SHOPKO STORES INC - 10-Q Quarterly Report

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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 November 2, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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Commission file number 1-10876
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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
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(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
----- -----

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----

The number of shares outstanding of each of the issuer's classes of Common Stock
as of November 29, 2002 is as follows:

1

SHOPKO STORES, INC.

FORM 10-Q

FOR THE 13 WEEKS AND 39 WEEKS ENDED NOVEMBER 2, 2002

INDEX

2

PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements.

3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements.

4

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements

6

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

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 Statement of
Financial Accounting Standards ("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 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 4, 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 the 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 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.

The following table categorizes intangible assets by major asset class as of
February 2, 2002 and November 2, 2002:

* Customer lists and other is principally composed of lists of prescription drug
customers that the Company has acquired through its retail health operations.

Estimated fiscal year amortization expense will be as follows: 2002 - $4.2
million; 2003 - $3.7 million; 2004 - $1.1 million; 2005 - $0.9 million; 2006 -
$0.9 million.

Amortization expense for the quarter (13 weeks) and 39 weeks ended November 2,
2002 was $1.1 million and $3.1 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 November 2, 2002. During the first three quarters of fiscal 2002,
eight leases were terminated. There are 10 remaining properties in the
restructuring reserve, with a $10.5 million reserve for asset writedowns of
owned properties and a $15.2 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 will not be exhausted 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 three quarters of fiscal 2002:

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 earnings from
operations of the respective business segments.

10

Summary 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 39 weeks
ended November 3, 2001 were $56.0 million.

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 three quarters of fiscal 2002 and fiscal 2001.

Subsequent Event:

On December 10, 2002, the Company terminated the term loan portion of the
Secured Credit Facility, reducing the overall commitment under the facility from
$600 million to $500 million.

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 November 2, 2002 and November 3, 2001 and the
results of their operations and cash flows for the thirteen week and thirty-nine
week 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 third quarter of fiscal 2002 and 2001
as a percentage of net sales:

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:

13

Net Sales:

The following table presents the Company's consolidated net sales for the third
quarter and first three quarters of fiscal 2002 and fiscal 2001:

* 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 six closed locations which were not replaced.

The 2.6 percent decrease in ShopKo comparable store sales during the third
quarter was primarily the result of decreased general merchandise sales and
adjustments to the advertising calendar, partially offset by strong sales in
retail health services. The 4.9 percent decrease in Pamida comparable store
sales reflected lower general merchandise sales, partially offset by strong
pharmacy sales. The Company believes the soft retail environment, a decline in
consumer confidence and increased competition in certain of its markets
negatively affected sales. The Company expects a continuation of most of these
trends for the rest of the fiscal year.

The 0.4 percent increase in ShopKo comparable store sales during the first three
quarters of fiscal 2002 was a result of strong sales in retail health services,
partially offset by decreased general merchandise sales. The 5.2 percent
decrease in Pamida comparable store sales during the first three quarters of
fiscal 2002 was a result of lower general merchandise sales, partially offset by
strong pharmacy sales.

14

The Company's store activity is summarized below:

* 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 third quarter was
24.8 percent compared with 22.3 percent for the same period last year.
Consolidated gross margin dollars increased 7.3 percent to $190.9 million for
the same period. ShopKo's gross margin as a percent of net sales was 24.6
percent for the third quarter compared with 23.0 percent for the third quarter
last year. ShopKo's gross margin dollars increased 4.1 percent to $143.8 million
for the same period. The improvement was a result of better merchandise margin
rates. Pamida's gross margin as a percent of net sales was 25.4 percent in the
third quarter compared with 20.1 percent last year. Pamida's gross margin
dollars increased 18.5 percent to $47.1 million for the same period. The
improvement was primarily attributable to reduced shrink expense and
improvements in merchandise margin rates.

Consolidated gross margin as a percent of net sales for the first three quarters
of fiscal 2002 was 25.2 percent compared with 22.7 percent for the same period
last year. Excluding closed stores, the gross margin was 23.2 percent for the
same period last year. ShopKo's gross margin as a percent of net sales for the
same period was 25.3 percent compared with 23.3 percent (24.1 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 three quarters of fiscal 2002 was 24.8 percent compared with 20.8 percent
for the same period last year. Pamida's gross margin improvement was a result of
reduced shrink expense, better merchandise margin rates and reduced distribution
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 last-in, first-out (LIFO) method for substantially all
inventories. There was no LIFO charge or credit for the quarters ended November
2, 2002 and November 3, 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 November 2, 2002, November 3, 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 third quarter were 20.6 percent compared with 19.0 percent last
year. ShopKo's selling, general and administrative expenses as a percent of net
sales for the third quarter were 18.6 percent compared with 17.4 percent last
year. Pamida's selling, general and administrative expenses for the third
quarter were 23.1 percent of net sales compared with 20.9 percent for the third
quarter last year. The increases at both divisions were primarily attributable
to increases in costs related to employee incentive plans and insurance. In
addition, at Pamida, the increase in expense 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 three quarters of fiscal 2002 were 20.6 percent compared
with 18.5 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 three quarters of fiscal 2002 were 18.8 percent compared with 17.1
percent (17.6 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 22.1 percent for the first three quarters of fiscal 2002 compared
with 20.1 percent last year. The increases at both divisions were primarily
attributable to increases in costs related to employee incentive plans and
insurance, and 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 third quarter were 2.7 percent compared with 2.8 percent last year. For
the first three quarters of fiscal 2002, depreciation and amortization expenses
as a percent of net sales were 2.7 percent compared with 2.9 percent for the
first three quarters of fiscal 2001. The decreases for the third quarter and
first three quarters of fiscal 2002 were attributable to the Company no longer
amortizing goodwill and to a significant reduction of assets placed in service
during 2001 compared with prior years.

Interest Expense - Net:

Interest expense for the third quarter decreased 17.8 percent to $13.3 million
and decreased 23.6 percent to $39.2 million for the first three quarters of the
fiscal year when compared with the same periods in the prior fiscal year. These
decreases were primarily due to lower debt levels.

Income Taxes:

The Company's effective tax rate for the third quarter and the first three
quarters of fiscal 2002 was 39.7 percent compared with 40.0 percent for the
third quarter and first three quarters 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 11 properties remaining in the restructuring reserve at the beginning of the
quarter, one was disposed of during the third quarter bringing to eight the
number of properties disposed of during the first three quarters 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 $55.1 million
for the first three quarters of fiscal 2002 compared with $52.2 million for the
same period last year.

17

As of November 2, 2002, the Company had $256.0 million of Senior Unsecured Notes
outstanding. These Senior Unsecured Notes have maturity dates ranging from
August 2003 to March 2022, with $156.0 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 third quarter of fiscal 2002, the
Company purchased a combined total of $11.7 million in principal amount of the
outstanding Senior Unsecured Notes, $10.8 million due in 2003 and $0.9 million
due in 2004. Through the first three quarters of fiscal 2002, the Company has
purchased $16.7 million in principal amount of the outstanding Senior Unsecured
Notes, $10.8 million due in 2003 and $5.9 million 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 $179.5 million of
loans outstanding under its Secured Credit Facility at the end of the third
quarter of fiscal 2002 compared with $330.0 million outstanding at the end of
the third quarter of fiscal 2001.

The following schedule sets forth the Company's contractual obligations and
commercial commitments as of November 2, 2002 (in thousands):

(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 November 2, 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 a margin of
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,
limits new indebtedness, repurchases of common stock, 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. As of November 2, 2002 and for the third
quarter of fiscal 2002 and 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.

On December 10, 2002, the Company terminated the term loan portion of the
Secured Credit Facility, reducing the overall commitment under the facility from
$600 million to $500 million.

18

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.

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 $9.4 million in the third quarter and $19.9 million in the
first three quarters of fiscal 2002 on capital expenditures compared with $11.8
million in the first three quarters of fiscal 2001. The Company's total capital
expenditures for the fiscal year ending February 1, 2003 are anticipated to be
approximately $35.0 to $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 merchandising
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 fiscal 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.

19

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 Item 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.

20

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.

Item 4: Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by us in the reports filed
under the Securities and Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified by the SEC
(the "Exchange Act"). Within the 90 days prior to the date of filing this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company's Disclosure Committee and the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14 promulgated under the
Exchange Act. Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company as required to be included in the Company's periodic SEC
filings. Subsequent to the date of that evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls, nor were any corrective actions
required with regard to significant deficiencies and material weaknesses.

21

PART II - OTHER INFORMATION

Item 5: Other Information

During the third quarter, the Audit Committee of the Board of Directors of the
Company approved the following audit and non-audit services performed or to be
performed for us by our independent accountants, Deloitte & Touche LLP: (1)
accounting and audit-related services, including auditing our 2002 financial
statements to be included in our Annual Report on Form 10-K and reviewing our
quarterly financial statements to be included in our Quarterly Reports on Form
10-Q, (2) tax consulting and tax compliance services and (3) other audit and
compliance services related to employee benefit plans.

Item 6: Exhibits and Reports on Form 8-K

(a) Exhibits.

10.1 2002 Amendment and Restatement of the ShopKo Stores, Inc.
Senior Officers Deferred Compensation Plan, originally
effective February 1, 1992, amended and restated effective
August 21, 2002.

10.2 2002 Amendment and Restatement of the ShopKo Stores, Inc.
Directors Deferred Compensation Plan, originally effective
February 1, 1992, amended and restated effective August 21,
2002.

10.3 Employment Agreement, dated October 28, 2002 between
ShopKo Stores, Inc. and Sam K. Duncan.

99.1 Statement of Sam K. Duncan, Chief Executive Officer,
President, 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 two Current Reports on Form 8-K during the third
quarter of fiscal 2002 as follows:

1) Form 8-K dated September 17, 2002, relating to the
Certification of the Company's Quarterly Report on Form 10-Q
for the quarter ended August 3, 2002 pursuant to the SEC's
Order issued June 27, 2002.

2) Form 8-K dated October 29, 2002, providing a press release
announcing the naming of Sam K. Duncan as Chief Executive
Officer and President.

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: December 17, 2002 By: /s/ Sam K. Duncan
------------------------------------
Sam K. Duncan
Chief Executive Officer, President
(Duly Authorized Officer of Registrant)

Date: December 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, Sam K. Duncan, 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;

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;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: December 17, 2002
/s/ Sam K. Duncan
--------------------------
By: Sam K. Duncan
Title: Chief Executive Officer, President

24

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;

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;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: December 17, 2002

/s/ Brian W. Bender
-----------------------------
By: Brian W. Bender
Title: Senior Vice President, Chief
Financial Officer

25

EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT