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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 1, 2004
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 28, 2004 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 29,364,978
Exhibit Index Page 1 of Page 26
on Page 22
1
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS ENDED MAY 1, 2004
INDEX
Part I Item 1 -- Financial Statements Page
----
Condensed Consolidated Statements of Operations for the 3
13 weeks ended May 1, 2004 and May 3, 2003
Condensed Consolidated Balance Sheets as of May 1, 4
2004, May 3, 2003 and January 31, 2004
Condensed Consolidated Statements of Cash Flows for the 13 5
weeks ended May 1, 2004 and May 3, 2003
Condensed Consolidated Statement of Shareholders' 6
Equity for the 13 weeks ended May 1, 2004
Notes to Condensed Consolidated Financial Statements 7-9
Item 2 -- Management's Discussion and Analysis of Financial 10-19
Condition and Results of Operations
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 -- Controls and Procedures 19
Part II Item 1 -- Legal Proceedings 20
Item 5 -- Other Information 20
Item 6 -- Exhibits and Reports on Form 8-K 20
Signatures 21
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 1, MAY 3,
2004 2003
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $ 735,033 $ 707,917
Licensed department rentals and other income 3,096 3,047
--------- ---------
738,129 710,964
Costs and expenses:
Cost of sales 551,222 525,254
Selling, general and administrative expenses 160,738 155,921
Depreciation and amortization expenses 21,500 20,971
--------- ---------
733,460 702,146
Earnings from operations 4,669 8,818
Interest expense 8,568 10,635
--------- ---------
Loss before income taxes (3,899) (1,817)
Income tax benefit (1,520) (722)
--------- ---------
Net loss $ (2,379) $ (1,095)
========= =========
Net loss per share of common stock:
Basic and diluted: $ (0.08) $ (0.04)
========= =========
Weighted average number of common shares outstanding:
Basic and diluted: 29,210 28,930
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 1, MAY 3, JANUARY 31,
ASSETS 2004 2003 2004 *
- --------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Current assets:
Cash and cash equivalents $ 28,289 $ 31,658 $ 22,786
Receivables, less allowance for losses of $2,579
$2,689 and $2,705, respectively 52,951 50,627 62,808
Merchandise inventories 644,244 601,410 569,315
Other current assets 10,726 13,002 10,874
------------ ----------- ------------
Total current assets 736,210 696,697 665,783
Other assets and deferred charges 7,660 12,540 7,584
Intangible assets, net of accumulated amortization of $11,389, $15,061 25,480 20,621 23,629
and $10,771 respectively
Property and equipment, net of accumulated
depreciation of $817,464, $742,094 and
$796,083; impairment reserve of $13,825, $16,985
and $14,032, respectively
770,518 790,321 781,428
------------ ------------ ------------
Total assets $ 1,539,868 $ 1,520,179 $ 1,478,424
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 117,423 $ 75,707 $ 82,270
Accounts payable -- trade 311,149 271,778 253,313
Accrued compensation and related taxes 31,433 33,183 35,509
Deferred taxes and other accrued liabilities 103,392 106,220 112,291
Accrued income and other taxes 31,794 29,544 45,543
Current portion of long-term obligations and leases 63,179 94,354 63,797
------------ ------------ ------------
Total current liabilities 658,370 610,786 592,723
Long-term obligations and leases, less current portion 244,800 311,556 246,990
Other long-term obligations 25,158 26,488 25,206
Deferred income taxes 22,803 23,795 22,803
Shareholders' equity:
Common stock 313 310 312
Additional paid-in capital 392,403 389,446 391,976
Retained earnings 236,587 198,048 238,729
Less treasury stock (40,566) (40,250) (40,315)
------------ ------------ ------------
Total shareholders' equity 588,737 547,554 590,702
------------ ------------ ------------
Total liabilities and shareholders' equity
$ 1,539,868 $ 1,520,179 $ 1,478,424
============ ============ ============
* 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 1, MAY 3,
2004 2003
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss $ (2,379) $ (1,095)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 21,500 20,971
Gain on sale of property and equipment (595) (908)
Deferred income taxes -0- 1,882
Change in assets and liabilities:
Receivables 9,857 (1,118)
Merchandise inventories (74,929) (38,679)
Other current assets 148 743
Other assets 431 933
Accounts payable 57,836 30,612
Accrued liabilities (26,695) (42,778)
Other long-term obligations (48) 96
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (14,874) (29,341)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (10,382) (2,834)
Proceeds from the sale of property and equipment 759 1,056
Payments for pharmacy customer lists (2,470) (1,065)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,093) (2,843)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from short-term borrowings 35,153 35,685
Payments of debt and capital lease obligations (2,878) (5,649)
Sale of common stock due to exercise of stock options 446 53
Purchase of treasury stock (251) -0-
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 32,470 30,089
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,503 (2,095)
Cash and cash equivalents at beginning of period 22,786 33,753
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 28,289 $ 31,658
- ----------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Noncash investing and financial activities --
Capital lease obligations incurred $ - $ -
Capital lease obligations terminated $ - $ 3,989
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 JANUARY 31, 2004 31,225 $ 312 $ 391,976 $ 238,729 (1,908) $ (40,315) 29,317 $ 590,702
Net loss (2,379) (2,379)
Forfeiture of restricted stock (10) (117) 78 (10) (39)
Sales of common stock under 48 1 445 48 446
option plans
Income tax benefit related to 99 99
stock options
Restricted stock expense 159 159
Purchase of treasury stock (17) (251) (17) (251)
--------------------------------------------------------------------------------------------------
BALANCES AT MAY 1, 2004 31,263 $ 313 $ 392,403 $ 236,587 (1,925) $ (40,566) 29,338 $ 588,737
==================================================================================================
See notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Interim Financial Statements
The Company operates on a 52/53-week fiscal year basis. The 2004 fiscal year
will end on January 29, 2005 and the 2003 fiscal year ended January 31, 2004.
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 1, 2004 and May 3,
2003, and the results of operations and cash flows for the then ended periods.
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 2003 Annual Report on Form 10-K contains a summary of significant
accounting policies and 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 January 31, 2004.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
B. 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 related employee terminations were made 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, sixteen were disposed of in subsequent years,
leaving eight remaining properties covered by the restructuring reserve as of
the beginning of fiscal 2004.
During the first quarter of fiscal 2004, no additional leases were terminated or
owned properties sold. As of May 1, 2004, the remaining reserve for lease
termination and related property carrying costs, as well as other costs, was
$14.2 million and the remaining property write-down reserve was $11.7 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 ($13.3
million) is recorded in other long-term obligations at May 1, 2004. 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 continuing softness in the retail real estate climate. Accordingly, the
level of reserves could prove to be inadequate and additional charges may be
required. The Company
7
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.
Activity in the restructuring reserve (in thousands) during the first quarter of
fiscal 2004:
Lease termination and
property carrying costs
-----------------------
Balance as of January 31, 2004 $ 14,505
Cash Payments 296
-----------------------
Balance as of May 1, 2004 $ 14,209
=======================
C. Stock-Based Employee Compensation Plans
The Company has various stock-based employee compensation plans, which are
described more fully in Note F of the Notes to Consolidated Financial Statements
in the Company's fiscal 2003 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. Pre-tax expense related to the intrinsic value of restricted
stock was $0.1 million and $0.2 million for the quarters ended May 1, 2004 and
May 3, 2003 respectively.
The following pro forma information illustrates the effect on net earnings 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 (in thousands):
THIRTEEN WEEK PERIOD ENDED
--------------------------------
May 1, 2004 May 3, 2003
----------- -----------
Net loss as reported $ (2,379) $ (1,095)
Add: Stock-based employee compensation expense
included in reported net loss net of related tax
effects. 74 127
Deduct: Total stock-based employee compensation
expense determined under fair value method
for all option awards, net of related tax effects (442) (117)
----------------------------------
Pro forma net loss $ (2,747) $ (1,085)
==================================
Net loss per share:
Basic and diluted -- as reported $ (0.08) $ (0.04)
Basic and diluted -- pro forma $ (0.09) $ (0.04)
8
D. 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 2003 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 1, 2004 MAY 3, 2003
===================================================================================================
Net sales
ShopKo Retail $ 552,799 $ 530,527
Pamida Retail 182,234 177,390
- ---------------------------------------------------------------------------------------------------
Total net sales $ 735,033 $ 707,917
- ---------------------------------------------------------------------------------------------------
Earnings (loss) from operations
ShopKo Retail $ 13,845 $ 15,852
Pamida Retail (2,438) (1,372)
Corporate (6,738) (5,662)
- ---------------------------------------------------------------------------------------------------
Earnings from operations $ 4,669 $ 8,818
===================================================================================================
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 2004 and fiscal 2003.
E. 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 $10.0 million as of May 1, 2004.
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY:
ShopKo Stores, Inc. is a customer-driven retailer of quality goods and services
in two distinct market environments. Headquartered in Green Bay, Wisconsin, the
company operates 359 stores in 23 states throughout the Midwest, Western
Mountain and Pacific Northwest. One hundred forty-one multi-department ShopKo
stores are located in mid-sized to larger cities and 218 convenient one-stop
Pamida stores provide Hometown Value to customers in smaller communities of
rural America.
During the last year the Company has focused on generating positive sales
growth, improving profitability, and reducing debt levels. In addition, fiscal
2004 capital expenditures are planned to increase in support of the Company's
business goals and are primarily associated with store remodels, consolidation
of the Omaha Distribution Centers, expanding the Company's retail health
business, and improving its information technology infrastructure.
In the first quarter of fiscal 2004, consolidated sales increased 3.8 percent to
$735.0 million compared with $707.9 million last year. Consolidated comparable
store sales for the first quarter increased 3.9 percent. The ShopKo division's
comparable store sales increased 4.2 percent due to more promotional events and
advertising. For the fifth consecutive quarter, Pamida continued to build sales
momentum with first quarter comparable store sales at a positive 3.3 percent,
and total sales increasing 2.7 percent. The Retail Health category has become an
increasing percentage of the Company's sales. In the first quarter of fiscal
2004, retail health sales made up 32.3% and 19.1% of ShopKo and Pamida retail
segment sales, respectively.
Consolidated gross margin as a percent of sales was 25.0 percent compared with
25.8 percent last year. This decrease was primarily attributable to increased
promotional activity in the ShopKo division, partially offset by improved shrink
performance and, at the Pamida division, the comparison was affected by a first
quarter fiscal 2003 reduction in inventory shrinkage provision. Otherwise,
Pamida's gross margin rate in the first quarter of fiscal 2004 would have been
flat compared with last year.
Consolidated selling, general and administrative expenses (SG&A) as a percent of
sales for the first quarter were 21.9 percent compared with 22.0 percent last
year. The decrease in SG&A as a percent of sales was primarily attributable to
sales leverage.
Interest expense was $8.6 million compared with $10.6 million last year, a
reduction of 19.4 percent, due primarily to lower debt levels. Debt declined by
$56.2 million from the first quarter of fiscal 2003.
Net loss for the first quarter was $2.4 million compared with a net loss of $1.1
million last year. Diluted loss per share was $0.08 compared with a loss per
share of $0.04 last year. The Company's increased promotional efforts generated
additional customer traffic and sales, but did not deliver adequate gross margin
dollars.
Capital expenditures were $10.4 million compared with $2.8 million last year.
The increase was related to remodeling activity in both divisions and the Omaha
distribution center expansion. Inventory levels increased by $42.8 million
compared with the first quarter of last year, due in part to expanded
merchandising assortments, deeper in-stock conditions at the ShopKo
10
division's stores, and inventory investments in Pamida pharmacies. Inventory
management continues to be a focus in an effort to maintain the appropriate
inventory levels while maximizing sales. The ShopKo division plans to reduce its
inventory during the second quarter through decreased purchases in selected
departments. Accounts payable increased by a similar amount due to the higher
levels of inventory and the timing of certain payments related to pharmacy
payables, relative to the quarter end date.
The retail industry is highly competitive and the ShopKo division competes in
most of its markets with a variety of national and regional retailers. Pamida's
competition varies by market, which includes other general merchandise
retailers, supermarkets, drug and specialty stores, and mail order merchants.
Generating profitable sales growth remains a Company priority. The Company
expects to continue to be challenged by competitor store openings for the
foreseeable future. The Company has undertaken and continues to take actions to
contend with the competition and drive sales. Such actions include merchandising
initiatives and advertising strategies as well as investments in remodeling and
development plans, which include the addition of pharmacies to certain existing
Pamida stores, the opening of new Pamida stores, and the development and opening
of Shopko freestanding drug stores. While there can be no assurance that such
efforts will succeed, the Company is encouraged by the positive sales growth and
increased store traffic experienced in the first quarter of fiscal 2004.
The following table sets forth items from the Company's unaudited condensed
consolidated financial statements for the first quarter of fiscal 2004 and
fiscal 2003 as a percentage of net sales:
FIRST QUARTER
(13 WEEKS)
--------------------------
FISCAL FISCAL
2004 2003
--------------------------
Revenues:
Net sales 100.0 % 100.0 %
Licensed department rentals and other income 0.4 0.4
--------- ----------
100.4 100.4
Cost of sales 75.0 74.2
Gross margin 25.0 25.8
Selling, general and administrative expenses 21.9 22.0
Depreciation and amortization expenses 2.9 3.0
--------- ----------
24.8 25.0
Earnings from operations 0.6 1.2
Interest expense 1.1 1.5
--------- ----------
Loss before income taxes (0.5) (0.3)
Income tax benefit (0.2) (0.1)
--------- ----------
Net loss (0.3) % (0.2) %
========= ==========
11
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
2004 2003
-------------------------------
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 75.1 74.3
Gross margin 24.9 25.7
Selling, general and administrative expenses 20.1 20.4
Depreciation and amortization expenses 2.8 2.8
------------- ------------
22.9 23.2
Earnings from operations 2.5 % 3.0 %
============= ============
FIRST QUARTER
(13 WEEKS)
--------------------------------
FISCAL FISCAL
2004 2003
--------------------------------
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 74.6 73.9
Gross margin 25.4 26.1
Selling, general and administrative expenses 23.6 23.7
Depreciation and amortization expenses 3.3 3.3
------------- ------------
26.9 27.0
Loss from operations (1.3) % (0.7) %
============= ============
12
NET SALES:
The following table presents the Company's consolidated net sales for the first
quarter of fiscal 2004 and fiscal 2003:
FIRST QUARTER % INCREASE
--------------- ------------
(13 WEEKS)
----------
------------------------------------------------------------
FISCAL FISCAL
2004 2003 TOTAL ** COMP*
-------- -------- ---------- --------
ShopKo Retail $ 552.8 $ 530.5 4.2% 4.2%
Pamida Retail 182.2 177.4 2.7% 3.3%
------------------------------------------------------------
Consolidated $ 735.0 $ 707.9 3.8% 3.9%
============================================================
* Comparable store sales represent sales of those stores open
during both fiscal years and do not include sales from the
ShopKo wholesale optical lab.
** Pamida division reflects sales from seven locations which were
closed in fiscal 2003 and not replaced. Two new Pamida
locations were opened in fiscal year 2003.
The 4.2 percent increase in ShopKo comparable store sales during the first
quarter was primarily the result of increased promotional efforts (including
additional events and advertising as well as aggressive pricing on
traffic-driving consumables), and merchandising initiatives instituted in prior
quarters. Changes in ShopKo comparable store sales in the first quarter of
fiscal 2004 by category were as follows: Hardlines/Home, 5.8%; Softlines, 3.5%;
and Retail Health, 2.1%. The 3.3 percent increase in Pamida comparable store
sales was driven by increased pharmacy sales due mostly to purchases of customer
pharmacy files into existing pharmacies. Changes in Pamida comparable store
sales in the first quarter of fiscal 2004 by category were as follows: Pharmacy,
23.8%; Hardlines, 0.4%; and Softlines, (8.8)%.
13
The Company's store activity is summarized below:
13 Weeks Ended
---------------------- Year Ended
May 1, May 3, January 31,
2004 2003 2004
---- ---- ----
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 218 223 223
Openings 0 0 2
Closings 0 1 7
------------------------------------------
Ending number of stores 218 222 218
==========================================
During the quarter, the Company decided not to renew a lease of a ShopKo store
in Nevada which will be closed during the second quarter. The Company does not
currently intend to replace the store.
GROSS MARGIN:
Consolidated gross margin dollars increased 0.5 percent to $183.8 million in the
first quarter of fiscal 2004 from $182.7 million for the same period last year.
Consolidated gross margin, as a percent of net sales for the first quarter of
fiscal 2004, was 25.0 percent compared with 25.8 percent for the same period
last year. The Company experienced compressed merchandise margins attributable
to heavier promotions in the ShopKo division.
ShopKo's gross margin dollars increased 0.8 percent to $137.6 million in the
first quarter of fiscal 2004 from $136.4 million for the same period last year.
ShopKo's gross margin, as a percent of net sales was 24.9 percent compared with
25.7 percent for the same period last year. The percent decrease was primarily
due to increased promotional activity (104 basis points), partially offset by
reduced shrink expense (28 basis points). Pamida's gross margin dollars was
basically unchanged at $46.2 million in the first quarter of fiscal 2004
compared with the same period last year. But as a percent of sales, Pamida's
gross margin was 25.4 percent in the first quarter of fiscal 2004 compared with
26.1 percent for the same period last year. The decrease was primarily due to a
reduction in inventory shrinkage provision in the first quarter of fiscal 2003.
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 1,
2004 and May 3, 2003. There was no difference between the LIFO and FIFO cost
methods at May 1, 2004, May 3, 2003 and January 31, 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Consolidated selling, general and administrative dollars increased but expenses
as a percent of net sales for the first quarter of fiscal 2004 were 21.9 percent
compared with 22.0 percent last year. The rate improvement was primarily
attributable to sales increasing at a faster rate than the increase in expense
dollars.
ShopKo's selling, general and administrative expenses as a percent of net sales
for the first quarter of fiscal 2004 were 20.1 percent compared with 20.4
percent last year. The rate improvement was attributable to increased sales and
disciplined store expense management. Pamida's selling, general and
administrative expenses for the first quarter of fiscal 2004 were 23.6
14
percent of net sales compared with 23.7 percent for the first quarter last year
due to sales leveraging.
DEPRECIATION AND AMORTIZATION EXPENSE:
Consolidated depreciation and amortization expenses were $21.5 million for the
first quarter of fiscal 2004 compared with $21.0 million for the same period
last year.
INTEREST EXPENSE:
Interest expense for the first quarter of the fiscal year decreased 19.4 percent
to $8.6 million when compared with the same period in the prior fiscal year. The
$2.1 million decrease was primarily due to a $56.2 million reduction in debt
levels compared to the prior year.
INCOME TAXES:
The Company's effective tax rate for the first quarter of fiscal 2004 was 39.0
percent compared with 39.7 percent for the first quarter of fiscal 2003.
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 utilizing the average
cost method of accounting. The valuation of inventories at cost requires certain
management judgments and estimates, including among others, the assessment of
shrinkage rates, obsolescence and the impact on inventory values of using the
lower of cost or market valuation method. In valuing the inventory, the Company
undertakes physical inventories at least annually at its stores and distribution
centers and adjusts inventory values regularly to reflect market conditions and
business trends. The Company estimates losses of inventory due to shrinkage
based upon historical experience by store and by merchandise department, which
are then verified by physical inventory counts. The Company's experience has
been that there is little fluctuation or risk in the estimate of obsolescence or
lower of cost or market reserve because (i) of the Company's inventory turnover
rate, (ii) a large percentage of our inventory is returnable to our vendors for
cost and (iii) the Company is able to receive vendor support monies if product
is sold below expected
15
prices. The non-returnable inventory goes through a markdown process that
liquidates the inventory, generally at prices in excess of cost.
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, sixteen were disposed of in
subsequent years, leaving eight remaining properties covered by the
restructuring reserve as of the beginning of fiscal 2004. During the first
quarter of fiscal 2004, no additional leases were terminated or owned properties
were sold.
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
and 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 inventory recently
sold and, accordingly, are reflected as reductions of cost of sales as
merchandise is sold. Vendor allowances received for advertising or fixturing
programs reduce the Company's expense or cost for the related advertising or
fixturing program. The Company recognizes vendor allowances based on the
provisions of EITF No. 02-16, which was adopted by the Company in fiscal year
2003.
Stock Based Compensation. As discussed in the Company's fiscal 2003 Annual
Report on Form 10-K, the Company follows Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees", which does not require
recognition of expense for stock options when the exercise price of an option
equals, or exceeds, the fair market value of the common stock on the date of
grant.
The Financial Accounting Standards Board has released an Exposure Draft,
"Share-Based Payment -- An Amendment to FASB Statements No. 123 and 95", which
revises the rules governing stock option accounting. The exposure draft requires
expense recognition of stock options and certain employee stock purchase plans
in the statement of operations. The comment period ends June 30, 2004. The
effective date for this statement would be fiscal 2005. The Company will adopt
any new rules required by the FASB when they are effective. The pro forma impact
on the first quarter of fiscal 2004 of expensing unvested stock options is
disclosed, as required under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" in Note C to the unaudited Condensed Consolidated Financial
Statements.
16
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 $14.9 million for
the first quarter of fiscal 2004 compared with cash used in operating activities
of $29.3 million for the same period last year. The change in cash used in
operating activities in comparison to the first quarter of fiscal 2003 was
primarily due to a $16.1 million change in accrued liabilities from the
respective year-end balances. The decline was primarily due to reduced accrued
compensation and income tax liabilities. The Company finances a significant
portion of its operations through vendor financing. As of May 1, 2004, accounts
payable totaled $311.1 million, an increase of $39.4 million compared with last
year due to the higher levels of inventory and the timing of payments related to
certain pharmacy payables, relative to the quarter end date. The Company
currently maintains favorable terms with its vendors, however these terms could
change based on the Company's future operating performance.
As of May 1, 2004, the Company had $209.0 million of long-term debt outstanding,
consisting of $155.3 million of Senior Unsecured Notes and approximately $53.7
million of long-term notes payable. The Senior Unsecured Notes have maturity
dates in November 2004 and March 2022, with approximately $55.3 million in
principal amount of the Senior Unsecured Notes maturing November 2004. A more
detailed description of these notes is contained in Note D of the Notes to
Consolidated Financial Statements in the Company's fiscal 2003 Annual Report on
Form 10-K. Subject to certain limitations set forth in our Amended Secured
Credit Facility (described below), proceeds of the Facility or funds from other
sources may be used to retire or repurchase Senior Unsecured Notes. The Company
anticipates funding the retirement of the notes due November 2004 through a
combination of operating cash flow and available borrowing capacity under the
Amended Secured Credit Facility. 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 $117.4 million
outstanding under its Amended Secured Credit Facility at the end of the first
quarter of fiscal 2004 compared with $75.7 million outstanding at the end of the
first quarter of fiscal 2003. During the third quarter of fiscal 2003, the
Company entered into the Amended Secured Credit Facility, which is secured by
the Company's inventory and accounts receivable. The Amended 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 0.25% or the
Eurodollar rate plus a margin of 1.5% to 2.0%, depending on borrowing
availability under the facility. The company had $301.3 million in availability
at the end of the first quarter.
The Amended Secured Credit Facility terminates August 19, 2007, and limits the
payment of dividends, 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 as defined
therein. 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
Amended 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 1, 2004 and for the first quarter of fiscal 2004, the Company was in
compliance with all covenants in the Amended Secured Credit Facility.
17
The following schedule sets forth the Company's contractual obligations and
commercial commitments as of May 1, 2004 (in thousands):
CONTRACTUAL OBLIGATIONS (1) Less than 1 After
Total year 2-3 years 4-5 years 5 years
------------ ----------- ----------- ----------- ----------
Long-Term Debt $209,033 $57,670 $5,924 $3,010 $142,429
Capital Lease Obligations (2) 98,946 6,170 12,218 12,645 67,913
Operating Leases (3) 196,488 19,619 35,431 31,938 109,500
Total Contractual Cash Obligations 504,467 83,459 53,573 47,593 319,842
(1) The schedule excludes obligations of $117.4 million outstanding
under the Amended Secured Credit Facility, which are classified on
the balance sheet as short-term debt, as well as $9.6 million of
outstanding documentary letters of credit as of May 1, 2004.
(2) Capital lease obligations represent the total minimum future
obligations, net of $73.8 million of interest.
(3) Operating leases are the aggregate future payments for operating
leases as of May 1, 2004, including closed stores.
The Company believes that the Amended 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 2004. 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 debt obligations maturing in November 2004. While the Company
believes it will have sufficient liquidity to retire this debt obligation as it
matures, there can be no assurance that the Company will be able to retire or
refinance this obligation. If the Company cannot retire or refinance this
obligation as it matures, the Company's results of operations and financial
condition will be materially adversely affected.
The Company spent $10.4 million in the first quarter of fiscal 2004 on capital
expenditures compared with $2.8 million in the first quarter of fiscal 2003. The
increase is related to remodeling activity in both divisions and the Omaha
distribution center expansion. The Company's total capital expenditures for the
fiscal year ending January 29, 2005 are anticipated to be up to $100.0 million,
which is within the restrictions on capital expenditures in the Amended Secured
Credit Facility. The planned capital expenditures include investments in
technology infrastructure and merchandise initiatives, expansion of the ShopKo
distribution center in Omaha, Nebraska to accommodate the consolidation of the
Pamida distribution operations also located in Omaha into one automated facility
serving both divisions, 10 ShopKo and approximately 50 Pamida store remodels,
six new Pamida stores, and up to three ShopKo freestanding drug stores. The
plans also call for up to 11 additional pharmacies in Pamida stores.
INFLATION:
Inflation has had only a minor effect on the results of operations of the
Company and its internal and external sources of liquidity. The recent
increases in fuel costs have not significantly impacted the Company's expenses,
but further increases could adversely impact the Company's distribution and
freight expenses, as well as raise the purchase price of petroleum based
merchandise items. To the extent inflation results in changes in interest rates,
the Company's future interest expense will be affected. At this time, the
Company is not anticipating a significant financial impact on the fiscal 2004
results of operation due to inflation.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS:
Certain statements contained in Item 2, "Management's Discussion and Analysis"
and elsewhere in this Form 10-Q are forward-looking statements within the
meaning of the Private
18
Securities Litigation Reform Act of 1995. These statements discuss, among other
things, expected growth, future revenues, product development, debt reduction,
capital expenditures and deployment plans and future operating and financial
performance. The forward-looking statements are subject to risks and
uncertainties, which could cause actual results to differ materially from those
discussed in such forward-looking statements. These risks and uncertainties
include, but are not limited to: 1.) the impact of accounting pronouncements as
described herein; and 2.) the following which are more fully discussed in our
Annual Report on Form 10-K for the fiscal year ended January 31, 2004: 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.) U.S.
and international political unrest and extended economic slow down; i.) general
economic conditions and weather; j.) smooth functioning distribution network;
k.) labor conditions; l.) anti-takeover provisions in the Company's organization
documents; m.); pending or future changes in laws or regulations and n.) 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. These forward-looking statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, which may, or may not come to fruition. In addition, the Company
does not undertake any obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
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 January 31, 2004. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 2003.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure 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. 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-15 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 as of the end of the period
covered by this report.
(b) Changes in Internal Control
There have been no significant changes in the Company's internal
control over financial reporting identified in connection with the
evaluation discussed above that occurred during the quarter ended May
1, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
During fiscal 2001, alleged shareholders of the Company filed purported class
action securities lawsuits against the Company and its then chief executive
officer containing substantially identical claims in the Federal District Court
for the Eastern District of Wisconsin. The suits were consolidated into one
action (In Re ShopKo's Securities Litigation No. 01-C-1034 (E.D. Wis.)). The
action alleges the Company and its former chief executive officer, William
Podany, made various misrepresentations and omissions in public disclosures
concerning the Company between August 10, 2000 and November 9, 2000.
The parties have agreed to a settlement of this matter. The settlement is
pending court approval. Settlement of the matter will not be material to the
Company's results of operations.
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 fiscal 2004
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.
31.1 Certification of Sam K. Duncan, Chief Executive
Officer, President, pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended.
31.2 Certification of Brian W. Bender, Senior Vice
President, Chief Financial Officer, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934,
as amended.
32.1 Statement of Sam K. Duncan, Chief Executive
Officer, President, pursuant to 18 U.S.C. ss. 1350.
32.2 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 furnished one Current Report on Form 8-K during the first
quarter of fiscal 2004 as follows:
1) Form 8-K with respect to Items 7 and 12 dated March
11, 2004, providing a press release containing its
financial results for the quarter and fiscal year
ended January 31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPKO STORES, INC. (Registrant)
Date: June 10, 2004 By: /s/ Sam K. Duncan
-----------------
Sam K. Duncan
Chief Executive Officer, President
(Duly Authorized Officer of Registrant)
Date: June 10, 2004 By: /s/ Brian W. Bender
--------------------------------------
Brian W. Bender
Senior Vice President, Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer of Registrant)
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EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit
Number Exhibit
- ------- -------
31.1 Certification of Sam K. Duncan, Chief Executive
Officer, President, pursuant to Rule 13a-14(a) under
the Securities Exchange Act of 1934, as amended.
31.2 Certification of Brian W. Bender, Senior Vice
President, Chief Financial Officer, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934,
as amended.
32.1 Statement of Sam K. Duncan, Chief Executive Officer,
President, pursuant to 18 U.S.C. ss. 1350.
32.2 Statement of Brian W. Bender, Senior Vice President,
Chief Financial Officer, pursuant to 18 U.S.C. ss.
1350.
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