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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 OCTOBER 30, 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 December 3, 2004 is as follows:
Title of Each Class Shares Outstanding
- ------------------- ------------------
Common Shares 29,559,201
Exhibit Index Page 1 of Page 28
on Page 24
1
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS and 39 WEEKS ENDED OCTOBER 30, 2004
INDEX
Page
----
Part I Item 1 - Financial Statements
Condensed Consolidated Statements of Operations for the 3
13 weeks ended October 30, 2004 and November 1, 2003
Condensed Consolidated Statements of Operations for the 4
39 weeks ended October 30, 2004 and November 1, 2003
Condensed Consolidated Balance Sheets as of October 30, 5
2004, November 1, 2003 and January 31, 2004
Condensed Consolidated Statements of Cash Flows for 6
the 39 weeks ended October 30, 2004 and November 1, 2003
Condensed Consolidated Statement of Shareholders' 7
Equity for the 39 weeks ended October 30, 2004
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of Financial 11-21
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 - Controls and Procedures 22
Part II Item 6 - Exhibits 23
Signatures 23
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SHOPKO STORES, INC. AND SUBSIDIARIES THIRD QUARTER (13 WEEKS) ENDED
- ------------------------------------ ------------------------------
(In thousands, except per share data)
OCTOBER 30, NOVEMBER 1,
2004 2003
---- ----
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $ 746,391 $ 758,543
Licensed department rentals and other income 3,497 3,483
----------- -------------
749,888 762,026
Costs and expenses:
Cost of sales 554,175 566,739
Selling, general and administrative expenses 162,684 165,165
Depreciation and amortization expenses 20,916 20,490
----------- -------------
737,775 752,394
Earnings from operations 12,113 9,632
Interest expense 8,840 8,033
----------- -------------
Income before income taxes 3,273 1,599
Income tax provision 1,278 635
----------- -------------
Net income $ 1,995 $ 964
=========== =============
Net income per share of common stock:
Basic $ 0.07 $ 0.03
=========== =============
Diluted $ 0.07 $ 0.03
=========== =============
Weighted average number of common shares outstanding:
Basic 29,362 29,034
Diluted 29,683 29,379
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SHOPKO STORES, INC. AND SUBSIDIARIES YEAR TO DATE (39 WEEKS) ENDED
- ------------------------------------ -----------------------------
(In thousands, except per share data)
OCTOBER 30, NOVEMBER 1,
2004 2003
---- ----
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $ 2,257,000 $ 2,231,152
Licensed department rentals and other income 9,847 9,770
----------- -----------
2,266,847 2,240,922
Costs and expenses:
Cost of sales 1,677,679 1,654,953
Selling, general and administrative expenses 486,630 482,097
Depreciation and amortization expenses 63,574 62,068
----------- -----------
2,227,883 2,199,118
Earnings from operations 38,964 41,804
Interest expense 25,985 29,249
----------- -----------
Income before income taxes 12,979 12,555
Income tax provision 5,064 4,987
----------- -----------
Net income $ 7,915 $ 7,568
=========== ===========
Net income per share of common stock:
Basic $ 0.27 $ 0.26
=========== ===========
Diluted $ 0.27 $ 0.26
=========== ===========
Weighted average number of common shares outstanding:
Basic 29,288 28,980
Diluted 29,553 29,261
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
SHOPKO STORES, INC. AND SUBSIDIARIES THIRD QUARTER AS OF FISCAL YEAR END
- ------------------------------------ ------------------- ---------------
(In thousands)
OCTOBER 30, NOVEMBER 1, JANUARY 31,
2004 2003 2004 *
---- ---- ------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 29,280 $ 58,453 $ 22,786
Receivables, less allowance for losses of $2,438
$2,692 and $2,705, respectively 55,398 49,195 62,808
Merchandise inventories 701,953 708,312 569,315
Other current assets 8,241 11,597 10,874
----------- ----------- -----------
Total current assets 794,872 827,557 665,783
Other assets and deferred charges 7,943 12,087 7,584
Intangible assets, net of accumulated amortization of $12,825, $10,169
and $10,771, respectively 28,984 24,217 23,629
Property and equipment, net of accumulated
depreciation of $828,447, $778,613 and
$796,085; impairment reserve of $4,004, $12,508
and $14,032, respectively 757,254 780,664 781,428
----------- ----------- -----------
Total assets $ 1,589,053 $ 1,644,525 $ 1,478,424
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 156,101 $ 205,048 $ 82,270
Accounts payable - trade 297,489 333,502 253,313
Accrued compensation and related taxes 37,287 40,067 35,509
Deferred taxes and other accrued liabilities 113,873 117,379 112,291
Accrued income and other taxes 29,087 28,015 45,543
Current portion of long-term obligations and leases 62,304 6,890 63,797
----------- ----------- -----------
Total current liabilities 696,141 730,901 592,723
Long-term obligations and leases, less current portion 240,637 304,389 246,990
Other long-term obligations 21,838 26,367 25,206
Deferred income taxes 29,791 25,186 22,803
Shareholders' equity:
Common stock 314 311 312
Additional paid-in capital 394,016 390,680 391,976
Retained earnings 246,882 207,006 238,729
Less treasury stock (40,566) (40,315) (40,315)
----------- ----------- -----------
Total shareholders' equity 600,646 557,682 590,702
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,589,053 $ 1,644,525 $ 1,478,424
=========== =========== ===========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SHOPKO STORES, INC. AND SUBSIDIARIES YEAR TO DATE (39 WEEKS) ENDED
- ------------------------------------ -----------------------------
(In thousands)
OCTOBER 30, NOVEMBER 1,
2004 2003
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $ 7,915 $ 7,568
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 63,574 62,068
Impairment charges 672 -0-
Gain on sale of property and equipment (2,821) (2,291)
Deferred income taxes 6,987 2,125
Change in assets and liabilities:
Receivables 7,410 314
Merchandise inventories (132,637) (145,581)
Other current assets 2,634 2,148
Other assets 831 (908)
Accounts payable 44,176 92,336
Accrued liabilities (12,702) (23,021)
Other long-term obligations (3,367) (25)
--------- ----------
Net cash used in operating activities (17,328) (5,267)
--------- ----------
Cash flows from investing activities:
Payments for property and equipment (50,799) (35,425)
Proceeds from the sale of property and equipment 14,948 4,101
Payments for pharmacy customer lists (7,410) (4,069)
--------- ----------
Net cash used in investing activities (43,261) (35,393)
--------- ----------
Cash flows from financing activities:
Proceeds from short-term borrowings 73,832 166,687
Payments of debt and capital lease obligations (8,119) (102,224)
Sale of common stock due to exercise of stock options 1,622 962
Purchase of treasury stock (252) (65)
--------- ----------
Net cash provided by financing activities 67,083 65,360
--------- ----------
Net increase in cash and cash equivalents 6,494 24,700
Cash and cash equivalents at beginning of period 22,786 33,753
--------- ----------
Cash and cash equivalents at end of period $ 29,280 $ 58,453
--------- ----------
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
6
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHOPKO STORES, INC. AND SUBSIDIARIES
- ------------------------------------
(In thousands) (UNAUDITED)
Additional
Common Stock ---------- 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 income 7,915 7,915
Issuance of restricted stock 15 256 (256) 15 0
Forfeiture of restricted stock (27) (308) 213 (27) (95)
Sales of common stock under
option plans 176 2 1620 176 1622
Income tax benefit related to
stock options 472 472
Restricted stock expense 281 281
Purchase of treasury stock (17) (251) (17) (251)
------ --------- ----------- ----------- ------ --------- ------ ---------
BALANCES AT October 30, 2004 31,389 $ 314 $ 394,016 $ 246,882 (1,925) $ (40,566) 29,465 $ 600,646
====== ========= =========== =========== ====== ========= ====== =========
See notes to condensed consolidated financial statements.
7
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 October 30, 2004 and
November 1, 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 reclassifications have been made to prior year amounts to conform with
the current year presentation.
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.
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 (four owned properties and four leased
properties) covered by the restructuring reserve as of the beginning of fiscal
2004.
During the first three quarters of fiscal 2004, the Company sold three owned
properties and none of the remaining leases were terminated. In the second
quarter of fiscal 2004, the Company entered into contracts to sell the two
remaining owned properties and recorded an additional $0.7 million increase to
the property write-down reserve based on the expected sale prices, which were
less than previously anticipated. The sale of one of the owned properties was
consummated during the third quarter but subsequent to the close of the third
quarter, the contract to sell the remaining owned property was terminated and
the property continues to be marketed for sale. As of the end of the third
quarter of fiscal 2004, there were five remaining properties (one owned property
and four leased properties) covered by the restructuring reserve and the
remaining property write-down reserve was $2.7 million and the remaining reserve
for lease termination
8
and related property carrying costs, as well as other costs, was $13.6 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 ($1.7 million) as a current liability and the
remainder ($11.9 million) is recorded in other long-term obligations at October
30, 2004. The Company believes the reserves are adequate, and continues to
negotiate lease terminations with landlords and market for sale the remaining
owned property. However, 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 termination of the leases.
Activity in the restructuring reserve (in thousands) during the first three
quarters of fiscal 2004:
Lease termination and
property carrying costs
-----------------------
Balance as of January 31, 2004 $ 14,505
Cash Payments 951
------------
Balance as of October 30, 2004 $ 13,554
============
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.
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):
THIRD QUARTER YEAR TO DATE
(13 WEEKS) ENDED (39 WEEKS) ENDED
---------------- ----------------
Oct 30, Nov 1, Oct 30, Nov 1,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 1,995 $ 964 $ 7,915 $ 7,568
Add: Stock-based employee compensation expense included
in reported net income, net of related tax
effects 114 125 309 375
Deduct: Total stock-based employee compensation expense
determined under fair value method for all option
awards, net of related tax effects (625) (867) (1,773) (1,400)
9
--------- --------- --------- ---------
Pro forma net income $ 1,484 $ 222 $ 6,451 $ 6,543
========= ========= ========= =========
Net income per share:
Basic - as reported $ 0.07 $ 0.03 $ 0.27 $ 0.26
Basic - pro forma $ 0.05 $ 0.01 $ 0.22 $ 0.23
Diluted - as reported $ 0.07 $ 0.03 $ 0.27 $ 0.26
Diluted - pro forma $ 0.05 $ 0.01 $ 0.22 $ 0.23
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).
THIRD QUARTER (13 WEEKS) ENDED YEAR TO DATE (39 WEEKS) ENDED
------------------------------ -----------------------------
OCTOBER 30, NOVEMBER 1, OCTOBER 30, NOVEMBER 1,
2004 2003 2004 2003
Net sales
ShopKo Retail $ 553,134 $ 568,492 $ 1,674,734 $ 1,657,829
Pamida Retail 193,257 190,051 582,266 573,323
---------- ----------- ----------- ------------
Total net sales $ 746,391 $ 758,543 $ 2,257,000 $ 2,231,152
---------- ----------- ----------- ------------
Earnings from operations
ShopKo Retail $ 18,466 $ 17,878 $ 55,625 $ 58,549
Pamida Retail (351) (3,342) 3,378 1,590
Corporate (6,002) (4,904) (20,039) (18,335)
---------- ----------- ----------- ------------
Earnings from operations $ 12,113 $ 9,632 $ 38,964 $ 41,804
---------- ----------- ----------- ------------
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
third quarter and first three 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 $9.7 million as of October 30, 2004.
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY:
ShopKo Stores, Inc. is a retailer headquartered in Green Bay, Wis., with 361
stores and 25,000 teammates throughout the Midwest, Mountain and Pacific
Northwest regions. Retail formats include ShopKo, providing quality name-brand
merchandise, great values, pharmacy and optical services to busy families in
mid-sized to larger cities; Pamida, bringing value close to home in small, rural
communities; and ShopKo Express, a new and convenient neighborhood drugstore
concept, which is included in the ShopKo Retail segment for reporting purposes.
In the third quarter of fiscal 2004, consolidated sales decreased 1.6 percent to
$746.4 million compared with $758.5 million for the third quarter of last year.
Consolidated comparable store sales for the third quarter decreased 1.5 percent.
ShopKo comparable store sales decreased 2.4 percent primarily due to weakness in
the home/hardlines and in the softlines categories. For the seventh consecutive
quarter, Pamida had positive comparable store sales. For the third quarter of
fiscal 2004, comparable store sales increased 1.2 percent, primarily due to an
increase in the retail health category, partially offset by declines in general
merchandise sales.
During the first three quarters of fiscal 2004, consolidated sales increased 1.2
percent to $2,257.0 million compared with $2,231.1 million for the same period
last year. Consolidated comparable store sales increased 1.3 percent. ShopKo
comparable store sales increased 1.2 percent primarily due to increases in the
home/hardlines and retail health categories. Pamida comparable store sales
increased 1.6 percent, primarily due to an increase in the retail health
category, partially offset by declines in general merchandise sales.
Over the past several years, the retail health category has become an increasing
percentage of the Company's sales. In the third quarter of fiscal 2004, retail
health sales made up 31.6 percent and 24.0 percent of ShopKo and Pamida retail
segment sales, respectively. During the first three quarters of fiscal 2004,
retail health sales made up 31.2 percent and 22.9 percent of ShopKo and Pamida
segment sales, respectively.
Consolidated gross margin as a percent of net sales was 25.8 percent for the
third quarter of fiscal 2004 compared with 25.3 percent for the third quarter of
last year. The increase was primarily due to improved pharmacy and general
merchandise margins at ShopKo and lower distribution and inventory shrinkage
costs at Pamida. During the first three quarters of fiscal 2004, gross margin as
a percent of net sales was 25.7 percent compared with 25.8 percent for the same
period last year. The decrease in gross margin as a percent of net sales for the
first three quarters of fiscal 2004 was primarily attributable to increased
promotional sales mix at ShopKo in the first half of fiscal 2004.
Consolidated selling, general and administrative expenses (SG&A) as a percent of
net sales for the third quarter and the first three quarters of fiscal 2004 were
flat compared with the same periods last year at 21.8 percent and 21.6 percent,
respectively. Although the rate remained flat for the quarter and year to date
as compared with the same periods last year, the company experienced variances
primarily attributable to lower advertising costs at ShopKo and disciplined
expense management, offset by higher remodel costs and increased pharmacy
payroll at both the ShopKo and Pamida divisions.
Interest expense for the third quarter of the fiscal 2004 increased 10.0 percent
compared with the third quarter of last year to $8.8 million primarily
attributable to interest received in the third
11
quarter of fiscal 2003 associated with the settlement of a federal tax return
audit. Interest expense decreased 11.2 percent to $26.0 million for the first
three quarters of fiscal 2004 compared with the same period last year primarily
due to lower debt balances.
Net income for the third quarter was $2.0 million compared with $1.0 million for
the same period last year. Diluted income per share was $0.07 compared with
$0.03 for the same period last year. During the first three quarters of fiscal
2004, net income was $7.9 million compared with $7.6 million for the same period
last year. Diluted income per share was $0.27 compared with $0.26 for the same
period last year. The increase in net income reflects improvements in gross
margin rates during the third quarter of fiscal 2004 and tight expense control
during the first three quarters of fiscal 2004.
Capital expenditures for the third quarter of fiscal 2004 were $19.4 million
compared with $21.4 million for the third quarter last year. During the first
three quarters of fiscal 2004, capital expenditures were $50.7 million compared
with $35.4 million for the same period last year. The increase in capital
expenditures is related to the store remodeling activity in both divisions,
consolidation of the Omaha Distribution Centers, expansion of the Company's
retail health business, and improvement of its information technology
infrastructure. Capital expenditures for fiscal 2004 are now expected to be in
the range of $80 to $85 million, reflecting the delay or elimination of some
projects, compared with $60.4 million for fiscal 2003.
During the third quarter of fiscal 2004, inventory levels decreased by $6.4
million, or 0.9 percent, compared with the third quarter of last year, resulting
from the Company's continued focus on inventory management.
The retail industry is highly competitive and ShopKo 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.
The Company continues to focus on achieving profitable sales growth through a
mix of promotional sales strategies and gross margin improvement initiatives.
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 to increase 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 remains
committed to improving profitability through sales growth, inventory management,
and controlling expenses. The company continues to focus on decreasing debt
levels and expects debt reduction for the 2004 fiscal year to be in excess of
$50 million.
The following table sets forth items from the Company's unaudited condensed
consolidated financial statements for the third quarter and year to date of
fiscal 2004 and fiscal 2003 as a percentage of net sales:
12
THIRD QUARTER YEAR TO DATE
(13 WEEKS) (39 WEEKS)
---------- ----------
FISCAL FISCAL FISCAL FISCAL
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.5 0.5 0.4 0.4
----- ----- ----- -----
100.5 100.5 100.4 100.4
Cost of sales 74.2 74.7 74.3 74.2
Gross margin 25.8 25.3 25.7 25.8
Selling, general and administrative expenses 21.8 21.8 21.6 21.6
Depreciation and amortization expenses 2.8 2.7 2.8 2.8
----- ----- ----- -----
24.6 24.5 24.4 24.4
Earnings from operations 1.6 1.3 1.7 1.9
Interest expense 1.2 1.1 1.1 1.3
----- ----- ----- -----
Earnings before income taxes 0.4 0.2 0.5 0.6
Income tax provision 0.2 0.1 0.2 0.2
----- ----- ----- -----
Net income 0.3% 0.1% 0.3% 0.3%
===== ===== ===== =====
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:
THIRD QUARTER YEAR TO DATE
(13 WEEKS) (39 WEEKS)
---------- ----------
FISCAL FISCAL FISCAL FISCAL
2004 2003 2004 2003
---- ---- ---- ----
SHOPKO RETAIL SEGMENT
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.5 0.5 0.5 0.5
----- ----- ----- ------
100.5 100.5 100.5 100.5
Cost of sales 73.8 74.3 74.3 74.1
Gross margin 26.2 25.7 25.7 25.9
Selling, general and administrative expenses 20.6 20.5 20.2 20.2
Depreciation and amortization expenses 2.8 2.6 2.7 2.7
----- ----- ----- ------
23.4 23.1 22.9 22.9
Earnings from operations 3.3% 3.1% 3.3% 3.5%
===== ===== ===== ======
13
THIRD QUARTER YEAR TO DATE
(13 WEEKS) (39 WEEKS)
---------- -----------
FISCAL FISCAL FISCAL FISCAL
2004 2003 2004 2003
---- ---- ---- ----
PAMIDA RETAIL SEGMENT
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.2 0.2 0.2 0.2
----- ----- ----- -----
100.2 100.2 100.2 100.2
Cost of sales 75.7 75.9 74.5 74.4
Gross margin 24.3 24.1 25.5 25.6
Selling, general and administrative expenses 22.1 23.1 22.2 22.5
Depreciation and amortization expenses 2.7 2.9 2.9 3.0
----- ----- ----- -----
24.8 26.0 25.1 25.5
Income from operations (0.3)% (1.7)% 0.6% 0.3%
===== ==== ===== =====
NET SALES:
The following table presents the Company's consolidated net sales for the third
quarter and year to date of fiscal 2004 and fiscal 2003:
THIRD QUARTER
(13 WEEKS)
---------- % INCREASE
FISCAL FISCAL ----------
2004 2003 TOTAL ** COMP*
---- ---- -------- -----
ShopKo Retail $ 553.1 $ 568.5 -2.7% -2.4%
Pamida Retail 193.3 190.1 1.7% 1.2%
------- ------- ------ ----
Consolidated $ 746.4 $ 758.6 -1.6% -1.5%
======= ======= ====== ====
YEAR TO DATE
(39 WEEKS)
---------- % INCREASE
FISCAL FISCAL ----------
2004 2003 TOTAL ** COMP*
---- ---- -------- -----
ShopKo Retail $ 1674.7 $ 1,657.8 1.0% 1.2%
Pamida Retail 582.3 573.3 1.6% 1.6%
-------- --------- --- ---
Consolidated $2,257.0 $ 2,231.1 1.2% 1.3%
======== ========= === ===
* Comparable store sales represent sales of those stores open during both
fiscal years and do not include sales from the ShopKo wholesale optical
lab.
** ShopKo division total sales variance reflects sales from one ShopKo closed
location in fiscal 2004 and one new ShopKo Express location. Pamida
division total sales variance reflects sales in the prior year periods
from seven locations which have been closed and not replaced, and two new
Pamida locations opened in fiscal 2003. Pamida division total sales
variance also reflects sales from five closed Pamida locations and seven
new locations in fiscal 2004.
14
ShopKo comparable store sales decreased 2.4 percent during the third quarter of
fiscal 2004. Changes in ShopKo comparable store sales in the third quarter of
fiscal 2004 by category were as follows: Retail Health, 0.9%; Softlines, (2.5)%;
and Hardlines/Home, (4.4)%. The 1.2 percent increase in Pamida comparable store
sales was primarily due to an increase in pharmacy sales, partially offset by
declines in general merchandise sales. Changes in Pamida comparable store sales
in the third quarter of fiscal 2004 by category were as follows: Pharmacy,
16.7%; Hardlines, (1.4)%; and Softlines, (8.2)%.
The 1.2 percent increase in ShopKo comparable store sales during the first three
quarters of fiscal 2004 was primarily related to increased sales in the
hardlines/home category, as well as increased promotional sales. Changes in
ShopKo comparable store sales in the first three quarters of fiscal 2004 by
category were as follows: Hardlines/Home, 1.5%; Retail Health, 1.5%; and
Softlines, 0.3%. The 1.6 percent increase in Pamida comparable store sales was
attributable to increased pharmacy sales, which were aided by the purchase of
customer pharmacy files and pharmacy installations in existing stores. Changes
in Pamida comparable store sales in the first three quarters of fiscal 2004 by
category were as follows: Pharmacy, 20.5%; Hardlines, (1.4)%; and Softlines,
(8.3)%.
The Company's store activity is summarized below:
39 Weeks Ended Year Ended
--------------- -----------
Oct 30, Nov 1, January 31,
2004 2003 2004
------- ------ -----------
SHOPKO STORES
Beginning number of stores 141 141 141
Openings * 1 0 0
Closings 1 0 0
------ ------ ------
Ending number of stores 141 141 141
====== ====== ======
PAMIDA STORES
Beginning number of stores 218 223 223
Openings 7 2 2
Closings 5 5 7
------ ------ ------
Ending number of stores 220 220 218
====== ====== ======
* ShopKo retail segment includes one new ShopKo Express location.
GROSS MARGIN:
Consolidated gross margin dollars increased 0.2 percent to $192.2 million in the
third quarter of fiscal 2004 from $191.8 million for the same period last year.
Consolidated gross margin, as a percent of net sales for the third quarter of
fiscal 2004, was 25.8 percent compared with 25.3 percent for the same period
last year. This increase was primarily attributable to improved pharmacy and
general merchandise margins at ShopKo and lower distribution and inventory
shrinkage costs at Pamida.
ShopKo's gross margin dollars decreased 0.6 percent to $145.2 million in the
third quarter of fiscal 2004 from $145.9 million for the same period last year.
ShopKo's gross margin, as a percent of net sales, was 26.2 percent compared with
25.7 percent for the same period last year. The rate increase was primarily due
to improved pharmacy and general merchandise margins (94 basis points) partially
offset by inventory shrinkage (23 basis points) and other various individually
immaterial margin variations that in the aggregate comprise the remainder of the
difference. Pamida's gross margin dollars increased 2.6 percent to $47.1 million
in the third quarter of fiscal 2004 from $45.9 million for the same period last
year. As a percent of sales, Pamida's gross margin was 24.3 percent in the third
quarter of fiscal 2004 compared with 24.1 percent for the
15
same period last year. The increase was primarily due to a reduction in
distribution expenses (35 basis points) and lower inventory shrinkage expenses
(11 basis points) partially offset by lower merchandise margins (27 basis
points).
Consolidated gross margin dollars increased 0.6 percent to $579.3 million during
the first three quarters of fiscal 2004 from $576.2 million for the same period
last year. Consolidated gross margin, as a percent of net sales for the first
three quarters of fiscal 2004, was 25.7 percent compared with 25.8 percent for
the same period last year. The decrease in gross margin as a percent of net
sales for the first three quarters of fiscal 2004 was primarily attributable to
increased promotional sales mix at ShopKo in the first half of fiscal 2004.
ShopKo's gross margin dollars increased 0.3 percent to $430.8 million during the
first three quarters of fiscal 2004 from $429.6 million for the same period last
year. ShopKo's gross margin, as a percent of net sales, was 25.7 percent
compared with 25.9 percent for the same period last year. The percent of sales
decrease was primarily due to lower merchandise margins (15 basis points)
attributable to increased promotional sales in the first half of fiscal 2004.
Pamida's gross margin dollars increased 1.3 percent to $148.5 million during the
first three quarters of fiscal 2004 from $146.6 million for the same period last
year. As a percent of sales, Pamida's gross margin was 25.5 percent during the
first three quarters of fiscal 2004 compared with 25.6 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 (20 basis points) and
lower merchandise margins (12 basis points) offset by a reduction in
distribution expenses (26 basis points) in fiscal 2004.
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 October
30, 2004 and November 1, 2003. There was no difference between the LIFO and FIFO
cost methods at October 30, 2004, November 1, 2003 and January 31, 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Consolidated selling, general and administrative (SG&A) expense dollars
decreased 1.5 percent. SG&A expenses as a percent of net sales for the third
quarter of fiscal 2004 were 21.8 percent, the same as the third quarter of
fiscal 2003 primarily attributable to lower advertising costs at ShopKo (37
basis points) and disciplined expense management, offset by higher remodel costs
(27 basis points) and increased pharmacy payroll (12 basis points) at both the
ShopKo and Pamida divisions.
ShopKo's SG&A expenses as a percent of net sales for the third quarter of fiscal
2004 were 20.6 percent compared with 20.5 percent for the same period last year
primarily due to lower advertising costs (50 basis points) and improvements in
store payroll (26 basis points), offset by pre-opening expenses associated with
the remodels (25 basis points) and increased employee benefit costs (15 basis
points) and other various individually immaterial expense variations that in the
aggregate comprise the remainder of the difference as well as the impact of
lower sales. Pamida's SG&A expenses for the third quarter of fiscal 2004 were
22.1 percent of net sales compared with 23.1 percent for the third quarter last
year. The improvement was driven by sales leveraging, i.e., sales increasing at
a faster rate than the increase in expense dollars (38 basis points) and reduced
operating expenses (employee benefits, maintenance and repair costs, and
insurance costs) (104 basis points) partially offset by higher pre-opening costs
(34 basis points).
Consolidated SG&A expense dollars increased but expenses as a percent of net
sales for the first three quarters of fiscal 2004 were 21.6 percent, the same as
for the prior year period. Although the rate remained flat for the first three
quarters as compared to last year, the company experienced variances in fiscal
2004 primarily attributable to sales leveraging (25 basis points) and lower
advertising costs (19 basis points), offset by increased payroll expenses (18
basis
16
points) and pre-opening costs (15 basis points) and other various individually
immaterial expense variations that in the aggregate comprise the remainder of
the difference.
ShopKo's SG&A expenses as a percent of net sales for the first three quarters of
fiscal 2004 were 20.2 percent, the same as the first three quarters of fiscal
2003. Although the rate remained flat for the first three quarters as compared
to last year, ShopKo experienced variances in fiscal 2004 primarily due to lower
advertising costs (25 basis points) and sales leveraging (20 basis points),
offset by increased employee benefit costs (18 basis points), pre-opening costs
(15 basis points) and other various individually immaterial expense variations
that in the aggregate comprise the remainder of the difference. Pamida's SG&A
expenses as a percent of net sales for the first three quarters of fiscal 2004
were 22.2 percent compared with 22.5 percent for the same period last year. The
decrease was attributable to sales leveraging (35 basis points) and reduced
operating expenses (52 basis points) offset by higher payroll due to Pharmacy
growth (36 basis points) and pre-opening expenses (15 basis points).
DEPRECIATION AND AMORTIZATION EXPENSE:
Consolidated depreciation and amortization expenses were $20.9 million for the
third quarter of fiscal 2004 compared with $20.5 million for the same period
last year. For the first three quarters of fiscal 2004, depreciation and
amortization expenses were $63.6 million compared with $62.1 million for the
same period last year. As a percent of net sales, consolidated depreciation and
amortization expenses were 2.8 percent for the third quarter of fiscal 2004
compared with 2.7 percent for the same period last year. As a percent of net
sales, consolidated depreciation and amortization expenses were 2.8 percent for
the first three quarters in both fiscal 2004 and fiscal 2003.
INTEREST EXPENSE:
Interest expense for the third quarter of the fiscal 2004 increased by $0.8
million, or 10.0 percent, to $8.8 million compared with the same period last
year. The $0.8 million increase was primarily attributable to interest received
in the third quarter of fiscal 2003 associated with the settlement of a federal
tax return audit. For the first three quarters of fiscal 2004, interest expense
decreased 11.2 percent to $26.0 million compared with the same period last year
primarily due to lower debt balances.
INCOME TAXES:
The Company's effective tax rate for the third quarter and first three quarters
of fiscal 2004 was 39.0 percent compared with 39.7 percent for the third quarter
and first three quarters of fiscal 2003. The decrease in the Company's effective
tax rate is due to a lower state income tax rate, net of federal tax benefits.
17
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 the financial statements and related
notes. Since future events and their impact cannot be determined with certainty,
the actual results will inevitably differ from the Company's 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 the financial statements and makes adjustments when facts and
circumstances dictate a change. The Company has identified certain critical
accounting policies, which are described below.
Merchandise inventory. 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 the inventory is returnable to vendors for cost
and (iii) the Company is able to receive vendor support monies if product is
sold below expected 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 (four owned properties and
four leased properties) covered by the restructuring reserve as of the beginning
of fiscal 2004. During the first three quarters of fiscal 2004, three owned
properties were sold and none of the remaining leases were terminated. In the
second quarter of fiscal 2004, the Company entered into contracts to sell the
two remaining owned properties and recorded an additional $0.7 million increase
to the property write-down reserve based on expected sale prices which were less
than previously anticipated. The sale of one of the owned properties was
consummated during the third quarter but subsequent to the close of the third
quarter, the contract to sell the remaining owned property was terminated and
the property continues to be marketed for sale. As of the end of the third
quarter of fiscal 2004, there were five remaining properties (one owned property
and four leased properties) covered by the restructuring reserve.
18
The Company believes the reserves are adequate, and continues to negotiate lease
terminations with landlords and market for sale the owned property. However,
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 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 for comment an Exposure
Draft entitled, "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 a company's statement of operations. The comment period ended
June 30, 2004. The effective date for this statement is expected to be in the
third quarter of fiscal 2005. The Company will adopt any new rules required by
the FASB when they are effective. The pro forma impact on the 13 and 39 week
periods ended October 30, 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. The impact of the exposure draft is not expected to be materially
different than the impact of FASB Statement No. 123.
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 by operating activities was $17.3 million for
the first three quarters of fiscal 2004 compared with cash used by operating
activities of $5.3 million for the same period last year. The change in cash
used by operating activities in comparison to the first three quarters of fiscal
2003 was primarily due to a $48.2 million decrease in the change of trade
accounts payable partially offset by $12.9 million decrease in the change in
merchandise inventories, a $10.3 million decrease in the change of accrued
liabilities, and a $7.1 million increase in the change of accounts receivable
from their respective year-end balances. The Company finances a significant
portion of its operations through vendor financing. As of October 30, 2004,
accounts payable totaled $297.5 million, a decrease of $36.0 million, compared
with $333.5 million at the end of the third quarter of fiscal 2003. The Company
currently maintains favorable terms with its vendors, however these terms could
change based on the Company's future operating performance.
As of October 30, 2004, the Company had $206.9 million of long-term debt
outstanding, consisting of $155.3 million of Senior Unsecured Notes and
approximately $51.6 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. Subsequent to the close of the third quarter in fiscal 2004, the
19
Company funded the $55.3 million principal payment of the Senior Unsecured Notes
through operating cash flow and availability under the Amended Secured Credit
Facility (as described below). A more detailed description of these Senior
Unsecured 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, proceeds
of the Facility or funds from other sources may be used to retire or repurchase
Senior Unsecured Notes. 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, the Company had $156.1 million outstanding under its Amended
Secured Credit Facility at the end of the third quarter of fiscal 2004 compared
with $205 million outstanding at the end of the third 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
$261.8 million in availability at the end of the third 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
October 30, 2004 and for the third quarter of fiscal 2004, the Company was in
compliance with all covenants in the Amended Secured Credit Facility.
The following schedule sets forth the Company's contractual obligations and
commercial commitments as of October 30, 2004 (in thousands):
Less than 1 After
CONTRACTUAL OBLIGATIONS (1) Total year 2-3 years 4-5 years 5 years
- --------------------------- ---------- ----------- ---------- ---------- ----------
Long-Term Debt $ 206,912 $ 56,359 $ 5,886 $ 2,988 $ 141,679
Capital Lease Obligations (2) 96,029 6,584 11,927 12,736 64,782
Operating Leases (3) 189,654 19,651 36,602 31,557 101,844
Total Contractual Cash Obligations 492,595 82,594 54,415 47,281 308,305
(1) The schedule excludes obligations of $156.1 million outstanding under the
Amended Secured Credit Facility, which are classified on the balance sheet
as short-term debt, as well as $10.4 million of outstanding documentary
letters of credit and $21.4 million of standby letters of credit as of
October 30, 2004 (which reduce availability under the Amended Secured
Credit Facility)
(2) Capital lease obligations represent the total minimum future obligations,
net of $69.3 million of interest.
(3) Operating leases are the aggregate future payments for operating leases as
of October 30, 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.
20
The Company spent $19.4 million in the third quarter and $50.8 million in the
first three quarters of fiscal 2004 on capital expenditures compared with $21.4
million and $35.4 million in the third quarter and first three quarters of
fiscal 2003, respectively. The increase in capital expenditures during the first
three quarters of fiscal 2004 as compared with the same period in fiscal 2003
are primarily due to the store remodeling activity in both divisions,
consolidation of the Omaha Distribution Centers, expanding the Company's retail
health business, and improving its information technology infrastructure.
Capital expenditures for fiscal 2004 are now expected to be in the range of $80
to $85 million, reflecting the delay or elimination of some projects, compared
with $60.4 million for fiscal 2003. The total estimated capital expenditures for
fiscal 2004 is within the restrictions on capital expenditures in the Amended
Secured Credit Facility. The expected expenditures during the remainder of
fiscal 2004 relate primarily to investments in store remodels (including new
merchandise initiatives), technology infrastructure, and two ShopKo freestanding
drug stores. Such plans may be reviewed and revised from time to time in light
of changing conditions.
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
distribution 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 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
slowdown; i.) general economic conditions and weather; j.) smooth functioning
distribution network; k.) labor conditions; l.) anti-takeover provisions in the
Company's organizational 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.
21
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 October 30, 2004
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
22
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS
(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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPKO STORES, INC. (Registrant)
Date: December 9, 2004 By: /s/ Sam K. Duncan
------------------------------------------
Sam K. Duncan
Chief Executive Officer, President
(Duly Authorized Officer of Registrant)
Date: December 9, 2004 By: /s/ Brian W. Bender
------------------------------------------
Brian W. Bender
Senior Vice President, Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer of Registrant)
23
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,
Officer, pursuant to 18 U.S.C. ss. 1350.
24