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As filed with the Securities and Exchange Commission March 31, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
Commission File Number 1-12381
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Linens 'n Things, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3463939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 Brighton Road
Clifton, New Jersey 07015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 778-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
The aggregate market value of voting stock held by non-affiliates of
the Registrant (for this purpose, deemed to refer to all persons and entities
other than executive officers, directors and 5% or more shareholders) on March
3, 1997, based on the closing sale price on the New York Stock Exchange on such
date, was approximately $278 million.
The number of outstanding shares of the Registrant's common stock, $0.01 par
value, as of March 3, 1997 was 19,267,758.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1996 are incorporated by reference into Part II, and portions
of the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders
are incorporated by reference into Part III.
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Table of Contents
Form 10-K
Item No. Name of Item Page
- ------- ------------ ----
PART I
Item 1. Business..................................................... 3
Item 2. Properties................................................... 12
Item 3. Legal Proceedings............................................ 12
Item 4. Submission of Matters to a Vote of
Security Holders......................................... 12
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.......................... 13
Item 6. Selected Financial Data...................................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................... 13
Item 8. Financial Statements and Supplementary
Data..................................................... 13
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................................... 13
PART III
Item 10. Directors and Executive Officers of
the Registrant........................................... 14
Item 11. Executive Compensation....................................... 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................... 14
Item 13. Certain Relationships and Related
Transactions............................................. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................... 15
2
PART I
Item 1. Business
General
Linens 'n Things, Inc. and its subsidiaries ("Linens 'n Things" or the
"Company") is one of the leading, national large format retailers of home
textiles, housewares and home accessories operating 169 stores in 34 states as
of December 31, 1996. According to Home Textiles Today, Linens 'n Things was the
largest specialty retailer (as measured by sales) in the home linens category in
1995. As of December 31, 1996, the Company operated 132 superstores averaging
approximately 32,000 gross square feet in size and 37 smaller traditional stores
averaging approximately 10,000 gross square feet in size. The Company's newest
stores range between 35,000 and 40,000 gross square feet in size and are located
in strip malls or power center locations. The Company's business strategy is to
offer a broad assortment of high quality, brand name merchandise at everyday low
prices, provide efficient customer service and maintain low operating costs.
Linens 'n Things' extensive selection of over 25,000 SKUs in its
superstores is driven by the Company's commitment to offering a broad and deep
assortment of high quality, brand name "linens" (e.g., bedding, towels and
pillows) and "things" (e.g., housewares and home accessories) merchandise. Brand
names sold by the Company include Wamsutta, Cannon, Laura Ashley, Martex,
Waverly, Royal Velvet, Braun, Krups, Calphalon and Henckel. The Company also
sells an increasing amount of merchandise under its own private label
(approximately 10% of sales) which is designed to supplement the Company's
offering of brand name products by offering high quality merchandise at value
prices. The Company's merchandise offering is coupled with a "won't be
undersold" everyday low pricing strategy with price points substantially below
regular department store prices and comparable with or below department store
sale prices.
From its founding in 1975 through the late 1980's, the Company operated a
chain of traditional stores ranging between 7,500 and 10,000 gross square feet
in size. Beginning in 1990, the Company introduced its superstore format which
has evolved from 20,000 gross square feet in size to its current size of 35,000
to 40,000 gross square feet, offering a broad merchandise assortment in a more
visually appealing, customer friendly format. The Company's introduction of
superstores has resulted in the closing or relocation of 104 of the Company's
traditional stores through December 31, 1996. As a result of superstore openings
and traditional store closings, the Company's gross square footage more than
tripled from 1.2 million to 4.7 million between January 1991 and December 1996,
although its store base only increased 20% from 141 to 169 during this period.
As part of this strategy, the Company instituted centralized management
and operating programs and invested significant capital in its distribution and
management information systems infrastructure in order to control operating
expenses as the Company grows. In addition, as part of its strategic initiative
to capitalize on customer demand for one-stop shopping destinations, the Company
has balanced its merchandise mix from being driven primarily by the "linens"
side of its business to a fuller assortment of "linens" and "things." The
Company estimates that the "things" side of its business has increased from less
than 10% of net sales in 1991 to approximately 35% in 1996.
The Company was a wholly-owned subsidiary of CVS Corporation ("CVS"),
formerly Melville Corporation, until November 26, 1996 when CVS completed an
initial public offering ("IPO") of 13,000,000 shares of the Company's common
stock. Subsequent to the IPO, CVS owns approximately 32.5% of the Company's
common stock, having retained 6,267,758 shares.
Executive Officers and Certain Key Personnel
The following table sets forth information regarding the executive officers
of the Company:
Name Age Position
- ----- --- -------
Norman Axelrod. 44 Chairman, Chief Executive Officer and President
James M. Tomaszewski 48 Senior Vice President, Chief Financial Officer
Steven B. Silverstein 36 Senior Vice President, General Merchandise Manager
Hugh J. Scullin 47 Senior Vice President, Store Operations
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Mr. Axelrod has been Chief Executive Officer and President of the Company
since 1988 and was elected to the additional position of Chairman of the Board
of Directors of the Company effective as of January, 1997. Prior to joining
Linens 'n Things, Mr. Axelrod held various management positions at
Bloomingdale's between 1976 to 1988 including: Buyer, Divisional Merchandise
Manager, Vice President/Merchandise Manager and Senior Vice President/General
Merchandise Manager. Mr. Axelrod earned his B.S. from Lehigh University and his
M.B.A. from New York University.
Mr. Tomaszewski has served as Senior Vice President, Chief Financial
Officer since joining Linens 'n Things in 1994. Mr. Tomaszewski began his career
with J.L. Hudsons Department Store in Detroit in 1970. In 1982, he was promoted
to Vice President, Controller of Diamonds Department Store in Tempe, Arizona. In
1985, he joined Filene's Department Store as Vice President, Controller, and
later that year he was promoted to Senior Vice President and Chief Financial
Officer for Filene's Basement. In 1987, Mr. Tomaszewski joined Lechmere's in
Boston as Senior Vice President and Chief Financial Officer. In 1992, he was
promoted to Executive Vice President Retail Operations at Lechmere's and elected
to Lechmere's Board of Directors. Mr. Tomaszewski has a B.S. in Finance and
Economics and an M.B.A. in Finance from Wayne State University.
Mr. Silverstein joined Linens 'n Things in 1992 as Vice President, General
Merchandise Manager. Prior to joining Linens 'n Things, Mr. Silverstein was
Merchandise Vice President of Home Textiles at Bloomingdales from 1985 to 1992.
Mr. Silverstein has been Senior Vice President, General Merchandise Manager
since 1993. He received his B.A. from Cornell University and his M.B.A. from
Wharton Business School.
Mr. Scullin joined Linens 'n Things in 1989 as Vice President, Store
Operations. Mr. Scullin has been Senior Vice President, Store Operations since
1994. From 1978 to 1987, Mr. Scullin held various management positions with The
Gap, Inc., including Zone Vice President at both The Gap and Banana Republic
from 1984 to 1987. From 1987 to 1989, Mr. Scullin was Vice President of Stores
with Alcott and Andrews. Mr. Scullin graduated from St. Joseph's University with
a B.S. in Marketing Management. The following table sets forth information
regarding the key managers of the Company:
Name Age Position
- ----- --- -------
William T. Giles 37 Vice President, Finance, Controller
Matthew J. Meaney 50 Vice President, Management Information Systems
Brian D. Silva 40 Vice President, Human Resources
Dominick J. Trapasso. 43 Vice President, Logistics
Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller and was
promoted to Vice President of Finance and Controller in 1994. From 1981 to 1990
, Mr. Giles was with Price Waterhouse. From 1990 to 1991, Mr. Giles held the
position of Director of Financial Reporting with Melville Corporation. Mr. Giles
is a certified public accountant and member of the American Institute of
Certified Public Accountants. He graduated from Alfred University with a B.A. in
Accounting and Management.
Mr. Meaney joined Linens 'n Things in 1991 as Vice President of Management
Information Services. From 1985 to 1991, Mr. Meaney was Vice President of
Management Information Services for Laura Ashley, Inc. Mr. Meaney received a
B.S. in Economics from St. Peter's College and an M.B.A. in Finance from Seton
Hall University.
Mr. Silva has been Vice President, Human Resources, since joining Linens
'n Things in 1995. Mr. Silva was Assistant Vice President, Human Resources at
The Guardian, an insurance and financial services company, from 1986 to 1995. He
holds an M.A. in Organizational Development from Columbia University and an M.A.
in Human Resources Management from New York Institute of Technology. Mr. Silva
received his B.A. from St. John's University.
Mr. Trapasso has been Vice President, Logistics since joining Linens 'n
Things in 1993. From 1979 to 1986, he was employed with John Wanamaker as
Director, Warehouse, Distribution. From 1986 to 1993, he was Senior Vice
President Distribution, Transportation at Charming Shoppes, Inc. Mr. Trapasso
received his B.A. from New York University.
4
Business Strategy
The Company's business strategy is to offer a broad assortment of high
quality, brand name products at everyday low prices, provide efficient customer
service and maintain low operating costs. Key elements of the Company's business
strategy are as follows:
Offer a Broad Assortment of Quality Name Brands at Everyday Low Prices.
Linens 'n Things' merchandising strategy is to offer the largest breadth of
selection in high quality, brand name fashion home textiles, housewares and home
accessories at everyday low prices. The Company offers over 25,000 SKUs in its
superstores across six departments, including bath, home accessories,
housewares, storage, top of the bed and window treatments. The Company is one of
the largest retailers of brand names, including Wamsutta, Laura Ashley, Martex,
Waverly, Royal Velvet, Braun, Krups and Calphalon. The Company also sells an
increasing amount of merchandise under its own private label which is designed
to supplement the Company's offering of brand name products by offering high
quality merchandise at value prices. The Company believes its prices are
typically well below the non-sale prices offered by department stores and are
comparable to or slightly below the sale prices offered by such stores. In
addition, the Company maintains a "won't be undersold" approach which guarantees
its customers prices as low as those offered by any of its competitors.
Merchandise and sample brands offered in each major department are
highlighted below:
Department Items Sold Sample Brands
----------- ---------- -------------
Bath Towels, shower curtains, waste baskets, hampers, Fieldcrest, Martex, Royal Velvet
bathroom rugs and wall hardware. and Springmaid.
Home Accessories Decorative pillows, napkins, Dakotah, Waverly and
tablecloths, placemats, Laura Ashley.
lamps, gifts, picture frames
and framed art.
Housewares Cookware, cutlery, kitchen gadgets, small Braun, Krups, Calphalon, Henckel,
electric appliances (such as blenders and Mikasa, Circulon, Farberware,
coffee grinders), dinnerware, flatware Black & Decker, Kitchen Aid,
and glassware. Copco and International Silver.
Storage Closet-related items (such as hangers, Rubbermaid and Closetmaid.
organizers and shoe racks).
Top of the Bed Sheets, comforters, comforter covers, Wamsutta, Laura Ashley,
bedspreads, bed pillows, blankets and Revman, Croscill, Fieldcrest,
mattress pads. Springmaid, Royal Sateen
and Beautyrest.
Window Treatment Curtains, valances and window hardware. Croscill, Graber, Bali, Waverly and
Laura Ashley.
Provide Efficient Customer Service and Shopping Convenience. To enhance
customer satisfaction and loyalty, Linens 'n Things strives to provide prompt,
knowledgeable sales assistance and enthusiastic customer service. Linens 'n
Things emphasizes competitive wages, training and personnel development in order
to attract and retain well-qualified, highly motivated employees committed to
providing efficient customer service. Linens 'n Things also endeavors to provide
more knowledgeable sales associates by providing training through various
programs which include management training, daily sales associate meetings and
vendor product support seminars. In addition, the Company has taken initiatives
to enhance the speed of its customer service, including installing satellite
transmission for credit card authorizations and upgrading its current
point-of-sale ("POS") system. The customer's experience is also enhanced by the
availability of sales associates who, since the transfer of inventory and
receiving responsibilities from the stores to the distribution center, have
redirected their focus from the backroom to the selling floor. The Company's
superstore format is designed to save the customer time by having inventory
visible and accessible on the selling floor for immediate purchase. The Company
believes its knowledgeable sales staff and efficient customer service, together
with the Company's liberal return policy, create a positive shopping experience
which engenders customer loyalty.
Maintain Low Operating Costs. A cornerstone of the Company's business
strategy is its commitment to maintaining low operating costs. In addition to
savings realized through sales volume efficiencies, operational efficiencies are
expected to be achieved through the streamlining of the Company's centralized
merchandising structure, the use of integrated management information systems
and the utilization of the distribution center.
5
The Company believes that its significant investment in the technology of its
management information systems and in its distribution center will allow the
Company to grow without requiring significant additional capital contributions
to its infrastructure through 1998. See information and discussion under
"Forward-Looking Statements" included under "Management's Discussion and
Analysis of Financial Condition" included as part of this Form 10-K.
Growth Strategy
New Superstore Expansion. The Company's expansion strategy is to increase
market share in existing markets and to penetrate new markets in which the
Company believes it can become a leading operator of home furnishings
superstores. Management believes that the new markets will be primarily located
in the western region of the United States in trading areas of 200,000 persons
within a ten-mile radius and with demographic characteristics that match the
Company's target profile. See information and discussion under "Forward-Looking
Statements" included under "Management's Discussion and Analysis of Financial
Condition" included as part of this Form 10-K. The Company believes that it is
well-positioned to take advantage of the continued market share gain by the
superstore chains in the home furnishings sector.
The following table sets forth information concerning the Company's
expansion program during the most recent five years:
Square Footage Store Count
---------------------- -----------------------
Year Openings Closings Begin Year End Year Begin Year End Year
- ---- -------- -------- --------- -------- --------- --------
1992 22 21 1,350 1,633 143 144
1993 20 21 1,633 2,078 144 143
1994 29 27 2,078 2,865 143 145
1995 28 18 2,865 3,691 145 155
1996 36 22 3,691 4,727 155 169
Linens 'n Things focuses on opening new superstores in areas where it
believes it can become a leading retailer of home-related products. The
Company's goal is to enter two to three new markets a year through its expansion
efforts. Markets for new superstores are selected on the basis of demographic
factors, such as income, population and number of households. The Company's
stores are located predominantly in power strip centers and, to a lesser extent,
in malls and as stand-alone stores.
The Company believes that its current management infrastructure and
management information systems, together with its new distribution center, are
capable of supporting planned expansion through 1998. See information and
discussion under "Forward-Looking Statements" included under "Management's
Discussion and Analysis of Financial Condition" included as part of this Form
10-K.
Increase Productivity of Existing Store Base. The Company is committed to
increasing its net sales per square foot, inventory turnover ratio and return on
invested capital. The Company believes the following initiatives will allow it
to achieve these goals:
Enhance Merchandise Mix and Presentation. The Company continues to
explore opportunities to increase sales in its "things" merchandise without
sacrificing market share or customer image in the "linens" side of the
business. The Company's long-term goal is to increase the sales of the
"things" merchandise to approximately 50% of net sales as part of its
strategic initiative to capitalize on customer demand for one-stop
shopping. The Company expects this shift to positively impact net sales per
square foot, the average net sale per customer and inventory turnover since
"things" merchandise tends to be more impulse driven merchandise as
compared to the "linens" portion of the business. See information and
discussion under "Forward-Looking Statements" included under "Management's
Discussion and Analysis of Financial Condition" included as part of this
Form 10-K. In addition, most "things" merchandise is higher margin than
"linens" products. The Company plans to regularly introduce new products
which it expects will increase sales and generate additional customer
traffic.
In addition, the Company intends to continue improving its
merchandising presentation techniques, space planning and store layout to
further improve the productivity of its existing and future superstore
locations. The Company periodically restyles its stores to incorporate new
offerings and realign its store space with its growth segments. The Company
6
expects that the addition of in-store customer services, such as a bridal
registry service, will further improve its store productivity. See
information and discussion under "Forward-Looking Statements" included
under "Management's Discussion and Analysis of Financial Condition"
included as part of this Form 10-K.
Increase Operating Efficiencies. As part of its strategy to increase
operating efficiencies, the Company has invested significant capital in
building a centralized infrastructure, including a distribution center and
a management information system, which it believes will allow it to
maintain low operating costs as it pursues its superstore expansion
strategy. See information and discussion under "Forward-Looking
Statements" included under "Management's Discussion and Analysis of
Financial Condition" included as part of this Form 10-K. In July 1995, the
Company began full operation of its 275,000 square foot distribution
center in Greensboro, North Carolina. By the end of 1996, approximately
80% of merchandise was received at the distribution center, as compared to
approximately 20% of merchandise received at the Company's distribution
center in 1995. Management believes that the increased utilization of the
distribution center will result in lower average freight costs, more
efficient scheduling of inventory shipments to the stores, improved
inventory turnover, better in-stock positions and improved information
flow. See information and discussion under "Forward-Looking Statements"
included under "Management's Discussion and Analysis of Financial
Condition" included as part of this Form 10-K. The Company believes that
the transfer of inventory receiving responsibilities from the stores to
the distribution center allows the store sales associates to redirect
their focus to the sales floor, thereby increasing the level of customer
service. The warehouse portion of the distribution center provides the
Company flexibility to manage safety stock and take advantage of
opportunistic purchases. The Company's ability to effectively manage its
inventory is also enhanced by a centralized merchandising management team
and its MIS system which allows the Company to more accurately monitor and
better balance inventory levels and improve in-stock positions in its
stores.
Continue Conversion of Store Base to Superstore Format. As of
December 31, 1996, the Company operated 132 superstores, representing 78%
of its total stores, and 37 traditional stores. The Company plans to close
or relocate approximately 13 of the 37 traditional stores by the end of
1997. Although the remaining traditional stores are currently profitable,
the Company's long-term plans include closing most of the remaining
traditional stores as opportunities arise.
Industry
According to U.S. Department of Commerce data, total industry sales of
products sold in the Company's stores, which primarily includes home textiles,
housewares and decorative furnishings categories, were estimated to be over $60
billion in 1995. The market for home furnishings is fragmented and highly
competitive. Specialty superstores are the fastest growing channel of
distribution in this market. In 1996, the Company estimates that the three
largest specialty superstore retailers of fashion home textiles (including the
Company) had aggregate sales representing less than 3% of the industry's total
unit sales.
The Company competes with many different types of retailers that sell many
or most of the items sold by the Company, including department stores, mass
merchandisers, specialty retail stores and other retailers. Linens 'n Things
generally classifies its competition within one of the following categories:
Department Stores: This category includes national and regional department
stores such as J.C. Penney Company Inc., Sears, Roebuck and Co., Dillard
Department Stores, Inc. and the department store chains operated by Federated
Department Stores, Inc. and The May Department Store Company. These retailers
offer brand-name merchandise as well as their own private label furnishings in a
high service environment. Department stores also offer certain designer
merchandise, such as Ralph Lauren, which is not generally distributed through
the specialty and mass merchandise distribution channels. In general, the
department stores offer a more limited selection of merchandise than the
Company. The prices offered by department stores during off-sale periods are
significantly higher than those of the Company and during on-sale periods are
comparable to or slightly higher than those of the Company.
Mass Merchandisers: This category includes companies such as Wal-Mart
Stores, Inc., the Target Stores division of Dayton Hudson Corporation and Kmart
Corporation. Fashion home furnishings represent only a small portion of the
total merchandise sales in these stores and reflect a significantly more limited
selection with fewer high quality name brands and lower quality merchandise at
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lower price points than specialty stores or department stores. In addition,
these mass merchandisers typically have more limited customer services staffs
than the Company.
Specialty Stores/Retailers: This category includes large format home
furnishings retailers most similar to Linens 'n Things, including Bed Bath &
Beyond Inc., Home Place and Strouds, Inc. and smaller niche retailers such as
Crate & Barrel, Lechters, Inc. and Williams-Sonoma, Inc. The Company estimates
that large format stores range in size from approximately 30,000 to 50,000 gross
square feet and offer a home furnishings merchandise selection of approximately
20,000 to 30,000 SKUs. The Company believes that these retailers have similar
pricing on comparable brand name merchandise and that they compete by attempting
to develop loyal customers and increase customer traffic by providing a single
outlet to satisfy all the customer's household needs. The niche retailers are
typically smaller in size than the large format superstores and offer a highly
focused and broad assortment within a specific niche. The prices offered by
niche retailers are often higher than the large format superstores and most do
not maintain an everyday low price strategy.
Other Retailers: This category includes mail order retailers, such as
Spiegel Inc. and Domestications, off-price retailers, such as the T.J. Maxx and
Marshall's divisions of the TJX Companies, Inc. and local "mom and pop" retail
stores. Both mail order retailers and smaller local retailers generally offer a
more limited selection of brand name merchandise at prices which tend to be
higher than those of the Company. Off-price retailers typically offer close-out
or out of season brand name merchandise at competitive prices.
Merchandising
The Company offers quality home textiles, housewares and home accessories
at everyday low prices. The Company's strategy consists of a commitment to offer
a breadth and depth of selection and to create merchandise presentation that
makes it easy to shop in a visually pleasing environment. The stores feature a
"racetrack" layout, enabling the customer to visualize and purchase fully
coordinated and accessorized ensembles. Seasonal merchandise is featured at the
front of every store to create variety and excitement and to capitalize on key
selling seasons including back-to-school and holiday events.
The Company's extensive merchandise offering of over 25,000 SKUs enables
its customers to select from a wide assortment of styles, brands, colors and
designs within each of the Company's major product lines. The Company is
committed to maintaining a consistent in-stock inventory position. This
presentation of merchandise enhances the customer's impression of a dominant
assortment of merchandise in an easy to shop environment. The Company's broad
and deep merchandise offering is coupled with everyday low prices that are
substantially below regular department store prices and comparable with or
slightly below department store sale prices. The Company has adopted a "won't be
undersold" approach and believes that the uniform application of its everyday
low price policy is essential to maintaining the integrity of this policy. This
is an important factor in establishing its reputation as a price leader and in
helping to build customer loyalty. In addition, the Company offers, on a regular
basis, "special" purchases which it obtains primarily through opportunistic
purchasing to enhance its high value perception among its customers.
Customer Service
Linens 'n Things treats every customer as a guest. The Company's
philosophy supports enhancing the guest's entire shopping experience and
believes that all elements of service differentiate it from the competition. To
facilitate the ease of shopping, the assisted self-service culture is
complemented by trained department specialists, zoned floor coverage, product
information displays and videos, self-demonstrations and vendor supported
training seminars. This philosophy is designed to encourage guest loyalty as
well as continually develop knowledgeable Company associates. The entire store
team is hired and trained to be highly visible in order to assist guests with
their selections. The ability to assist guests has been augmented by the
transfer of inventory receiving responsibilities from the stores, allowing sales
associates to focus on the sales floor. Sophisticated management systems which
provide efficient customer service and liberal return procedures are geared
toward making each guest's final impression of visiting a store a convenient,
efficient and pleasant experience.
8
Advertising
Advertising programs are focused on building and strengthening the Linens
'n Things superstore concept and image. Because of the Company's commitment to
everyday low prices, advertising vehicles are aggressively used in positioning
the Company among new and existing customers by communicating price, value and
breadth and depth of selection, with a "won't be undersold" approach. The
Company focuses its advertising programs during key selling seasons such as
back-to-school and holidays.
The Company primarily uses full color inserts in newspapers to reach its
customers. In addition, the Company periodically advertises on television and
radio during peak seasonal periods or for promotional events. Grand opening
promotional events are used to support new stores, with more emphasis placed on
those located in new markets.
Purchasing and Suppliers
The merchandising mix for each store is selected by the central buying
staff in consultation with district store managers. The Company purchases its
merchandise from approximately 1,000 suppliers. Springs Industries, Inc.,
through its various operating companies, supplied approximately 15% of the
Company's total purchases in 1996. In 1996, the Company purchased a significant
number of products from other key suppliers. Due to its breadth of selection,
the Company is often one of the largest customers for certain of its vendors.
The Company believes that this buying power and its ability to make centralized
purchases generally allow it to acquire products at favorable terms. In 1996,
approximately 95% of the Company's merchandise was purchased in the United
States.
Distribution
The Company operates a 275,000 square foot distribution center in
Greensboro, North Carolina. The Company began full operation of the distribution
center in 1995. Management believes that the utilization of the centralized
distribution center will result in lower average freight expense, more timely
control of inventory shipments to stores, improved inventory turnover, better
in-stock positions and improved information flow. See information and discussion
under "Forward-Looking Statements" included under "Management's Discussion and
Analysis of Financial Condition" included as part of this Form 10-K. In
addition, transferring inventory receiving responsibilities from the stores to
the distribution center allows the sales associates to direct their focus to the
sales floor, thereby increasing the level of customer service. The Company
believes strong distribution support for its stores is a critical element to its
growth strategy and is central to its ability to maintain a low cost operating
structure.
The Company manages the distribution process centrally from its corporate
headquarters. Purchase orders issued by Linens 'n Things are electronically
transmitted to the majority of its suppliers. By the end of 1996, the Company
received approximately 80% of its total inventory through the distribution
center. The balance of the Company's merchandise is directly shipped to
individual stores. The Company plans to continue efforts to ship as much
merchandise through the distribution center as possible to ensure all benefits
of the Company's logistics strategy are fully leveraged. Continued growth will
also facilitate new uses of Electronic Data Interchange technologies between
Linens 'n Things and its suppliers to exploit the most productive and beneficial
use of its assets and resources.
As of December 31, 1996, the distribution center was utilized at
approximately 50% of capacity. Management estimates that the existing
distribution center can support the Company's growth for the next few years. See
information and discussion under "Forward-Looking Statements" included under
"Management's Discussion and Analysis of Financial Condition" included as part
of this Form 10-K.
Management Information Systems
Over the last three years, the Company has made significant investment in
technology to improve customer service, gain efficiencies and reduce operating
costs. Linens 'n Things has installed a customized IBM AS/400 management
information system, which integrates all major aspects of the Company's
business, including sales, distribution, purchasing, inventory control,
merchandise planning and replenishment and financial systems. The Company
utilizes POS terminals with price look-up capabilities for both inventory and
sales transactions
9
on a SKU basis which the Company is currently in the process of upgrading.
Information obtained daily by the system results in automatic inventory
replenishment in response to specific requirements of each superstore.
The Company believes its management information systems have fully
integrated the Company's stores, distribution and home office. The Company
continually evaluates and upgrades its management information systems on a
regular basis to enhance the quantity, quality and timeliness of information
available to management.
Store Management and Operations
In general, each superstore is staffed with one General Manager, two to
four Merchandise Managers and one Receiving Manager. The General Manager reports
to a District Manager who in turn reports to one of three Zone Vice Presidents.
Each Zone Vice President reports to the Senior Vice President of Store
Operations.
The Company places a strong emphasis on its people, their development and
opportunity for advancement, particularly at the store level. The Company's
commitment to maintaining a high internal promotion rate is best exemplified
through the practice of opening each new store with a seasoned management crew,
who participate in training at an existing store immediately prior to the new
opening. As a result, the vast majority of General Managers opening a new store
have significant experience at the Company. Additionally, the structured
management training program requires each new associate to learn all facets of
the business within the framework of a fully operational store. This program
includes, among other things, product knowledge, merchandise presentation,
business and sales perspective, employee relations and manpower planning,
complemented at the associate level through daily product knowledge seminars and
structured register training materials and proficiencies. The Company believes
that its policy of promoting from within the Company, as well as the
opportunities for advancement generated by its ongoing store expansion program,
serve as incentives to attract and retain quality individuals which, the Company
believes, results in lower turnover.
Linens 'n Things stores are open seven days a week, generally from 10:00
a.m. to 9:00 p.m. Monday through Saturday and 11:00 a.m. to 6:00 p.m. on Sunday,
unless affected by local laws.
Inflation and Seasonality
The Company does not believe that its operating results have been
materially affected by inflation during the preceding three years. There can be
no assurance, however, that the Company's operating results will not be affected
by inflation in the future.
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and substantially all of its net income for the year during the third and fourth
quarters. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the timing of
new store openings. The Company believes this is the general pattern associated
with its segment of the retail industry and expects this pattern will continue
in the future. Consequently, comparisons between quarters are not necessarily
meaningful and the results for any quarter are not necessarily indicative of
future results.
Employees
As of December 1996, the Company employed approximately 6,800 people of
whom approximately 3,300 were full-time employees and 3,500 were part-time
employees. None of the Company's employees are represented by unions, and the
Company believes that its relationship with its employees is good.
Competition
The Company believes that although it will continue to face competition
from retailers in all four of the categories referred to in
"Business--Industry," its most significant competition is from the large format
specialty stores. The home textiles industry is becoming increasingly
competitive as several specialty retailers are in the process of expanding into
new markets. In addition, as the Company expands into new markets, it will face
new competitors. The visibility of the Company may encourage additional
competitors or may encourage existing competitors to imitate the Company's
format and methods. If any of the Company's major competitors seek to gain or
retain market share by reducing prices, the Company may be required to reduce
its prices in order to remain competitive.
10
The Company believes that the ability to compete successfully in its
markets is determined by several factors, including price, breadth and quality
of product selection, in-stock availability of merchandise, effective
merchandise presentation, customer service and superior store locations. The
Company believes that it is well positioned to compete on the basis of these
factors. Nevertheless, there can be no assurance that any or all of the factors
that enable the Company to compete favorably will not be adopted by companies
having greater financial and other resources than the Company.
Trade Names and Service Marks
The Company uses the "Linens 'n Things" name as a trade name and as a
service mark in connection with retail services. The Company has registered the
"Linens 'n Things" logo as a service mark with the United States Patent and
Trademark Office. Management believes that the name Linens 'n Things is an
important element of the Company's business.
11
Item 2. Properties
As of December 31, 1996 the Company operated 169 retail stores in 34
states. The Company currently leases all of its existing stores and expects that
its policy of leasing rather than owning will continue as it expands. The
Company's leases provide for original lease terms that generally range from 5 to
20 years and certain of the leases provide for renewal options that range from 5
to 15 years at increased rents. Certain of the leases provide for scheduled rent
increases and certain of the leases provide for contingent rent (based upon
store sales exceeding stipulated amounts). Prior to the Company's IPO in
November 1996, CVS acted as guarantor on substantially all of the Company's
store leases. Following the IPO, although CVS will continue to guarantee the
Company's current store leases where CVS has guaranteed such leases in the past
(including extensions and renewals relating to certain of such leases), CVS will
no longer enter into commitments to guarantee future leases on behalf of the
Company.
The Company owns its 275,000 square foot distribution center in North
Carolina. The Company leases its 59,000 square foot corporate office in Clifton,
New Jersey.
The table below sets forth the number of stores located in each state as
of December 31, 1996:
State Number of Stores State Number of Stores
- ----- --------------- ----- ---------------
Arizona 2 Nevada 2
Arkansas 1 New Jersey 12
California 19 New York 8
Colorado 3 North Carolina 9
Connecticut 8 Ohio 3
Florida 16 Oklahoma 1
Georgia 7 Oregon 1
Illinois 12 Pennsylvania 4
Indiana 1 Rhode Island 1
Louisiana 1 Tennessee 5
Maine 1 Texas 14
Maryland 3 Utah 1
Massachusetts 6 Vermont 1
Michigan 2 Virginia 13
Minnesota 6 Washington 1
Missouri 2 Washington D.C. 1
Nebraska 1 Wisconsin 1
Item 3. Legal Proceedings
There are no material legal proceedings against the Company. The Company
is involved in various claims and legal actions arising in the ordinary course
of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Linens 'n Things common stock is listed on the New York Stock Exchange.
Its trading symbol is LIN. At December 31, 1996 there were approximately 2,000
shareholders of record. The high and low trading price of the Company's stock,
beginning November 26, 1996, the date of the IPO, through December 31, 1996 is
as follows:
High Low
---- ----
Fourth Quarter (from November 26, 1996) 19 3/4 15 1/8
The Company paid no dividends on its common stock in fiscal 1996.
Management of the Company currently intends to retain its earnings to finance
the growth and development of its business and does not currently anticipate
paying cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company, satisfying all requirements
under its bank financing agreement and such other factors as the Company's Board
of Directors may consider relevant. In addition, the revolving credit facility
prohibits the payment of cash dividends by the Company.
Item 6. Selected Financial Data.
The information required by this Item is incorporated by reference to
the Five-Year Financial Summary appearing on page 17 of the Company's 1996
Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by this Item is incorporated by reference to
pages 11 through 14 of the Company's 1996 Annual Report to Shareholders.
Item 8. Financial Statements and Supplementary Data.
The financial statements required by this Item are incorporated by
reference to pages 16 and 18 through 30 of the Company's 1996 Annual Report to
Shareholders. These financial statements are indexed under Item 14(a)(1). See
also the financial statement schedule that is included herein and is indexed
under Item 14(a)(2).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There were no disagreements between the Company and its independent
public accountants on matters of accounting principles or practices.
13
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item concerning the Company's
directors is incorporated by reference to the Company's Proxy Statement for the
Company's 1997 Annual Meeting of Shareholders under the heading "Election of One
Director."
The information required by this Item concerning the Company's
executive officers is incorporated by reference to Part I, Item 1, "Business -
Executive Officers and Certain Key Personnel."
The information required by this Item with respect to Section 16
reporting is incorporated by reference to the Company's Proxy Statement for the
Company's 1997 Annual Meeting of Shareholders under the heading "Section 16(a)
Beneficial Reporting Compliance."
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders under
the headings "Director Compensation - Attendance; Committees" and "Executive
Compensation" other than information included therein under the subcaptions
"Report on Compensation of Executive Officers" and "Performance Graph" which are
not incorporated herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders under
the heading "Beneficial Ownership of Common Stock."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
Company's Proxy Statement for the 1997 Annual Meeting of Shareholders under the
heading "Certain Transactions with Related Parties."
14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this Report.
1. Financial Statements:
The following Financial Statements of Linens 'n Things, Inc. are
incorporated by reference to the Company's 1996 Annual Report to Shareholders:
Pages in Annual Report
to Shareholders
---------------------
Independent Auditors' Report .......................... 16
Consolidated Statements of Operations -
for the fiscal years ended
December 31, 1996, 1995 and 1994 ................ 18
Consolidated Balance Sheets -
as of December 31, 1996 and 1995 ................ 19
Consolidated Statements of Shareholders' Equity -
for the fiscal years ended
December 31, 1996, 1995 and 1994 ................. 19
Consolidated Statements of Cash Flows -
for the fiscal years ended
December 31, 1996, 1995 and 1994 ................. 20
Notes to Consolidated Financial Statements ............. 21 through 30
2. Schedules:
The supplementary income statement schedule is included in this Report.
3. Exhibits:
The Exhibits on the accompanying Exhibit Index immediately following the
financial statement schedules are filed as part of, or incorporated by reference
into, this Annual Report on Form 10-K.
15
Schedule 1
Linens 'n Things, Inc. and Subsidiaries
Supplementary Income Statement Information
($ in 000's)
Year Ended Year Ended Year Ended
Item December 31, 1996 December 31, 1995 December 31, 1994
---- ---------------- ---------------- ----------------
Advertising Costs $19,743 $16,950 $12,172
======= ======= =======
16
EXHIBIT INDEX
Exhibit
Number Description
------- ----------
3.1 Certificate of Incorporation of the Registrant1
3.2 Amended and Restated Certificate of Incorporation1
3.3 By-Laws of the Registrant1
4 Specimen Certificate of Common Stock1
10.1 Transitional Services Agreement between the Registrant and
CVS Corporation1
10.2 Stockholder Agreement between the Registrant and CVS
Corporation1
10.3 Tax Disaffiliation Agreement between the Registrant and CVS
Corporation1
10.4 Subordinated Note between Registrant and CVS1
10.5 Credit Facility1
10.6 Employment Agreement between Norman Axelrod and the
Registrant1*
10.7 Employment Agreement between James M. Tomaszewski and
the Registrant1*
10.8 Employment Agreement between Steven B. Silverstein and the
Registrant1*
10.9 Employment Agreement between Hugh J. Scullin and the
Registrant1*
10.10 1996 Incentive Compensation Plan1*
10.11 1996 Non-Employee Director Stock Plan1*
11 Computation of Net Income (Loss) Per Common Share2
12 Computation of Ratio of Earnings to Fixed Charges2
21 List of Subsidiaries2
27 Financial Data Schedule (filed electronically with SEC only)2
- ---------------
1 Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 (No. 333-12267), which Registration
Statement became effective on November 26, 1996.
2 Filed with this Form 10-K.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
No Current Reports on Form 8-K were filed by the Company during the last
fiscal quarter of fiscal 1996. With the exception of the information
incorporated by reference to the Annual Report to Shareholders in Items 6,
7, and 8 of Part II and Item 14 of Part IV of this Annual Report, the
Annual Report to Shareholders is not deemed filed as part of this Annual
Report on Form 10-K.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Linens 'n Things, Inc.
(Registrant)
By:/S/ NORMAN AXELROD
---------------------------------------
Norman Axelrod
Chairman, Chief Executive Officer
and President
Dated: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on its behalf of the Registrant in the capacities
and on the dates indicated.
Signature Title Date
--------- ---- ----
/S/ NORMAN AXELROD Chairman, Chief Executive March 25, 1997
- -------------------------------- Officer and President
Norman Axelrod
/s/ CHARLES C. CONAWAY Director March 27, 1997
- --------------------------------
Charles C. Conaway
/s/ STANLEY P. GOLDSTEIN Director March 27, 1997
- --------------------------------
Stanley P. Goldstein
/s/ PHILIP E. BEEKMAN Director March 28, 1997
- --------------------------------
Philip E. Beekman
/s/ JAMES M. TOMASZEWSKI Senior Vice President, March 25, 1997
- -------------------------------- Chief Financial Officer
James M. Tomaszewski (Principal Financial Officer)
/s/ WILLIAM T. GILES Vice President, Finance, March 25, 1997
- -------------------------------- Controller
William T. Giles (Principal Accounting Officer)