Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 2005
--------------
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
--------
DEB SHOPS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1913593
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9401 Blue Grass Road, Philadelphia, Pennsylvania 19114
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 676-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former 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 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 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 13,987,767
- --------------------------------------------------------------------------------
(Class) (Outstanding at June 3, 2005)
DEB SHOPS, INC. AND SUBSIDIARIES
I N D E X
---------
PAGE
----
PART I. Financial Information:
Item 1. Financial statements
Consolidated Balance Sheets
April 30, 2005 (Unaudited) and January 31, 2005 1
Consolidated Statements of Operations (Unaudited)
Three Months Ended April 30, 2005 and 2004 2
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended April 30, 2005 and 2004 3
Notes to Consolidated Financial Statements
April 30, 2005 (Unaudited) 4-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - April 30, 2005 7-11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
Item 4. Controls and Procedures 11
PART II. Other Information 12
Item 6. Exhibits 12
Exhibit Index 13
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30,
2005 JANUARY 31,
(UNAUDITED) 2005
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32,868,176 $ 30,298,970
Marketable securities 147,100,000 146,100,000
Merchandise inventories 25,476,107 30,560,176
Prepaid expenses and other 2,834,173 2,616,185
Deferred income taxes 910,889 910,889
------------------------------------
Total current assets 209,189,345 210,486,220
PROPERTY, PLANT AND EQUIPMENT - AT COST
Land 150,000 150,000
Buildings 2,365,697 2,365,697
Leasehold improvements 53,345,227 53,168,985
Furniture and equipment 16,560,463 16,568,516
------------------------------------
72,421,387 72,253,198
Less accumulated depreciation and amortization 49,720,747 48,993,382
------------------------------------
Net property, plant and equipment 22,700,640 23,259,816
OTHER ASSETS
Deferred income taxes 7,421,935 7,421,935
Other 1,712,223 1,712,223
------------------------------------
Total other assets 9,134,158 9,134,158
------------------------------------
Total assets $241,024,143 $242,880,194
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 25,442,708 $ 26,921,683
Accrued expenses and other 11,022,022 11,314,244
Income taxes payable 1,535,282 4,618,905
------------------------------------
Total current liabilities 38,000,012 42,854,832
Deferred lease credits 10,783,087 11,114,224
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 8,966,585 7,232,646
Retained earnings 194,482,182 193,467,638
------------------------------------
203,606,110 200,857,627
Less common treasury shares, at cost:
April 30, 2005 - 1,823,529; January 31, 2005 - 1,926,279 11,365,066 11,946,489
------------------------------------
192,241,044 188,911,138
------------------------------------
Total liabilities and shareholders' equity $241,024,143 $242,880,194
====================================
See notes to consolidated financial statements.
-1-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED APRIL 30,
----------------------------------
2005 2004
- ---------------------------------------------------------------------------------------
(AS RESTATED, SEE
NOTE B)
Net sales $77,484,747 $73,080,583
----------------------------------
Costs and expenses:
Cost of sales, including buying
and occupancy costs 55,682,817 53,659,820
Selling and administrative 17,095,260 17,133,968
Depreciation and amortization 1,366,807 1,316,231
----------------------------------
74,144,884 72,110,019
Operating income 3,339,863 970,564
Other income, principally interest 1,048,455 405,353
----------------------------------
Income before income taxes 4,388,318 1,375,917
Income tax provision 1,628,000 497,250
----------------------------------
Net income $ 2,760,318 $ 878,667
==================================
Net income per common share
Basic $ 0.20 $ 0.06
==================================
Diluted $ 0.20 $ 0.06
==================================
Cash dividend declared
per common share $ 0.125 $ 0.125
==================================
Weighted average number of
common shares outstanding
Basic 13,781,578 13,687,389
==================================
Diluted 13,948,925 13,698,505
==================================
See notes to consolidated financial statements.
-2-
DEB SHOPS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED APRIL 30,
-------------------------------------
2005 2004
---------------------------------------------------------------------------------------------------------------
(AS RESTATED, SEE
NOTE B)
Cash flows from operating activities: $ 2,760,318 $ 878,667
Net income
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,366,807 1,316,231
Loss on retirement of property, plant and equipment 34,704 10,794
Changes in operating assets and liabilities:
Decrease in merchandise inventories 5,084,069 3,883,393
Increase in prepaid expenses and other (217,988) (658,756)
Decrease in trade accounts payable (1,478,975) (5,362,082)
Decrease in accrued expenses and other (303,940) (235,159)
Decrease in income taxes payable (2,994,823) (1,620,094)
Decrease in deferred lease credits (331,137) (50,042)
-------------------------------------
Net cash provided by (used in) operating activities 3,919,035 (1,837,048)
-------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (842,340) (1,079,215)
Purchases of investment securities (1,000,000) (8,550,000)
Sales of investment securities -- 7,450,000
-------------------------------------
Net cash used in investing activities (1,842,340) (2,179,215)
-------------------------------------
Cash flows from financing activities:
Preferred stock cash dividends paid (13,800) (13,800)
Common stock cash dividends paid (1,720,252) (1,710,613)
Proceeds from exercise of stock options 2,226,563 403,750
-------------------------------------
Net cash provided by (used in) financing activities 492,511 (1,320,663)
-------------------------------------
Increase (decrease) in cash and cash equivalents 2,569,206 (5,336,926)
Cash and cash equivalents at beginning of period 30,298,970 34,064,418
-------------------------------------
Cash and cash equivalents at end of period $ 32,868,176 $ 28,727,492
=====================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes, net $ 4,611,000 $ 3,078,000
=====================================
See notes to consolidated financial statements.
-3-
DEB SHOPS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 30, 2005
- - A - ORGANIZATION / BASIS OF PRESENTATION
Deb Shops, Inc. operates 323 women's and men's specialty apparel retail
stores in regional malls and strip shopping centers principally located in the
East and Midwest regions of the United States. We operate 314 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. DEB merchandise consists of clothing and accessories appealing
primarily to fashion-conscious junior and plus-sized female consumers between
the ages of 13 and 25. One hundred and forty-eight of the DEB stores contain
plus-size departments. We also operate Tops `N Bottoms, a 19 location chain in
11 states. Two of the Tops `N Bottoms stores operate as combination stores with
DEB, and we operate 13 Tops `N Bottoms departments within DEB stores. The Tops
`N Bottoms stores sell moderately priced men's and women's apparel. In addition,
we operate 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.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP") for interim financial information. Accordingly, they do
not include all of the information and footnotes required by GAAP 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 months ended April 30, 2005 are not necessarily indicative
of the results that may be expected for the fiscal year ending January 31, 2006.
For further information, refer to the consolidated financial statements and
footnotes thereto included in our Annual Report on Form 10-K/A for the fiscal
year ended January 31, 2005.
The preparation of the consolidated financial statements in conformity
with GAAP 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.
-B- RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the publicity on the restaurant industry financial
statement restatements related to leases, we commenced a review of certain of
our accounting policies related to leases during January 2005. Subsequently, on
February 7, 2005, the Office of the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing its views regarding certain
operating-lease-related accounting issues and their application under GAAP.
Based on our internal review, and after consultation with the Audit Committee of
our Board of Directors and our predecessor independent registered public
accounting firm on April 19, 2005, we restated our financial statements for
years prior to fiscal 2005 to correct our accounting for landlord allowances,
calculation of straight-line rent expense, recognition of rent holiday periods,
and depreciation of leasehold improvements for our retail stores.
In prior years, we classified our investments in auction rate
certificates as cash and cash equivalents. During fiscal 2005, additional
clarification was provided regarding the financial statement classification of
this type of investment. Pursuant to this guidance, auction rate securities are
not to be classified as cash and cash equivalents. As a result, we have
classified our auction rate certificates as marketable securities and have
restated the consolidated statements of cash flows for the quarter ended April
30, 2004 to reflect the purchase and sale activity of these securities within
the investing activities section of the consolidated statements of cash flows.
This change had no effect on current or total assets or net income.
-4-
Following is a summary of the effects of these adjustments on our
consolidated statements of operations and cash flows for the quarter ended April
30, 2004:
CONSOLIDATED STATEMENT OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------------------------------------------------
QUARTER ENDED APRIL 30, 2004:
Cost of sales, including
buying and occupancy costs $ 53,971,273 $ (311,453) $ 53,659,820
Depreciation and amortization $ 986,940 $ 329,291 $ 1,316,231
Operating income $ 988,402 $ (17,838) $ 970,564
Other income, principally interest $ 389,000 $ 16,353 $ 405,353
Income before income taxes $ 1,377,402 $ (1,485) $ 1,375,917
Income tax provision $ 502,000 $ (4,750) $ 497,250
Net income $ 875,402 $ 3,265 $ 878,667
Basic net income per share $ 0.06 $ -- $ 0.06
Diluted net income per share $ 0.06 $ -- $ 0.06
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------
AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
--------------------------------------------------------
QUARTER ENDED APRIL 30, 2004:
Net cash used in operating activities $ (2,107,074) $ 270,026 $ (1,837,048)
Purchases of property, plant and
equipment $ (889,189) $ (190,026) $ (1,079,215)
Purchases of marketable securities $ -- $ (8,550,000) $ (8,550,000)
Sales of marketable securities $ -- $ 7,450,000 $ 7,450,000
Net cash used in investing activities $ (889,189) $ (1,290,026) $ (2,179,215)
Increase (decrease) in cash and cash
equivalents $ (4,236,926) $ (1,100,000) $ (5,336,926)
Cash and cash equivalents at
beginning of period $ 166,264,418 $ (132,200,000) $ 34,064,418
Cash and cash equivalents at
end of period $ 162,027,492 $ (133,300,000) $ 28,727,492
- - C - 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 APRIL 30,
-------------------------------------
2005 2004
(AS RESTATED)
-------------------------------------
Net income $ 2,760,318 $ 878,667
Dividends on preferred stock (13,800) (13,800)
-------------------------------------
Income available to common
shareholders $ 2,746,518 $ 864,867
=====================================
Basic weighted average number
of common shares outstanding 13,781,578 13,687,389
Effect of dilutive stock options 167,347 11,116
-------------------------------------
Diluted weighted average number of
common shares outstanding 13,948,925 13,698,505
=====================================
-5-
- - C - NET INCOME PER SHARE (CONTINUED)
During the quarters ended April 30, 2005 and 2004, we issued 93,750 and
22,000 shares, respectively, 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 1,100,639 shares of common stock, at a weighted
average exercise price of $23.78 per share, were outstanding at April 30, 2005.
At April 30, 2004, options to purchase 1,264,000 shares of common stock, at a
weighted average exercise price of $23.77 were outstanding. The effect of these
options on the diluted weighted average number of common shares outstanding at
April 30, 2005 and 2004 is reflected in the above table.
- -D - INCOME TAXES
Our effective tax rate differs from the federal statutory rate due
primarily to state income taxes, offset by tax-exempt interest earnings.
- - E - STOCK RELATED COMPENSATION
We have a stock option plan whereby options may be granted to employees
or non-employee directors on the basis of contributions to our operations.
Details concerning the plan are described in Note G to the financial statements
included in our Annual Report on Form 10-K/A for the fiscal year ended January
31, 2005. We continue 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 this plan. Under APB No. 25, generally, when the
exercise price of our stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized.
Had we recognized compensation cost for the stock option plan
consistent with the provisions of Statement of Financial Accounting Standards
No. 123 ("FAS 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 APRIL 30,
-----------------------------
2005 2004
(AS RESTATED)
-----------------------------
Net income as reported $ 2,760,318 $ 878,667
Stock-based employee compensation cost (92,179) (61,503)
-----------------------------
Pro forma net income $ 2,668,139 $ 817,164
=============================
Basic net income per common share, as reported $ 0.20 $ 0.06
Pro forma basic net income per common share $ 0.19 $ 0.06
Diluted net income per common share, as reported $ 0.20 $ 0.06
Pro forma diluted net income per common share $ 0.19 $ 0.06
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123(R), "Share-Based Payment" ("FAS 123(R)"). FAS
123(R) revised FAS No. 123, and requires companies to expense the fair value of
employee stock options and other forms of stock-based compensation. Companies
must adopt FAS 123(R) no later than the beginning of their next fiscal year that
begins after June 15, 2005. Accordingly, we will be required to adopt FAS 123(R)
in our first quarter of fiscal 2007.
Previously, in complying with FAS 123, we disclosed the value of stock
options granted and its pro forma impact on our net income in a footnote to our
consolidated financial statements. We are currently considering which transition
method we will select in adopting FAS 123(R), and whether this new accounting
requirement will result in any changes in compensation strategies. Information
contained in the footnotes provides the impact on pro forma net income for past
financial statements. The impact of the adoption of FAS 123(R) is not expected
to have a material impact on our future financial statements.
-6-
ITEM 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
We have 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 our 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, our ability to improve or maintain
sales and margins, respond to changes in fashion, find suitable retail locations
and our ability to attract and retain key management personnel. Such factors may
also include other risks and uncertainties detailed in our other filings with
the Securities and Exchange Commission, including our Annual Report on Form
10-K/A for the fiscal year ended January 31, 2005 (the "2005 10-K/A"). We assume
no obligation to update or revise our 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
Our 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 2005
10-K/A. There were no material changes subsequent to the filing of the 2005
10-K/A in our critical accounting policies or in the assumptions or estimates
used to prepare the financial information appearing in this report.
RESTATEMENT OF FINANCIAL STATEMENTS
As a result of the publicity on the restaurant industry financial
statement restatements related to leases, we commenced a review of certain of
our accounting policies related to leases during January 2005. Subsequently, on
February 7, 2005, the Office of the Chief Accountant of the Securities and
Exchange Commission ("SEC") issued a letter to the American Institute of
Certified Public Accountants expressing its views regarding certain
operating-lease-related accounting issues and their application under generally
accepted accounting principles in the United States of America ("GAAP"). Based
on our internal review, and after consultation with the Audit Committee of our
Board of Directors and our predecessor independent registered public accounting
firm on April 19, 2005, we restated our financial statements for years prior to
fiscal 2005 to correct our accounting for landlord allowances, calculation of
straight-line rent expense, recognition of rent holiday periods, and
depreciation of leasehold improvements for our retail stores.
The details of the restatement are more fully described in our 2005
10-K/A. The discussion contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" gives effect to the restatement.
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. As used in
this report, the term "fiscal 2006" refers to our fiscal year that will end on
January 31, 2006. The term "fiscal 2005" refers to our fiscal year that ended on
January 31, 2005.
We operate 323 women's and men's specialty apparel retail stores in
regional malls and strip shopping centers principally located in the East and
Midwest regions of the United States. We operate 314 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. One
hundred and forty-eight of the DEB stores contain plus-size departments. We also
operate Tops `N Bottoms, a 19 location chain in 11 states. Two of the Tops `N
Bottoms stores operate as combination stores with DEB, and we operate 13 Tops `N
Bottoms departments within DEB stores. The Tops `N Bottoms stores sell
moderately priced men's and women's apparel. In addition, we operate 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.
-7-
Our performance during the quarter ended April 30, 2005 (the "Current
Quarter") was highlighted by a 6.9% increase in comparable store sales,
resulting from strong customer reaction to our spring merchandise assortment. In
addition, we continued to improve gross margin levels and drive additional
operating expense leverage, which allowed us to materially exceed our results
for the quarter ended April 30, 2004 (the "Comparable Quarter").
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2005 COMPARED TO THREE MONTHS ENDED APRIL 30, 2004
NET SALES
Net sales increased 6.0% during the Current Quarter to $77,485,000 from
$73,081,000 in the Comparable Quarter. The $4,404,000 increase was the result of
a 6.9% or $4,855,000 comparable store sales increase, offset by the effect of
operating fewer stores during the Current Quarter as compared to the Comparable
Quarter. We believe that the comparable store sales increase is attributable to
improved customer acceptance of our merchandise offerings as evidenced by
increases in unit sales and net sales per transaction versus the Comparable
Quarter.
The following table sets forth certain store information.
STORE DATA(1)
THREE MONTHS ENDED
APRIL 30,
-------------------------------
2005 2004
-------------------------------
Stores open at end of the period 323 329
Average number in operation during the period 323 331
Average net sales per store (in thousands) $ 240 $221
Average operating income
per store (in thousands) $10.3 $2.9(2)
Comparable store sales(3) - percent change 6.9% 2.4%
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of net sales:
THREE MONTHS ENDED
APRIL 30,
-------------------------------
2005 2004
(AS RESTATED)
-------------------------------
Net sales 100.0% 100.0%
Gross margin 28.1% 26.6%
Operating income 4.3% 1.3%
Income before income taxes 5.7% 1.9%
Income tax provision 2.1% 0.7%
-------------------------------
Net income 3.6% 1.2%
===============================
- --------
(1) Includes Tops `N Bottoms stores
(2) As restated
(3) 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-
COST OF SALES, INCLUDING BUYING AND OCCUPANCY COSTS
Cost of sales, including buying and occupancy costs, increased
$2,023,000 or 3.8% during the Current Quarter to $55,683,000 from $53,660,000 in
the Comparable Quarter. The nominal increase between periods was due to the
overall increase in sales. As a percentage of net sales, these costs decreased
to 71.9% from 73.4% in the Comparable Quarter. The decrease as a percentage of
sales was due to an improvement in the leveraging of buying and occupancy costs
as a result of the 6.9% comparable store sales increase. Buying and occupancy
costs were 15.9% and 17.4% of net sales for the Current Quarter and Comparable
Quarter, respectively.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased $39,000 or 0.2% during
the Current Quarter to $17,095,000 from $17,134,000 in the Comparable Quarter.
As a percentage of net sales, these costs decreased to 22.1% from 23.4% in the
Comparable Quarter. The $39,000 net decrease was primarily due to the fact that
the Comparable Quarter amount included a payment made relating to an employee
separation matter, offset by Current Quarter increases in accounting fees and
merchant fees relating to credit card sales. Similar to the percentage decrease
in cost of sales, including buying and occupancy expenses, the decrease as a
percentage of net sales was due to an improvement in the leveraging of selling
and administrative expenses as a result of the increase in net sales.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased $51,000 or 3.8% to $1,367,000 in the
Current Quarter from $1,316,000 in the Comparable Quarter. As a percentage of
net sales, these expenses remained consistent at 1.8%. The nominal increase was
due to depreciation expense related to assets placed in service for new and
remodeled stores during the past 12 months. During the period from May 2004
through April 2005, we opened eight new stores and remodeled 10 locations.
OTHER INCOME, PRINCIPALLY INTEREST
Other income, principally interest, increased $643,000 or 158.7% to
$1,048,000 in the Current Quarter from $405,000 in the Comparable Quarter. The
increase was the result of more than a 100% increase in average interest rates
and greater average invested balances during the Current Quarter versus the
Comparable Quarter.
INCOME TAX PROVISION
The income tax provision for the Current Quarter was $1,628,000,
resulting in a 37.1% effective tax rate, as compared to $497,000 and a 36.1%
effective tax rate for the Comparable Quarter. The effective tax rate for the
Current Quarter is the rate estimated for fiscal 2006. The effective tax rate
for the Comparable Quarter was the rate anticipated for fiscal 2005, based on
originally budgeted earnings for that year. The actual effective rate for fiscal
2005 was 37.1%.
LIQUIDITY AND CAPITAL RESOURCES
As of April 30, 2005, we had cash and cash equivalents of $32,868,000
and marketable securities of $147,100,000 compared to cash and cash equivalents
of $28,727,000 and marketable securities of $133,300,000 as of April 30, 2004.
The cash and cash equivalents are invested principally in money market mutual
funds while the marketable securities are invested principally in auction market
securities, which trade on a par-in, par-out basis and provide interest-rate
reset options on a revolving 35-day basis. Because we regularly liquidate our
investments in these securities for reasons including, among others, changes in
market interest rates and changes in the availability of and the yield on
alternative investments, we have classified these securities as available for
sale. We do not invest for trading purposes and therefore do not believe we have
significant exposure to market risk with respect to our investments.
During the Current Quarter and Comparable Quarter, we funded all of our
operating needs internally, including capital expenditures for the opening of
new stores and the remodeling of existing stores. For the Current Quarter, cash
provided by operations was $3,919,000, resulting primarily from net income and
the non-cash charge for depreciation and amortization, and the seasonal decrease
in merchandise inventories. Offsetting these items was the seasonal decrease in
income taxes and accounts payable. During the Comparable Quarter, cash used in
operations was $1,837,000, resulting primarily from seasonal decreases in
accounts and income taxes payable, offset by net income and the non-cash charge
for depreciation and amortization and the seasonal decrease in merchandise
inventories. The inventory turnover rate was approximately 0.7 times during both
the Current Quarter and Comparable Quarter.
-9-
Net cash used in investing activities was $1,842,000 and $2,179,000 for
the Current Quarter and Comparable Quarter, respectively. These funds were used
for the purchase of marketable securities and for opening of new stores and the
remodeling of existing stores. During the Current Quarter, the Company opened
one and remodeled four stores, while during the Comparable Quarter the Company
opened one and remodeled five stores.
During the Current Quarter net cash provided by financing activities
was $493,000. These funds were provided by employee stock option exercises,
offset by the payment of dividends on preferred and common stock. During the
Comparable Quarter, we used $1,321,000 in financing activities. These funds were
used for the payment of dividends on preferred and common stock partially offset
by proceeds from the exercise of employee stock options.
On May 11, 2005, our Board of Directors approved a special dividend of
$6.00 per share on our common stock. This special dividend will be incorporated
into our next regularly scheduled dividend payment on August 16, 2005 for
shareholders of record as of July 29, 2005. Based on the approximately
13,988,000 shares outstanding as of June 3, 2005, the total payout to
shareholders relating to the special dividend will be approximately $83,900,000.
The amount of the dividend payout will increase to the extent that any of the
approximately 1,059,000 vested stock options are exercised prior to the dividend
record date.
We believe that our existing cash and marketable securities and
internally generated funds will be sufficient to meet our anticipated capital
expenditures, none of which are material, and current operating needs, including
the payment of the aforementioned special dividend. We have an unsecured line of
credit in the amount of $20,000,000 as of April 30, 2005. Of this amount,
$2,182,000 was outstanding as letters of credit for the purchase of inventory.
We lease our retail apparel stores, warehouse and office building for original
periods ranging from one to 20 years. Following is a summary of our contractual
obligations for minimum rental payments on our non-cancelable operating leases
and minimum payments on our other commitments as of April 30, 2005.
Payments Due by Period
Contractual Less than 1 1 - 3 3 - 5 More than 5
obligations Total year years years years
-------------------------------------------------------------------------------------------------
Operating
leases $ 126,440,000 $ 23,045,000 $ 38,353,000 $ 27,433,000 $ 37,609,000
Letters of
credit 2,182,000 2,182,000 -- -- --
-------------------------------------------------------------------------------------------------
Total $ 128,622,000 $ 25,227,000 $ 38,353,000 $ 27,433,000 $ 37,609,000
=================================================================================================
The above table excludes $1,746,000 in dividends, which were accrued at
April 30, 2005 and were paid in May 2005 as well as approximately $83,900,000
relating to the aforementioned special dividend, which will be paid on August
16, 2005 to shareholders of record on July 29, 2005.
-10-
OTHER MATTERS
Seasonality and Quarterly Results
Our 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
our 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 our 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.
Our 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 our operations.
ITEM 3.
- -------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of April 30, 2005, we had cash and cash equivalents of $32,868,000
and marketable securities of $147,100,000 compared to cash and cash equivalents
of $28,727,000 and marketable securities of $133,300,000 as of April 30, 2004.
The cash and cash equivalents are invested principally in money market mutual
funds while the marketable securities are invested principally in auction market
securities, which trade on a par-in, par-out basis and provide interest-rate
reset options on a revolving 35-day basis. Because we regularly liquidate our
investments in these securities for reasons including, among others, changes in
market interest rates and changes in the availability of and the yield on
alternative investments, we have classified these securities as available for
sale. We do not invest for trading purposes and therefore do not believe we have
significant exposure to market risk with respect to our investments.
ITEM 4.
- -------
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our chief executive officer and chief financial officer, with the
participation of other members of management, have evaluated the effectiveness
of our 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 disclosure controls and
procedures were effective for recording, processing, summarizing and reporting
information that is required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, within the time periods specified in the SEC's
rules and forms.
(b) Changes in Internal Control over Financial Reporting
There has not been any change in our internal control over financial
reporting during the quarter ended April 30, 2005 that has materially affected
or is reasonably likely to materially affect our internal control over financial
reporting.
-11-
PART II. OTHER INFORMATION
ITEMS 1 - 5. NOT APPLICABLE
- ------------
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
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: June 9, 2005 By: Marvin Rounick
--------------
Marvin Rounick
President and Chief Executive Officer
DATE: June 9, 2005 By: Barry J. Susson, CPA
-------------------------
Barry J. Susson, CPA
Chief Financial Officer
-12-
EXHIBIT INDEX
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
-13-