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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________________to_________________________
Commission File Number 0-12188
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DEB SHOPS, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1913593
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9401 Blue Grass Road, Philadelphia, Pennsylvania 19114
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(Address of principal executive offices) (Zip Code)
(215) 676-6000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name and address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes _X_ No___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, Par Value $.01 13,748,900
- ---------------------------- ----------------------------------
(Class) (Outstanding at September 3, 2004)
DEB SHOPS, INC. AND SUBSIDIARIES
I N D E X
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PAGE
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PART I. Financial Information:
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - 1
July 31, 2004 and January 31, 2004
Consolidated Statements of Operations - Three Months 2
and Six Months Ended July 31, 2004 and 2003
Consolidated Statements of Cash Flows - 3
Six Months Ended July 31, 2004 and July 31, 2003
Notes to Consolidated Financial Statements - 4-6
July 31, 2004
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-11
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
Item 4. Controls and Procedures 12
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits 13
SIGNATURES 14
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
2004 JANUARY 31,
(UNAUDITED) 2004
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $168,236,898 $166,264,418
Merchandise inventories 32,401,876 28,264,675
Prepaid expenses and other 3,386,463 3,150,882
Deferred income taxes 1,260,191 1,260,191
---------------------------------------------------
Total current assets 205,285,428 198,940,166
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 150,000 150,000
Buildings 2,365,697 2,365,697
Leasehold improvements 40,528,796 40,566,558
Furniture and equipment 16,771,655 16,656,545
---------------------------------------------------
59,816,148 59,738,800
Less accumulated depreciation and amortization 43,458,351 42,625,923
---------------------------------------------------
Net property, plant and equipment 16,357,797 17,112,877
OTHER ASSETS
Deferred income taxes 4,732,846 4,732,846
Other 1,962,223 1,962,223
---------------------------------------------------
Total other assets 6,695,069 6,695,069
---------------------------------------------------
Total assets $228,338,294 $222,748,112
====================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $28,975,736 $26,523,559
Accrued expenses and other 16,264,837 10,649,923
Income taxes payable 1,448,474 2,010,234
---------------------------------------------------
Total current liabilities 46,689,047 39,183,716
SHAREHOLDERS' EQUITY
Series A preferred stock, par value $1.00 per share:
Authorized - 5,000,000 shares
Issued and outstanding - 460 shares,
liquidation value $460,000 460 460
Common stock, par value $.01 per share:
Authorized - 50,000,000 shares
Issued - 15,688,290 shares 156,883 156,883
Additional paid-in capital 6,996,672 5,864,790
Retained earnings 186,523,034 189,966,983
---------------------------------------------------
193,677,049 195,989,116
Less common treasury shares, at cost:
July 31, 2004 -1,939,390; January 31, 2004 - 2,003,390 12,027,802 12,424,720
---------------------------------------------------
181,649,247 183,564,396
---------------------------------------------------
Total liabilities and shareholders' equity $228,338,294 $222,748,112
====================================================
See notes to consolidated financial statements.
-1-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 72,830,500 $ 73,018,632 $ 145,911,083 $ 143,180,223
---------------------------------------------------------------------------------
Costs and expenses:
Cost of sales, including
buying and occupancy costs 47,463,674 50,269,898 101,434,947 102,663,901
Selling and administrative 17,470,560 17,779,797 34,604,528 34,458,894
Depreciation and amortization 962,399 1,043,118 1,949,339 2,081,777
---------------------------------------------------------------------------------
65,896,633 69,092,813 137,988,814 139,204,572
Operating income 6,933,867 3,925,819 7,922,269 3,975,651
Other income, principally interest 442,917 409,811 831,917 810,953
---------------------------------------------------------------------------------
Income before income taxes 7,376,784 4,335,630 8,754,186 4,786,604
Income tax provision 2,737,000 1,630,000 3,239,000 1,801,000
---------------------------------------------------------------------------------
Net income $ 4,639,784 $ 2,705,630 $ 5,515,186 $ 2,985,604
=================================================================================
Net income per common share
Basic $ 0.34 $ 0.20 $ 0.40 $ 0.22
=================================================================================
Diluted $ 0.34 $ 0.20 $ 0.40 $ 0.22
=================================================================================
Cash dividend declared
per common share $ 0.525 $ 0.175 $ 0.650 $ 0.275
=================================================================================
Weighted average number of
common shares outstanding
Basic 13,723,122 13,684,900 13,705,255 13,684,900
=================================================================================
Diluted 13,723,122 13,684,900 13,710,813 13,684,900
=================================================================================
See notes to consolidated financial statements.
-2-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JULY 31,
--------------------------------------------------
2004 2003
---- ----
Cash flows related to operating activities:
Net income $ 5,515,186 $ 2,985,604
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,949,339 2,081,777
Loss on retirement of property, plant and equipment 92,910 23,988
Changes in operating assets and liabilities:
Increase in merchandise inventories (4,137,201) (5,446,882)
Increase in prepaid expenses and other (235,581) (1,212,565)
Increase in trade accounts payable 2,452,177 9,361,402
Increase (decrease) in accrued expenses and other 107,354 (1,093,279)
Decrease in income taxes payable (552,960) (2,514,658)
-------------------------------------------
Net cash provided by operating activities 5,191,224 4,185,387
-------------------------------------------
Cash flows related to investing activities:
Purchase of property, plant and equipment (1,287,168) (1,130,830)
-------------------------------------------
Net cash used in investing activities (1,287,168) (1,130,830)
-------------------------------------------
Cash flows related to financing activities:
Preferred stock cash dividends paid (27,600) (27,600)
Common stock cash dividends paid (3,423,976) (2,736,981)
Proceeds from exercise of stock options 1,520,000 --
-------------------------------------------
Net cash used in financing activities (1,931,576) (2,764,581)
-------------------------------------------
Increase in cash and cash equivalents 1,972,480 289,976
Cash and cash equivalents at beginning of period 166,264,418 152,617,355
-------------------------------------------
Cash and cash equivalents at end of period $168,236,898 $152,907,331
===========================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net $ 4,650,000 $ 5,562,000
===========================================
See notes to consolidated financial statements.
-3-
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JULY 31, 2004
NOTE A - ORGANIZATION / BASIS OF PRESENTATION
Deb Shops, Inc. (the "Company") operates 327 women's and men's
specialty apparel retail stores. The Company operates 318 stores under the name
"DEB" which offer moderately priced, fashionable, coordinated women's
sportswear, dresses, coats, lingerie, accessories and shoes for junior and plus
sizes. In addition, the Company operates three outlet stores under the name
"CSO." The outlet stores offer the same merchandise as DEB at reduced prices and
serve as clearance stores for slow-moving inventory. One hundred and thirty of
the DEB stores contain plus-size departments. The Company also operates six
apparel retail stores under the name "Tops 'N Bottoms." The Tops 'N Bottoms
stores sell moderately priced men's and women's apparel. Seventeen of the DEB
stores contain Tops 'N Bottoms departments. The Company's stores are located in
regional malls and strip shopping centers principally located in the East and
Midwest regions of the United States.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the first and third quarters, cost of goods sold and inventories are estimated
based on the use of the gross profit method. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and
six-month periods ended July 31, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending January 31, 2005. The
Consolidated Balance Sheet at January 31, 2004 has been derived from the audited
financial statements at that date. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2004.
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
-4-
NOTE B - NET INCOME PER SHARE
The table below sets forth the reconciliation of the numerators and
denominators of the basic and diluted net income per common share computations.
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
--------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------------------
Net income $ 4,639,784 $ 2,705,630 $ 5,515,186 $ 2,985,604
Dividends on preferred stock (13,800) (13,800) (27,600) (27,600)
--------------------------------------------------------------------------------
Income available to
common shareholders $ 4,625,984 $ 2,691,830 $ 5,487,586 $ 2,958,004
================================================================================
Basic weighted average
number of common
shares outstanding 13,723,122 13,684,900 13,705,255 13,684,900
Effect of dilutive stock options -- -- 5,558 --
--------------------------------------------------------------------------------
Diluted weighted average
number of common
shares outstanding 13,723 122 13,684,900 13,710,813 13,684,900
================================================================================
During the quarter ended July 31, 2004, the Company issued 42,000
common shares as a result of employee stock option exercises. The effect of
these exercises is included in the basic and diluted weighted average number of
common shares outstanding.
Options to purchase 1,218,000 shares of common stock, at a weighted
average exercise price of $23.77 per share, were outstanding at July 31, 2004.
The effect of these options on the diluted weighted average number of common
shares outstanding for the six months ended July 31, 2004 is reflected in the
above table. For the three months ended July 31, 2004, these options are not
included in the computation of diluted earnings per share because the exercise
price was greater than the average market price of the common stock during the
period and, therefore, the effect would have been antidilutive.
Options to purchase 1,381,500 shares of common stock, at a weighted
average exercise price of $23.77 per share, were outstanding during the three
and six-month periods ended July 31, 2003. These options were not included in
the computation of diluted earnings per share because the exercise price was
greater than the average market price of the common stock during the period and,
therefore, the effect would have been antidilutive.
NOTE C - INCOME TAXES
The Company's effective tax rate differs from the federal statutory
rate due primarily to state income taxes, offset by tax-exempt interest
earnings.
-5-
NOTE D - STOCK RELATED COMPENSATION
The Company has a stock option plan whereby options may be granted to
employees or non-employee directors on the basis of contributions to the
operations of the Company. Details concerning the plan are described in Note F
to the financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 2004. The Company continues to use the
accounting method under Accounting Principles Board Opinion No. 25 ("APB No.
25"), "Accounting for Stock Issued to Employees," and related interpretations
for these plans. Under APB No. 25, generally, when the exercise price of the
Company's stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.
Had the Company recognized compensation cost for the stock option plan
consistent with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," net income and
basic and diluted net income per share would have been adjusted to the following
pro forma amounts.
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
----------------------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------------------------
Net income as reported $ 4,639,784 $ 2,705,630 $ 5,515,186 $ 2,985,604
Stock-based employee
compensation cost (213,045) (517,819) (274,548) (1,217,420)
----------------------------------------------------------------------------------
Pro-forma net income 4,426,739 2,187,811 5,240,638 1,768,184
Dividends on preferred stock (13,800) (13,800) (27,600) (27,600)
----------------------------------------------------------------------------------
Pro forma net income available
to common shareholders $ 4,412,939 $ 2,174,011 $ 5,213,038 $ 1,740,584
==================================================================================
Basic net income per common
share, as reported $ 0.34 $ 0.20 $ 0.40 $ 0.22
Pro forma basic net income
per common share $ 0.32 $ 0.16 $ 0.38 $ 0.13
Diluted net income per
common share, as reported $ 0.34 $ 0.20 $ 0.40 $ 0.22
Pro forma diluted net income
per common share $ 0.32 $ 0.16 $ 0.38 $ 0.13
-6-
ITEM 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Deb Shops, Inc. (the "Company") has made in this report, and from time
to time may otherwise make, "forward-looking statements" (as that term is
defined under federal securities laws) concerning the Company's future
operations, performance, profitability, revenues, expenses, earnings and
financial condition. This report includes, in particular, forward-looking
statements regarding expectations of future performance, store openings and
closings and other matters. Such forward-looking statements are subject to
various risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors. Such factors may
include, but are not limited to, the Company's ability to improve or maintain
sales and margins, respond to changes in fashion, find suitable retail locations
and the Company's ability to attract and retain key management personnel. Such
factors may also include other risks and uncertainties detailed in the Company's
other filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2004
(the "2004 10-K"). The Company assumes no obligation to update or revise its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and notes accompanying the consolidated financial statements that
appear in the 2004 10-K. There were no material changes subsequent to the filing
of the 2004 10-K in the Company's critical accounting policies or in the
assumptions or estimates used to prepare the financial information appearing in
this report.
OVERVIEW
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial
statements and accompanying notes appearing elsewhere in this report.
The Company operates 327 women's and men's specialty apparel retail
stores. The Company operates 318 stores under the name "DEB" which offer
moderately priced, fashionable, coordinated women's sportswear, dresses, coats,
lingerie, accessories and shoes for junior and plus sizes. In addition, the
Company operates three outlet stores under the name "CSO." The outlet stores
offer the same merchandise as DEB at reduced prices and serve as clearance
stores for slow-moving inventory. One hundred and thirty of the DEB stores
contain plus-size departments. The Company also operates six apparel retail
stores under the name "Tops 'N Bottoms." The Tops 'N Bottoms stores sell
moderately priced men's and women's apparel. Seventeen of the DEB stores contain
Tops 'N Bottoms departments. The Company's stores are located in regional malls
and strip shopping centers principally located in the East and Midwest regions
of the United States.
While the Company experienced a 0.5% decrease in comparable store sales
during the quarter ended July 31, 2004 (the "Current Quarter"), the Current
Quarter was highlighted by the continuation of the reduction in markdowns as a
percentage of sales. The Company believes this reduction is due to improved
acceptance of the Company's merchandise offerings. This reduction began in the
quarter ended April 30, 2004 and enabled the Company to improve gross margins,
which resulted in an increase in net income when compared to the quarter ended
July 31, 2003 (the "Comparable Quarter").
-7-
The Company experienced a 0.9% increase in comparable store sales
during the six months ended July 31, 2004 (the "Current Year-to-Date Period")
and an improvement in store operating performance resulting from this increase.
Due primarily to a reduction in markdowns as a percentage of sales, the Company
also improved gross margins, which, when combined with the aforementioned sales
increase, resulted in improved expense leverage and an increase in net income
when compared to the six months ended July 31, 2003 (the "Comparable
Year-to-Date Period").
The following table sets forth certain store information:
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31,(1) JULY 31,(1)
-----------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Stores open at end of the period 327 331 327 331
Average number in operation during the period 329 331 329 330
Average net sales per store (in thousands) $221 $221 $443 $434
Average operating income per store
(in thousands) $ 21 $ 12 $ 24 $ 12
Comparable store sales(2) - percent change (0.5)% (9.2)% 0.9 % (11.3)%
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2004 COMPARED TO THREE MONTHS ENDED JULY 31, 2003
NET SALES
Net sales decreased 0.3% during the Current Quarter to $72,831,000 from
$73,019,000 during the Comparable Quarter. The $188,000 decrease was the result
of a 0.5% or $380,000 comparable store sales decrease and the loss of sales from
closed stores, partially offset by sales from new stores.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY COSTS
Cost of sales, including buying and occupancy costs, decreased
$2,806,000 or 5.6% during the Current Quarter to $47,464,000 from $50,270,000 in
the Comparable Quarter. As a percentage of net sales, these costs decreased to
65.2% from 68.8% in the Comparable Quarter. The nominal and percentage decreases
were due to a reduction in markdowns as a percentage of sales compared to the
Comparable Quarter. Buying and occupancy costs were 17.7% and 18.0% of net sales
for the Current Quarter and Comparable Quarter, respectively.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased $309,000 or 1.7% during
the Current Quarter to $17,471,000 from $17,780,000 in the Comparable Quarter.
As a percentage of net sales, these costs decreased to 24.0% from 24.3% in the
Comparable Quarter. The nominal and percentage decreases were due to reductions
in store operations travel costs as well as decreases in miscellaneous store and
warehouse expenses.
- -----------------
(1) Includes Tops 'N Bottoms stores.
(2) Comparable store sales include stores open for both periods. A store is
added to the comparable store base in its 13th month of operation.
-8-
DEPRECIATION AND AMORTIZATION
Depreciation expense decreased $81,000 or 7.7% to $962,000 in the
Current Quarter from $1,043,000 in the Comparable Quarter. As a percentage of
net sales, this expense decreased to 1.3% in the Current Quarter from 1.4% in
the Comparable Quarter. The decrease was due to the fact that a portion of the
leasehold improvements and furniture and equipment in certain older stores are
fully depreciated, therefore reducing the amount of recurring depreciation
expense for these locations.
OTHER INCOME, PRINCIPALLY INTEREST
Other income, principally interest, increased $33,000 or 8.0% to
$443,000 in the Current Quarter from $410,000 in the Comparable Quarter. The
increase was the result of the combination of higher average interest rates and
higher cash balances during the Current Quarter compared to the Comparable
Quarter.
INCOME TAX PROVISION
The income tax provision for the Current Quarter was $2,737,000,
resulting in a 37.1% effective tax rate, as compared to $1,630,000 and a 37.6%
effective tax rate for the Comparable Quarter. The effective tax rate for the
Current Quarter results from increasing the rate anticipated for the Company's
fiscal year ending January 31, 2005 ("Fiscal 2005") from 36.5% to 37.0%. The
increase to 37.0% is due to an expected higher effective state income tax rate.
The effective tax rate for the Comparable Quarter was the rate anticipated for
the Company's fiscal year ended January 31, 2004 ("Fiscal 2004"), based on
originally budgeted earnings for that year. The actual effective rate for Fiscal
2004 was 35.8%.
SIX MONTHS ENDED JULY 31, 2004 COMPARED TO SIX MONTHS ENDED JULY 31, 2003
NET SALES
Net sales increased 1.9% during the Current Year-to-Date Period to
$145,911,000 from $143,180,000 during the Comparable Year-to-Date Period. The
$2,731,000 increase was the result of a 0.9% or $1,267,000 comparable store
sales increase as well as sales from new stores, partially offset by the loss of
sales from closed stores. The Company believes that this sales increase is
attributable to improved customer acceptance of the Company's merchandise
offerings as evidenced by increases in unit sales and net sales per transaction
versus the Comparable Year-to-Date Period, particularly in the quarter ended
April 30, 2004.
COST OF SALES, INCLUDING BUYING AND OCCUPANCY COSTS
Cost of sales, including buying and occupancy costs, decreased
$1,229,000 or 1.2% during the Current Year-to-Date Period to $101,435,000 from
$102,664,000 in the Comparable Year-to-Date Period. As a percentage of net
sales, these costs decreased to 69.5% from 71.7% in the Comparable Year-to-Date
Period. The nominal and percentage decreases were due to a reduction in
markdowns as a percentage of sales compared to a year ago, as well as a
reduction in buying and occupancy costs. Buying and occupancy costs were 17.8%
and 18.1% of net sales for the Current Year-to-Date Period and Comparable
Year-to-Date Period, respectively.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased $146,000 or 0.4% during
the Current Year-to-Date period to $34,605,000 from $34,459,000 in the
Comparable Year-to-Date Period. As a percentage of net sales, these costs
decreased to 23.7% from 24.1% in the Comparable Year-to-Date Period. The nominal
increase was due to a payment made relating to an employee separation matter and
an increase in merchant fees relating to credit card sales, offset by reductions
in store operations travel costs as well as decreases in miscellaneous store and
warehouse expenses. The percentage decrease was due to the increase in net
sales.
-9-
DEPRECIATION AND AMORTIZATION
Depreciation expense decreased $133,000 or 6.4% to $1,949,000 in the
Current Year-to-Date Period from $2,082,000 in the Comparable Year-to-Date
Period. As a percentage of net sales, these expenses decreased to 1.3% in the
Current Year-to-Date Period from 1.5% in the Comparable Year-to-Date Period. The
decrease was due to the fact that a portion of the leasehold improvements and
furniture and equipment in certain older stores are fully depreciated, therefore
reducing the amount of recurring depreciation expense for these locations.
OTHER INCOME, PRINCIPALLY INTEREST
Other income, principally interest, increased $21,000 or 2.6% to
$832,000 in the Current Year-to-Date Period from $811,000 in the Comparable
Year-to-Date Period. The increase was the result of the combination of higher
average interest rates and higher cash balances during the Current Year-to-Date
Period compared to the Comparable Year-to-Date Period.
INCOME TAX PROVISION
The income tax provision for the Current Year-to-Date Period was
$3,239,000, resulting in a 37.0% effective tax rate, as compared to $1,801,000
and a 37.6% effective tax rate for the Comparable Year-to-Date Period. The
effective tax rate for the Current Year-to-Date Period is the rate estimated for
Fiscal 2005. The effective tax rate for the Comparable Year-to-Date Period was
the rate anticipated for Fiscal 2004, based on originally budgeted earnings for
that year. The actual effective rate for Fiscal 2004 was 35.8%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded all of its operating needs internally, including
capital expenditures for the opening of new stores and the remodeling of
existing stores. For the Current Year-to-Date Period, cash provided by operating
activities was $5,191,000. These funds were provided by net income and the
non-cash charges for depreciation and amortization, as well as from increases in
trade accounts payable and accrued expenses. Offsetting these items were uses of
cash relating to the seasonal increase in merchandise inventories, income tax
payments and an increase in prepaid expenses. For the Comparable Year-to-Date
Period, cash provided by operating activities was $4,185,000. These funds were
provided by net income, an increase in trade accounts payable and non-cash
charges for depreciation and amortization, partially offset by increases in
merchandise inventories and prepaid expenses and decreases in income taxes
payable and accrued expenses. Using retail sales divided by average inventory at
retail for the applicable periods, the inventory turnover rates were
approximately 1.4 and 1.3 times during the Current and Comparable Year-to-Date
Periods, respectively.
Net cash used in investing activities was $1,287,000 and $1,131,000 for
the Current and Comparable Year-to-Date Periods, respectively. During both
periods, these funds were used for the opening of new stores and the remodeling
of existing stores. During the Current Year-to-Date Period, the Company opened
two and remodeled six stores, while during the Comparable Year-to-Date Period
the Company opened six and remodeled 13 stores.
Net cash used in financing activities was $1,932,000 and $2,765,000 for
the Current and Comparable Year-to-Date Period, respectively. During both
periods, these funds were used for the payment of dividends on preferred and
common stock and, during the Current Year-to-Date Period, the use of funds was
partially offset by proceeds from the exercise of stock options.
As of July 31, 2004, the Company had cash and cash equivalents of
$168,237,000, compared with $152,907,000 at July 31, 2003.
On May 19, 2004, the Company announced a special dividend of $0.40 per
share on its common stock. This special dividend was incorporated into the
Company's dividend payment on August 17, 2004, which was payable to shareholders
of record as of July 31, 2004.
-10-
The Company believes that its existing cash and cash equivalents and
internally generated funds will be sufficient to meet its anticipated capital
expenditures, none of which are material, and current operating needs. The
Company had an unsecured line of credit in the amount of $20,000,000 as of July
31, 2004. Of this amount, $691,000 was outstanding as letters of credit for the
purchase of inventory. The Company leases its retail apparel stores, warehouse
and office building for periods ranging from one to 20 years. Following is a
summary of the Company's contractual obligations for minimum rental payments on
its non-cancelable operating leases and minimum payments on its other
commitments as of July 31, 2004.
Payments Due by Period
Within 1 1 - 3 4 - 5 After 5
Total Year years years years
---------------------------------------------------------------------------------------------------
Operating $ 134,447,000 $ 23,692,000 $ 41,154,000 $ 28,681,000 $ 40,920,000
leases
Other
commitments 691,000 691,000 -- -- --
---------------------------------------------------------------------------------------------------
Total $ 135,138,000 $ 24,383,000 $ 41,154,000 $ 28,681,000 $ 40,920,000
===================================================================================================
OTHER MATTERS
Seasonality and Quarterly Results
The Company's operating results are subject to seasonal fluctuations.
Highest sales levels have historically occurred during the five-month period
from August 1 to December 31 of each year (the back-to-school and holiday
periods). Sales generated during these periods have traditionally had a
significant impact on the Company's results of operations. Any decreases in
sales for these periods or in the availability of working capital needed in the
months preceding these periods could have a material adverse effect on the
Company's results of operations. Results of operations in any one fiscal quarter
are not necessarily indicative of the results of operations that can be expected
for any other fiscal quarter or for the full fiscal year.
The Company's results of operations may also fluctuate from quarter to
quarter as a result of the amount and timing of expenses incurred in connection
with, and sales contributed by, new stores, store remodels and the integration
of new stores into the operations of the Company.
ITEM 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of July 31, 2004, the Company had cash and cash equivalents of
$168,237,000 compared to $152,907,000 as of July 31, 2003. These funds are
invested primarily in money market mutual funds and short-term municipal bonds,
all of which are fully insured or guaranteed by letters-of-credit. The Company
does not invest for trading purposes. Accordingly, the Company does not believe
it has significant exposure to market risk with respect to its investments.
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ITEM 4.
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CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer, with
the participation of other members of the Company's management, have evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this report (the "Evaluation Date") and,
based on that evaluation, concluded that, as of the Evaluation Date, the Company
had sufficient controls and procedures for recording, processing, summarizing
and reporting information that is required to be disclosed in its reports under
the Securities Exchange Act of 1934, as amended, within the time periods
specified in the SEC's rules and forms.
(b) Change in Internal Control over Financial Reporting
There has not been any change in the Company's internal control over
financial reporting during its quarter ended July 31, 2004 that has materially
affected or is reasonably likely to materially affect its internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
- ------ ----------------------------------------------------
The annual meeting of the Company was held on Wednesday, May 19, 2004.
Total votes present either in person or by proxy were 12,539,473.
Votes were cast as follows for the election of directors:
FOR WITHHELD
------- ----------
Marvin Rounick 12,316,076 223,397
Warren Weiner 12,316,076 223,397
Jack A. Rounick 12,316,076 223,397
Barry H. Feinberg 12,513,404 26,069
Barry H. Frank 12,316,106 223,367
Ivan Inerfeld 12,513,404 26,069
Ned Kaplin 12,513,404 26,069
There were no other matters voted on at the meeting.
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Item 6. EXHIBITS
- ------ --------
Exhibit 31.1 Section 302 Certification by President and
Chief Executive Officer
Exhibit 31.2 Section 302 Certification by Chief Financial
Officer
Exhibit 32.1 Certification of Periodic Report by President and
Chief Executive Officer
Exhibit 32.2 Certification of Periodic Report by Chief
Financial Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEB SHOPS, INC.
DATE: September 9, 2004 By: Marvin Rounick
--------------
Marvin Rounick
President and Chief
Executive Officer
DATE: September 9, 2004 By: Barry J. Susson
---------------
Barry J. Susson, CPA
Chief Financial Officer
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