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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 MAY 3, 2003
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
-------
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 May 30, 2003 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 29,105,032
Exhibit Index Page 1 of Page 27
on Page 25
1
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS ENDED MAY 3, 2003
INDEX
Part I Item 1 -- Financial Statements Page
----
Condensed Consolidated Statements of Operations for the 3
13 weeks ended May 3, 2003 and May 4, 2002
Condensed Consolidated Balance Sheets as of May 3, 4
2003, May 4, 2002 and February 1, 2003
Condensed Consolidated Statements of Cash Flows for 5
the 13 weeks ended May 3, 2003 and May 4, 2002
Condensed Consolidated Statement of Shareholders' 6
Equity for the 13 weeks ended May 3, 2003
Notes to Condensed Consolidated Financial Statements 7-11
Item 2 -- Management's Discussion and Analysis of Financial 12-19
Condition and Results of Operations
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 -- Controls and Procedures 20
Part II Item 5 -- Other Information 21
Item 6 -- Exhibits and Reports on Form 8-K 21
Signatures 22
Certifications 23-24
2
PART I -- FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
SHOPKO STORES, INC. AND SUBSIDIARIES FIRST QUARTER (13 WEEKS) ENDED
- -----------------------------------------------------------------------------------------------------
(In thousands, except per share data)
MAY 3, MAY 4,
2003 2002
- -----------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $ 707,917 $ 728,764
Licensed department rentals and other income 3,047 3,124
--------- ---------
710,964 731,888
Costs and expenses:
Cost of sales 525,254 543,839
Selling, general and administrative expenses 155,643 153,281
Depreciation and amortization expenses 20,971 20,902
--------- ---------
701,868 718,022
Earnings from operations 9,096 13,866
Interest expense -- net 10,913 13,086
--------- ---------
Earnings (loss) before income taxes (1,817) 780
Provision (credit) for income taxes (722) 308
--------- ---------
Earnings (loss) before accounting change (1,095) 472
Cumulative effect of accounting change -0- (186,052)
--------- ---------
Net loss $ (1,095) $(185,580)
========= =========
Net earnings (loss) per share of common stock:
Basic:
Earnings (loss) before cumulative effect of accounting change $ (0.04) $ 0.02
Cumulative effect of accounting change -0- (6.48)
--------- ---------
Net loss $ (0.04) $ (6.46)
========= =========
Diluted:
Earnings (loss) before cumulative effect of accounting change $ (0.04) $ 0.02
Cumulative effect of accounting change -0- (6.37)
--------- ---------
Net loss $ (0.04) $ (6.35)
========= =========
Weighted average number of common shares outstanding:
Basic: 28,930 28,733
Diluted: 29,155 29,210
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
SHOPKO STORES, INC. AND SUBSIDIARIES FIRST QUARTER AS OF FISCAL YEAR END
- ------------------------------------------------------------------------------------------------------
(In thousands)
MAY 3, MAY 4, FEBRUARY 1,
ASSETS 2003 2002 2003 *
- ------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Current assets:
Cash and cash equivalents $ 31,658 $ 30,385 $ 33,753
Receivables, less allowance for losses of $2,689
$3,436 and $2,611, respectively 50,627 51,240 49,509
Merchandise inventories 601,410 638,304 562,731
Other current assets 13,002 24,903 13,745
----------- ----------- -----------
Total current assets 696,697 744,832 659,738
Other assets and deferred charges 12,540 11,287 12,570
Intangible assets -- net 20,621 23,397 20,475
Property and equipment, net of accumulated
depreciation of $742,094, $670,375 and
$723,550; impairment reserve of $16,985, $13,780
and $17,129, respectively 790,321 856,443 812,184
----------- ----------- -----------
Total assets $ 1,520,179 $ 1,635,959 $ 1,504,967
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 75,707 $ 85,030 $ 40,022
Accounts payable -- trade 271,778 265,027 241,166
Accrued compensation and related taxes 33,183 39,468 44,957
Deferred taxes and other accrued liabilities 116,186 131,529 128,809
Accrued income and other taxes 29,544 26,609 49,998
Current portion of long-term obligations and leases 94,354 7,626 95,554
----------- ----------- -----------
Total current liabilities 620,752 555,289 600,506
Long-term obligations and leases, less current portion 311,556 542,988 319,577
Other long-term obligations 16,522 4,928 16,744
Deferred income taxes 23,795 27,790 19,769
Shareholders' equity:
Common stock 310 307 310
Additional paid-in capital 389,446 385,195 389,177
Retained earnings 198,048 159,712 199,134
Less treasury stock (40,250) (40,250) (40,250)
----------- ----------- -----------
Total shareholders' equity 547,554 504,964 548,371
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,520,179 $ 1,635,959 $ 1,504,967
=========== =========== ===========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------
SHOPKO STORES, INC. AND SUBSIDIARIES FIRST QUARTER (13 WEEKS) ENDED
- -------------------------------------------------------------------------------------------------------
(In thousands)
MAY 3, MAY 4,
2003 2002
- -------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Earnings (loss) before accounting change $ (1,095) $ 472
Adjustments to reconcile earnings (loss) before accounting change to net
cash provided by (used in) operating activities:
Depreciation and amortization 20,971 20,902
Provision for losses on receivables 47 50
Gain on sale of property and equipment (908) (544)
Deferred income taxes 1,882 5,148
Change in assets and liabilities:
Receivables (1,165) (2,552)
Merchandise inventories (38,679) (24,393)
Other current assets 743 (6,938)
Other assets and intangibles (132) (223)
Accounts payable 30,612 9,397
Accrued liabilities (42,778) 6,136
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (30,502) 7,455
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (2,834) (2,932)
Proceeds from the sale of property and equipment 1,056 6,581
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,778) 3,649
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from debt borrowings 35,685 74,693
Net payments of debt and capital lease obligations (5,553) (84,555)
Debt issuance costs -0- (1,376)
Change in common stock from stock options 53 350
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 30,185 (10,888)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,095) 216
Cash and cash equivalents at beginning of period 33,753 30,169
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,658 $ 30,385
- -------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Noncash investing and financial activities --
Capital lease obligations incurred $ -0- $ 18
Capital lease obligations terminated $ 3,989 $ 11,000
See notes to condensed consolidated financial statements
5
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
SHOPKO STORES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) (UNAUDITED)
Common Stock Additional Treasury Stock Total
---------------- Paid-in Retained ------------------ -----------------
Shares Amount Capital Earnings Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES AT FEBRUARY 1, 2003 30,974 $ 310 $ 389,177 $ 199,134 (1,904) $ (40,250) 29,070 $548,371
Net loss (1,095) (1,095)
Issuance of restricted stock 18 -0- 203 (203) 18 -0-
Sales of common stock under
option plans 7 -0- 53 7 53
Income tax benefit related to
stock options 13 13
Restricted stock expense 212 212
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 3, 2003 30,999 $ 310 $ 389,446 $ 198,048 (1,904) $ (40,250) 29,095 $547,554
==============================================================================================================================
See notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Interim Financial Statements
The Company operates on a 52-week fiscal year basis. The 2003 fiscal year will
end on January 31, 2004 and the 2002 fiscal year ended February 1, 2003. The
accompanying condensed consolidated financial statements have been prepared by
the Company without audit. However, the foregoing financial statements reflect
all adjustments (which include only normal recurring adjustments) which are, in
the opinion of Company management, necessary to present fairly the consolidated
financial position of the Company as of May 3, 2003 and May 4, 2002, and the
results of operations and cash flows for the first quarters (thirteen week
periods) ended May 3, 2003 and May 4, 2002.
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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. The Company's
fiscal 2002 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 1, 2003.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
B. Intangible Assets
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 fiscal
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 as of February 3, 2002 related to the write down of all goodwill
recorded on the Company's balance sheet, all of which related to the Pamida
retail segment.
In fiscal 2002, an independent appraiser prepared a valuation of the Company's
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. In the first quarter of fiscal 2003, Company
management updated the valuation using a consistent methodology, which
7
was reviewed by the same appraiser, and concluded that no impairment of these
assets has occurred.
C. 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. The inventory and fixed asset write-down
reserves were recorded in the fourth quarter of fiscal 2000. All stores and the
distribution center were closed and approximately 2,500 employees were
terminated in the first quarter of fiscal 2001. The Company utilized all of the
employee severance reserve prior to fiscal 2002. Of the 24 properties initially
covered by the restructuring reserve, six were disposed of in fiscal 2001 and
nine were disposed of in fiscal 2002, leaving nine remaining properties covered
by the restructuring reserve.
The amount of the asset write-downs 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. Due to continuing
softness in the retail real estate climate, as well as a growing number of
vacant retail properties coming on the market as the Company's competitors
continue to restructure and downsize their operations, the Company engaged a
real estate consulting firm to evaluate the obligations of the remaining four
leased closed stores and potential sales prices for the remaining five owned
closed store properties during fiscal 2002. Based on this evaluation, the
Company lowered the estimated valuations of the properties. Disposition of some
properties may also take longer than originally estimated. As a result, the
Company took an additional $5.6 million pre-tax impairment charge on the owned
properties and an additional $0.4 million charge for future lease obligations on
the leased properties during the fourth quarter of fiscal 2002.
During the first quarter of fiscal 2003, no additional leases were terminated or
owned properties sold. As of May 3, 2003, the remaining reserve for lease
termination and related property carrying costs, as well as other costs, was
$15.0 million and the remaining property write-down reserve was $16.1 million.
For balance sheet reporting purposes, the portion of the reserve for the lease
termination, property carrying and other costs to be paid in the next 12 months
is reported in accrued expenses as a current liability and the remainder ($13.9
million) is recorded in other long-term obligations at May 3, 2003. The Company
believes the reserves are adequate, and continues to negotiate lease
terminations with landlords and actively market closed stores for sale. However,
sales of owned stores and lease terminations have been slower than anticipated,
due to the unfavorable retail real estate climate described earlier.
Accordingly, the level of reserves could prove to be inadequate and additional
charges may be required. The Company will continue to evaluate the adequacy of
the amounts reserved as it proceeds with the disposition of the real estate and
termination of the leases.
8
Following is an analysis of the change in the restructuring reserve (in
thousands) during the first quarter of fiscal 2003:
Balance as of Cash Other Balance as of
February 1, 2003 Payments Adjustments May 3, 2003
---------------- -------- ----------- -----------
Lease termination and property
carrying costs $14,971 (41) 115 $15,045
Other costs 115 (115) -0-
----------------------------------------------------------------
$15,086 (41) -0- $15,045
================================================================
D. Stock-Based Employee Compensation Plans
The Company has various stock-based employee compensation plans, which are
described more fully in Note G of the Notes to Consolidated Financial Statements
in the Company's 2002 Annual Report on Form 10-K. The Company accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in results of operations for
stock option awards, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
The following pro forma information illustrates the effect on net income and
earnings per share as if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
in accounting for its employee stock options. The expense associated with
restricted stock awards has not been separately identified in the following
table, as the expense would be the same under either standard.
THIRTEEN WEEK PERIOD ENDED
---------------------------------
May 3, 2003 May 4, 2002
----------- -----------
Net loss as reported $ (1,095) $ (185,580)
Deduct: Total stock-based employee compensation expense determined
under fair value method for all option awards, net of
related tax effects 10 (444)
-------------------------------
Pro forma net loss $ (1,085) $ (186,024)
===============================
Net Loss per share:
Basic -- as reported $ (0.04) $ (6.46)
Basic -- pro forma $ (0.04) $ (6.48)
Diluted -- as reported $ (0.04) $ (6.35)
Diluted -- pro forma $ (0.04) $ (6.37)
9
E. 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 2002 Annual
Report on Form 10-K. The Company evaluates performance based on earnings from
operations of the respective business segments.
Summary financial information concerning the Company's reportable segments is
shown in the following table (in thousands).
FIRST QUARTER (13 WEEKS) ENDED
---------------------------------
MAY 3, 2003 MAY 4, 2002
Net sales
ShopKo Retail $530,527 $552,470
Pamida Retail 177,390 176,294
---------------------------------
Total net sales $707,917 $728,764
---------------------------------
Earnings (loss) from operations
ShopKo Retail $ 15,813 $ 25,053
Pamida Retail (1,372) (2,736)
Corporate (5,345) (8,451)
---------------------------------
Earnings from operations $ 9,096 $ 13,866
=================================
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 quarters of fiscal 2003 and fiscal 2002.
F. Commitments & Contingencies
The Company is contingently liable on the lease payments for two former retail
stores, which were assumed by an unrelated party. Total remaining lease
obligations for the stores are $10.7 million as of May 3, 2003. The Company also
indemnifies its directors and officers for claims that may arise in performing
their duties as directors and officers of the Company. There are no specified
limits as to the exposure of the Company, however, the Company insures against
this exposure with reputable insurance providers in amounts deemed sufficient to
cover any reasonable risk of loss.
G. Recent Accounting Pronouncements
In January 2003, the Emerging Issues Task Force ("EITF"), issued EITF Consensus
No. 02-16, "Accounting By a Customer (Including a Reseller) for Certain
Consideration Received From a Vendor", applicable to fiscal years beginning
after December 15, 2002. EITF No. 02-16 provides accounting guidance on how a
customer, including a reseller, should characterize consideration received from
a vendor and when to recognize and how to measure that consideration in its
income statement. The Company adopted EITF No. 02-16 on a prospective basis as
of February 2, 2003. EITF 02-16, as it applies to the Company, addresses the
10
recognition of certain vendor allowances and requires these allowances be
treated as a reduction of inventory cost unless specifically identified as
reimbursement for services or other costs incurred. The adoption of EITF 02-16
resulted in the deferral of certain vendor allowances into inventory cost. This
reduced earnings for the first quarter ended May 3, 2003 by approximately $0.9
million after tax or $0.03 per share. The Company believes the full year impact
on earnings will be immaterial. Additionally, the adoption of EITF 02-16
impacted certain vendor allowances resulting in a reclassification that
increased Selling, General and Administrative expenses and, correspondingly,
decreased Cost of Sales by $7.7 million for the thirteen week period ended May
3, 2003.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
It amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As of May 3, 2003, the Company has not elected to
expense stock options. The potential impact on consolidated financial statements
of expensing of stock options is disclosed in Note D of the Notes to Condensed
Consolidated Financial Statements.
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 first quarter of fiscal 2003 and 2002
as a percentage of net sales:
FIRST QUARTER
(13 WEEKS)
-----------------------
FISCAL FISCAL
2003 2002
-----------------------
Revenues:
Net sales 100.0 % 100.0 %
Licensed department rentals and other income 0.4 0.4
----- -----
100.4 100.4
Cost of sales 74.2 74.6
Gross margin 25.8 25.4
Selling, general and administrative expenses 22.0 21.0
Depreciation and amortization expenses 3.0 2.9
----- -----
25.0 23.9
Earnings from operations 1.2 1.9
Interest expense -- net 1.5 1.8
----- -----
Earnings (loss) before income taxes (0.3) 0.1
Provision (benefit) for income taxes (0.1) 0.0
----- -----
Earnings (loss) before accounting change (0.2)% 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:
FIRST QUARTER
(13 WEEKS)
------------------------
FISCAL FISCAL
2003 2002
------------------------
SHOPKO RETAIL SEGMENT
Net sales 100.0 % 100.0 %
Licensed department rentals and other income 0.5 0.5
----- -----
100.5 100.5
Cost of sales 74.3 74.1
Gross margin 25.7 25.9
Selling, general and administrative expenses 20.5 19.1
Depreciation and amortization expenses 2.8 2.8
----- -----
23.3 21.9
Earnings from operations 2.9 % 4.5 %
===== =====
FIRST QUARTER
(13 WEEKS)
------------------------
FISCAL FISCAL
2003 2002
------------------------
PAMIDA RETAIL SEGMENT
Net sales 100.0 % 100.0 %
Licensed department rentals and other income 0.2 0.2
----- -----
100.2 100.2
Cost of sales 73.9 76.2
Gross margin 26.1 23.8
Selling, general and administrative expenses 23.7 22.4
Depreciation and amortization expenses 3.3 3.2
----- -----
27.0 25.6
Loss from operations (0.7)% (1.6)%
===== =====
13
NET SALES:
The following table presents the Company's consolidated net sales for the first
quarter of fiscal 2003 and fiscal 2002:
FIRST QUARTER % INCREASE/
(13 WEEKS) (DECREASE)
------------------------------------------------------
FISCAL FISCAL
2003 2002 TOTAL *** COMP**
------- ------- --------- -------
ShopKo Retail $ 530.5 $ 552.5 (4.0)% (4.0)%
Pamida Retail* 177.4 176.3 0.6 % 1.3 %
------------------------------------------------------
Consolidated $ 707.9 $ 728.8 (2.9)% (2.7)%
======================================================
* 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.
*** Pamida division reflects sales from three closed locations which were
not replaced.
The 4.0 percent decrease in ShopKo comparable store sales during the first
quarter was primarily the result of decreased general merchandise sales as a
result of weak consumer sentiment, adjustments to the advertising calendar,
competitive openings, and price deflation in cost of goods sold, partially
offset by strong sales in retail health services. Changes in ShopKo comparable
store sales in the first quarter of fiscal 2003 by category were as follows:
Retail Health, 4.5%; Hardlines/Home, (7.8)%; and Softlines, (6.9)%. The 1.3
percent increase in Pamida comparable store sales was driven by increased
pharmacy and advertised sales, resulting from new convenience and value
merchandising and marketing efforts. Changes in Pamida comparable store sales in
the first quarter of fiscal 2003 by category were as follows: Pharmacy, 15.5%;
Hardlines, (3.2)%; and Softlines, 4.4%.
Generating sales growth is a Company priority, which will be challenging in the
current environment. The Company does not expect changes in consumer sentiment
or competitive intrusion in the near future. To address this priority, the
Company has initiated investments in infrastructure, in both organization and
technology, and is continuing forward with store development plans to focus on
our strong Retail Health segment and to strengthen the performance in
Hardlines/Home and Softlines. Moreover, the Company will continue to refine
merchandising and advertising techniques in this challenging environment. There
can be no assurance that such efforts will succeed.
14
The Company's store activity is summarized below:
13 Weeks Ended
------------------ Year Ended
May 3, May 4, February 1,
2003 2002 2003
---- ---- ----
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 223 225 225
Openings 0 0 0
Closings 1 1 2
---------------------------------
Ending number of stores 222 224 223
=================================
GROSS MARGIN:
Consolidated gross margin, as a percent of net sales for the first quarter of
fiscal 2003, was 25.8 percent compared with 25.4 percent for the same period
last year. Consolidated gross margin dollars decreased 1.2 percent to $182.7
million for the same period. The adoption of EITF No. 02-16 favorably affected
gross margin by 90 basis points, or $6.3 million. Excluding the effect of EITF
No. 02-16, the Company experienced compressed merchandise margins attributable
to heavier promotions in the ShopKo division, partially offset by reduced shrink
expense.
ShopKo's gross margin as a percent of net sales was 25.7 percent in the first
quarter compared with 25.9 percent last year. ShopKo's gross margin dollars
decreased 4.6 percent to $136.5 million for the same period, due primarily to
increased promotional sales. The adoption of EITF No. 02-16 favorably affected
gross margin by 120 basis points or $6.6 million. Pamida's gross margin as a
percent of net sales was 26.1 percent in the first quarter of fiscal 2003
compared with 23.8 percent last year. Pamida's gross margin dollars increased
10.4 percent to $46.2 million for the same period. The improvement was primarily
attributable to continued reductions in shrink expense and improvements in
merchandise margin rates. The adoption of EITF No. 02-16 adversely affected
gross margin by 20 basis points or ($0.3) million.
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 May 3,
2003 and May 4, 2002. If the first-in, first-out (FIFO) method had been used to
determine cost of inventories, the Company's inventories would have been $2.9
million higher at May 4, 2002. There was no difference between the LIFO and FIFO
cost methods at May 3, 2003 and February 1, 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Consolidated selling, general and administrative (SG&A) expenses as a percent of
net sales for the first quarter were 22.0 percent compared with 21.0 percent
last year. The adoption of EITF No. 02-16 adversely affected consolidated SG&A
by 110 basis points or $7.7 million. Excluding the effect of EITF No. 02-16, the
Company's expense rate would have improved by ten basis points over the same
period last year. The improvement is primarily attributable to reduced employee
benefit costs, partially offset by sales deleveraging.
ShopKo's selling, general and administrative expenses as a percent of net sales
for the first quarter were 20.5 percent compared with 19.1 percent last year.
The adoption of EITF No. 02-16 adversely affected SG&A by 140 basis points.
Pamida's selling, general and administrative
15
expenses for the first quarter were 23.7 percent of net sales compared with 22.4
percent for the first quarter last year, reflecting increased payroll costs
associated with pharmacy growth and higher employee benefit costs. The adoption
of EITF No. 02-16 did not have a material effect on Pamida's SG&A expense.
The difference in the effects of adopting EITF No. 02-16 between the $6.3
million in gross margin and the $7.7 million in SG&A expense, or $1.4 million,
relates to the deferred recognition of vendor allowances until the merchandise
is sold.
DEPRECIATION AND AMORTIZATION EXPENSE:
Consolidated depreciation and amortization expenses as a percent of net sales
for the first quarter were 3.0 percent compared with 2.9 percent last year. The
increase for the first quarter of fiscal 2003 was primarily attributable to
lower sales leverage.
INTEREST EXPENSE - NET:
Net interest expense for the first quarter of the fiscal year decreased 16.6
percent to $10.9 million when compared with the same period in the prior fiscal
year. The $2.2 million decrease was primarily due to a $154 million reduction in
debt levels compared to the prior year.
INCOME TAXES:
The Company's effective tax rate for the first quarter of fiscal 2003 was 39.7
percent compared with 39.5 percent for the first quarter of fiscal 2002.
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 applicable 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, lower of
cost or market value of merchandise inventory, and shrinkage rates. These
assumptions can have a significant impact on current and future operating
results and financial position.
16
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 pre-tax charge of $125.0 million related to inventory and property
write-downs, lease termination and property carrying costs, and employee
separation and other costs. The inventory and fixed asset write-down reserves
were recorded in the fourth quarter of fiscal 2000, and the Company closed all
23 stores and the distribution center in fiscal 2001. The Company utilized all
of the employee severance reserve prior to fiscal 2002. Of the 24 properties
initially covered by the restructuring reserve, six were disposed of in fiscal
2001 and nine were disposed of in fiscal 2002, leaving nine remaining properties
covered by the restructuring reserve. During the first quarter of fiscal 2003,
no additional leases were terminated or owned properties sold.
The amount of the asset write-downs 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. Due to continuing
softness in the retail real estate climate, as well as a growing number of
vacant retail properties coming on the market as the Company's competitors
continue to restructure and downsize their operations, the Company engaged a
real estate consulting firm to evaluate the obligations of the remaining four
leased closed stores and potential sales prices for the remaining five owned
closed store properties during fiscal 2002. Based on this evaluation, the
Company lowered the estimated valuations of the properties. Disposition of some
properties may also take longer than originally estimated. As a result, the
Company took an additional $5.6 million pre-tax impairment charge on the owned
properties and an additional $0.4 million charge for future lease obligations on
the leased properties during the fourth quarter of fiscal 2002.
The Company believes the reserves are adequate, and continues to negotiate lease
terminations with landlords and actively market closed stores for sale. However,
due to the unfavorable retail real estate climate described earlier, sales of
owned stores and lease terminations have been slower than anticipated.
Accordingly, the level of reserves could prove to be inadequate and additional
charges may be required. The Company will continue to evaluate the adequacy of
the amounts reserved as it proceeds with the disposition of the real estate and
termination of the leases.
Vendor Allowances. The Company records vendor allowances and discounts in
the income statement when the purpose for which those monies were designated is
fulfilled. Allowances provided by vendors generally relate to profitability of
inventory recently sold and, accordingly, are reflected as reductions of cost of
merchandise sold. Vendor allowances received for advertising or fixturing
programs reduce the Company's expense for the related advertising or fixturing
program.
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 used in operating activities was $30.5 million for
the first quarter of fiscal 2003 compared with cash provided by operating
activities of $7.5 million for the same period last year. The change in cash
provided by/used in operating activities in comparison to the first quarter of
2002 was primarily due to payments of accrued income taxes and lower accrued
compensation and related taxes. The Company finances a significant portion of
its operations through vendor financing. As of May 3, 2003, accounts payable
totaled $271.8 million. The Company currently maintains favorable terms with its
vendors, however these terms could change based on the Company's future
operating performance.
17
As of May 3, 2003, the Company had $247.5 million of Senior Unsecured Notes
outstanding. These Senior Unsecured Notes have maturity dates ranging from
August 2003 to March 2022, with approximately $147.5 million principal amount of
the Senior Unsecured Notes maturing between August 2003 and November 2004.
Subject to certain limitations set forth in our Senior Secured Revolving Credit
Facility ("Secured Credit Facility"), 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. The
Company anticipates funding the retirement of the notes due August 2003 through
a combination of operating cash flow and available borrowings under the Secured
Credit Facility. During the first quarter of fiscal 2003, the Company purchased
a combined total of $1.5 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 $75.7 million
outstanding under its Secured Credit Facility at the end of the first quarter of
fiscal 2003 compared with $185.0 million outstanding at the end of the first
quarter of fiscal 2002. The Company has available a $450.0 million 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 $450.0 million, bearing 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. On May 8, 2003, the Company reduced the revolving credit commitment from
$500.0 million to $450.0 million.
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 May 3, 2003 and for the first
quarter of fiscal 2003, the Company was in compliance with all covenants in the
Secured Credit Facility.
The following schedule sets forth the Company's contractual obligations and
commercial commitments as of May 3, 2003 (in thousands):
CONTRACTUAL OBLIGATIONS Less than 1 After
Total year 2-3 years 4-5 years 5 years
-------- ----------- --------- --------- --------
Long-Term Debt $301,462 $ 90,275 $ 61,235 $ 5,706 $144,246
Capital Lease Obligations (1) 187,639 14,325 29,868 26,481 116,965
Operating Leases (2) 180,095 19,497 33,427 30,112 97,059
Total Contractual Cash Obligations $669,196 $ 124,097 $124,530 $62,299 $358,270
(1) Capital lease obligations represent the total minimum future
obligations including interest.
(2) Operating leases are the aggregate future payments for operating
leases as of May 3, 2003, including closed stores.
The Company believes that the Secured Credit Facility, and expected cash from
operations together with continued favorable vendor credit terms, will provide
sufficient liquidity to finance continuing operations, including planned capital
expenditures, for fiscal 2003. However, if the
18
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 $2.8 million in the first quarter of fiscal 2003 on capital
expenditures compared with $2.9 million in the first quarter of fiscal 2002. The
Company's total capital expenditures for the fiscal year ending January 31, 2004
are anticipated to be approximately $70.0 to $80.0 million, which is within the
restrictions on capital expenditures in the Secured Credit Facility. The
expected expenditures relate primarily to investments in infrastructure,
especially technology. Capital also will be allocated for pharmacy growth, store
remodels (including new merchandise initiatives), and initial development of a
2004 new store opening program. However, the Company does not expect to pursue
significant growth of its retail store business through new store construction
or acquisitions in fiscal 2003. Such plans may be reviewed and revised from time
to time in light of changing conditions.
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 AND RISK FACTORS:
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. All forward-looking statements involve risks and
uncertainties. Such forward-looking statements include, without limitation,
statements regarding earnings, growth and capital expenditure plans and capital
requirements. The information under the heading "Forward-Looking Statements and
Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
February 1, 2003, which information is incorporated herein by reference,
provides cautionary statements identifying, for purposes of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, important
factors that could cause our actual results to differ materially from those
contained in the forward-looking statements, including: a.) significant debt
levels; b.) continued availability of vendor financing; c.) failure to achieve
the expected benefits of current or future 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 Company's business; g.) competition;
h.) long-term economic effects of U.S. and international political unrest and an
extended economic slowdown; i.) general economic conditions and weather; j.)
smooth functioning of the Company's distribution network; k.) labor conditions;
l.) pending or future changes in federal, state or local laws and regulations
and m.) pending or future litigation. In addition, the impact of recent
accounting pronouncements described in Item 1 of this report could cause our
actual results to differ materially from those anticipated by the
forward-looking statements. The Company undertakes no obligation to update any
forward-looking statements to reflect subsequent events or circumstances.
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 1, 2003. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 2002.
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 Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized and reported within the time periods specified
by the SEC. 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 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.
20
PART II - OTHER INFORMATION
ITEM 5: OTHER INFORMATION
During the first 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 2003 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.
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 one Current Report on Form 8-K during the first quarter
of fiscal 2003 as follows:
1) Form 8-K with respect to Items 9 and 12 dated March 13, 2003,
providing a press release containing its financial results for
the quarter and fiscal year ended February 1, 2003.
21
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: June 17, 2003 By: /s/ Sam K. Duncan
-----------------
Sam K. Duncan
Chief Executive Officer, President
(Duly Authorized Officer of Registrant)
Date: June 17, 2003 By: /s/ Brian W. Bender
-------------------
Brian W. Bender
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer and Duly
Authorized Officer of Registrant)
22
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: June 17, 2003
/s/ Sam K. Duncan
--------------------------
By: Sam K. Duncan
Title: Chief Executive Officer, President
23
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: June 17, 2003
/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 Sam K. Duncan, Chief Executive Officer,
President, 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