieve the kind of
strong, sustainable store economics for which we are known.
Disciplined Growth to Drive Shareholder Value As our expansion continues, we
will adhere to the principles that we have followed successfully in the past:
focusing on markets with the greatest potential and growing our store base
between 15% and 20% per year. We also intend to finance this growth through
internally generated
19
cash flow. The only long-term debt on our balance sheet is capitalized leases.
The Board of Directors has endorsed this disciplined approach. They have also
approved devoting a portion of our excess cash flow to a share repurchase
program. We have already bought back 500,000 shares of Cost Plus World Market
common stock under this program and are authorized to repurchase an additional
500,000 shares.
In closing, we want to thank all of our employees, partners, customers and
shareholders for their continued strong support. 2002 was a watershed year for
Cost Plus World Market, and we are committed to building on our momentum in 2003
and beyond.
Sincerely,
/s/ Murray Dashe
Murray H. Dashe
Chairman, Chief Executive Officer and President
March 2003
20
2002 Financial Overview
Five Year Summary of Selected Financial Data..................................22
Management's Discussion and Analysis..........................................23
Consolidated Balance Sheets...................................................32
Consolidated Statements of Operations.........................................33
Consolidated Statements of Shareholders' Equity...............................34
Consolidated Statements of Cash Flows.........................................35
Notes to Consolidated Financial Statements....................................36
Independent Auditors' Report..................................................48
Store Locations...............................................................49
Directors and Officers........................................................50
21
Five Year Summary of Selected Financial Data
Fiscal Year/1/
----------------------------------------------------------------------
(In thousands, except per share and
selected operating data) 2002 2001 2000 1999 1998
----------------------------------------------------------------------
Statement of Operations Data:
Net sales $ 692,301 $ 568,472 $ 493,661 $ 402,292 $ 315,135
Cost of sales and occupancy 450,385 372,948 316,500 255,383 200,023
----------------------------------------------------------------------
Gross profit 241,916 195,524 177,161 146,909 115,112
Selling, general and administrative
expenses 192,284 156,832 135,923 110,108 89,261
Store preopening expenses 5,378 4,612 5,044 3,671 2,927
----------------------------------------------------------------------
Income from operations 44,254 34,080 36,194 33,130 22,924
Net interest expense 3,452 962 666 859 1,226
----------------------------------------------------------------------
Income before income taxes 40,802 33,118 35,528 32,271 21,698
Income taxes 12,416 12,916 13,856 12,586 8,462
----------------------------------------------------------------------
Net income $ 28,386 $ 20,202 $ 21,672 $ 19,685 $ 13,236
======================================================================
Net income per share - basic $ 1.31 $ 0.95 $ 1.04 $ 0.97 $ 0.67
Net income per share - diluted $ 1.28 $ 0.93 $ 1.00 $ 0.93 $ 0.65
Weighted average shares
outstanding - basic 21,696 21,355 20,813 20,321 19,724
Weighted average shares
outstanding - diluted 22,158 21,756 21,568 21,189 20,363
======================================================================
Selected Operating Data:
Percent of net sales:
Gross profit 34.9% 34.4% 35.9% 36.5% 36.5%
Selling, general and
administrative expenses 27.8% 27.6% 27.5% 27.4% 28.3%
Income from operations 6.4% 6.0% 7.3% 8.2% 7.3%
Number of stores:
Opened during period 26 23 24 18 15
Closed during period 1 - - - -
Open at end of period 175 150 127 103 85
Average sales per selling square foot/2/ $ 266 $ 258 $ 273 $ 269 $ 258
Comparable store sales increase/3/ 5.6% 0.3% 4.6% 8.6% 5.5%
======================================================================
Balance Sheet Data (at period end):
Working capital $ 142,769 $ 117,381 $ 98,001 $ 80,663 $ 61,031
Total assets 374,659 317,940 252,865 214,699 173,141
Note payable and capital lease
obligations, less current portion 37,972 33,216 13,474 14,416 15,110
Total shareholders' equity 225,780 198,709 169,121 138,335 109,403
Current ratio 2.44 2.54 2.59 2.47 2.43
Debt to equity ratio 17.6% 17.2% 8.2% 10.9% 14.3%
======================================================================
/1./ The Company's fiscal year end is the Saturday closest to the end of
January. Fiscal 2000 was 53 weeks and ended on February 3, 2001. All other
fiscal years presented consisted of 52 weeks.
/2./ Calculated using net sales for stores open during the entire period
divided by the selling square feet of such stores.
/3./ A store is included in comparable store sales the first day of the fiscal
month beginning with the fourteenth full fiscal month of sales. To ensure
a meaningful comparison, comparable store sales are always measured on a
52-week basis.
22 CPWM
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 Annual Report,
including "Quarterly Results and Seasonality" beginning on page 27. 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. 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.
Critical Accounting Policies and Estimates
Cost Plus, Inc. and its subsidiaries' discussion and analysis of its financial
condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosure of contingent assets and liabilities. Estimates
and assumptions include, but are not limited to, inventory values, fixed asset
lives, intangible asset values, deferred income taxes, self-insurance reserves
and the impact of contingencies and litigation. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from those
estimates under different assumptions or conditions. The Company has also chosen
certain accounting policies when options are available, including:
. the retail inventory method of accounting for inventories.
. the intrinsic value method to account for common stock incentive awards.
These accounting policies are applied consistently for all years presented.
Operating results would be affected if other alternatives were used. Information
about the impact on operating results by using Accounting Principles Board (APB)
Opinion No. 25 "Accounting for Stock Issued to Employees" is included in Note 1
to the consolidated financial statements.
Although not all inclusive, the Company believes that the following represent
the more critical estimates and assumptions used in the preparation of the
consolidated financial statements.
Revenue Recognition The Company recognizes revenue from the sale of merchandise,
net of discounts and an allowance for estimated returns, at the time the
merchandise is sold. The allowance for sales returns is estimated based on
historical experience. Historically, sales returns have not been material, and
the Company believes they will not be material in the future.*
Net Sales Net sales consist of sales from comparable stores and non-comparable
stores. A store is not included in comparable store sales until the first day of
the fiscal month beginning with the fourteenth full fiscal month of sales.
Non-comparable store sales include sales in the current fiscal year from stores
opened during the previous fiscal year and new stores opened during the current
fiscal year before they are considered comparable stores.
Inventory Inventories are stated at the lower of cost or market with cost
determined under the retail inventory method ("RIM"), in which the valuation
of inventories at cost and gross margins are calculated by applying a calculated
cost-to-retail ratio to the retail value of inventories. RIM is an averaging
method that is widely used in the retail industry due to its practicality. Also,
the Company's use of the RIM results in valuing inventories at lower of cost
or market as markdowns are currently taken as a reduction of the retail value
of inventories. Inherent in the RIM calculation are certain
23 CPWM
significant management judgments and estimates including, among others,
merchandise markon, markdowns and shrinkage, which impact the ending inventory
valuation at cost as well as gross margin. To reduce the potential of such
distortions in the valuation of inventory, the Company's RIM utilizes several
departments in which fairly homogeneous classes of merchandise inventories
having similar gross margins are grouped. In addition, failure to take timely
markdowns could result in an overstatement of cost under the lower of cost or
market principle. When necessary, the Company records a markdown allowance that
reduces inventory value to the lower of cost or market. Management believes that
the Company's RIM provides an inventory valuation that reasonably approximates
cost and results in carrying inventory at the lower of cost or market.
Insurance / Benefits The Company records estimates for certain health and
welfare, workers' compensation and casualty insurance costs that are
self-insurance programs with per occurrence and aggregate limits on losses.
Should a greater amount of claims occur compared to what was estimated or costs
of medical care increase beyond what was anticipated, reserves recorded may not
be sufficient and additional costs to the consolidated financial statements
could be required.
Other Accounting Estimates Estimates inherent in the preparation of the
Company's financial statements include those associated with the evaluation of
the recoverability of deferred tax assets and goodwill as well as those used in
the determination of liabilities related to litigation, claims and assessments.
Various assumptions and other factors underlie the determination of these
significant estimates. The process of determining significant estimates is fact
specific and takes into account factors such as historic experience and current
and expected economic conditions. The Company periodically reevaluates these
significant factors and makes adjustments where facts and circumstances dictate.
To date, actual results have not significantly deviated from those determined
using the estimates described above.
The Company has not recorded a valuation allowance to reduce its deferred tax
assets. The Company has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. In the event the Company were to determine that it would not be able
to realize all or part of its net deferred tax assets in the future, an
adjustment to deferred tax assets would be charged to income in the period such
a determination was made. Likewise, should the Company determine it would be
able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such a determination was made.
The Company had net goodwill in the amount of $4.2 million at February 1, 2003.
In connection with the adoption of Statement of Financial Accounting Standard
(SFAS) No. 142, "Goodwill and Other Intangible Assets," the Company performed an
impairment test which resulted in no impairment being identified.
The Company is involved in litigation, claims and assessments incidental to its
business, the disposition of which is not expected to have a material effect on
the Company's financial position or results of operations.* It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in the Company's
assumptions related to these matters. The Company accrues its best estimate of
the probable cost for the resolution of claims. When appropriate, such estimates
are developed in consultation with outside counsel handling the matters and are
based upon a combination of litigation and settlement strategies. To the extent
additional information arises or the Company's strategies change, it is possible
that the Company's best estimate of its probable liability may change.
Forward-Looking Statements and Factors Affecting Future Performance
This report includes a number of forward-looking statements, which reflect the
Company's current beliefs and estimates with respect to future events and the
Company's future financial performance, operations and competitive position.
24 CPWM
In addition to statements marked with an asterisk "*", the words "expect,"
"anticipate," "estimate," "believe," "looking ahead," "forecast," "may," "will,"
"should," "project," "continue," "aims," "intends," "likely," "plan" and
similar expressions identify forward-looking statements.
The Company's continued success depends, in part, upon its ability to increase
sales at existing locations, to open new stores and to operate stores on a
profitable basis. There can be no assurance that the Company's existing
strategies and store expansion program will result in a continuation of revenue
and profit growth. Future economic and industry trends that could potentially
impact revenue and profitability are difficult to predict.
The forward-looking statements that are contained in this report are subject to
known and unknown risks and uncertainties that could cause the Company's actual
results to differ materially from historical results or current expectations.
These factors include, without limitation, a general deterioration in economic
trends, ongoing competitive pressures in the retail industry, obtaining
acceptable store locations, timely introduction and customer acceptance of the
Company's merchandise offering, the Company's ability to efficiently source and
distribute products, the Company's ability to realize the expected operational
and cost efficiencies from its distribution centers, the Company's ability to
successfully extend its geographic reach into new markets, unseasonable weather
trends, significant increases in the cost of fuel or utility services, changes
in the level of consumer spending on, or preferences for, home-related
merchandise, the Company's ability to attract and retain the retail talent
necessary to execute its strategies, international conflicts and political
strife and the effects on the flow or price of merchandise from overseas,
further terrorist attacks and our nation's response thereto and the Company's
ability to implement and integrate various new systems and technologies. In
addition, the Company's corporate headquarters, one of its distribution centers
and a significant number of its stores are located in California; therefore, a
downturn in the California economy or a major natural disaster could
significantly affect the Company's operating results and financial condition.
In addition to the above factors, the retail industry is highly seasonal. The
net sales of the Company for the fourth (Holiday) fiscal quarter are
historically higher than each of the first three fiscal quarters. The Company
has realized a significant portion of its profits in each fiscal year during the
fourth fiscal quarter. If intensified price competition, lower than anticipated
consumer demand or other factors were to occur during the fourth fiscal quarter,
the Company's fiscal year results could be adversely affected.
Results of Operations
Fiscal 2002 Compared to Fiscal 2001
Net Sales Net sales increased $123.8 million, or 21.8%, to $692.3 million in
fiscal 2002, from $568.5 million in fiscal 2001. The increase in net sales was
attributable to an increase in comparable and non-comparable store sales.
Comparable store sales rose 5.6%, or $30.1 million for fiscal 2002, compared to
0.3%, or $1.3 million, in fiscal 2001. Comparable store sales increased as a
result of a 2.7% increase in customer traffic and a 2.9% increase in average
transaction size per customer. The increase in average transaction size per
customer resulted primarily from a sales mix shift to home furnishings, which
carry a higher average retail price. Non-comparable store sales, which include
all stores open less than fourteen full fiscal months, increased $93.7 million.
As of February 1, 2003, the Company operated 175 stores compared to 150 stores
as of February 2, 2002.
Cost of Sales and Occupancy Cost of sales and occupancy, which consists of costs
to acquire merchandise inventory, costs of freight and distribution, as well as
certain facility costs, increased $77.4 million, or 20.8%, in fiscal 2002
compared to fiscal 2001. Cost of sales increased $67.4 million due to the
increased sales volume, as well as an increase in distribution costs from the
ramp-up of the Company's new Virginia distribution center. Occupancy costs
increased $10.0 million due to the addition of 25 net new stores in fiscal 2002,
an increase in rental rates for renewal lease agreements and increases in common
area maintenance costs passed through by landlords under these agreements. Total
cost of sales
25 CPWM
and occupancy decreased 0.5 percentage points to 65.1% of sales in fiscal 2002
from 65.6% of sales in fiscal 2001. The decline is mainly due to a higher sales
mix of home furnishings in fiscal 2002 which have a lower product cost as a
percentage of sales.
Gross Profit As a percentage of net sales, gross profit was 34.9% in fiscal 2002
and 34.4% in fiscal 2001. The increase is substantially explained by a sales mix
shift to higher margin home furnishings. Home furnishings made up 63% of total
sales in fiscal 2002, compared to 62% in fiscal 2001.
Selling, General and Administrative ("SG&A") Expenses As a percentage of net
sales, SG&A expenses increased to 27.8% in the current year from 27.6% last
year. The increase in the SG&A expense rate resulted primarily from costs
associated with the settlement of claims relating to the California wage and
hour lawsuit and professional fees related to an employment and capital
investment tax study. Together these costs impacted the SG&A rate by 0.5
percentage points. Partially offsetting this effect was the additional leverage
on operating expenses from increased sales.
Store Preopening Expenses Store preopening expenses, which include grand opening
advertising and preopening merchandise setup expenses, were $5.4 million in
fiscal 2002 and $4.6 million in fiscal 2001. Expenses vary depending on the
particular store site and whether it is located in a new or existing market. The
Company opened 26 stores in fiscal 2002 compared to 23 stores in fiscal 2001.
Net Interest Expense Net interest expense, which includes interest on capital
leases and interest expense on the Company's revolving line of credit, net of
interest income earned on Company investments, was $3.5 million in fiscal 2002
and $1.0 million in fiscal 2001. This increase in net interest expense was due
to an increase in capital lease interest incurred in connection with leases
signed for the Virginia distribution center, higher average borrowings and lower
interest earned on investments due to a significant drop in the prime rate.
Income Taxes The Company's effective tax rate was 30.4% in fiscal 2002 and 39.0%
in fiscal 2001. The decrease in the tax rate was substantially due to tax
credits relating to an employment and capital investment tax study recorded in
fiscal 2002. Of the credits recognized in fiscal 2002, $2.4 million related to
prior years. Excluding the effect of the prior year credits and associated fees,
the Company's effective tax rate was 35.8% for fiscal 2002. For fiscal 2003, the
Company expects that the effective tax rate will be 37.0% due to the benefit of
employment and capital investment tax credits.*
Fiscal 2001 Compared to Fiscal 2000
Net Sales Net sales increased $74.8 million, or 15.2%, to $568.5 million in
fiscal 2001, a 52-week fiscal year, from $493.7 million in fiscal 2000, a
53-week fiscal year. The increase in net sales was attributable to a $1.3
million increase in comparable store sales and a $73.5 million increase in
non-comparable store sales adjusted to include the 53rd week in fiscal 2000.
Comparable store sales rose 0.3% for fiscal 2001, compared to a 4.6% increase in
fiscal 2000. Comparable store sales were impacted by lower sales in the third
fiscal quarter due primarily to the weak economy, temporarily exacerbated by the
September 11th tragedy and an impeded flow of goods to stores associated with
the installation of a new warehouse management system. Comparable store sales
decreased 7.4% in the third fiscal quarter, yet recovered to a 2.7% increase for
the fourth fiscal quarter of 2001. As of February 2, 2002, the Company operated
150 stores compared to 127 stores as of February 3, 2001.
Cost of Sales and Occupancy Cost of sales and occupancy, which consists of costs
to acquire merchandise inventory, costs of freight and distribution, as well as
certain facility costs, increased $56.4 million, or 17.8%, in fiscal 2001
compared to fiscal 2000. Cost of sales increased $48.2 million due to the
increased sales volume, and occupancy costs increased $8.2 million due to the
addition of 23 new stores in fiscal 2001.
26 CPWM
Gross Profit As a percentage of net sales, gross profit was 34.4% in fiscal 2001
and 35.9% in fiscal 2000. The reduction is substantially explained by a sales
mix shift to lower margin consumable goods and higher markdowns to stimulate
foot traffic. Consumable goods made up 38% of total sales in fiscal 2001,
compared to 37% in fiscal 2000. Reduced leverage on occupancy costs from a
higher percentage of new stores in the base and increased transportation costs
also negatively impacted margin. Newer stores generally have higher occupancy
costs as a percentage of sales until they reach maturity.
Selling, General and Administrative ("SG&A") Expenses As a percentage of net
sales, SG&A expenses increased slightly to 27.6% in fiscal 2001 from 27.5% in
the prior year. The increase in the SG&A expense rate resulted almost entirely
from reduced sales leverage on lower comparable store sales growth in fiscal
2001 compared to fiscal 2000.
Store Preopening Expenses Store preopening expenses, which include grand opening
advertising and preopening merchandise setup expenses, were $4.6 million in
fiscal 2001 and $5.0 million in fiscal 2000. Expenses vary depending on the
particular store site and whether it is located in a new or existing market. The
Company opened 23 stores in fiscal 2001 compared to 24 stores in fiscal 2000.
Net Interest Expense Net interest expense, which includes interest on capital
leases and interest expense on the Company's revolving line of credit, net of
interest income earned on Company investments, was $1.0 million in fiscal 2001
and $0.7 million in fiscal 2000. The increase in net interest expense was due to
an increase in average borrowings and lower interest earned on investments due
to a significant drop in the prime rate.
Income Taxes The Company's effective tax rate was 39.0% in both fiscal 2001 and
fiscal 2000.
Inflation
The Company does not believe that inflation has had a material effect on its
financial condition and results of operations during the past three fiscal
years. However, there can be no assurance that the Company's business will not
be affected by inflation in the future.
Quarterly Results and Seasonality
The following table sets forth the Company's unaudited quarterly operating
results for the eight most recent quarterly periods.
Fiscal Quarters Ended
----------------------------------------------------------------------
(In thousands, except per share data and number May 4, August 3, November 2, February 1,
of stores) 2002 2002 2002 2003
----------------------------------------------------------------------
Net sales $ 134,349 $ 138,339 $ 149,886 $ 269,727
Gross profit 45,700 47,095 50,210 98,911
Net income (loss) 1,677 2,155 (712) 25,266
Net income (loss) per share
Basic $ 0.08 $ 0.10 $ (0.03) $ 1.16
Diluted $ 0.08 $ 0.10 $ (0.03) $ 1.14
Number of stores open
at end of period 156 163 169 175
27 CPWM
Fiscal Quarters Ended
--------------------------------------------------------
(In thousands, except per share data and number May 5, August 4, November 3, February 2,
of stores) 2001 2001 2001 2002
--------------------------------------------------------
Net sales $ 112,915 $ 112,101 $ 113,544 $ 229,912
Gross profit 37,261 37,342 36,294 84,627
Net income (loss) 1,233 1,509 (2,321) 19,781
Net income (loss) per share
Basic $ 0.06 $ 0.07 $ (0.11) $ 0.93
Diluted $ 0.06 $ 0.07 $ (0.11) $ 0.91
Number of stores open at end of period 132 137 145 150
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the fourth
quarter (Holiday) season. Due to the importance of the Holiday 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 Holiday 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. 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 quarterly results of operations may also fluctuate based upon such
factors as delays in the flow of merchandise, the ability to realize the
expected operational and cost efficiencies from its distribution centers, the
number and timing of store openings and related store preopening expenses, the
amount of net sales contributed by new and existing stores, the mix of products
sold, the timing and level of markdowns, store closings or relocations,
competitive factors, changes in fuel and other shipping costs, general economic
conditions, geopolitical conditions, 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 seasonal borrowings
under the Company's revolving credit facility. The Company believes that the
combination of its cash and cash equivalents, internally generated funds and
available borrowings under a revolving line of credit will be sufficient to
finance its working capital and capital expenditure requirements for at least
the next twelve months.*
Net cash provided by operating activities totaled $31.2 million for fiscal 2002,
an increase of $3.2 million from fiscal 2001. The increase in net cash provided
by operating activities was primarily due to the increase in net income to $28.4
million and an increase in current liabilities, partially offset by an increase
in inventories.
For fiscal 2001, net cash provided by operating activities totaled $28.0
million, an increase of $5.9 million from fiscal 2000. The increase in net cash
provided by operating activities in fiscal 2001, was primarily due to an
increase in current liabilities, partially offset by a slight decrease in net
income and increases in inventories and deposits on equipment for the Company's
second distribution center which was opened in fiscal 2002.
28 CPWM
Net cash used in investing activities, including capital expenditures for new
stores, totaled $22.8 million in fiscal 2002 compared to $27.4 million in fiscal
2001, a decrease of $4.6 million. This decrease resulted from additional
spending for distribution center projects in fiscal 2001 partially offset by
opening three more stores in fiscal 2002 compared to fiscal 2001. The Company
estimates that fiscal 2003 capital expenditures will approximate $26.5 million,
including approximately $13.0 million for new stores, $8.5 million for
information systems and distribution center projects, and $5.0 million allocated
to investments in existing stores and facilities.*
For fiscal 2001, net cash used in investing activities, primarily capital
expenditures for new stores, totaled $27.4 million compared to $26.5 million in
fiscal 2000, an increase of $0.9 million. Additional spending for distribution
center projects in fiscal 2001 was only partially offset by the Company opening
one less store in fiscal 2001 compared to fiscal 2000.
Net cash used in financing activities was $4.2 million in fiscal 2002 which was
due primarily to the repurchase of 298,600 shares of the Company's common stock
for $7.8 million, partially offset by proceeds of $4.8 million from the issuance
of common stock in connection with the Company's stock option and stock purchase
plans. Under a plan approved by the Company's Board of Directors in fiscal 2002,
the Company was authorized to purchase up to 500,000 shares of its common stock
under a common stock repurchase plan. As of the end of February 2003, the
Company had purchased the maximum number of shares permitted under the initial
authorization. At its February 2003 meeting, the Board of Directors approved an
additional repurchase up to 500,000 shares under the program. The Company will
repurchase common stock when the price of its common stock creates an
opportunity for an effective use of capital beyond what is needed to fund store
expansion. The program does not require the Company to repurchase any common
stock and can be discontinued at any time.
For fiscal 2001, net cash provided by financing activities was $6.0 million, an
increase of $1.2 million from fiscal 2000. The increase in cash provided by
financing activities was due primarily to an increase of $0.9 million from the
proceeds from the issuance of common stock in connection with the Company's
stock option and stock purchase plans.
The table below presents significant contractual obligations of the Company at
February 1, 2003.
Less than After Total Amount
Contractual Obligations (in millions) 1 year 1-3 years 4-5 Years 5 Years Committed
- ----------------------------------------------------------------------------------------------------------
Operating leases $ 50.4 $ 142.3 $ 83.6 $ 128.8 $ 405.1
Capital leases (principal and interest) 5.2 15.4 10.0 48.9 79.5
--------------------------------------------------------------
Total contractual obligations $ 55.6 $ 157.7 $ 93.6 $ 177.7 $ 484.6
==============================================================
The Company has no financial arrangements involving special purpose entities or
lease agreements commonly described as synthetic leases.
The Company has an unsecured revolving line of credit agreement with a group of
banks. The agreement allows for cash borrowings and letters of credit up to
$30.0 million from January through June of each year, increasing to $75.0
million from July through December of each year to coincide with Holiday
borrowing needs. Interest is paid quarterly in arrears on base rate loans and at
each interest period applicable to IBOR loans (30, 60 and 90 days) based on the
Company's election of the bank's reference rate or IBOR plus 0.9% from May 29,
2002 to June 1, 2003, increasing to IBOR plus 1.125% from June 2, 2003 to June
1, 2004 and IBOR plus 1.25% from June 2, 2004 to June 1, 2005. The agreement
requires a 30-day "clean-up period" each year where outstanding credit advances,
as defined in the agreement can (a) not exceed $20 million for not less than 30
consecutive days during the period from January 1, 2003 through March 31, 2003
and (b) must be zero for not less than 30 consecutive days during the period
from January 1, 2004 through March 31, 2004 and from January 1, 2005 through
March 31, 2005. The Company is subject
29 CPWM
to and in compliance with, certain financial covenants customary to such
agreements. At the end of the last three fiscal years, the Company had no
outstanding borrowings under its line of credit agreement. The Company had $10.7
million, $8.2 million and $4.1 million in outstanding letters of credit at the
end of fiscal 2002, 2001 and 2000, respectively.
The line of credit represents the Company's only commercial credit facility. The
Company believes the line of credit is sufficient to meet its borrowing needs
for the next year.*
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets," which became effective for the
Company for fiscal 2002. SFAS No. 142 specifies that goodwill and certain
intangible assets will no longer be amortized but instead will be subject to
periodic impairment testing. The adoption of this standard reduced amortization
associated with goodwill and other intangible assets by approximately $312,000
in fiscal 2002. See Note 1 of the Notes to Consolidated Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 establishes accounting and
reporting standards for the impairment of long-lived assets and for long-lived
assets to be disposed of. The Company adopted SFAS No. 144 in the first quarter
of fiscal 2002. The initial adoption of SFAS No. 144 did not impact the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance included
in Emerging Issues Task Force (EITF) Issue No. 94-3. The Company has adopted the
provisions of SFAS No. 146 for restructuring activities, if any, initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred
and that the liability be measured and recorded at fair value. Under Issue No.
94-3, a liability for an exit cost was estimated and recognized at the date of
the Company's commitment to an exit plan. Accordingly, SFAS No. 146 may affect
the timing of recognizing future restructuring costs as well as the amounts
recognized.*
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. The Company will not adopt the voluntary
transition afforded under SFAS No. 148 and will continue to account for
stock-based compensation using the intrinsic value method in accordance with the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", as
allowed by SFAS No. 123. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
annual disclosure provisions of SFAS No. 148 are effective for the Company's
fiscal year ended February 1, 2003. The interim disclosure provisions are
effective for the first quarter of the fiscal year ending January 31, 2004.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN No. 45 are effective for interim and annual periods ending
after December 15, 2002, and the initial recognition and measurement
requirements
30 CPWM
are effective prospectively for guarantees issued or modified after December 31,
2002. The initial adoption of FIN No. 45 did not have a material impact on the
Company's financial position or results of operations.
In November 2002, the EITF reached a consensus regarding EITF Issue No. 02-16,
"Accounting by a Customer (including a Reseller) for Certain Consideration
Received from a Vendor." Issue No. 02-16 addresses the timing of recognition and
classification of consideration received from vendors, including rebates and
allowances. Issue No. 02-16 is effective for certain of the Company's vendor
rebates and allowances commencing in November 2002 and others in January 2003.
The adoption of Issue No. 02-16 did not have a material impact on the Company's
consolidated financial statements.
Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to financial market risks, which include changes in U.S.
interest rates and foreign exchange rates. The Company does not engage in
financial transactions for trading or speculative purposes.
Interest Rate Risk The interest payable on the Company's bank line of credit is
based on variable interest rates and is therefore affected by changes in market
interest rates. If interest rates on existing variable rate debt were to rise 40
basis points (a 10% change from the Company's borrowing rate as of February 1,
2003), the Company's results of operations and cash flows would not be
materially affected. In addition, the Company has fixed and variable income
investments consisting of cash equivalents and short-term investments which are
also affected by changes in market interest rates.
Foreign Currency Risks The Company enters into a significant amount of purchase
obligations outside of the United States of America which are settled in U.S.
Dollars and, therefore, the Company has only minimal exposure to foreign
currency exchange risks. The Company does not hedge against foreign currency
risks and believes that foreign currency exchange risk is immaterial.*
Stock Activity
The Company's common stock is currently traded on the over-the-counter market
and is quoted on the Nasdaq National Market under the symbol "CPWM." The
following table sets forth the high and low closing sales prices, for the
periods indicated, as reported by the Nasdaq National Market.
Price Range
-------------------------
High Low
-------------------------
Fiscal Year Ended February 1, 2003
First Quarter $ 32.03 $ 24.31
Second Quarter 34.58 20.10
Third Quarter 30.07 19.89
Fourth Quarter 34.08 23.60
Fiscal Year Ended February 2, 2002
First Quarter $ 27.81 $ 21.13
Second Quarter 30.18 25.25
Third Quarter 27.00 15.29
Fourth Quarter 27.94 20.20
As of April 3, 2003, the Company estimated it had approximately 6,000
shareholders. The Company's present policy is to not pay cash dividends.
31 CPWM
Consolidated Balance Sheets
February 1, February 2,
(In thousands, except share amounts) 2003 2002
---------------------------
Assets
Current assets:
Cash and cash equivalents $ 49,707 $ 45,420
Merchandise inventories, net 172,388 131,344
Other current assets 19,980 16,789
---------------------------
Total current assets 242,075 193,553
Property and equipment, net 120,900 110,922
Goodwill, net 4,178 4,178
Other assets, net 7,506 9,287
---------------------------
Total assets $ 374,659 $ 317,940
===========================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 58,119 $ 43,990
Income taxes payable 9,478 10,082
Accrued compensation 11,645 8,305
Other current liabilities 20,064 13,795
---------------------------
Total current liabilities 99,306 76,172
Capital lease obligations 37,972 33,216
Other long-term obligations 11,601 9,843
Commitments and contingencies (See Note 9)
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 21,555,643 and
21,549,643 shares 215 215
Additional paid-in capital 136,542 131,730
Retained earnings 89,023 66,764
---------------------------
Total shareholders' equity 225,780 198,709
---------------------------
Total liabilities and shareholders' equity $ 374,659 $ 317,940
===========================
See notes to consolidated financial statements.
32 CPWM
Consolidated Statements of Operations
Fiscal Year Ended
--------------------------------------------
February 1, February 2, February 3,
(In thousands, except per share amounts) 2003 2002 2001
--------------------------------------------
Net sales $ 692,301 $ 568,472 $ 493,661
Cost of sales and occupancy 450,385 372,948 316,500
--------------------------------------------
Gross profit 241,916 195,524 177,161
Selling, general and administrative expenses 192,284 156,832 135,923
Store preopening expenses 5,378 4,612 5,044
--------------------------------------------
Income from operations 44,254 34,080 36,194
Interest income 324 882 1,293
Interest expense (3,776) (1,844) (1,959)
--------------------------------------------
Income before income taxes 40,802 33,118 35,528
Income taxes 12,416 12,916 13,856
--------------------------------------------
Net income $ 28,386 $ 20,202 $ 21,672
============================================
Net income per share
Basic $ 1.31 $ 0.95 $ 1.04
Diluted $ 1.28 $ 0.93 $ 1.00
============================================
Weighted average shares outstanding
Basic 21,696 21,355 20,813
Diluted 22,158 21,756 21,568
============================================
See notes to consolidated financial statements.
33 CPWM
Consolidated Statements of Shareholders' Equity
Common Stock Additional Total
-------------------------- Paid-in Retained Shareholders'
(In thousands, except shares) Shares Amount Capital Earnings Equity
---------------------------------------------------------------------------
Balance at January 29, 2000 20,521,884 $ 205 $ 113,240 $ 24,890 $ 138,335
Common stock issued under Employee
Stock Purchase Plan 15,768 - 380 380
Exercise of common stock options 467,685 5 5,138 5,143
Tax effect of disqualifying
common stock dispositions 3,591 3,591
Net income 21,672 21,672
---------------------------------------------------------------------------
Balance at February 3, 2001 21,005,337 210 122,349 46,562 169,121
Common stock issued under Employee
Stock Purchase Plan 16,417 - 355 355
Exercise of common stock options 527,889 5 6,029 6,034
Tax effect of disqualifying
common stock dispositions 2,997 2,997
Net income 20,202 20,202
---------------------------------------------------------------------------
Balance at February 2, 2002 21,549,643 215 131,730 66,764 198,709
Common stock issued under Employee
Stock Purchase Plan 14,385 - 355 355
Exercise of common stock options 290,215 3 4,463 4,466
Repurchase of common stock (298,600) (3) (1,695) (6,127) (7,825)
Tax effect of disqualifying
common stock dispositions 1,689 1,689
Net income 28,386 28,386
---------------------------------------------------------------------------
Balance at February 1, 2003 21,555,643 $ 215 $ 136,542 $ 89,023 $ 225,780
===========================================================================
See notes to consolidated financial statements.
34 CPWM
Consolidated Statements of Cash Flows
Fiscal Year Ended
--------------------------------------------
February 1, February 2, February 3,
(In thousands) 2003 2002 2001
--------------------------------------------
Cash Flows From Operating Activities:
Net income $ 28,386 $ 20,202 $ 21,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 19,764 16,320 13,887
Loss on disposal of property and equipment 131 203 407
Deferred income taxes 1,341 234 (2,103)
Changes in assets and liabilities:
Merchandise inventories (41,044) (21,515) (18,427)
Other assets (3,154) (5,667) (3,172)
Accounts payable 14,129 12,398 6,520
Other liabilities 11,670 5,832 3,317
--------------------------------------------
Net cash provided by operating activities 31,223 28,007 22,101
--------------------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (22,784) (27,411) (26,529)
--------------------------------------------
Net cash used in investing activities (22,784) (27,411) (26,529)
--------------------------------------------
Cash Flows From Financing Activities:
Principal payments on capital lease obligations (1,148) (380) (691)
Cash used for repurchase of common stock (7,825) - -
Proceeds from the issuance of common stock 4,821 6,389 5,523
--------------------------------------------
Net cash (used in) provided by financing activities (4,152) 6,009 4,832
--------------------------------------------
Net increase in cash and cash equivalents 4,287 6,605 404
Cash and Cash Equivalents:
Beginning of period 45,420 38,815 38,411
--------------------------------------------
End of period $ 49,707 $ 45,420 $ 38,815
============================================
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 3,283 $ 912 $ 669
============================================
Cash paid for taxes $ 9,988 $ 9,537 $ 11,672
============================================
Non-cash Financing:
Capital lease obligation related to distribution center $ 6,686 $ 20,632 $ -
============================================
See notes to consolidated financial statements.
35 CPWM
Notes to Consolidated Financial Statements
Note 1. Summary of Business and Significant Accounting Policies
Business Cost Plus, Inc. and subsidiaries (the "Company") is a specialty
retailer of casual home living and entertaining products. At February 1, 2003,
the Company operated 175 stores in 23 states under the names "World Market,"
"Cost Plus World Market," "Cost Plus" and "Cost Plus Imports." The Company's
product offerings are designed to provide solutions to customers' casual home
furnishing and home entertaining needs. The offerings include home decorating
items such as furniture and rugs, as well as a variety of tabletop and kitchen
products. Cost Plus World Market stores also offer a number of gift and
decorative accessories including collectibles, cards, wrapping paper and other
seasonal items. In addition, Cost Plus World Market offers its customers a wide
selection of gourmet foods and beverages, including wine, micro-brewed and
imported beer, coffee and tea. The Company accounts for its operations as one
operating segment.
Fiscal Year The Company's fiscal year end is the Saturday closest to the end of
January. The current and prior fiscal years ended February 1, 2003 (fiscal 2002)
and February 2, 2002 (fiscal 2001) contained 52 weeks. Consistent with the
National Retail Federation fiscal calendar, the fiscal year ended February 3,
2001 (fiscal 2000) contained 53 weeks.
Principles of Consolidation The consolidated financial statements include the
accounts of Cost Plus, Inc. and its subsidiaries. Intercompany balances and
transactions are eliminated in consolidation.
Accounting Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, including disclosures of contingent assets
and liabilities, as of the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Company's significant accounting judgments and estimates affect the
valuation of inventories, depreciable lives of long-lived assets, impairments of
long-lived assets, accrued liabilities, deferred taxes, self insurance reserves
and reserves for sales returns.
Estimated Fair Value of Financial Instruments The carrying value of cash and
cash equivalents, accounts receivable and accounts payable approximates their
estimated fair value.
Cash Equivalents The Company considers all highly liquid investments with
original maturities of three months or less as cash equivalents.
Inventories Inventories are stated at lower of cost or market under the retail
inventory method ("RIM"), in which the valuation of inventories at cost and
gross margins are calculated by applying a calculated cost-to-retail ratio to
the retail value of inventories. Cost includes certain buying and distribution
costs related to the procurement, processing and transportation of merchandise.
Management believes that the Company's RIM provides an inventory valuation which
reasonably approximates cost and results in carrying inventory at the lower of
cost or market.
Property and Equipment Furniture, fixtures and equipment are stated at cost and
are depreciated using the straight-line method over the following estimated
useful lives:
Store fixtures and equipment 3-10 years
Leasehold improvements Lesser of life of the asset or life of lease
Computer equipment and software 3-5 years
36 CPWM
Capital Leases Noncancelable leases which meet the criteria of capital leases
are capitalized as assets in property and equipment and amortized on a
straight-line basis over their related lease terms.
Other Assets Other assets include lease rights and interests, deferred taxes and
other intangibles. Lease rights and interests are amortized on a straight-line
basis over their related lease terms.
Goodwill In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that goodwill be disclosed separately
from other intangible assets in the balance sheet, and no longer be amortized
but tested at least annually for impairment. The Company adopted SFAS No. 142 on
February 3, 2002 and ceased amortizing $4.2 million of goodwill as of that date.
As required by this pronouncement, during the year, the Company completed the
transitional and annual impairment tests, and based on the tests performed,
there was no impairment of goodwill in fiscal 2002. There can be no assurance
that future goodwill impairment tests will not result in a charge to earnings.
Impairment of Long-Lived and Intangible Assets The Company's management believes
that the carrying value of long-lived assets is appropriate and no adjustments
to the carrying value of such assets is necessary.
Self-Insurance The Company is self insured for workers' compensation, general
liability costs and certain health insurance plans with per occurrence and
aggregate limits on losses. The self-insurance liability recorded in the
financial statements is based on claims filed and an estimate of claims incurred
but not yet reported.
Deferred Rent Certain of the Company's operating leases contain predetermined
fixed escalations of minimum rentals during the initial term. For these leases,
the Company recognizes the related rental expense on a straight-line basis over
the life of the lease and records the difference between amounts charged to
operations and amounts paid as deferred rent. As part of its lease agreements,
the Company may receive certain lease incentives, primarily construction
allowances. These allowances are also deferred and are amortized as a reduction
of rent expense on a straight-line basis over the life of the lease. The
cumulative net excess of recorded rent expense over lease payments made in the
amount of $10.5 million and $8.6 million is reflected in other liabilities in
the balance sheets as of February 1, 2003 and February 2, 2002, respectively.
Stock-Based Compensation The Company accounts for stock-based awards to
employees using the intrinsic value method prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
Consequently, no compensation expense has been recognized in the financial
statements for employee stock arrangements. The disclosure requirements of SFAS
No. 123, "Accounting for Stock-Based Compensation," are set forth below.
SFAS No. 123 establishes a fair value method of accounting for stock options and
other equity instruments. SFAS No. 123 requires the disclosure of pro forma net
income and earnings per share as if the Company had adopted the fair
37 CPWM
value method. For determining pro forma earnings per share, the fair value of
the stock options and employees' purchase rights were estimated using the
Black-Scholes option pricing model with the following assumptions:
Fiscal Year Ended
----------------------------------------------------
February 1, February 2, February 3,
Stock Options 2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Expected life after vesting (in years) 1.8 1.8 1.8
Expected volatility 64.0% 62.5% 65.0%
Risk free interest rates 4.0% 4.4% 6.4%
Weighted average fair value per share granted $ 12.99 $ 12.10 $ 11.22
Expected dividends - - -
The Company's calculations are based on a multiple option approach and
forfeitures are recognized as they occur. Had compensation cost for these stock
option and stock purchase plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the methods of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:
Fiscal Year Ended
------------------------------------------
February 1, February 2, February 3,
(In thousands, except per share data) 2003 2002 2001
------------------------------------------
Net income:
As reported $ 28,386 $ 20,202 $ 21,672
Pro forma 24,019 16,382 17,981
Basic net income per share:
As reported $ 1.31 $ 0.95 $ 1.04
Pro forma 1.11 0.77 0.86
Diluted net income per share:
As reported $ 1.28 $ 0.93 $ 1.00
Pro forma 1.08 0.75 0.83
Revenue Recognition The Company recognizes revenue from the sale of merchandise,
net of discounts and an allowance for estimated returns, at the time the
merchandise is sold. The allowance for sales returns is estimated based on
historical experience, and to date has not been material.
Advertising Expense Advertising costs, which include newspaper, television,
radio and other media advertising, are expensed as incurred. For fiscal 2002,
2001 and 2000, advertising costs were $38.7 million, $30.6 million and $27.2
million, respectively.
Store Preopening Expenses Store preopening expenses include grand opening
advertising, labor, travel and hiring expenses and are expensed as incurred.
Concentration of Credit Risk Financial instruments, which potentially subject
the Company to concentration of credit risk, consist principally of cash and
cash equivalents. The Company places its cash with high quality financial
institutions. At times, such balances may be in excess of FDIC insurance limits.
38 CPWM
Income Taxes Income taxes are accounted for using an asset and liability
approach that requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns.
Comprehensive Income The Company's comprehensive income and net income are the
same for all periods presented.
Net Income per Share SFAS No. 128 "Earnings Per Share," requires earnings per
share (EPS) to be computed and reported as both basic EPS and diluted EPS. Basic
EPS is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed by dividing net
income by the weighted average number of common shares and dilutive common stock
equivalents outstanding during the period. Dilutive EPS reflects the potential
dilution that could occur if options to issue common stock were exercised into
common stock. The following is a reconciliation of the weighted average number
of shares used in the Company's basic and diluted per share computations.
Fiscal Year Ended
------------------------------------------
February 1, February 2, February 3,
(In thousands) 2003 2002 2001
------------------------------------------
Basic shares 21,696 21,355 20,813
Effect of dilutive stock options 462 401 755
------------------------------------------
Diluted shares 22,158 21,756 21,568
==========================================
Certain options to purchase common stock were outstanding but were not included
in the computation of diluted earnings per share because the effect would be
anti-dilutive. For the fiscal years ended February 1, 2003, February 2, 2002 and
February 3, 2001, these options totaled 241,399, 288,374 and 241,049,
respectively.
Impact of New Accounting Standards In June 2001, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill be
disclosed separately from other intangible assets in the balance sheet, and no
longer be amortized but tested at least annually for impairment. The Company
adopted SFAS No. 142 on February 3, 2002 and ceased amortizing $4.2 million of
goodwill and $0.7 million in intangible assets as of that date. As required by
this pronouncement, during the year, the Company completed the transitional and
annual impairment tests, and based on the tests performed, there was no
impairment of goodwill and other intangible assets that are not subject to
amortization in fiscal 2002. There can be no assurance that future goodwill and
other intangibles impairment tests will not result in a charge to earnings. At
February 1, 2003, the gross carrying value of intangible assets, subject to
amortization, was $3.1 million with accumulated amortization of $2.1 million.
Amortization expense related to these assets, primarily lease rights, in fiscal
2002, 2001 and 2000 totaled approximately $136,000, $138,000 and $147,000,
respectively.
39 CPWM
The following table presents the impact of SFAS No. 142 on net income and net
income per share had the accounting standard been in effect for fiscal 2002,
2001 and 2000.
Fiscal Year Ended
------------------------------------------
February 1, February 2, February 3,
(In thousands, except per share amounts) 2003 2002 2001
------------------------------------------
Net income - as reported $ 28,386 $ 20,202 $ 21,672
Amortization of goodwill and other intangibles, net of tax - 190 172
Net income - adjusted $ 28,386 $ 20,392 $ 21,844
Basic net income per share - as reported $ 1.31 $ 0.95 $ 1.04
Basic net income per share - adjusted $ 1.31 $ 0.95 $ 1.05
Diluted net income per share - as reported $ 1.28 $ 0.93 $ 1.00
Diluted net income per share - adjusted $ 1.28 $ 0.94 $ 1.01
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 establishes accounting and
reporting standards for the impairment of long-lived assets and for long-lived
assets to be disposed of. The Company adopted SFAS No. 144 in the first quarter
of fiscal 2002. The initial adoption of SFAS No. 144 did not have a significant
impact on the Company's reporting for impairments or disposals of long-lived
assets.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance included
in Emerging Issues Task Force (EITF) Issue No. 94-3. The Company has adopted the
provisions of SFAS No. 146 for restructuring activities, if any, initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS No.
148 are effective for the Company's fiscal year ended February 1, 2003. The
interim disclosure provisions are effective for the first quarter of the fiscal
year ending January 31, 2004. The Company continues to account for stock-based
compensation using the intrinsic value method in accordance with the provisions
of APB Opinion No. 25, "Accounting for Stock Issued to Employees", as allowed by
SFAS No. 123. As a result, the adoption of SFAS No. 148 did not have any impact
on the Company's consolidated financial results.
In November 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees ,Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements about
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value
40 CPWM
of the obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN No. 45 are effective for interim and annual periods ending
after December 15, 2002, and the initial recognition and measurement
requirements are effective prospectively for guarantees issued or modified after
December 31, 2002. The initial adoption of FIN No. 45 did not have a material
impact on the Company's financial position or results of operations.
In November 2002, the EITF reached a consensus regarding EITF Issue No. 02-16,
"Accounting by a Customer (including a Reseller) for Certain Consideration
Received from a Vendor." Issue No. 02-16 addresses the timing of recognition and
classification of consideration received from vendors, including rebates and
allowances. Issue No. 02-16 is effective for certain of the Company's vendor
rebates and allowances commencing in November 2002 and others in January 2003.
The adoption of Issue No. 02-16 did not have a material impact on the Company's
consolidated financial statements.
Note 2. Property and Equipment
Property and equipment consist of the following:
February 1, February 2,
(In thousands) 2003 2002
----------------------------
Land and land improvements $ 530 $ 530
Building and leasehold improvements 69,554 61,221
Furniture, fixtures and equipment 88,298 74,645
Facilities under capital leases 51,982 45,296
----------------------------
Total 210,364 181,692
Less accumulated depreciation and amortization (89,464) (70,770)
----------------------------
Property and equipment, net $ 120,900 $ 110,922
============================
Note 3. Other Assets
Other assets consist of the following:
February 1, February 2,
(In thousands) 2003 2002
---------------------------------
Deferred income taxes $ 3,001 $ 4,500
Lease rights and interests 3,146 3,146
Other intangibles 1,439 1,400
Other 4,021 4,027
---------------------------------
Total 11,607 13,073
Less accumulated amortization (4,101) (3,786)
---------------------------------
Other assets, net $ 7,506 $ 9,287
=================================
41 CPWM
Note 4. Leases
The Company leases certain properties consisting of retail stores, distribution
centers, the corporate office and equipment. Store leases typically contain
initial terms and provisions for two to three renewal options of five to ten
years each, with renewal periods from 2003 to 2040 at the then-current market
rates. The retail stores, distribution centers and corporate office leases
generally provide that the Company assumes the maintenance and all or a portion
of the property tax obligations on the leased property.
The minimum rental payments required under capital leases (with interest rates
ranging from 3.2% to 12.7%) and non-cancelable operating leases with an initial
lease term in excess of one year at February 1, 2003, are as follows:
(In thousands) Capital Leases Operating Leases Total
- ------------------------------------------------------------------------------------------------------------
Fiscal year:
2003 $ 5,164 $ 50,382 $ 55,546
2004 5,164 49,283 54,447
2005 5,125 47,321 52,446
2006 5,115 45,693 50,808
2007 5,080 43,399 48,479
Thereafter through the year 2040 53,898 169,026 222,924
-------------------------------------------------------
Minimum lease commitments 79,546 $ 405,104 $ 484,650
===================================
Less amount representing interest (39,902)
----------------
Present value of capital lease obligations 39,644
Less current portion (1,672)
----------------
Long-term portion $ 37,972
================
Accumulated depreciation related to capital leases was $14.0 million and $12.1
million at February 1, 2003 and February 2, 2002, respectively. Depreciation
expense related to capital leases is classified as cost of sales and occupancy
cost. For fiscal 2002, 2001 and 2000 such depreciation expense was $1.9 million,
$1.0 million and $1.2 million, respectively. Interest expense related to capital
leases was $3.5 million, $1.7 million and $1.8 million for fiscal 2002, 2001 and
2000, respectively.
Minimum and contingent rental expense, which is based upon certain factors such
as sales volume and property taxes, under operating and capital leases and
sublease rental income are as follows:
Fiscal Year Ended
--------------------------------------------
February 1, February 2, February 3,
(In thousands) 2003 2002 2001
--------------------------------------------
Operating leases:
Minimum rental expense $ 44,828 $ 36,671 $ 28,488
Contingent rental expense 761 751 981
Less sublease rental income (1,084) (1,137) (1,070)
--------------------------------------------
Total $ 44,505 $ 36,285 $ 28,399
============================================
Capital leases - contingent rental expense $ 1,261 $ 1,119 $ 1,047
============================================
42 CPWM
Total minimum rental income to be received from noncancelable sublease
agreements through 2011 is approximately $2.8 million as of February 1, 2003.
Note 5. Revolving Line of Credit
The Company has an unsecured revolving line of credit agreement with a group of
banks. The agreement allows for cash borrowings and letters of credit up to
$30.0 million from January through June of each year, increasing to $75.0
million from July through December of each year to coincide with Holiday
borrowing needs. Interest is paid quarterly in arrears on base rate loans and at
each interest period applicable to IBOR loans (30, 60 and 90 days) based on the
Company's election of the bank's reference rate or IBOR plus 0.9% from May 29,
2002 to June 1, 2003, increasing to IBOR plus 1.125% from June 2, 2003 to June
1, 2004 and IBOR plus 1.25% from June 2, 2004 to June 1, 2005. The agreement
requires a 30-day "clean-up period" each year where outstanding credit advances,
as defined in the agreement can (a) not exceed $20 million for not less than 30
consecutive days during the period from January 1, 2003 through March 31, 2003
and (b) must be zero for not less than 30 consecutive days during the period
from January 1, 2004 through March 31, 2004 and from January 1, 2005 through
March 31, 2005. The Company is subject to and in compliance with, certain
financial covenants customary to such agreements. At the end of the last three
fiscal years, the Company had no outstanding borrowings under its line of credit
agreement. The Company had $10.7 million, $8.2 million and $4.1 million in
outstanding letters of credit at the end of fiscal 2002, 2001 and 2000,
respectively. Interest expense for borrowings under the credit agreement was
$255,000, $172,000 and $167,000 for fiscal 2002, 2001 and 2000, respectively.
Note 6. Income Taxes
The provision for income taxes consists of the following:
Fiscal Year Ended
--------------------------------------------
February 1, February 2, February 3,
(In thousands) 2003 2002 2001
--------------------------------------------
Current:
Federal $ 10,276 $ 10,788 $ 13,442
State 799 1,894 2,517
--------------------------------------------
Total current 11,075 12,682 15,959
--------------------------------------------
Deferred:
Federal 5,353 422 (1,788)
State (4,012) (188) (315)
--------------------------------------------
Total deferred 1,341 234 (2,103)
--------------------------------------------
Provision for income taxes $ 12,416 $ 12,916 $ 13,856
============================================
43 CPWM
The differences between the U.S. federal statutory tax rate and the Company's
effective tax rate are as follows:
Fiscal Year Ended
---------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
---------------------------------------------
U.S. federal statutory tax rate 35.0% 35.0% 35.0%
State income taxes (net of U.S. federal
income tax benefit) 2.4 3.3 4.0
Benefit of wage and other tax credits (7.5) - -
Non-deductible expenses 0.2 0.2 0.3
Other 0.3 0.5 (0.3)
---------------------------------------------
Effective income tax rate 30.4% 39.0% 39.0%
=============================================
Significant components of the Company's deferred tax assets and liabilities are
as follows:
February 1, February 2,
(In thousands) 2003 2002
----------------------------
Current deferred tax asset (liability):
Deductible reserves and other $ 119 $ (39)
Long-term deferred tax asset (liability):
Deferred rent 3,640 3,154
Capital leases 272 12
Lease rights (402) (484)
Depreciation (4,557) 922
Deferred compensation 451 546
Credit carryforward 3,161 -
Other 436 350
----------------------------
Total 3,001 4,500
----------------------------
Net deferred tax assets $ 3,120 $ 4,461
============================
At February 1, 2003, the Company had California state enterprise zone credit
carryforwards of approximately $3.2 million which have no expiration date and
are available to offset future California franchise taxes.
Note 7. Equity and Stock Compensation Plans
Shareholder Rights Plan Each outstanding share of common stock has a Preferred
Share Purchase Right (expiring on June 30, 2008) which is exercisable only upon
the occurrence of certain change in control events.
Options The Company currently has options outstanding under two employee stock
option plans: the 1994 Stock Option Plan (1994 Plan) and the 1995 Stock Option
Plan (1995 Plan). The 1994 Plan permitted the granting of options to employees
to purchase up to 1,940,976 shares of common stock at prices ranging from 85% to
100% of fair market value as of the date of grant. Options are exercisable over
ten years and became fully vested upon the Company's initial public offering in
April 1996. Upon approval of the 1995 Plan, the 1994 Plan was terminated except
for options then outstanding.
44 CPWM
The 1995 Plan permits the granting of options to employees and directors to
purchase, at fair market value as of the date of grant, up to 5,968,006 shares
of common stock, less the aggregate number of shares relating to options granted
and outstanding under the 1994 Plan (821,120 at February 1, 2003). Options are
exercisable over ten years and vest as determined by the Board of Directors,
generally over three or four years. A 900,000 increase in the number of shares
of common stock reserved for issuance was approved by the Board of Directors in
February 2002 and by shareholders in June 2002 and is included in the share
count above.
On March 13, 1996, the Board of Directors approved the 1996 Director Stock
Option Plan (Director Option Plan) which was last amended by the shareholders in
June 2002. The Director Option Plan permits the granting of options to
non-employee directors to purchase up to 403,675 shares of common stock at fair
market value as of the date of grant. Options are exercisable over ten years and
vest as determined by the Board of Directors, generally over four years. A
150,000 increase in the number of shares of common stock reserved for issuance
was approved by the Board of Directors in February 2002 and by shareholders in
June 2002 and is included in the share count above.
A summary of activity under the Company's option plans is set forth below:
Weighted
Average
Shares Exercise Price
----------------------------------
Outstanding at January 29, 2000 (366,508 exercisable
at a weighted average price of $8.02) 1,719,177 $ 13.80
Granted 623,137 19.72
Exercised (467,685) 10.97
Canceled and expired (143,106) 19.51
----------------------------------
Outstanding at February 3, 2001 (659,880 exercisable
at a weighted average price of $13.89) 1,731,523 16.21
Granted 1,000,532 22.60
Exercised (527,889) 11.43
Canceled and expired (234,063) 20.56
----------------------------------
Outstanding at February 2, 2002 (702,287 exercisable
at a weighted average price of $18.27) 1,970,103 20.23
Granted 540,500 24.49
Exercised (291,215) 15.39
Canceled and expired (171,618) 22.52
----------------------------------
Outstanding at February 1, 2003 2,047,770 $ 21.79
==================================
45 CPWM
The following table summarizes information about the weighted average remaining
contractual life (in years) and the weighted average exercise prices for stock
options both outstanding and exercisable as of February 1, 2003:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------- ----------------------------------
Actual Range of Exercise Number Outstanding Remaining Life (Yrs.) Exercise Price Number of Shares Exercise Price
- ------------------------------------------------------------------------------------------- ----------------------------------
$ 2.56 - $ 2.64 17,971 2.2 $ 2.60 17,971 $ 2.60
5.03 - 7.00 71,444 3.2 5.62 71,444 5.62
8.00 - 10.72 70,089 4.3 9.84 70,089 9.84
13.11 - 19.19 329,754 6.7 16.28 133,229 15.64
20.00 - 29.16 1,356,113 8.6 23.28 266,720 22.44
31.13 - 33.81 202,399 6.7 32.35 191,108 32.29
------------------------------------------------------------- ---------------------------------
2,047,770 7.7 $ 21.79 750,561 $ 20.49
============================================================= =================================
Employee Stock Purchase Plan On March 13, 1996, the Board of Directors approved
the 1996 Employee Stock Purchase Plan (Purchase Plan). A total of 675,000 shares
have been authorized for issuance under the Purchase Plan, of which 550,934
remain available for issue as of February 1, 2003. Employees who work at least
20 hours per week and more than five calendar months per calendar year and have
been so employed for at least one year are eligible to have a specified
percentage (not to exceed 10%) of each salary payment withheld to purchase
common stock at 90% of its fair market value as of the last day of the purchase
period. During fiscal 2002, 2001 and 2000, employees purchased approximately
14,385, 16,417 and 15,768 shares, respectively, of the Company's common stock
under the Purchase Plan at weighted average per share prices of $24.71, $21.65
and $24.08, respectively.
Note 8. Employee Benefit Plans
The Company has a 401(k) plan for employees who meet certain service and age
requirements. Participants may contribute up to 25% of their salaries to a
maximum of $12,000 per year and participants age 50 or older may contribute an
additional catch-up deferral amount up to $2,000 in 2003. The Company matches
50% of the first 4% of base salary that the employee contributes to the 401(k)
plan. The Company contributed approximately $455,000 in fiscal 2002, $442,000 in
fiscal 2001 and $328,000 in fiscal 2000.
In addition, a non-qualified deferred compensation plan is available to certain
employees whose benefits are limited under Section 401(k) of the Internal
Revenue Service Code. Compensation deferrals approximated $456,000 for fiscal
2002 and $685,000 for fiscal 2001.
46 CPWM
Note 9. Commitments and Contingencies
The Company is involved in litigation, claims and assessments incidental to its
business, the disposition of which is not expected to have a material effect on
the Company's financial position or results of operations. It is possible,
however, that future results of operations for any particular quarterly or
annual period could be materially affected by changes in the Company's
assumptions related to these matters. The Company accrues its best estimate of
the probable cost for the resolution of claims. When appropriate, such estimates
are developed in consultation with outside counsel handling these matters and
are based upon a combination of litigation and settlement strategies. To the
extent additional information arises or the Company's strategies change, it is
possible that the Company's best estimate of its probable liability may change.
Note 10. Quarterly Information (unaudited)
Fiscal Quarters Ended
------------------------------------------------------------------------------
(In thousands, except per share data) May 4, 2002 August 3, 2002 November 2, 2002 February 1, 2003
------------------------------------------------------------------------------
Net sales $ 134,349 $ 138,339 $ 149,886 $ 269,727
Gross profit 45,700 47,095 50,210 98,911
Net income (loss) 1,677 2,155 (712) 25,266
Net income (loss) per share
Basic $ 0.08 $ 0.10 $ (0.03) $ 1.16
Diluted $ 0.08 $ 0.10 $ (0.03) $ 1.14
Fiscal Quarters Ended
------------------------------------------------------------------------------
(In thousands, except per share data) May 5, 2001 August 4, 2001 November 3, 2001 February 2, 2002
------------------------------------------------------------------------------
Net sales $ 112,915 $ 112,101 $ 113,544 $ 229,912
Gross profit 37,261 37,342 36,294 84,627
Net income (loss) 1,233 1,509 (2,321) 19,781
Net income (loss) per share
Basic $ 0.06 $ 0.07 $ (0.11) $ 0.93
Diluted $ 0.06 $ 0.07 $ (0.11) $ 0.91
47 CPWM
Board of Directors and Shareholders
Cost Plus, Inc.
Oakland, California
We have audited the accompanying consolidated balance sheets of Cost Plus, Inc.
and subsidiaries (the "Company") as of February 1, 2003 and February 2, 2002,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three fiscal years in the period ended February 1,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cost Plus, Inc. and subsidiaries as
of February 1, 2003 and February 2, 2002, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended
February 1, 2003, in conformity with accounting principles generally accepted in
the United States of America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Francisco, California
March 17, 2003
48 CPWM
Cost Plus World Market Across the Country
One Hundred Eighty-One Stores Nationwide*
Alabama
Birmingham
Arizona
Chandler
Mesa
Peoria
Phoenix (2)
Scottsdale (2)
Tucson (2)
California
Bakersfield
Brea
Citrus Heights
City of Industry
Colma
Concord
Escondido
Folsom
Fremont
Fresno
Glendale
La Jolla
La Mesa
Lakewood
Los Angeles (2)
Marin
Mission Viejo
Modesto
Mountain View
Northridge
Oakland
Oceanside
Ontario
Oxnard
Palm Desert
Pasadena
Pleasanton
Redding
Roseville
Sacramento
San Diego
San Dimas
San Francisco
San Jose (2)
San Luis Obispo
San Mateo
Santa Ana
Santa Barbara
Santa Cruz
Santa Rosa
Sherman Oaks
Stockton
Temecula
Thousand Oaks
Torrance
Tracy
Valencia
Vallejo
Walnut Creek
Woodland Hills
Colorado
Aurora
Boulder
Colorado Springs
Denver (3)
Thornton
Georgia
Atlanta (6)
Idaho
Boise
Illinois
Aurora
Champaign
Chicago (2)
Evanston
Gurnee
Kildeer
Normal
Northbrook
Oak Brook
Orland Park
Rockford
Schaumburg
Skokie
St. Charles
Indiana
Carmel
Iowa
Des Moines
Louisiana
New Orleans (2)
Baton Rouge
Michigan
Ann Arbor
Auburn Hills
Kentwood
Lansing
Novi
Portage
Rochester Hills
Shelby Township
Troy
Westland
Minnesota
Minneapolis-St.Paul (4)
Missouri
Brentwood
Chesterfield
Kansas City
Sunset Hills
Nebraska
Omaha
Nevada
Las Vegas (2)
Reno
New Mexico
Albuquerque
Santa Fe
North Carolina
Cary
Charlotte (4)
Durham
Greensboro
Winston-Salem
Ohio
Akron
Avon
Cincinnati (4)
Columbus (3)
Mayfield Heights
Mentor
North Canton
North Olmsted
Oregon
Clackamas
Eugene
Gresham
Portland
Tigard
Texas
Austin (4)
Dallas (3)
Fort Worth
Grapevine
Houston (5)
Plano (2)
San Antonio (3)
Virginia
Arlington
Fairfax
Falls Church
Kingstowne
Newport News
Sterling
Washington
Bellevue
Lynnwood
Redmond
Seattle
Spokane
Tacoma
Tukwila
Woodinville
Wisconsin
Appleton
Madison
* As of April 10, 2003
49 CPWM
Directors and Officers
DIRECTORS
Murray H. Dashe
Chairman, Chief Executive Officer and President
Cost Plus, Inc.
Joseph H. Coulombe/1/
Independent Management Consultant
Barry J. Feld/2/
President, Chief Executive Officer
Chairman, PCA International, Inc.
Professional Photography Service Firm
Danny W. Gurr/1/
President, Quarto Holdings, Inc.
Illustrated Book Publisher
Kim D. Robbins/2/
Independent Management Consultant
Fredric M. Roberts/2/
President, F. M. Roberts and Company, Inc.
Investment Banking Firm
Thomas D. Willardson/1/
Independent Financial Consultant
/1/ Member of the Audit Committee of the Board of Directors.
/2/ Member of the Compensation Committee of the Board of Directors.
SENIOR OFFICERS
Murray H. Dashe
Chairman of the Board, Chief Executive Officer and President
Gary D. Weatherford
Executive Vice President, Operations
Michael J. Allen
Senior Vice President, Store Operations
Joan S. Fujii
Senior Vice President, Human Resources
Stephen L. Higgins
Senior Vice President, Merchandising
John J. Luttrell
Senior Vice President and Chief Financial Officer
Judith A. Soares
Senior Vice President, Cost Plus Management Services, Inc.
OFFICERS
Jane L. Baughman
Vice President, Financial Planning, Treasurer
and Corporate Secretary
Gail H. Fuller
Vice President, Divisional Merchandise Manager,
Trend Director
Lisa J. Griffin
Vice President, Planning and Allocation
Patricia A. Juckett
Vice President, Marketing and Advertising
Cliff A. March
Vice President, Information Services
Chris M. Miller
Vice President, Controller
Janet L. Tucker
Vice President, Divisional Merchandise Manager
50 CPWM
[PHOTO OF JOSEPH H. COULOMBE, BARRY J. FELD, FREDRIC M. ROBERTS, MURRAY H.DASHE,
DANNY W. GURR, KIM D. ROBBINS, THOMAS D. WILLARDSON]
Board of Directors, pictured from left: Joseph H. Coulombe, Barry J. Feld,
Fredric M. Roberts, Murray H. Dashe, Danny W. Gurr, Kim D. Robbins,
Thomas D.Willardson
CORPORATE DATA
Corporate Headquarters
Cost Plus, Inc.
200 4th Street
Oakland, California 94607
www.costplusworldmarket.com
Annual Report on Form 10-K
A copy of the Company's fiscal 2002 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission is available to shareholders by contacting
the Investor Relations Department at the address above or online at
www.costplusworldmarket.com.
Independent Auditors
Deloitte & Touche LLP
San Francisco, California
Transfer Agent and Registrar
Bank Boston
c/o EquiServe, LP
Boston, Massachusetts
(781) 575-3120
Corporate Counsel
Wilson Sonsini Goodrich & Rosati
Palo Alto, California
[Gift Card attached here]
Use this gift card as cash at any Cost Plus World Market location. Card has no
value until activated by cashier.