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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period (13 weeks) ended August 3, 2002
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 1-10876
-------
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 429-2211
------------------------
Former name, former address and former fiscal year, if changed since last
report:
N/A
- --------------------------------------------------------------------------------
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
The number of shares outstanding of each of the issuer's classes of Common Stock
as of August 31, 2002 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 28,877,340
Exhibit Index Page 1 of Page 27
on Page 25
1
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS AND 26 WEEKS ENDED AUGUST 3, 2002
INDEX
Part I Item 1 - Financial Statements Page
----
Condensed Consolidated Statements of Operations for the 3
13 weeks ended August 3, 2002 and August 4, 2001
Condensed Consolidated Statements of Operations for the 4
26 weeks ended August 3, 2002 and August 4, 2001
Condensed Consolidated Balance Sheets as of August 3, 5
2002, August 4, 2001 and February 2, 2002
Condensed Consolidated Statements of Cash Flows for the 26 6
weeks ended August 3, 2002 and August 4, 2001
Condensed Consolidated Statement of Shareholders' 7
Equity for the 26 weeks ended August 3, 2002
Notes to Condensed Consolidated Financial Statements 8-11
Item 2 - Management's Discussion and Analysis of Financial 12-19
Condition and Results of Operation
Item 3 - Quantitative and Qualitative Disclosure About Market Risk 20
Part II Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24
2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Second Quarter (13 Weeks) Ended
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
August 3, August 4,
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $ 783,369 $ 791,181
Licensed department rentals and other income 3,199 3,339
----------- -----------
786,568 794,520
Costs and expenses:
Cost of sales 583,902 606,236
Selling, general and administrative expenses 157,233 143,574
Depreciation and amortization expenses 20,707 23,234
----------- -----------
761,842 773,044
Earnings from operations 24,726 21,476
Interest expense - net 12,784 17,153
----------- -----------
Earnings from operations before
income taxes 11,942 4,323
Provision for income taxes 4,737 1,729
----------- -----------
Net earnings $ 7,205 $ 2,594
=========== ===========
Net earnings per share of common stock:
Basic: $ 0.25 $ 0.09
=========== ===========
Diluted: $ 0.25 $ 0.09
=========== ===========
Weighted average number of common shares outstanding:
Basic: 28,803 28,699
Diluted: 29,320 28,808
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (26 Weeks) Ended
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
August 3, August 4,
2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $ 1,512,133 $ 1,573,005
Licensed department rentals and other income 6,323 6,500
----------- -----------
1,518,456 1,579,505
Costs and expenses:
Cost of sales 1,127,741 1,213,040
Selling, general and administrative expenses 310,514 286,929
Depreciation and amortization expenses 41,609 46,842
----------- -----------
1,479,864 1,546,811
Earnings from operations 38,592 32,694
Interest expense-net 25,870 35,113
----------- -----------
Earnings (loss) from operations before
income taxes 12,722 (2,419)
Provision (credit) for income taxes 5,045 (969)
----------- -----------
Earnings (loss) before accounting change 7,677 (1,450)
----------- -----------
Cumulative effect of accounting change (186,052)
----------- -----------
Net earnings (loss) $ (178,375) $ (1,450)
=========== ===========
Basic earnings (loss) per share of common stock:
Earnings (loss) before cumulative effect of accounting change $ 0.27 $ (0.05)
Cumulative effect of accounting change $ (6.47)
----------- -----------
Net earnings (loss) $ (6.20) $ (0.05)
=========== ===========
Diluted earnings (loss) per share of common stock:
Earnings (loss) before cumulative effect of accounting change $ 0.26 $ (0.05)
Cumulative effect of accounting change (6.36)
----------- -----------
Net earnings (loss) $ (6.10) $ (0.05)
=========== ===========
Weighted average number of common shares outstanding:
Basic: 28,768 28,699
Diluted: 29,265 28,699
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Second Quarter as of Fiscal Year End
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands) (UNAUDITED) (UNAUDITED)
August 3, August 4, February 2,
ASSETS 2002 2001 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 35,869 $ 60,159 $ 30,169
Receivables, less allowance for losses of
$3,448, $2,715 and $3,220, respectively
53,680 50,129 48,738
Merchandise inventories 611,192 669,285 613,911
Other current assets 23,373 36,383 15,840
---------- ---------- ----------
Total current assets 724,114 815,956 708,658
Other assets and deferred charges 10,974 14,150 11,185
Intangible assets - net 22,715 29,498 22,119
Goodwill - net 188,538 186,052
Property and equipment, net of accumulated
depreciation of $690,470, $614,486 and
$651,853; impairment reserve of $11,121, $14,951
and $13,344, respectively 841,129 930,062 892,022
---------- ---------- ----------
Total assets $1,598,932 $1,978,204 $1,820,036
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 30,853 $ 210,000 $ 47,808
Accounts payable - trade 281,683 273,863 255,630
Accrued compensation and related taxes 42,142 37,133 45,145
Deferred taxes and other accrued liabilities 130,539 137,797 143,906
Accrued income and other taxes 25,876 25,259 23,249
Current portion of long-term obligations and leases 7,621 82,043 79,942
---------- ---------- ----------
Total current liabilities 518,714 766,095 595,680
Long-term obligations and leases, less current portion 532,744 509,355 505,467
Other long-term obligations 4,370 23,409 6,199
Deferred income taxes 29,811 19,000 22,642
Shareholders' equity:
Common stock 308 307 306
Additional paid-in capital 387,135 384,948 384,745
Retained earnings 166,100 315,340 345,247
Less treasury stock (40,250) (40,250) (40,250)
---------- ---------- ----------
Total shareholders' equity 513,293 660,345 690,048
---------- ---------- ----------
Total liabilities and shareholders' equity $1,598,932 $1,978,204 $1,820,036
========== ========== ==========
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (26 weeks) Ended
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
August 3, August 4,
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Earnings (loss) before accounting change $ 7,677 $ (1,450)
Adjustments to reconcile earnings (loss) before accounting change to net
cash used in operating activities:
Depreciation and amortization 41,609 46,842
Provision for losses on receivables 176 168
Gain on sale of property and equipment (769) (900)
Deferred income taxes 10,789 21,626
Change in assets and liabilities:
Receivables (5,118) 7,284
Merchandise inventories 2,719 44,640
Other current assets (4,985) (22,869)
Other assets and intangibles 653 1,340
Accounts payable 26,053 (4,312)
Accrued liabilities 3,344 (14,640)
- ------------------------------------------------------------------------------------------------------------------------------
Net Cash provided by operating activities 82,148 77,729
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (10,451) (5,557)
Proceeds from the sale of property and equipment 9,240 6,919
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (1,211) 1,362
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from debt borrowings 37,471 310,000
Net payments of debt and capital lease obligations (112,317) (356,603)
Debt issuance costs (1,380) (7,663)
Change in common stock from stock options 989
- ------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (75,237) (54,266)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,700 24,825
Cash and cash equivalents at beginning of period 30,169 35,334
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 35,869 $ 60,159
- ------------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ 18 $ 64
Capital lease obligations terminated $ 11,000
See notes to condensed consolidated financial statements
6
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands) (UNAUDITED)
Common Stock Treasury Stock Total
------------ Additional -------------- -----
Paid-in Retained
Shares Amount Capital Earnings Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT FEBRUARY 2, 2002 30,628 $ 306 $ 384,745 $ 345,247 (1,904) $ (40,250) 28,724 $ 690,048
Net loss (178,375) (178,375)
Issuance of restricted stock 50 1 980 (981) 50
Sales of common stock under option
plans 104 1 988 104 989
Income tax benefit related to stock
options 422 422
Restricted stock expense 209 209
---------------------------------------------------------------------------------------------
BALANCES AT AUGUST 3, 2002 30,782 $ 308 $ 387,135 $ 166,100 (1,904) $ (40,250) 28,878 $ 513,293
=============================================================================================
See notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies:
The Company's fiscal 2001 Annual Report on Form 10-K contains a summary of
significant accounting policies which includes the consolidated financial
statements and the notes to the consolidated financial statements. The same
accounting policies are followed in the preparation of interim reports. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the fiscal year ended February 2, 2002.
Reclassifications:
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Recent Pronouncements:
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities". SFAS No. 146
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Therefore, SFAS No. 146
eliminates the definition and requirements for recognition of exit costs in EITF
No. 94-3. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect the adoption of this statement to have a material impact on its
consolidated financial statements.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets", effective February 3, 2002. Under
SFAS No. 142, the Company no longer amortizes goodwill and other intangible
assets with indefinite useful lives. Instead, the carrying value is evaluated
for impairment on an annual basis. During the quarter ended August 3, 2002,
based on the analysis of an independent appraiser, the Company completed its
assessment of the impairment of goodwill of the Pamida retail segment in
accordance with the guidelines provided by SFAS No. 142. The fair value of the
Pamida retail segment was determined by an independent appraiser based on a
combination of a discounted cash flow analysis and an analysis of market prices
of other retail companies. The fair values of the underlying assets and
liabilities were determined by an independent appraiser using standard valuation
practices, including income capitalization, sales comparisons, market rent
analysis, relief from royalty and replacement cost. As a result of this
assessment, the Company recorded a charge of $186.1 million related to the write
down of all goodwill recorded on the Company's balance sheet. The Company has
received a report from an independent appraiser containing an analysis of
intangible assets with indefinite lives, which primarily consist of a trademark
associated with the Pamida retail segment. No impairment was recorded as a
result of this assessment.
8
The results for periods prior to adoption of SFAS No. 142 have not been
restated. The following table reflects consolidated results from operations
(before the effect of accounting change) as if the adoption of SFAS No. 142 had
occurred on February 4, 2001.
(In thousands, except per share data) Second Quarter (13 Weeks) Ended Year to Date (26 Weeks) Ended
----------------- ---------------- -------------- -----------------
August 3, 2002 August 4, 2001 August 3, August 4, 2001
2002
----------------- ---------------- -------------- -----------------
Earnings (loss) before accounting change:
Reported earnings (loss) before accounting change $ 7,205 $ 2,594 $ 7,677 $ (1,450)
Goodwill and trademark amortization
net of tax 1,277 2,539
----------------- ---------------- -------------- -----------------
Proforma $ 7,205 $ 3,871 $ 7,677 $ 1,089
================= ================ ============== =================
Basic earnings (loss) per share before accounting change:
Earnings (loss) before accounting change:
As reported $ 0.25 $ 0.09 $ 0.27 $ (0.05)
Goodwill and trademark amortization
net of tax 0.04 0.09
----------------- ---------------- -------------- -----------------
Proforma $ 0.25 $ 0.13 $ 0.27 $ 0.04
================= ================ ============== =================
Diluted earnings (loss) per share before accounting change:
Earnings (loss) before accounting change:
As reported $ 0.25 $ 0.09 $ 0.26 $ (0.05)
Goodwill and trademark amortization
net of tax 0.04 0.09
----------------- ---------------- -------------- -----------------
Proforma $ 0.25 $ 0.13 $ 0.26 $ 0.04
- ------------------------------------------------------- ================= ================ ============== =================
The following table categorizes intangible assets by major asset class as of
February 2, 2002 and August 3, 2002:
- ----------------------------------------------------- ------------------------------------ -----------------------------------
(In thousands) February 2, 2002 August 3, 2002
------------------------------------ -----------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ------------------- --------------- -------------------
Goodwill (Pamida retail segment) $ 198,696 $ (12,644) $ $
================ =================== =============== ===================
Intangible assets with indefinite lives:
Trademark $ 7,800 $ (506) $ 7,294 $
================ =================== =============== ===================
Intangible assets with finite lives:
Debt issuance costs $ 11,403 $ (4,693) $ 12,782 $ (6,213)
Customer lists and other* 11,883 (3,768) 13,204 (4,352)
---------------- ------------------- --------------- -------------------
$ 23,286 $ (8,461) $ 25,986 $ (10,565)
- ----------------------------------------------------- ================ =================== =============== ===================
* Customer lists and other is principally composed of lists of prescription drug
customers that the Company has acquired through our retail health operations.
Estimated fiscal year amortization expense is as follows: 2002 - $4.3 million;
2003 - $3.7 million; 2004 - $1.1 million; 2005 - $0.8 million; 2006 - $0.8
million.
Amortization expense for the quarter (13 weeks) and 26 weeks ended August 3,
2002 was $1.0 million and $2.0 million, respectively.
9
Real Estate Financing:
On March 27, 2002, the Company closed on a $50.0 million private placement
mortgage financing. The loan has a term of 10 years at an interest rate of 11
percent and is secured by 13 ShopKo stores and one distribution center.
Principal payments are based on a 25 year amortization schedule with a balloon
payment due March 2012. Prepayments are permitted subject to certain penalties.
The loan was used to retire lease liabilities associated with closed stores
controlled by affiliates of the lender, to provide additional liquidity, and to
add a layer of longer term debt to the Company's capital structure.
Restructuring Reserve:
In the fourth quarter of fiscal 2000, the Company announced a strategic
reorganization plan to close 23 ShopKo retail stores, a distribution center, and
to downsize its corporate workforce. All stores and the distribution center were
closed in the first quarter of fiscal 2001. The inventory and fixed asset
writedown reserves were recorded in the fourth quarter of fiscal 2000. The
Company utilized all of the employee severance reserve prior to fiscal 2002. For
balance sheet reporting the remainder of the reserve for the lease termination,
property carrying and other costs are reported in accrued expenses as a current
liability at August 3, 2002. During the first half of fiscal 2002, seven leases
were terminated. There are 11 remaining properties in the restructuring reserve,
with a $10.6 million reserve for asset writedowns of owned properties and a
$16.3 million reserve for lease terminations and property carrying costs which
are primarily lease payments, taxes, and costs to maintain the properties. The
Company continues to negotiate with landlords and market the closed stores.
However, due to a soft retail real estate market, sales of owned stores and
lease terminations have been slower than anticipated and could negatively impact
the reserve such that additional charges may be required. If sales of owned
stores and lease terminations do not proceed as originally expected, the reserve
is not likely to be totally utilized by the end of the fiscal year. Following is
an analysis of the change in cash payments in the restructuring reserve (in
thousands) during the first half of fiscal 2002:
Balance as of Cash Other Balance as of
Feb. 2, 2002 Payments Adjustments August 3, 2002
------------ -------- ----------- --------------
Lease termination and property carrying costs $ 32,792 $ 16,511 $ 16,281
Other costs 228 116 112
Business Segment Information:
The Company's reportable segments are based on the Company's strategic business
operating units and include a ShopKo Retail segment and a Pamida Retail segment,
each of which includes the following product categories: hardlines/home,
softlines, and retail health services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's fiscal 2001 Annual
Report on Form 10-K. The Company evaluates performance based on operating
earnings of the respective business segments.
10
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in thousands). The ShopKo Retail net sales and
total net sales include sales of the 23 ShopKo stores closed in the first
quarter of fiscal 2001. Net sales of the ShopKo closed stores for the 26 weeks
ended August 4, 2001 were $56.0 million.
Second Quarter (13 Weeks) Ended Year to Date (26 Weeks) Ended
--------------------------------------------------- -------------------------------------
August 3, 2002 August 4, 2001 August 3, 2002 August 4, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales
ShopKo Retail $ 583,283 $ 577,144 $ 1,135,753 $ 1,170,123
Pamida Retail 200,086 214,037 376,380 402,882
- ---------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 783,369 $ 791,181 $ 1,512,133 $ 1,573,005
Total net sales excluding $ 783,369 $ 791,181 $ 1,512,133 $ 1,517,029
ShopKo closed stores
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations
ShopKo Retail $ 28,634 $ 24,738 $ 53,687 $ 49,616
Pamida Retail 3,708 1,855 972 (6,567)
Corporate (7,616) (5,117) (16,067) (10,355)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations $ 24,726 $ 21,476 $ 38,592 $ 32,694
=================================================================================================================================
The Company's areas of operations are principally in the United States. No major
customer accounted for a significant amount of consolidated revenue during the
first half of fiscal 2002 and fiscal 2001.
Statement of Registrant:
The data presented herein is unaudited, but in the opinion of management,
includes all adjustments (which consist only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of the
Company and its subsidiaries at August 3, 2002 and August 4, 2001 and the
results of their operations and cash flows for the periods then ended. These
interim results are not necessarily indicative of the results of the fiscal
years as a whole because the operations of the Company are highly seasonal. The
fourth fiscal quarter has historically contributed a significant part of the
Company's earnings due to the Christmas selling season.
11
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth items from the Company's unaudited condensed
consolidated financial statements for the second quarter of fiscal 2002 and 2001
as a percentage of net sales:
Year to Date (26 Weeks)
Second Quarter Year to Date Fiscal 2001
(13 weeks) (26 weeks) ----------------------------
Fiscal Fiscal Fiscal As Excluding
2002 2001 2002 Reported Closed Stores
------ ------ --------------------------------------------
Revenues:
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other income 0.4 0.4 0.4 0.4 0.4
------- ------ --------- --------- ---------
100.4 100.4 100.4 100.4 100.4
Cost of sales 74.5 76.6 74.6 77.1 76.3
Gross margin 25.5 23.4 25.4 22.9 23.7
Selling, general and administrative expenses 20.1 20.5 18.1 18.2 18.9
Depreciation and amortization expenses 2.6 2.9 2.8 3.0 3.1
------- ------- --------- --------- ---------
22.7 21.1 23.3 21.2 22.0
Earnings from operations 3.2 2.7 2.6 2.1 2.1
Interest expense - net 1.6 2.2 1.7 2.3 2.3
------- ------- --------- --------- ---------
Earnings (loss) before income taxes 1.5 0.5 0.8 (0.2) (0.2)
Provision (benefit) for income taxes 0.6 0.2 0.3 (0.1) (0.1)
------- ------- --------- --------- ---------
Earnings (loss) before accounting change 0.9 % 0.3 % 0.5 % (0.1) % (0.1) %
------- ------- --------- --------- ---------
Cumulative effect of accounting change - - (12.3) - -
------- ------- --------- --------- ---------
Net earnings (loss) 0.9 % 0.3 % (11.8) % (0.1) % (0.1) %
======= ======= ========= ========= ========
12
The Company has two business segments: a ShopKo Retail segment and a Pamida
Retail segment. The following tables set forth items from the Company's business
segments as percentages of net sales:
Second Quarter Year to Date Year to Date (26 Weeks)
(13 weeks) (26 Weeks) Fiscal 2001
------------------------ ------------ ------------------------------
Fiscal Fiscal Fiscal As Excluding
2002 2001 2002 Reported Closed Stores
-------------------------- -------------------------------------------
SHOPKO RETAIL SEGMENT
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other
income 0.5 0.5 0.5 0.5 0.5
----------- ------------ ----------- ----------- ----------
100.5 100.5 100.5 100.5 100.5
Cost of sales 74.5 76.1 74.3 76.5 75.3
Gross margin 25.5 23.9 25.7 23.5 24.7
Selling, general and administrative
expenses 18.5 17.2 18.8 17.0 17.8
Depreciation and amortization expenses 2.6 2.9 2.7 2.8 3.0
----------- ------------ ----------- ----------- ----------
21.1 20.1 21.5 19.8 20.7
Earnings from operations 4.9 % 4.3 % 4.7 % 4.2 % 4.5 %
Year to Date
Second Quarter (26 Weeks)
------------------------
Fiscal Fiscal Fiscal Fiscal
2002 2001 2002 2001
-------------------------- ------------------------
PAMIDA RETAIL SEGMENT
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other
income 0.2 0.2 0.2 0.2
----------- ------------ ----------- -----------
100.2 100.2 100.2 100.2
Cost of sales 74.8 78.0 75.5 78.9
Gross margin 25.2 22.0 24.5 21.1
Selling, general and administrative
expenses 20.8 18.3 21.6 19.7
Depreciation and amortization
expenses 2.7 3.0 2.9 3.3
----------- ------------ ----------- -----------
23.6 21.3 24.5 22.9
Earnings (loss) from operations 1.9 % 0.9 % 0.3 % (1.6) %
13
Net Sales:
The following table presents the Company's consolidated net sales for the second
quarter and first half of fiscal 2002 and fiscal 2001:
SECOND QUARTER (13 % INCREASE/
------------------ -----------
WEEKS) (DECREASE)
------ ----------
-----------------------------------------------
FISCAL FISCAL
2002 2001 TOTAL COMP**
------- ------ ----- ------
ShopKo Retail $ 583.3 $ 577.2 1.1% 1.1%
Pamida Retail* 200.1 214.0 (6.5)% (5.2)%
-----------------------------------------------
Consolidated $ 783.4 $ 791.2 (1.0)% (0.6)%
===============================================
YEAR TO DATE (26 WEEKS) % INCREASE/
----------------------- -----------
(DECREASE)
----------
----------------------------------------------------
FISCAL FISCAL
2002 2001 TOTAL *** COMP **
--------- --------- --------- -------
ShopKo Retail $ 1,135.7 $ 1,170.1 (2.9)% 1.9%
Pamida Retail* 376.4 402.9 (6.6)% (5.3)%
----------------------------------------------------
Consolidated $ 1,512.1 $ 1,573.0 (3.9)% 0.0%
====================================================
* Changes in store sales are exclusive of layaway sales which are
immaterial.
** Changes in comparable store sales are based upon those stores open
for the entire preceding fiscal year.
*** ShopKo division reflects sales from 23 locations closed in the
first quarter of 2001 which were not replaced. Pamida division
reflects sales from 5 locations closed which were not replaced.
The 1.1 percent increase in the ShopKo comparable store sales during the second
quarter was a result of strong sales in retail health services and increased
promotional sales, partially offset by substantially lower clearance activity.
The 5.2 percent decrease in the Pamida comparable store sales reflected lower
advertised sales partially offset by strong pharmacy sales. The Company believes
the soft retail environment, unseasonable weather and increased competition in
certain of our markets negatively affected sales. The Company expects a
continuation of most of these trends for the rest of the fiscal year.
The 1.9 percent increase in the ShopKo comparable store sales during the first
half of fiscal 2002 was a result of strong sales in retail health services and
advertised sales, partially offset by decreased clearance sales. The 5.3 percent
decrease in the Pamida comparable store sales during the first half of fiscal
2002 was a result of lower advertised sales partially offset by positive sales
in retail health services.
14
The Company's store activity is summarized below:
26 Weeks Ended Year Ended
August 3, 2002 August 4, 2001 February 2, 2002
-------------- -------------- ----------------
SHOPKO STORES
Beginning number of stores 141 141* 141
Openings 0 0 0
Closings 0 0 0
---- ---- ----
Ending number of stores 141 141 141
PAMIDA STORES
Beginning number of stores 225 229 229
Openings 0 0 0
Closings 1 0 4
---- ---- ----
Ending number of stores 224 229 225
* ShopKo store count reflects the 23 closings announced on January
31, 2001. The actual closings occurred in the first quarter of
fiscal 2001.
Gross Margin:
Consolidated gross margin as a percent of net sales for the second quarter was
25.5 percent compared to 23.4 percent for the same period last year.
Consolidated gross margin dollars increased 7.9 percent to $199.5 million for
the same period. ShopKo's gross margin as a percent of net sales was 25.5
percent for the second quarter compared with 23.9 percent for the second quarter
last year. ShopKo's gross margin dollars increased 8.0 percent to $148.9 million
for the same period. The improvement was primarily attributable to the increased
margins on advertised sales and better sell-through of advertised merchandise,
reducing the need for clearance. Pamida's gross margin as a percent of net sales
was 25.2 percent in the second quarter compared with 22.0 percent last year.
Pamida's gross margin dollars increased 7.4 percent to $50.5 million for the
same period. The improvement was primarily attributable to improvements in
merchandise margin rates as well as lower costs of distribution and reduced
shrink expense.
Consolidated gross margin as a percent of net sales for the first half of fiscal
2002 was 25.4 percent compared to 22.9 percent for the same period last year.
Excluding closed stores, the gross margin was 23.7 percent for the same period
last year. ShopKo's gross margin as a percent of net sales for the same period
was 25.7 percent compared to 23.5 percent (24.7 percent excluding closed stores)
for the same period last year. ShopKo's gross margin improvement was a result of
better merchandise margin rates. Pamida's gross margin for the first half of
fiscal 2002 was 24.5 percent compared to 21.1 percent for the same period last
year. Pamida's gross margin improvement was a result of better merchandise
margin rates and reduced distribution and shrink expense, partially offset by
lower vendor allowances. The Company believes that better inventory management
is benefiting gross margin in both divisions.
The Company uses the LIFO method for substantially all inventories. There was no
LIFO charge or credit for the quarters ended August 3, 2002 and August 4, 2001.
If the first-in, first-out (FIFO) method had been used, the Company's
inventories would have been $2.9 million, $19.1 million, and $2.9 million higher
at August 3, 2002, August 4, 2001 and February 2, 2002, respectively.
15
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expenses as a percent of net
sales for the second quarter were 20.1 percent compared with 18.1 percent last
year. ShopKo's selling, general and administrative expenses as a percent of net
sales for the second quarter were 18.5 percent compared to 17.2 percent last
year. Pamida's selling, general and administrative expenses for the second
quarter were 20.8 percent of net sales compared to 18.3 percent for the second
quarter last year. The increases at both divisions were primarily attributable
to increases in costs related to employee incentive plans, insurance, and
employee benefits. In addition, at Pamida, the increase as a percent of sales
was also due to lack of sales leverage.
Consolidated selling, general and administrative expenses as a percent of net
sales for the first half of fiscal 2002 were 20.5 percent compared with 18.2
percent last year (18.9 percent excluding ShopKo's closed stores). ShopKo's
selling, general and administrative expenses as a percent of net sales for the
first half of fiscal 2002 were 18.8 percent compared to 17.0 percent (17.8
percent excluding ShopKo's closed stores) for the same period last year.
Pamida's selling, general and administrative expenses as a percent of net sales
were 21.6 percent for the first half of fiscal 2002 compared to 19.7 percent
last year. The increases at both divisions were primarily attributable to
increases in costs related to employee incentive plans, insurance, and employee
benefits, as well as one time expense obligations relating to employment
contracts and severance agreements.
Depreciation and Amortization Expense:
Consolidated depreciation and amortization expenses as a percent of net sales
for the second quarter was 2.6 percent compared to 2.9 percent last year. For
the first half of fiscal 2002, depreciation and amortization expenses as a
percent of net sales was 2.8 percent compared to 3.0 percent for the first half
of fiscal 2001. The decreases for the second quarter and first half of fiscal
2002 are attributable to the Company no longer amortizing goodwill and to a
significant reduction in 2001 assets placed in service compared to prior years.
Interest Expense - Net:
Interest expense for the second quarter decreased 25.5 percent to $12.8 million
and decreased 26.3 percent to $25.9 million for the first half of the fiscal
year when compared to same periods in the prior fiscal year. This decrease is
primarily due to lower debt levels.
Income Taxes:
The Company had an effective tax rate for the second quarter and the first half
of fiscal 2002 of 39.7 percent compared with 40.0 percent for the first quarter
and first half of fiscal 2001.
16
Critical Accounting Policies and Estimates:
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the appropriate application of certain accounting policies, many of
which require management to make estimates and assumptions about future events
and their impact on amounts reported in our financial statements and related
notes. Since future events and their impact cannot be determined with certainty,
the actual results will inevitably differ from our estimates. Such differences
could be material to the financial statements.
Management believes that its application of accounting policies, and the
estimates inherently required therein, are reasonable. Management periodically
reevaluates these accounting policies and estimates in the preparation of our
financial statements and makes adjustments when facts and circumstances dictate
a change. We have identified certain critical accounting policies which are
described below.
Merchandise Inventory. Our merchandise inventory is carried at the lower
of cost or market on a last-in, first-out (LIFO) basis. The valuation of
inventories at cost requires certain management judgments and estimates,
including among others, an assessment of any excess inventory levels, cost
estimates, market value of merchandise inventory, and shrinkage rates. These
assumptions can have a significant impact on current and future operating
results and financial position.
Restructuring Reserve. In connection with the reorganization plan
announced in the fourth quarter of fiscal 2000 to close 23 Shopko retail stores,
a distribution center, and to downsize its corporate workforce, the Company
incurred a pretax charge of $125.0 million, including $67.6 million related to
inventory and property writedowns, $45.8 million related to lease termination
and property carrying costs, and $11.6 million for employee separation and other
costs. The decision to close the facilities was based on management's
determination that the long term future economic cost of continuing to operate
such facilities would be more costly than closing them. The inventory and fixed
asset writedown reserves were recorded in the fourth quarter of fiscal 2000. The
Company utilized all of the employee severance reserve prior to fiscal 2002. Of
the 12 properties remaining in the restructuring reserve at the beginning of the
quarter, one was disposed of during the second quarter bringing to seven the
number of properties disposed of during the first half of fiscal 2002.
The amount of the asset writedowns and reserves for lease termination and
property carrying costs are based in part on management's estimates as to the
timing for disposition of, sales proceeds from, and disposition costs of the
closed facilities. The Company's intention has been, and continues to be, to
relieve all obligations associated with the closed facilities. At this time, the
Company believes the reserves are adequate. However, due to a soft retail real
estate market, sales of owned stores and lease terminations have been slower
than anticipated and could negatively impact the reserve such that additional
charges may be required. As a result, the Company continues to evaluate the
adequacy of the amounts reserved as it proceeds with the disposition of the real
estate and termination of the leases.
Liquidity and Capital Resources:
The Company's liquidity requirements are met primarily by cash generated from
operations, with remaining funding requirements provided by short-term and
long-term borrowings. Cash provided by operating activities was $82.1 million
for the first half of fiscal 2002 compared to $77.7 million for the same period
last year.
17
As of August 3, 2002, the Company had $267.7 million of Senior Unsecured Notes
outstanding. These Senior Unsecured Notes have maturity dates ranging from
August 2003 to March 2022, with $167.7 million principal amount of the Senior
Unsecured Notes maturing between August 2003 and November 2004. Subject to
certain limitations set forth in our Secured Credit Facility (described below),
proceeds of the Secured Credit Facility or funds from other sources may be used
to retire or repurchase those Senior Unsecured Notes maturing during the term of
the Secured Credit Facility. During the second quarter of fiscal 2002, the
Company purchased $5 million in principal amount of the outstanding Senior
Unsecured Notes due in 2004. Payments due under the Senior Unsecured Notes could
be accelerated in the event the Company defaults on any debt obligation in
excess of $25.0 million.
In addition to the Senior Unsecured Notes, the Company had $130.9 million of
loans outstanding under its Secured Credit Facility at the end of the second
quarter of fiscal 2002 compared to $310.0 million outstanding at the end of the
second quarter of fiscal 2001.
The following schedule sets forth the Company's contractual obligations and
commercial commitments as of August 3, 2002 (in thousands):
- ------------------------------------------------- --------------- -------------- --------------- -------------- ---------------
Contractual Obligations Less than After
Total 1 year 2-3 years 4-5 years 5 years
- ------------------------------------------------- --------------- -------------- --------------- -------------- ---------------
Long-Term Debt $ 425,583 $ 2,130 $ 270,551 $ 4,180 $ 148,722
- ------------------------------------------------- --------------- -------------- --------------- -------------- ---------------
Capital Lease Obligations (1) 208,162 16,634 31,206 28,233 132,089
- ------------------------------------------------- --------------- -------------- --------------- -------------- ---------------
Operating Leases (2) 166,066 17,372 30,624 26,186 91,884
- ------------------------------------------------- --------------- -------------- --------------- -------------- ---------------
Total Contractual Cash Obligations $ 799,811 $36,136 $ 332,381 $ 58,599 $ 372,695
- ------------------------------------------------- --------------- -------------- --------------- -------------- ---------------
(1) Capital lease obligations represent the total minimum future
obligations inclusive of interest.
(2) Operating leases are the aggregate future payments for operating
leases as of August 3, 2002, excluding closed stores.
The Company has a $600.0 million senior secured revolving credit and term loan
facility ("Secured Credit Facility"), which is secured by the Company's
inventory and accounts receivable. The Secured Credit Facility provides for
revolving credit borrowings of up to $500.0 million and a term loan of $100.0
million, both of which bear interest at the bank's base rate plus 0.0% to 0.5%
or the Eurodollar rate plus a margin of 2.0% to 2.5% depending on borrowing
availability under the facility and the Company's operating cash flow. The
Secured Credit Facility terminates March 12, 2004 but the facility may be
extended for an additional year at the Company's option subject to certain
conditions. The Secured Credit Facility prohibits the payment of dividends and
repurchases of common stock, limits new indebtedness and capital expenditures
and requires the Company to meet financial performance covenants relating to
borrowing availability and minimum operating cash flows. The consequences of
failing to comply with the various covenants and requirements range from
increasing the interest rate to restrictions on cash management to default and
acceleration of the debt. The indebtedness under the Secured Credit Facility can
be declared immediately due and payable in the event other Company debt in
excess of $10.0 million is accelerated. During the second quarter of fiscal 2002
and after giving effect to the writedown of goodwill pursuant to SFAS No. 142,
the Company was in compliance with all covenants in the Secured Credit Facility.
During the first quarter of fiscal 2002, the Company closed on a $50.0 million
private placement mortgage financing. The loan has a term of 10 years at an
interest rate of 11 percent and is secured by 13 ShopKo stores and one
distribution center. Principal payments are based on a 25 year amortization
schedule with a balloon payment due March 2012. Prepayments are permitted
subject to certain penalties. The loan was used to retire five lease liabilities
associated with closed stores controlled by affiliates of the lender, to provide
additional liquidity, and to add a layer of longer term debt to the Company's
capital structure.
18
The Company believes that the Secured Credit Facility, and expected cash from
operations together with continued normal vendor credit terms, will provide
sufficient liquidity to finance continuing operations, including planned capital
expenditures. However, if the Company's operating results were to deteriorate
significantly for any reason, or if the Company were to require significant
additional capital for unexpected events, the Company could suffer liquidity
problems which would materially adversely affect its results of operations and
financial condition. Furthermore, as described above, the Company has a
significant amount of debt obligations maturing in the period from August 2003
to November 2004. While the Company believes it will have sufficient liquidity
to retire these debt obligations as they mature, there can be no assurance that
the Company will be able to retire or refinance these obligations. If the
Company cannot retire or refinance these obligations as they mature, the
Company's results of operations and financial condition will be materially
adversely affected.
The Company spent $7.6 million for the second quarter and $10.5 million for the
first half of fiscal 2002 on capital expenditures compared to $5.6 million on
capital expenditures for the first half of fiscal 2001. The Company's total
capital expenditures for the fiscal year ending February 1, 2003 are anticipated
to be approximately $35.0 - $40.0 million, which is within the restrictions on
capital expenditures in the Secured Credit Facility. The expected expenditures
relate primarily to general maintenance, store remodels (including merchandise
initiatives), and pharmacy business expansion. This amount excludes any capital
that may be utilized for acquisitions of businesses. However, the Company does
not expect to pursue growth of its retail store business through new store
construction or acquisitions in fiscal 2002. Such plans may be reviewed and
revised from time to time in light of changing conditions.
In the second quarter the Board of Directors approved an $80 million capital
expenditure budget for 2003, which will be primarily focused on store remodels
(including new merchandising initiatives), general maintenance, pharmacy
business expansion, and initial development for a 2004 new store opening
program.
Inflation:
Inflation has and is expected to have only a minor effect on the results of
operations of the Company and its internal and external sources of liquidity.
Forward-Looking Statements:
Item 2 of this Form 10-Q, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, without limitation,
statements regarding earnings, growth and capital expenditure plans and capital
requirements. Such statements are subject to important factors which could cause
the Company's actual results to differ materially from those anticipated by the
forward-looking statements. These factors include: 1) the impact of recent
accounting pronouncements as described in Part I hereof; and 2) the following
which are more fully discussed in our Annual Report on Form 10-K for the fiscal
year ended February 2, 2002: a.) significant debt levels; b.) continued
availability of vendor financing; c.) failure to achieve the expected benefits
of reorganizations; d.) inability to execute future expansion plans; e.) failure
to remodel existing stores on schedule or within budget; f.) quarterly
performance fluctuations - most notably the highly seasonal nature of the
business; g.) competition h.) long-term economic effects of the September 2001
terrorist attacks; i) general economic conditions and weather; j) smooth
functioning of the distribution network; k.) labor conditions; l.) anti-takeover
provisions; and m.) pending or future litigation. These and other risks and
uncertainties as may be indicated in subsequent filings with the Securities and
Exchange Commission, are incorporated herein by reference.
19
Item 3: Quantitative and Qualitative Disclosures about Market Risk
For information as to the Company's Quantitative and Qualitative Disclosures
About Market Risk, please see the Company's Annual Report on Form 10-K for the
fiscal year ended February 2, 2002. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 2001.
20
PART II - OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
(a) The Company held its 2002 Annual Meeting of Shareholders on May 29,
2002.
(b) Votes cast for the election of directors at the 2002 Annual Meeting
were as follows:
Martha A. McPhee:
For 27,119,344
Withheld Authority 137,495
Gregory H. Wolf:
For 27,124,339
Withheld Authority 132,500
The terms of office as directors for Messrs. Eugster, Girard, Kramer, Turner,
and Watson continued after the 2002 Annual Meeting of Shareholders.
(c) Votes cast to ratify the appointment of Deloitte & Touche LLP as the
Company's auditors for the fiscal year ending February 1, 2003 were as
follows:
For 27,026,962
Against 201,031
Abstain 28,846
Broker Non-Vote 0
21
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Statement of Jeffrey C. Girard, Vice Chairman,
Finance and Administration, Interim Chief Executive
Officer, pursuant to 18 U.S.C. ss. 1350
99.2 Statement of Brian W. Bender, Senior Vice President,
Chief Financial Officer, pursuant to 18 U.S.C. ss.
1350
(b) Reports on Form 8-K.
The Company filed no Current Reports on Form 8-K with respect to the
second quarter of fiscal 2002.
22
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.
SHOPKO STORES, INC. (Registrant)
Date: September 17, 2002 By: /s/ Jeffrey C. Girard
---------------------
Jeffrey C. Girard
Vice Chairman, Finance and Administration,
Interim Chief Executive Officer
(Duly Authorized Officer of Registrant)
Date: September 17, 2002 By: /s/ Brian W. Bender
--------------------
Brian W. Bender
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer and Duly
Authorized Officer of Registrant)
23
CERTIFICATIONS
I, Jeffrey C. Girard, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ShopKo
Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: September 17, 2002
/s/ Jeffrey C. Girard
-----------------------------------------
By: Jeffrey C. Girard
Title: Vice Chairman, Finance and
Administration, Interim Chief
Executive Officer
I, Brian W. Bender, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ShopKo
Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report.
Date: September 17, 2002
/s/ Brian W. Bender
-----------------------------------------
By: Brian W. Bender
Title: Senior Vice President,
Chief Financial Officer
24
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit Sequential
Number Exhibit Page Number
- ------ ------- -----------
99.1 Statement of Jeffrey C. Girard, Vice Chairman,
Finance and Administration, Interim Chief Executive
Officer, pursuant to 18 U.S.C. ss. 1350 26
99.2 Statement of Brian W. Bender, Senior Vice President,
Chief Financial Officer, pursuant to 18 U.S.C. ss. 1350 27
25