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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-10767
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VALUE CITY DEPARTMENT STORES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1322832
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
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(Address of principal executive offices) (Zip Code)
(614) 471-4722
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Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Shares, without par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 reports), and (2) has been subject to the filing
requirements for at least the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant,
12,840,124 Common Shares, based on the $3.89 closing sale price on April 15,
2002, was $49,948,082.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 33,977,707 Common Shares were
outstanding at April 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Proxy Statement for the 2002 Annual Meeting of Shareholders, in part,
as indicated.
TABLE OF CONTENTS
FORM
10-K
REPORT
ITEM NO. PAGE
-------- ----
PART I
1. Business............................................................................................3
2. Properties.........................................................................................15
3. Legal Proceedings..................................................................................16
4. Submission of Matters to a Vote of Security Holders................................................16
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..........................17
6. Selected Financial Data............................................................................18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................19
7A. Quantitative and Qualitative Disclosures about Market Risk ........................................28
8. Financial Statements and Supplementary Data........................................................28
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................................28
PART III
10. Directors and Executive Officers of the Registrant.................................................29
11. Executive Officer Compensation.....................................................................29
12. Security Ownership of Certain Beneficial Owners and Management.....................................29
13. Certain Relationships and Related Transactions.....................................................29
PART IV
14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................30
Signatures.........................................................................................31
TABLE OF CONTENTS TO FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report............................................................................F-1
Consolidated Balance Sheets.............................................................................F-2
Consolidated Statements of Operations...................................................................F-3
Consolidated Statements of Shareholders' Equity.........................................................F-4
Consolidated Statements of Cash Flows...................................................................F-5
Notes to Consolidated Financial Statements..............................................................F-6
SCHEDULES
II - Valuation and Qualifying Accounts..................................................................S-1
Index to Exhibits.......................................................................................E-1
2
PART I
ITEM 1. BUSINESS.
As used in this Annual Report on Form 10-K and except as the context otherwise
may require, "Company", "we", "us", and "our" refers to Value City Department
Stores, Inc. and its subsidiaries, including but not limited to, DSW Shoe
Warehouse, Inc. and Filene's Basement, Inc.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. You can identify such forward-looking statements by the words
"expects", "intends", "plans", "projects", "believes", "estimates", and similar
expressions. In the normal course of business, we, in an effort to help keep our
stockholders and the public informed about our operations, may from time to time
issue such forward-looking statements, either orally or in writing. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, or
projections involving anticipated revenues, earnings or other aspects of
operating results. We base the forward-looking statement on our current
expectations, estimates, and projections. We caution you that these statements
are not guarantees of future performance and involve risks, uncertainties, and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Therefore, the actual results of the future events described in
the forward-looking statements in this Annual Report on Form 10-K or elsewhere,
could differ materially from those stated in the forward-looking statements.
Additional information concerning factors that could cause actual results to
differ materially from those in our forward-looking statements is contained
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
GENERAL
Value City Department Stores, Inc. operates a chain of 117 department stores
located in Ohio, Pennsylvania and 13 other Midwestern, Eastern and Southern
states and the District of Columbia, principally under the name Value City, 108
DSW Shoe Warehouse ("DSW") stores located throughout the United States, and 21
Filene's Basement stores located principally in the Northeast United States. For
over 80 years, our strategy has been to provide exceptional value by offering a
broad selection of brand name merchandise at prices substantially below
conventional retail prices. Our Value City stores carry men's, women's and
children's apparel, housewares, giftware, home furnishings, toys, sporting
goods, jewelry, shoes and health and beauty care items, with apparel comprising
well over one-half of total sales. Our Value City stores average 87,000 square
feet which allow us to offer over 100,000 different items of merchandise similar
to the items found in traditional department, specialty and discount stores. Our
DSW stores are a chain of upscale shoe stores offering a wide selection of dress
and casual footwear below traditional retail prices. These stores average 25,000
square feet with up to 45,000 pairs of women's and men's designer brand shoes
and athletic footwear per store. Our Filene's Basement stores average 27,000
square feet and specialize in top tier brand name merchandise of men's and
women's apparel, jewelry, shoes, accessories and home goods. Our pricing
strategy is supported by our ability to purchase large quantities of goods in a
variety of special buying opportunities. For many years, we have had a
reputation in the marketplace as a purchaser of buy-outs and manufacturers'
closeouts.
3
HISTORY OF OUR BUSINESS
We opened our first department store in Columbus, Ohio in 1917. Until our
initial public offering on June 18, 1991, Value City department stores operated
as a division of Schottenstein Stores Corporation ("SSC"). SSC owns
approximately 53% of our stock. We also have a number of ongoing related party
agreements and arrangements that exist with SSC. These are more fully described
in Item 13 of this report.
In July 1997, we entered agreements with Mazel Stores, Inc. ("Mazel") to create
VCM, Ltd. ("VCM"), a 50/50 joint venture. VCM operated the licensed health and
beauty care, toy and sporting goods departments in the Value City stores and
beginning in fiscal 2000, the food department was added. We accounted for our
fifty percent interest in the joint venture under the equity method. See
"Licensed Departments." Effective at the close of business February 2, 2002, we
purchased the Mazel partners' interest in the partnership.
Effective May 3, 1998, we purchased 99.9% of the common stock of Shonac
Corporation from Nacht Management, Inc. and SSC. In September 2000, we purchased
the remaining shares to give Value City 100% ownership. Shonac had been the shoe
licensee in all of the Value City stores since its inception in 1969 and has
operated the DSW chain of retail shoe stores since the opening of the first
store in 1991. The DSW chain of stores has grown to over 108 stores operating
across the country. Shonac operates the license shoe departments in all Value
City stores and 17 Filene's Basement stores. DSW operates licensed shoe
departments in two Filene's Basement stores.
Effective May 3, 1998, we acquired the store operations of Valley Fair
Corporation from SSC. Valley Fair operated two department stores located in New
Jersey. Prior to their acquisition, we had been a licensee of certain
departments in these two stores for eighteen years.
On November 19, 1999, we acquired 100% of the common stock of Gramex Retail
Stores, Inc. ("Gramex"), a chain of 15 discount stores operating in the greater
St. Louis metropolitan area, from Gramex Corporation. Of the 15 stores acquired
and after liquidation of the existing Grandpa's inventory, 13 stores were
converted to the Value City format. Six stores received only minor improvements
and were reopened in March 2000. The other 7 stores were remodeled based on our
current Value City format and were reopened in April 2000.
On March 17, 2000, we completed the acquisition of substantially all of the
assets and the assumption of certain liabilities of Filene's Basement Corp., a
Massachusetts corporation, and Filene's Basement, Inc., a wholly owned
subsidiary of Filene's Basement Corp. through our wholly owned subsidiary, Base
Acquisition Corp. Filene's Basement was operating as debtor-in-possession under
Chapter 11 of the Bankruptcy Code. We continue to operate the 14 Filene's
Basement stores acquired on March 17, 2000 and have reopened 3 other Filene's
Basement stores in the Washington D.C. area. We opened 1 new Filene's Basement
store in fiscal 2001 and, during fiscal 2000, we opened 2 new Filene's Basement
stores.
CHANGE IN FISCAL YEAR-END
On June 10, 1998, we changed our fiscal year from a 52/53-week year that ended
on the Saturday nearest to July 31 to a 52/53-week year that ends on the
Saturday nearest to January 31. The six-month transition period of August 2,
1998 through January 30, 1999 (the "Transition Period") preceded the start of
the 1999 fiscal year that ended January 29, 2000.
4
OPERATING SEGMENTS
We are managed in three operating segments, Value City Department Stores, DSW
Shoe Warehouse and Filene's Basement. See Note 14 of Notes to Consolidated
Financial Statements beginning on page F-21 of this annual report for
information regarding our segments.
BUSINESS STRATEGIES
Our strategy is to provide brand name merchandise at competitive retail prices.
We believe that the size of our Value City department stores facilitates a
full-line merchandise offering and range of brands which differentiates us from
other off-price retailers.
Our DSW stores' mission is to be each customer's favorite retailer of branded
footwear by satisfying customer expectations for selection, convenience and
value. We use the tagline "The Shoes of the Moment. The Deal of a Lifetime." and
offer a REWARD YOUR STYLE program to reward frequent shoppers.
Filene's Basement strategy is similar to Value City's focus on providing the
best brand names at everyday low prices for men's and women's apparel, jewelry,
shoes, accessories and home goods.
The principal elements of Value City's, DSW's and Filene's Basement business
strategies are discussed below.
MERCHANDISING
Selection
Value City is a full-line, off-price retailer carrying men's, women's and
children's apparel, housewares, giftware, home furnishings, toys, sporting
goods, jewelry, shoes, health, and beauty care items. Off-price retailing, as
distinguished from traditional full-price retailing and discount or off-brand
merchandising, is characterized by the purchase of primarily high quality brand
name merchandise, at prices below normal cost to most retailers. A portion of
the cost savings is then passed on to customers through lower prices. Our Value
City stores strive to offer customers one-stop-shopping for the categories of
merchandise we carry. The large size of our Value City stores facilitates the
offering of a wide range of merchandise categories with broad, deep selections
of goods within each category. Value City stores average 87,000 square feet and
carry over 100,000 different items of merchandise similar to the items found in
traditional department, specialty and discount stores. To improve store
profitability and meet the changing needs of our customers, we continually
refine the Value City merchandise mix eliminating less productive departments
and introducing new merchandise categories.
We believe customers are attracted to Value City stores because of continuous
new offerings of value-priced merchandise acquired in special purchases. At the
same time, Value City maintains a broad and consistent range of goods, it
purchases continuing lines of merchandise and draws upon its vendor contacts to
ensure constant availability of certain basic categories of merchandise as well
as current fashion trends.
DSW stores attract customers because of their wide assortment of top quality
name brand dress, casual and athletic footwear for men and women together with a
regularly changing selection of more fashion-oriented footwear. Our DSW stores
are large, contemporary, warehouse formats, that average 25,000 square feet and
allow us to sell a large selection of branded footwear in a clean and simple
environment.
5
Filene's Basement stores average 27,000 square feet and offer branded apparel,
home goods, accessories and retail stocks purchased directly from major upscale
retailers. The branded merchandise represents a focused assortment of
fashionable, nationally recognized men's and women's apparel accessories and
home goods bearing prominent designers `and manufacturers' names. Branded
merchandise constitutes most of the product line and is often obtained through
opportunistic purchases from a diverse group of quality manufacturers and
vendors, including direct imports from some of the most prominent European
designers.
The following table sets forth the relative contributions of each major
merchandise category to total sales.
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
2/2/02 2/3/01 1/29/00
------ ------ -------
Apparel and Ready-to-Wear - Includes: Men's, Women's
and Children's outerwear, suits, dresses, sportswear,
sleepwear, underwear and accessories, and department
store shoe sales........................................................ 57.8% 61.9% 62.7%
Hard goods and Home Furnishings - Includes: domestics;
jewelry; housewares; giftware; and small appliances .................... 15.5 14.7 17.2
Licensed Departments - Includes: health and beauty care;
food; toys and sporting goods and other incidental
departments............................................................. 5.6 6.0 6.3
DSW Stores................................................................. 21.1 17.4 13.8
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
Value Pricing
Value City stores offer quality brand name merchandise at prices typically 50%
to 70% below prices charged by traditional department stores for similar items
and at prices comparable to or lower than prices charged by other off-price
retailers. We can offer exceptional values because our buyers purchase
merchandise directly from manufacturers and other vendors generally at prices
substantially below those paid by conventional retailers. This allows us to pass
on the savings directly to our customers. See "Supplier Relationships and
Purchasing."
DSW price points are targeted to be up to 50% lower than the regular prices of
other specialty retailers and traditional department stores. DSW continually
strives to improve its merchandise sourcing to maintain quality, lower costs and
shortened delivery cycles. Identifying and building relationships with
cost-efficient manufacturers and suppliers of quality merchandise is essential
to DSW's merchandising strategy.
Well known designer labels, brand names and original retailer names are
prominently displayed throughout our Value City and Filene's Basement stores.
Many items carry labels and/or original price tags showing brand names
identifiable with major designers, manufacturers and retail stores, as well as
tags showing original retail, comparable or "nationally advertised" prices. In
certain cases, suppliers may require removal of labels or original retail price
tags as a condition to a special purchase arrangement. See "Supplier
Relationships and Purchasing."
6
Our Filene's Basement stores' merchandise assortment is typically priced at
levels 30%-60% below regular prices at traditional department and specialty
stores. These discounts are achieved by buying in-season closeouts and values at
advantageous prices and offering them for sale at lower markups than those of
traditional department stores. We are also able to keep the cost of merchandise
low because we do not require markdown or advertisement allowances, or
anticipation of returns from vendors, all of which are typical in the department
store industry.
Licensed Departments
We operate all departments in the Value City stores except for the health and
beauty care, toy and sporting goods, food and certain other incidental
departments. Effective with the close of business on February 2, 2002 by
acquisition of our partner's interest in VCM for $8,375,000, we now operate the
health and beauty care, toy, sporting goods and food departments in the Value
City stores. These departments are licensed to others, including affiliated
parties, for a percentage of net sales, generally ranging from 5% to 11%, for
initial periods of up to 10 years with, in some instances, an option to renew.
In addition, we receive a fee from some licensees for general and administrative
expenses. The aggregate annual license fees received from licensees for fiscal
year ended February 2, 2002 were $11,340,000, including $9,698,000 from VCM, and
for fiscal year ended February 3, 2001 were $11,323,000, including $9,144,000
from VCM. For fiscal years 2002 and beyond, the results of operations of
departments previously licensed by VCM will be consolidated in future financial
statements.
SSC owned 49.9% of the outstanding stock of Shonac until May 1998 when we
purchased it. Shonac operates the shoe departments within all the Value City
stores and 17 Filene's Basement stores. DSW operates the shoe departments in 2
Filene's Basement stores. Intercompany license fees and expenses are eliminated
in the consolidated financial statements.
Filene's Basement licenses the fragrance for cosmetics and certain other
incidental departments to independent third parties. The aggregate annual
license fees for fiscal year ended February 2, 2002 were approximately $888,000.
Licensees supply their own merchandise and generally supply their own store
fixtures. In most instances, licensees utilize our associates to operate their
departments. The licensees reimburse us for all costs associated with such
associates. Licensed departments are operated under our general supervision and
licensees are required to abide by our policies with regard to pricing, quality
of merchandise, refunds and store hours. Licensed departments complement the
operations of our stores and facilitate the uniformity of the in store
merchandising strategy including the overall emphasis on values.
SUPPLIER RELATIONSHIPS AND PURCHASING
An important factor in our operations has been the relationships we have
developed with our various suppliers and our many years of experience in
purchasing merchandise directly from manufacturers and other vendors at prices
substantially below those generally paid by conventional retailers.
Continuously, we seek to find and negotiate special purchase opportunities. Over
the years, our buyers have established excellent relationships with suppliers
including a reputation for the ability to purchase entire lots of merchandise.
As a result of our relationships and experience many suppliers offer special
purchase opportunities to us prior to attempting to dispose of merchandise
through other channels. Many manufacturers of brand name merchandise are
reluctant to sell merchandise for resale at discounted prices through their
normal channels of distribution or to retailers that may be considered
competitors in their regular distribution channels. We believe we fill that
need. By
7
selling such merchandise through our own retail stores, we are able to assure
suppliers that the merchandise will be sold without disturbing the suppliers'
regular channels of distribution.
Although we cannot quantify the amount by which the prices we pay for special
purchases are lower, if any, than the prices paid by our competitors for similar
purchases, we believe that such special purchases are made at prices
sufficiently favorable to enable us to offer merchandise to our customers at
very competitive price points.
We purchase merchandise from more than 4,700 suppliers, none of which accounted
for a material percentage of purchases during the past fiscal year. We do not
maintain any long-term or exclusive commitments to purchase merchandise from any
one supplier. We regularly purchase overstocked or overproduced items from
manufacturers and other retailers, including end-of-season, out-of-season and
end-of-run merchandise and manufacturers' slight irregulars. From time to time,
we purchase all or substantially all of the inventories of financially
distressed retailers and make other special purchases. We also have started to
more aggressively seek advantageous buying opportunities overseas, particularly
in non-apparel categories.
Our distribution facilities are designed to enable us to prioritize the
processing of merchandise on short notice and to deliver merchandise to stores
within days of receipt. This allows our buyers to purchase merchandise very late
in the season, when prices tend to be more favorable, and still deliver the
merchandise to stores before the end of the season. At the same time, we are
capable of devoting warehouse space to out-of-season goods for our Value City
stores. This merchandise is generally warehoused until the most opportune time
to offer it in the Value City stores, which in most cases is the next season.
This ability to purchase and quickly distribute or hold merchandise in
substantial quantities has enabled us to offer high-quality merchandise to
customers at prices significantly below usual retail prices. We believe that
this ability distinguishes us from the typical discount or department store and
provides us with a competitive advantage in making purchases as favorable
opportunities arise.
The relatively large size of the Value City stores provides us with the
flexibility to purchase full lots of merchandise that may not be available to
other off-price retailers with smaller stores requiring more targeted purchases.
Although there is growing competition for the kinds of special purchases that we
seek, we believe that, because of the factors discussed above, we will be able
to obtain sufficient supplies of desirable merchandise at favorable prices in
the future.
DSW's merchandising group constantly monitors current fashion trends as well as
historical sales trends to identify popular styles and styles that may become
popular in the upcoming season. Once our buyers determine the styles and
merchandise mix for any upcoming season, they focus on purchasing the
appropriate quantities of each category at the lowest cost and the highest
quality available.
DSW believes it has good relationships with its vendors. Merchandise is
purchased from both domestic and foreign suppliers directly or through agents.
Vendors include suppliers who either manufacture their own merchandise or supply
merchandise manufactured by others, or both. DSW believes that, consistent with
the retail footwear industry as a whole, most of its domestic vendors import a
large portion of their merchandise from abroad. We have implemented quality
control programs under which buyers inspect incoming merchandise for fit, color
and material, as well as for overall quality of manufacturing. As the number of
DSW locations increase, we believe there will be adequate sources available to
acquire and/or produce a sufficient supply of quality goods in a timely manner
and on satisfactory economic terms.
8
We believe the acquisition of Filene's Basement in March 2000, a well-known
institution in Boston since 1908, parallels the Value City `Value Driven'
merchandising philosophy. Because of the longstanding relationships Filene's
Basement has with vendors, it receives quality buying opportunities at
competitive prices similar to that of Value City. These longstanding
relationships make Filene's Basement a prime choice for vendors with overruns,
department store cancellations and unmet volume objectives.
DISTRIBUTION
We use a regionalized distribution strategy with 10 distribution centers located
in Columbus, Ohio and a distribution facility in Auburn, Massachusetts for
Filene's Basement. The aggregate area of the distribution facilities is
approximately 3,000,000 square feet; however, use of multi-tier processing
levels in some of the distribution centers substantially increases their
operating capacity. In addition, to expedite the flow of merchandise to certain
clusters of stores, we use a third party processor located in New Jersey.
Our distribution facilities utilize material handling equipment, including
mechanized conveyor systems to separate and collate shipments to the stores. Our
distribution facilities are designed to allow priority delivery of late season
purchases and fast-moving merchandise to have it in our stores quickly to take
full advantage of the remaining selling season.
Merchandise is processed, ticketed and consolidated prior to shipment to the
stores to ensure full-truck loads to minimize shipping costs. We lease our fleet
of road tractors and approximately 70% of our semi-rig trailers with the
remainder being owned. Our fleet makes the majority of all deliveries to the
stores.
To support the planned growth of our shoe operations, we consolidated and
relocated Shonac and DSW's principal offices and distribution center operations
in 2001 to a new 700,000 square foot facility located in Columbus, Ohio. We have
entered a 15-year lease with three five-year option periods with an affiliate of
SSC for this facility.
This distribution center facility uses a modern warehouse management system and
material handling equipment, including new conveyor systems, to separate and
collate shipments to our stores. The design of the distribution center
facilitates the prompt delivery of priority purchases and fast selling footwear
to stores so we can take full advantage of each selling season.
Filene's Basement's merchandise is processed and distributed from a 457,000
square foot leased distribution facility situated on 32.8 acres with adjacent
rail service in Auburn, Massachusetts, outside of metropolitan Boston,
Massachusetts.
ADVERTISING AND PROMOTION
We commit substantial resources to advertising and believe our marketing
strategy is one of the keys to our success. Value City advertises frequently in
print, including newspapers, circulars and flyers, and on television and radio.
The promotional strategy is carefully planned and budgeted to include not only
institutional and seasonal promotions, but also weekly storewide sales events
highlighting recent buy-outs and other specially purchased brand name
merchandise designed to maximize customer interest. In some cases, a supplier
may prohibit the advertising or non-store promotion of its brand name.
Our DSW stores currently use a broadcast campaign, primarily radio, focusing on
the slogan "The Shoes of the Moment. The Deal of a Lifetime." This campaign is
supplemented by print promotions and, increasingly, television. In addition, a
valuable marketing tool for DSW is the "Reward Your Style" loyal customer
9
program. Customers are asked to join the program during the checkout procedure.
By analyzing the member database, as well as the sales transactions of those
members, we are able to direct the advertising to encourage repeat shopping and
to reach targeted customers. DSW also sponsors certain LPGA events.
Filene's Basement employs a multi-media approach, using print, broadcast and
direct mail. The communication strategy is designed to target customer segments
and generate increased store trips and cross shopping opportunities.
STORES
Store Location and Design
We believe customers are attracted to our stores principally by the wide
assortment of quality items at substantial savings.
Our Value City stores average approximately 87,000 square feet, with
approximately 70% of the total area of each store representing selling space.
The stores are generally laid out on a single level, with central traffic aisles
providing access to major departments. Each department strives to display and
stock large quantities and assortments of merchandise, giving the store a full
appearance. The stores are generally open from 9:30 a.m. until 9:30 p.m. Monday
through Saturday and 11:00 a.m. until 6:00 p.m. on Sunday. All of the stores are
located in leased facilities. Of the 117 Value City stores open as of March 15,
2002, 25 are freestanding and 92 are in shopping centers, of which 25 are
enclosed malls in which they serve as an anchor.
Our DSW stores average approximately 25,000 square feet, with about 87% of the
total area of each store representing selling space. The stores' exteriors
feature black and white color schemes and in many cases, windows with striped
awnings. The store interiors are well lighted and feature a unique display
concept, a simple case presentation which groups the shoes together by style.
Interior signage is tasteful and kept to a minimum. The shoe stores are
generally laid out on a single level, with the cases of shoes forming the aisles
in the stores. This allows customers to view the entire store when they enter.
Of the 108 DSW stores open as of March 29, 2002, 12 are freestanding, 77 are in
shopping centers and 19 are in enclosed malls. The stores are generally open
from 10:00 a.m. until 9:00 p.m. Monday through Saturday and 12:00 p.m. until
6:00 p.m. on Sunday. The stores are located in leased facilities.
The Filene's Basement Boston store is a landmark institution recognized by
generations of New England families and visitors as a source of quality
off-price men's and women's merchandise. The downtown location is famous for a
unique marketing concept - the Automatic Markdown Plan - whereby certain
merchandise is automatically discounted based on the number of days the
merchandise has been on the sales floor. Filene's Basement believes the
Automatic Markdown Plan, found only in the downtown Boston location, generates a
sense of shopping urgency and creates customer excitement and loyalty. Filene's
Basement subleases 178,000 square feet (approximately 65,300 square feet of
selling space) on four floors. The sublease terminates in 2009 with rights on
behalf of Filene's Basement to extend until 2024. The Boston store generated
over $1,014 in sales per square foot of selling space during fiscal 2001 and
represents approximately 23% of total sales.
Excluding the downtown Boston location, most of our Filene's Basement stores are
located in suburban areas, near large residential neighborhoods away from
downtown commercial centers and average approximately 27,000 square feet of
selling space per store. Filene's Basement operates 20 branch stores in six
states and the District of Columbia. Generally, the branch store's selling space
is on a single level and uses a prototypical "racetrack" aisle layout for
merchandise presentation. The branch stores are designed to be convenient and
10
attractive in their merchandise presentation, dressing rooms, checkouts and
customer service areas. Their merchandise mix is similar to that of the Boston
flagship store. Because of the operational complexities associated with
transferring the Automatic Markdown Plan to the branch stores, the branch stores
do not operate under the Automatic Markdown Plan, although markdowns are taken
as required.
Store Operations
We offer customers a convenient, pleasurable shopping experience and a high
level of satisfaction. At Value City, a training program is utilized to assure
every associate maintains the highest level of professionalism and places
customer service at the forefront. At DSW, all associates receive Retail Results
University training in both product knowledge and sales/service. This in-house
training program emphasizes acknowledgment of all customers, customized levels
of service, and realization of sales opportunities at all moments of customer
contact.
All of our stores are designed for self-service shopping, although sales
personnel are available to help customers locate merchandise and to assist in
the selection and fitting of apparel and footwear. In all stores, a customer
service desk is conveniently located generally adjacent to the central checkout
area. To promote the ease of checkout we have invested in point of sale scanning
systems that expedite the checkout process by providing automated check and
credit approval and price lookup. Sales associates are trained to create a
"customer-friendly" environment. We accept all major credit cards, and also
provide a private label credit card program at the Value City and Filene's
Basement stores. Private label and other credit card sales are nonrecourse to
us, with the servicing agent assuming all of the credit risk. Value City offers
a layaway program in its stores and maintains a liberal return policy.
Our stores are organized into separate geographic regions and districts, each
with a territory or district manager. Territory and district managers are
headquartered in their region and spend the majority of their time in their
stores to ensure adherence to merchandising, operational and personnel
standards. The typical staff for a Value City store consists of a store manager
and several assistants, and full and part-time hourly associates. Each store
manager reports directly to one of the territory or district managers, and each
of the territory or district managers reports to a Regional Vice President who
in turn reports to the Vice President of Operations.
The typical staff for a DSW store consists of a store manager and two assistant
managers who supervise 20 to 25 full and part-time hourly associates. Each store
manager reports directly to one of 17 district managers who in turn report to
one of 2 regional managers who in turn report to the head of Operations.
Our Filene's Basement stores' typical staff consists of a general manager, an
assistant store manager, merchandising group managers and full and part-time
associates. Each general manager reports to the group store manager who in turn
reports to the Senior Vice President, Director of Stores.
Our store managers function both as administrators and merchants. All managers
are responsible on a day-to-day basis for maintenance of displays and
inventories in all departments, for the overall condition of their stores, for
customer relations, personnel hiring and scheduling, and for all other
operational matters arising in the stores. Each store manager is compensated, in
part, based on the performance of his or her store. Our store managers are an
important source of information concerning local market conditions, trends and
customer preferences.
We prefer to fill management positions through promotion of existing associates.
A store management training program is maintained to develop the management
skills of associates and to provide a source of management personnel for future
store expansion.
11
Expansion
We have increased our department store base from 74 stores at the start of
fiscal 1994 to 117 stores at the end of fiscal 2001. No new department stores
were added in Fiscal 2001 and none are planned for Fiscal 2002. Our past
expansion has been accomplished by leasing newly constructed locations or by
acquiring existing locations from other retailers.
We plan to open 25 to 30 new DSW shoe stores during fiscal 2002. We intend to
open new DSW stores in both existing and new markets with an emphasis on
locating stores in highly visible sites on high traffic streets in relatively
affluent trade areas. Factors considered in evaluating new store sites include
store size, configuration, demographics and lease terms. We seek to cluster
stores in targeted metropolitan areas to enhance name recognition, share
advertising costs and achieve economies of scale in management and distribution.
The table below sets forth certain information relating to the Company's stores
during each of the last five fiscal years:
6 Months
Year Ended Ended Year Ended
---------------------------------- ----- --------------------
2/2/02 2/3/01 1/29/00 1/30/99 8/1/98 8/2/97
------ ------ ------- ------- ------ ------
Beginning of Year(1) 221 167 145 142 95 86
Opened(2)(3) 27 55 22 4 49 9
Closed 2 1 -- 1 2 --
- -----------------------------------------------------------------------------------------------------------------------------
End of Year(3) 246 221 167 145 142 95
- -----------------------------------------------------------------------------------------------------------------------------
(1) Excludes apparel, domestics and housewares departments operated by
the Company in two Valley Fair department stores prior to May 3,
1998.
(2) Fiscal year ended February 3, 2001 includes 14 Filene's Basement
stores acquired on March 17, 2000. Fiscal year ended August 1,
1998 includes 2 department stores obtained in the purchase of
Valley Fair and the 43 shoe stores obtained in the purchase of
Shonac.
(3) Includes Crown Shoe Stores which are combined with Value City
Department Stores sales, but are not reflected in individual store
counts due to immateriality. Total number of Crown stores were 5
in fiscal years ended February 2, 2002 and February 3, 2001 and 4
in the earlier periods.
Based upon our experience, we estimate the average cost of opening a new
department store ranges from approximately $4.5 million to $6.5 million and the
cost of opening a new DSW shoe store ranges from approximately $1.0 million to
$2.0 million, including leasehold improvements, fixtures, inventory, pre-opening
expenses and other costs. Similar costs for a Filene's Basement store are in the
$2.0 million to $3.0 million range. Preparations for opening a department store
generally take eight to twelve weeks and preparations for opening a DSW shoe
store or a Filene's Basement store generally take eight to ten weeks. We charge
pre-opening expenses to operations as incurred. It has been our experience that
new stores generally achieve profitability and contribute to net income
following the first year of operations. It is not uncommon to receive lease
incentives for our DSW store openings.
We continually refurbish our stores by updating the merchandise displays and
in-store signage. The costs of refurbishing on a per store basis are generally
not substantial. On an annual basis, we select stores to be
12
remodeled, which generally involves more significant changes to the interior or
exterior of the store. We maintain our own architectural design staff,
construction crews and carpentry shop to assist in refurbishing and remodeling
store interiors and to build in-store display tables and racks.
MANAGEMENT INFORMATION AND CONTROL SYSTEMS
We believe a high level of automation is essential to maintaining and improving
our competitive position. We rely upon computerized data systems to provide
information at all levels, including warehouse operations, store billing,
inventory control, merchandising and automated accounting. Value City utilizes
two IBM AS/400 computer systems, and Shonac utilizes a Unix computer system for
all of its processing needs.
We utilize point of sale ("POS") registers with full scanning capabilities to
increase speed and accuracy at customer checkouts and facilitate inventory
restocking. Since layaways represent an important part of our department store
business, an automated system to capture and control layaways is integrated into
the POS system.
We utilize automated distribution center systems to track and control the
receipt, processing, storage and shipping of product to the stores.
ASSOCIATES
As of March 15, 2002, we had approximately 17,000 associates of which 9,200 were
full-time and the balance were part-time. Approximately 1,500 of these
associates in 21 stores are covered by collective bargaining agreements.
Group hospitalization, surgical, medical, vision, dental, disability and life
insurance benefits and a 401(k) plan are provided to full-time non-union
associates. The Company is a co-sponsor with SSC in these plans. The Company
also sponsors an associate stock purchase plan and a stock option plan for
salaried associates.
We believe that, in general, we have satisfactory relations with all of our
associates.
COMPETITION
The retail industry is highly competitive. We compete with a variety of
conventional and discount retail stores, including national, regional and local
independent department and specialty stores, as well as with catalog operations,
on-line providers, factory outlet stores and other off-price stores.
In the discount or off-price retailing segment, we differentiate ourselves
through our store format and the breadth of value product offering. Our large
stores differ from most other off-price retailers which tend to operate
substantially smaller stores focusing predominantly on either hard or soft
goods. Our large stores facilitate our merchandise offering and broad range of
brands and products.
In addition, because we purchase much of our inventory opportunistically, we
compete for merchandise with other national and regional off-price apparel and
discount outlets. Many of our competitors handle identical or similar lines of
merchandise and have comparable locations, and some have greater financial
resources than we do.
Competitive factors important to our customers include fashion, value,
merchandise selection, brand name recognition and, to a lesser degree, store
location. We compete primarily on the basis of value, merchandise quality and
selection. We believe our competitive advantages include; our reputation in the
marketplace for
13
being able to purchase entire lots of merchandise; our ability to either quickly
distribute or hold the merchandise for sale at the most opportune time; our
full-line merchandise and style offerings; and our range of brand names.
SERVICE MARKS, TRADEMARKS AND TRADENAMES
The service mark "Value City" has been registered by SSC in the U.S. Patent and
Trademark Office. Our four department stores in Columbus operate under the
tradename "Schottenstein's," which has been registered in the State of Ohio. We
are entitled to use such names for the sole purpose of operating department
stores on an exclusive basis pursuant to a perpetual license from SSC. SSC also
operates a chain of furniture stores under the name "Value City Furniture." We
have also registered in the U.S. Patent and Trademark Office various trademarks
used in our marketing program.
Through the acquisition of Shonac, we registered in the U.S. Patent and
Trademark Office a number of trademarks and service marks, including: DSW; DSW
Shoe Warehouse; Coach and Four; Crown Shoes; Reward Your Style; Flites; Jonathan
Victor; Kristi G; Lakota Trail; Landmarks; Sandler; Shoes by Kari; and Sylvia
Cristie.
Filene's Basement has an exclusive, perpetual, worldwide, royalty-free license
to use the name Filene's Basement and Filene's Basement of Boston trademark and
service mark registrations as well as certain other tradenames. Filene's
Basement's exclusive licensee status with respect to these registered marks has
been recorded with the United States Patent and Trademark Office and relevant
state offices.
14
ITEM 2. PROPERTIES.
Set forth in the following table are the locations of stores operated by the
Company as of February 2, 2002:
Filene's
Value City DSW Basement Total
------------- ------------- ------------- -------------
Arizona - 1 - 1
California - 4 - 4
Colorado - 3 - 3
Connecticut - 1 - 1
Delaware 3 - - 3
Florida - 6 - 6
Georgia 4 2 - 6
Illinois 16 6 2 24
Indiana 7 2 - 9
Kansas - 2 - 2
Kentucky 4 - - 4
Maryland 7 4 - 11
Massachusetts - 5 8 13
Michigan 9 6 - 15
Minnesota - 3 - 3
Missouri 8 1 - 9
New Hampshire - 1 - 1
New Jersey 7 6 1 14
New York - 11 4 15
North Carolina 1 1 - 2
Ohio 23 9 1 33
Oklahoma - 1 - 1
Pennsylvania 18 9 1 28
Tennessee 1 2 - 3
Texas - 11 - 11
Virginia 4 6 - 10
Washington D.C. 1 - 3 4
West Virginia 4 - - 4
Wisconsin - 1 - 1
------------ ------------- ------------ -------------
117 104 20 241
------------- ------------- ------------- -------------
We maintain buying offices in Columbus, Ohio; Boston, Massachusetts; and Los
Angeles, California. We operate 10 warehouse/distribution complexes located in
Columbus, Ohio and one distribution facility in Auburn, Massachusetts. In
addition, to expedite the flow of merchandise to certain clusters of stores, we
use third party processors located principally in New Jersey. Our executive
offices occupy approximately 45,000 square feet in a building which includes a
store and also serves as one of our apparel distribution centers.
The stores and all of the warehouse, buying and executive office facilities are
leased or subleased except for one owned shoe store location. As of February 2,
2002, we leased or subleased 28 stores and 7 warehouse facilities and a parcel
of land from SSC or entities affiliated with SSC. The remaining stores and
warehouses are
15
leased from unrelated entities. Most of the store leases provide for an annual
rent based upon a percentage of gross sales, with a specified minimum rent.
Our office, warehouse and distribution facilities for our Value City and
Filene's Basement department store business are adequate for our current needs
and we believe that such facilities, with certain modifications and additional
equipment will be adequate for our foreseeable future demands.
To support the planned growth of our DSW shoe warehouse business, we have
consolidated and relocated the related back office and distribution operations
of our shoe business in Spring 2001, to a new 700,000 square foot facility
located in Columbus, Ohio. The facility is leased from an affiliate of SSC and
has a 15 year base term with 3 five-year option periods.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in various legal proceedings that are incidental to the conduct
of our business. In the opinion of management, the amount of any liability with
respect to these proceedings individually or in the aggregate, will not be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the high and low sales prices of the Common
Shares as reported on the NYSE Composite Tape during the periods indicated. As
of April 15, 2002, there were 550 shareholders of record.
HIGH LOW
Fiscal 2000:
First Quarter $16.50 $9.375
Second Quarter 11.375 8.00
Third Quarter 9.9375 6.875
Fourth Quarter 8.125 4.625
Fiscal 2001:
First Quarter $9.45 $6.65
Second Quarter 11.50 5.60
Third Quarter 6.30 2.50
Fourth Quarter 6.45 2.98
Fiscal 2002:
First Quarter (through April 15, 2002) $4.60 $3.04
We have paid no dividends and presently anticipate that all of our future
earnings will be retained for development of our businesses and we do not
anticipate paying cash dividends on our common shares during fiscal 2002. The
payment of any future dividends will be at the discretion of our board of
directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. The payment of dividends under our long-term credit facility is
restricted to the greater of $5.0 million or 10% of consolidated net income.
17
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth for the periods indicated selected financial data
included in our consolidated financial statements and our underlying books and
records. The 12 month period ended January 30, 1999 is presented for comparative
purposes. Such selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of Value City Department
Stores, Inc. including the notes thereto, set forth in Item 8 of this Form 10-K
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" set forth in Item 7 of this Form 10-K.
Transition
12 Months Period
Ended 6 Months
For the Fiscal Year Ended (Unaudited) Ended For the Year Ended
---------------------------------- ----- -----------------------
2/2/02 2/3/01(1) 1/29/00 1/30/99) 1/30/99(1) 8/1/98(2) 8/2/97
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Net Sales (3) $2,283,878 $2,213,017 $1,670,176 $1,364,030 $780,263 $1,161,379 $1,073,399
Operating (Loss) Profit $(16,344) $(135,601) $65,788 $51,266 $40,815 $38,544 $10,674
Net (Loss) Income $(28,723) $(101,791) $33,468 $24,871 $20,256 $20,359 $3,951
Basic (Loss) Earnings
per Share $(0.85) $(3.03) $1.03 $0.77 $0.63 $0.64 $0.12
Diluted (Loss) Earnings
per Share $(0.85) $(3.03) $1.02 $0.76 $0.62 $0.63 $0.12
Total Assets $880,311 $908,009 $744,181 $574,427 $574,427 $684,078 $457,973
Working Capital $228,775 $211,402 $205,011 $165,527 $165,527 $204,784 $158,476
Current Ratio 1.79 1.66 1.82 1.98 1.98 1.88 2.14
Long-term Obligations $337,199 $326,449 $144,168 $101,447 $101,447 $165,648 $57,763
Number of (4):
Department Stores 117 119 105 97 97 95 95
Shoe Stores 104 78 58 44 44 43 --
Filene's Basement Stores 20 19 -- -- -- -- --
Net Sales per
Selling Sq. Ft. (5) $233 $234 $221 $235 $126 $229 $217
Comp Sales Change (6) (2.4)% (1.1)% 7.2% 6.0% 3.3% 5.9% 0.1%
(1) Fiscal 2000 includes 53 weeks; all other years contain 52 weeks. The
six month period includes 26 weeks.
(2) The operations of Shonac and Valley Fair are included from the date of
acquisition, May 3, 1998.
(3) Excludes sales of licensed departments. Prior to fiscal 1998, sales
from our toys and sporting goods departments were included in Net
Sales. At the start of fiscal 1998 these departments became licensed
departments operated by VCM, Ltd., a 50/50 joint venture with Mazel
Stores, Inc.
(4) Includes all stores operating at the end of the fiscal year. Years
prior to 1998 exclude the apparel, domestic and housewares departments
operated by us in two affiliated department stores which were acquired
effective May 3, 1998.
(5) Excludes licensed departments and stores not operated during the
entire fiscal period.
(6) Comparable Store Sales Change excludes licensed departments. A store is
considered to be comparable in its second full fiscal year of
operation. For fiscal year 2000, comparable store sales are computed
using like 52-week periods.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationships to net sales of the listed items included in our Consolidated
Statements of Operations.
For the Year Ended
--------------------------------------------
2/2/02 2/3/01 1/29/00
52 Weeks 53 Weeks 52 Weeks
- --------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales
licensed departments 100.0% 100.0% 100.0%
Cost of sales (62.6) (67.5) (62.2)
- ------------------------------------------------------------------------------------------------------------------
Gross profit 37.4 32.5 37.8
Selling, general and
administrative expenses (38.9) (39.3) (34.7)
License fees from affiliates
and other operating income 0.8 0.7 0.8
- ------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (0.7) (6.1) 3.9
Interest expense, net (1.3) (1.3) (0.6)
Equity in (loss) income of joint venture - (0.1) 0.1
- ------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (2.0) (7.5) 3.4
Benefit (provision) for income taxes 0.7 2.9 (1.4)
- ------------------------------------------------------------------------------------------------------------------
Net (loss) income (1.3)% (4.6)% 2.0%
- ------------------------------------------------------------------------------------------------------------------
19
CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis discusses the results of operations and
financial condition as reflected in the Company's consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. As discussed in Note 2 to the Company's Consolidated
Financial Statements, the preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of commitments and contingencies at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. On an ongoing basis, management evaluates its estimates and judgments,
including, but not limited to, those related to inventory valuation,
depreciation, amortization, recoverability of long-lived assets including
intangible assets, the calculation of retirement benefits, estimates for self
insurance reserves for health and welfare, workers' compensation and casualty
insurance, income taxes, contingencies, litigation and revenue recognition.
Management bases its estimates and judgments on its historical experience and
other relevant factors, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. The process of determining significant estimates is
fact specific and takes into account factors such as historical experience,
current and expected economic conditions, product mix, and in some cases,
actuarial techniques. The Company constantly re-evaluates these significant
factors and makes adjustments where facts and circumstances dictate.
While the Company believes that the historical experience and other factors
considered provide a meaningful basis for the accounting policies applied in the
preparation of the consolidated statements, the Company cannot guarantee that
its estimates and assumptions will be accurate. As the determination of these
estimates requires the exercise of judgement, actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements.
We believe the following represent the most critical estimates and assumptions
used in the preparation of our consolidated financial statements. We have
discussed the selection, application and disclosure of the critical accounting
policies with the audit committee of the board of directors.
- Inventory. Our merchandise inventory is carried at the lower of cost
or market on a first-in, first-out basis using the retail inventory
method. Under the retail inventory method, the valuation of
inventories at cost and the resulting gross margins are calculated by
applying a calculated cost to retail ratio to the retail value of
inventories. This is an averaging method that has been widely used in
the retail industry due to its practicality. It is recognized that the
use of this method results in valuing inventories at lower of cost or
market if markdowns are currently taken as a reduction of the retail
value of inventories. Inherent in the calculation are certain
significant management judgements and estimates including, merchandise
markon, markups, markdowns and shrinkage, which significantly impact
the ending inventory valuation at cost and the resulting gross
margins. These significant estimates, coupled with the fact that this
method is an averaging process, can, under certain circumstances,
produce distorted or inaccurate cost figures. Additionally, these
significant estimates may change as a result of further markdowns
based on our sales performance. Reserves to value inventory at the
lower of cost or market were $33.5 million and $54.1 million at the
end of fiscal 2002 and 2001, respectively.
20
- Long-lived assets. In evaluating the fair value and future benefits of
long-lived assets, we perform an analysis of the anticipated
undiscounted future cash flows of the related long-lived asset and
reduce the carrying value by the excess, if any, of the result of such
calculation. We believe at this time that the long-lived assets'
carrying values and useful lives continue to be appropriate. During
fiscal 2001, we recorded a charge of $4.9 million for the write-down
of capitalized development and software costs related to discontinued
information systems and a goodwill write-down of $1.5 million relating
to a previous acquisition.
Effective February 3, 2002, the beginning of the new fiscal year, SFAS
142 will be adopted. SFAS 142 requires that goodwill will no longer be
amortized, but will be subject to annual fair value based impairment
tests. In addition, a transitional impairment test is required upon
the adoption date. These impairment tests are conducted on each
business of the Company where goodwill is recorded, and may require
two steps. The initial step is designed to identify potential goodwill
impairment by comparing an estimate of the fair value for each
applicable business to its respective carrying value. For those
businesses where the carrying amount exceeds its estimated fair value,
a second step is performed to measure the amount of goodwill
impairment, if any. We are in the process of determining if existing
goodwill is impaired. Goodwill impairment, if any, will be recognized
in accordance with SFAS 142 and will be classified as a cumulative
effect of a change in accounting principle.
- Self-insurance reserves. We record estimates for certain health and
welfare, workers compensation and casualty insurance costs that are
self-insured programs. These estimates are based on actuarial
assumptions and are subject to change based on actual results. Should
a greater amount of claims occur compared to what was estimated or
costs of the medical profession increase beyond what was anticipated,
reserves recorded may not be sufficient and additional costs to the
consolidated financial statements could be required. During fiscal
2001, 2000 and 1999, we recorded charges of $8.1 million, $8.6 million
and $0, respectively, for self-insurance liabilities associated with
employee health and welfare plans, workers compensation and casualty
insurance programs.
See Note 2 to the Company's Consolidated Financial Statements for a discussion
of our significant accounting policies.
FISCAL YEAR ENDED FEBRUARY 2, 2002 COMPARED TO FISCAL YEAR ENDED FEBRUARY 3,
2001
Sales for the fifty-two weeks ended February 2, 2002, increased by 3.2% to $2.28
billion from $2.21 billion in the fifty-three week period of 2000. Excluding the
extra week in fiscal 2000, total sales increased 5.2% and same store sales
declined 2.4%. Fiscal 2001 sales include $293.4 million attributable to Filene's
Basement, which was acquired in March 2000. Filene's Basement sales in the prior
year were $249.1 million. By segment comparable store sales were:
2001 2000
------- ------
Value City Department Stores (3.7)% (4.3)%
DSW 0.0 % 19.1%
Filene's Basement 2.2 % n/a
--------------------------------------------------------------------
Total (2.4)% (1.1)%
---------------------------------------------------------------------
21
Department Store non-apparel comparable sales increased 3.3% for the twelve
months. Apparel comparable sales declined 5.9% for the year to date period
including a positive comparable of 3.7% for children while men's and ladies
declined 4.7% and 10.7%, respectively.
Including a flat twelve-month comparable store growth rate, DSW sales rose
almost $100.0 million to $509.4 million for the year to date period. This
includes a net increase of 26 stores.
Gross profit increased $134.3 million from $720.1 million to $854.4 million, and
increased as a percentage of net sales from 32.5% to 37.4%. Last year's gross
margin included a $105.4 million charge for the realignment of excess inventory
quantities. Excluding the charge the gross margin percent to sales would have
been 37.3% in fiscal 2000. Gross profit, as a percent of sales by segment, were:
2001 2000
------- ------
Value City Department Stores 37.6% 30.7%
DSW 38.2% 38.3%
Filene's Basement 35.1% 34.4%
- ---------------------------------------------------------------------
Total 37.4% 32.5%
- ---------------------------------------------------------------------
For the year to date period, SG&A increased $18.5 million to $888.7 million or
38.9% of sales. The fifty-two week period ended February 2, 2002 includes
approximately $24.7 million, or $0.47 per share, for employee benefit, severance
costs, write off of software development efforts, DSW warehouse relocation and
fees associated with the terminated sale of DSW and Filene's Basement. The
fifty-three week period ended February 3, 2001 included pretax charges of $4.6
million for asset impairment and severance costs. New DSW stores added
approximately $67.0 million of SG&A expenses. SG&A as a percent of sales by
segment were:
2001 2000
------- ------
Value City Department Stores 40.4% 40.8%
DSW 38.0% 36.7%
Filene's Basement 32.9% 34.4%
- ---------------------------------------------------------------------
Total 38.9% 39.3%
- ---------------------------------------------------------------------
Based upon our experience, we estimate the average cost of opening a new
department store to range from approximately $4.5 million to $6.5 million and
the cost of opening a new shoe store to range from approximately $1.0 million to
$2.0 million including leasehold improvements, fixtures, inventory, pre-opening
expense and other costs. Similar costs for a Filene's Basement store are in the
$2.0 million to $3.0 million range. Preparations for opening a department store
generally take between eight and twelve weeks and preparations for a DSW store
or a Filene's Basement store generally take eight to ten weeks. Pre-opening
costs are expensed as incurred. It has been our experience that new stores
generally achieve profitability and contribute to net income after the first
full year of operations. Twenty-three department stores opened less than twelve
months during fiscal 2000 had pre-tax operating losses of $22.8 million,
including $4.5 million of pre-opening expense. Twenty-six DSW stores opened less
than twelve months in fiscal 2001 had a pre-tax net operating loss of $2.5
million, including $0.1 million of pre-opening expenses. Twenty DSW stores
opened less than twelve months during fiscal 2000 had a pre-tax net operating
loss of $6.5 million, including $4.6 million of pre-opening expenses.
22
License fees from affiliates increased $0.9 million, or 8.0%, from $11.3 million
to $12.2 million, and remained at 0.5% as a percentage of net sales.
Other operating income increased $2.4 million, or 76.1%, from $3.3 million to
$5.7 million and increased as a percentage of net sales from 0.15% to 0.25%.
Operating loss decreased $119.3 million from a loss of $135.6 million to a loss
of $16.3 million, and decreased as a percentage of net sales from a loss of 6.1%
to a 0.7% loss as a result of the above factors.
Interest expense, net of interest income, decreased $2.0 million from $30.5
million to $28.5 million due primarily to a decrease in interest rates, offset
partially by slightly higher average borrowings.
Equity in loss of joint venture decreased $0.9 million from a loss of $1.3
million to a loss of $0.4 million.
Loss before benefit for income taxes decreased $122.1 million from a loss of
$167.4 million to a loss of $45.3 million, and decreased as a percentage of
sales from a loss of 7.5% to a 2.0% loss as a result of the above factors.
FISCAL YEAR ENDED FEBRUARY 3, 2001 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
2000
Our net sales increased $542.8 million, or 32.5%, from $1,670.2 million to
$2,213.0 million. Fiscal 2000's sales included $249.1 million net owned sales of
the Filene's Basement stores acquired effective March 17, 2000. Comparable store
sales decreased 1.1%. Net sales for the department stores ("Value City")
increased $130.3 million, or 9.2%, from $1,423.6 million to $1,553.9 million.
Value City's comparable store sales decreased 4.3%, or $60.7 million.
Non-apparel sales increased 7.2% and apparel sales increased 6.4%. On a
comparable store basis, apparel and non-apparel sales decreased 5.1% and 5.4%,
respectively. DSW Shoe Warehouse achieved sales of $410.0 million with a 19.1%
comparable stores sales increase.
Gross profit increased $89.1 million from $631.0 million to $720.1 million, and
decreased to 32.5% as a percentage of net sales, compared to 37.8% as a
percentage of net sales in the prior year. The decrease in the gross margin
percentage is due primarily to a $105.4 million charge for the realignment of
excess inventory quantities.
Selling, general and administrative expenses ("SG&A") increased $290.7 million
from $579.5 million to $870.2 million, and increased as a percentage of net
sales from 34.7% to 39.3%, an increase of 4.6%. New DSW and Value City stores
accounted for $102.5 million of the SG&A increase; the Filene's Basement stores
added $86.0 million. Comparable store SG&A increased $37.0 million, primarily in
the areas of payroll, benefits and occupancy costs. Distribution and
transportation costs were up $41.1 million. Overhead increased $14.1 million to
support expansion of our shoe business and the relocation of its distribution
complex. SG&A also include $4.6 million of non-recurring severance and asset
impairment charges. All other expenses as a group were up approximately $6.6
million.
Based upon our experience, we estimate the average cost of opening a new
department store to range from approximately $4.5 million to $6.5 million and
the cost of opening a new shoe store to range from approximately $1.0 million to
$2.0 million including leasehold improvements, fixtures, inventory, pre-opening
expense and other costs. Similar costs for a Filene's Basement store are in the
$2.5 million to $3.5 million range. Preparations for opening a department store
generally take between 8 and 12 weeks and preparations for a shoe store or a
Filene's Basement store generally take 8 to 10 weeks. Pre-opening costs are
expensed as incurred. It has been our experience that new stores generally
achieve profitability and contribute to net income after the first
23
full year of operations. Twenty-three department stores opened less than 12
months as of the beginning of fiscal 2000 had a pre-tax net operating loss of
$22.8 million, including $4.5 million of pre-opening expense amortization. Ten
department stores opened less than 12 months during fiscal 1999 had pre-tax
operating losses of $1.6 million in 1999, including $3.8 million of pre-opening
expense. Twenty DSW stores opened less than 12 months in fiscal 2000 had a
pre-tax net operating loss of $6.5 million, including $4.6 million of
pre-opening expenses. Twenty-two DSW stores opened less than 12 months during
fiscal 1999 had a pre-tax net operating loss of $3.7 million after recognizing
$3.3 million of pre-opening expenses.
License fees from affiliates increased $2.9 million, or 34.0%, from $8.5 million
to $11.3 million, and remained at 0.5% as a percentage of net sales.
Other operating income decreased $2.4 million, or 42.0%, from $5.6 million to
$3.3 million and decreased as a percentage of net sales from 0.34% to 0.15%.
Operating (loss) profit decreased $201.2 million from $65.6 million to a loss of
$135.6 million, and decreased as a percentage of net sales from 3.9% to a 6.1%
loss as a result of the above factors.
Interest expense, net of interest income, increased from $10.7 million to $30.5
million due to increased borrowing.
Equity in income (loss) of joint venture decreased $2.7 million from income of
$1.3 million to a loss of $1.3 million due primarily to markdowns taken to
liquidate inventory.
Income (loss) before provision for income taxes decreased $223.8 million from
income of $56.4 million to a loss of $167.4 million, and decreased as a
percentage of sales from 3.4% to a 7.5% loss as a result of the above factors.
SEASONALITY
Our business is affected by the pattern of seasonality common to most retail
businesses. Historically, the majority of our sales and operating profit have
been generated during the back-to-school and Christmas selling seasons.
FISCAL YEAR
The Company follows a 52/53-week fiscal year that ends on the Saturday nearest
to January 31. Fiscal 2001 and 1999 contain 52 weeks and fiscal 2000 has 53
weeks.
INCOME TAXES
The effective tax rate for fiscal 2001 was 36.5% versus 39.2% for fiscal 2000.
ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") periodically issues Statements
of Financial Accounting Standards ("SFAS"), some of which require implementation
by a date falling within or after the close of our fiscal year.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 2000. SFAS 133, as
amended, establishes accounting and reporting standards for de-
24
rivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS 133, certain contracts that
were not formerly considered derivatives may now meet the definition of a
derivative. Our adoption of SFAS 133 effective February 4, 2001 did not have a
significant impact our financial position, results of operations, or cash flows.
We utilize interest rate swap agreements to manage our interest rate risks on
borrowings under the $300 million variable rate credit agreement. We do not hold
or issue derivative financial instruments for trading purposes. We do not have
derivative financial instruments that are held or issued and accounted for as
hedges of anticipated transactions.
In June 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets". The guidance in SFAS No. 141
supersedes APB 16 and is applicable to business combinations initiated after
June 30, 2001. Upon adoption of SFAS No. 142, goodwill will cease to be
amortized and will instead be subject to at least an annual assessment for
impairment as set forth in the new standard. We have approximately $41.0 million
in goodwill recorded in our consolidated balance sheet as of February 2, 2002.
Amortization of the goodwill is generally not deductible for tax purposes. We
recorded approximately $4.9 million in amortization expense related to goodwill
for the twelve months ended February 2, 2002 and we intend to adopt SFAS No. 142
for the 2002 fiscal year. We are in the process of determining if existing
goodwill is impaired. Goodwill impairment, if any, will be recognized in
accordance with SFAS No. 142 and will be classified as a cumulative effect of a
change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addressed financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Under this Statement, obligations that meet
the definition of a liability will be recognized consistently with the
retirement of the associated tangible long-lived assets. This Statement is
effective for financial statements issued for fiscal years beginning after June
15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." Because SFAS No. 121 did not address
the accounting for a segment of a business accounted for as a discontinued
operation under Opinion 30, two accounting models existed for long-lived assets
to be disposed of. The FASB decided to establish a single accounting model,
based on the framework established in Statement 121, for long-lived assets to be
disposed of by sale. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years.
We are currently assessing the impact of SFAS No. 143 and 144. At this time, we
have not yet determined the effect of these pronouncements on our results of
operations and financial position.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management believes
that the effect of inflation, if any, on the results of operations and financial
condition has been minor.
25
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $228.8 million and $211.4 million at February 2, 2002
and February 3, 2001, respectively. Current ratios at those dates were 1.8 and
1.7, respectively.
Net cash provided by operating activities totaled $58.4 million in fiscal 2001.
Net cash used in operating activities was $114.7 million for the fiscal year
2000. Earnings before interest, taxes, depreciation and amortization (EBITDA)
was $40.3 million versus a loss of $89.4 million last year.
Net cash used for capital expenditures was $40.2 million and $70.2 million for
fiscal 2001 and 2000, respectively. During fiscal 2001, capital expenditures
included $11.6 million for new stores, $8.9 million for improvements in existing
stores, $11.6 million for relocation of office, warehousing and operations of
our shoe business, $4.6 million for MIS equipment upgrades and new systems. All
other capital expenditures aggregated $3.5 million. Proceeds from lease
incentives totaled $14.2 million in fiscal 2002 and are amortized as a reduction
of rent expense over the life of the lease.
At February 2, 2002, we had a $300 million Amended and Restated Credit Agreement
(Credit Agreement), dated as of March 15, 2000. The Credit Agreement, which
expires on March 15, 2003, provides for revolving and overnight loans and
issuance of letters of credit. Outstanding advances are secured by a lien on
assets and are subject to a monthly borrowing base of eligible inventories and
receivables, as defined. Terms of the Credit Agreement require compliance with
certain restrictive covenants, including limitations on dividends, the
incurrence of additional debt and financial ratio tests. At February 2, 2002,
$11.8 million was available under the Credit Agreement. Borrowings aggregated
$211.0 million, plus $17.0 million of letters of credit were issued and
outstanding. The Credit Agreement provides for various borrowing rates,
currently equal to 275 basis points over LIBOR. The LIBOR rate on $75.0 million
has been locked in at a fixed annual rate of 6.99% through April 2003 under a
swap agreement.
To supplement operating cash requirements, we have a $100.0 million subordinated
secured credit facility with SSC. Outstanding advances under the agreement are
subordinated to the Credit Agreement and are subject to a junior lien on assets
securing the Credit Agreement. At February 2, 2002, $20.0 million was
outstanding. The interest rate and terms of the $100.0 million facility are
generally the same as the Credit Agreement.
We entered a $75.0 million Senior Subordinated Convertible Loan Agreement
(Senior Facility), dated as of March 15, 2000. The Senior Facility bears
interest at various rates, currently equal to 250 basis points over LIBOR. The
interest rate increases an additional 50 basis points every 90 days after the
first anniversary date. The Senior Facility is due in September 2003. In
December 2000, pursuant to terms of the Senior Facility, SSC purchased the
outstanding balance under the same continuing terms. The terms provide that if
prior to February 4, 2002, the balance outstanding thereunder is not repaid from
the proceeds of an equity offering or other subordinated debt acceptable to
lenders under the Credit Agreement, then after that date SSC, as the lender, has
the right to convert the debt into our common stock at a price equal to 95% of
the 20-day average of high and low sales prices reported on the New York Stock
Exchange at the time of conversion. A one time fee of 200 basis points, or $1.5
million, was paid to SSC at the initial closing in consideration for entering
into a Put Agreement associated with the Senior Facility.
Achievement of expected cash flows from operations and compliance with our
Credit Agreement covenants (see Note 5 to the Consolidated Financial Statements)
are dependent upon a number of factors, including the attainment of sales, gross
profit, expense levels, vendor relations, and flow of merchandise that are
consistent
26
with our financial projections. In the first quarter of fiscal 2001, a major
Factor organization reduced our availability of credit and indicated that we
needed to strengthen our liquidity and increase our credit availability from
other sources. Future limitations of credit availability by Factor organizations
and/or vendors will restrict our ability to obtain merchandise and services and
may impair operating results. Although operating results for fiscal 2001 were
below plan, we believe that cash generated by operations, along with the
available proceeds from our Credit Agreement, SSC Facility and other sources of
financing will be sufficient to meet our obligations for working capital,
capital expenditures, and debt service requirements. However, there is no
assurance that we will be able to meet our projections. Further, there is no
assurance that extended financing will be available to us in the future if we
fail to meet our projections or on terms acceptable to us.
ACQUISITIONS
Effective with the close of business on February 2, 2002 by acquisition of our
partner's interest in VCM for $8,375,000, we now own 100% of VCM and operate the
health and beauty care, toy, sporting goods and food departments in the Value
City stores.
On March 17, 2000, we, through our wholly-owned subsidiary, Base Acquisition
Corp, completed the acquisition of substantially all of the assets and assumed
certain liabilities of Filene's Basement Corp., a Massachusetts corporation, and
Filene's Basement, Inc., a wholly owned subsidiary of Filene's Basement Corp.
pursuant to the closing of the asset purchase agreement, dated February 2, 2000.
The purchase price included cash of $3.5 million paid at closing, $1.2 million
to be paid over a period not to exceed three years, 403,208 shares of our common
stock with an agreed value of $5.5 million and the assumption of specified
liabilities. The assumed liabilities included the payment of amounts outstanding
under Filene's Basement debtor-in-possession financing facility of approximately
$22.5 million and certain trade payable and other obligations which will be paid
in the ordinary course. Allocation of the purchase price has been determined
based on fair market valuation of the net assets acquired subject to resolution
of several outstanding matters.
These acquisitions were funded by cash from operations and a portion of the
proceeds from the Credit Agreement.
RISK FACTORS
The following factors, among others, in some cases have affected and in the
future could affect our financial performance and actual results and could cause
actual results for 2002 and beyond to differ materially from those expressed or
implied in any such forward-looking statements: decline in demand for our
merchandise, the ability to repay the $75.0 million Senior Facility through an
equity offering or refinancing, our ability to attain our fiscal 2002 business
plan, expected cash from operations, vendor and their factor relations, flow of
merchandise, compliance with the credit agreement, our ability to strengthen our
liquidity and increase our credit availability, the availability of desirable
store locations on suitable terms, changes in consumer spending patterns,
consumer preferences and overall economic conditions, the impact of competition
and pricing, changes in weather patterns, changes in existing or potential
duties, tariffs or quotas, paper and printing costs, and the ability to hire and
train associates.
Historically, our operations have been seasonal, with a disproportionate amount
of sales and a majority of net income occurring in the back-to-school and
Christmas selling seasons. As a result of this seasonality, any factors
negatively affecting us during this period, including adverse weather, the
timing and level of markdowns
27
or unfavorable economic conditions, could have a material adverse effect on our
financial condition and results of operations for the entire year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from changes in interest rates which may adversely
affect our financial position, results of operations and cash flows. In seeking
to minimize the risks from interest rate fluctuations, we manage exposures
through our regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. We do not use
financial instruments for trading or other speculative purposes and are not
party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings under our
revolving credit facility. At February 2, 2002, direct borrowings aggregated
$211.0 million. The Credit Agreement, as amended and restated effective March
17, 2000, permits debt commitments up to $300.0 million, has a March 15, 2003
maturity date and generally bears interest at a floating rate of LIBOR plus
2.75%. We utilize interest rate swap agreements to effectively establish
long-term fixed rates on borrowings under the Credit Agreement, thus reducing a
portion of our interest rate risk. These swap agreements, which are designated
as cash flow hedges, involve the receipt of variable rate amounts in exchange
for fixed rate interest payments over the life of the agreements. At February 2,
2002, we had outstanding swap agreements with notional amounts totaling $75.0
million, for which the interest rate has been locked at a fixed rate of 6.99%
until April 2003.
At February 2, 2002, we performed a sensitivity analysis assuming an average
outstanding principal amount of $320.0 million subject to variable interest
rates. A 10% increase in LIBOR would result in approximately $1.0 million of
additional interest expense annually.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and financial statement schedule and the Independent
Auditors' Report thereon are filed pursuant to this Item 8 and are included in
this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item appears under the captions "Nominees for
Election as Directors," "Officers and Key Employees," and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in our Proxy Statement
relating to our 2002 Annual Meeting of Shareholders (the "Annual Meeting") and
is incorporated herein by reference.
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The information required by this item appears under the captions "Executive
Officer Compensation," "Information Concerning Board of Directors," and
"Compensation Committee Interlocks and Insider Participation" in our Proxy
Statement relating to our Annual Meeting and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item appears under the caption "Security
Ownership of Certain Beneficial Owners and Management" in our Proxy Statement
relating to our Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item appears under the caption "Relationship
with SSC and its Affiliates" in our Proxy Statement relating to our Annual
Meeting of Shareholders and is incorporated herein by reference.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
14(a)(1) FINANCIAL STATEMENTS
The documents listed below are filed as part of this Form 10-K:
Page in
Form 10-K
---------
Independent Auditors' Report F-1
Consolidated Balance Sheets at February 2, 2002 and February 3, 2001 F-2
Consolidated Statements of Operations for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 F-3
Consolidated Statements of Shareholders' Equity for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 F-4
Consolidated Statements of Cash Flows for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 F-5
Notes to Consolidated Financial Statements F-6
14(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
The schedule listed below is filed as part of this Form 10-K:
Schedule II. Valuation and Qualifying Accounts S-1
Schedules not listed above are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or the notes thereto.
14(a)(3) EXHIBITS:
See Index to Exhibits which begins on Page E-1.
14(b) REPORTS ON FORM 8-K
On February 5, 2002, we filed a Form 8-K, Item 5 -- "Other Items" relating to
our acquisition of Mazel Stores, Inc. 50% interest in the VCM Ltd. joint
venture. In addition, on February 5, 2002, we also filed a Form 8-K, Item 5 --
"Other Items" relating to the termination by Schottenstein Stores Corporation of
its letter of intent with respect to its purchase of Shonac Corporation, DSW
Shoe Warehouse, Inc. and Filene's Basement, Inc.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALUE CITY DEPARTMENT STORES, INC.
Date: April 23, 2002 By: *
-------------------------------------------
(James A. McGrady, Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended report has been signed by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
* Chairman of the Board of Directors 4/23/02
- ------------------------------------
(Jay L. Schottenstein)
* President and Chief Executive Officer 4/23/02
- ------------------------------------ (Principal Executive Officer)
(John C. Rossler)
* Chief Financial Officer and Treasurer 4/23/02
- ------------------------------------ (Principal Financial and Accounting Officer)
(James A. McGrady)
* Director 4/23/02
- ------------------------------------
(Henry L. Aaron)
* Director 4/23/02
- ------------------------------------
(Ari Deshe)
* Director 4/23/02
- ------------------------------------
(Jon P. Diamond)
* Director 4/23/02
- ------------------------------------
(Elizabeth Mugar Eveillard)
* Director 4/23/02
- ------------------------------------
(Marvin Goldstein)
* Director 4/23/02
- ------------------------------------
(Richard Gurian)
* Director 4/23/02
- ------------------------------------
(Norman Lamm)
31
* Director 4/23/02
- ------------------------------------
(Geraldine H. Schottenstein)
* Director 4/23/02
- ------------------------------------
(Robert L. Shook)
* Director 4/23/02
- ------------------------------------
(Harvey L. Sonnenberg)
* Director 4/23/02
- ------------------------------------
(James L. Weisman)
*By: /s/ James A. Mcgrady
-------------------------------------
James A. McGrady, (Attorney-in-Fact)
32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Value City Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Value City
Department Stores, Inc. (a majority owned subsidiary of Schottenstein Stores
Corporation) and its wholly owned subsidiaries (the "Company") as of February 2,
2002 and February 3, 2001 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended February 2, 2002,
February 3, 2001 and January 29, 2000. Our audits also included the financial
statement schedule listed in the Index as Item 14(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Value City Department Stores, Inc.
and its wholly owned subsidiaries as of February 2, 2002 and February 3, 2001,
and the results of their operations and their cash flows for the years ended
February 2, 2002, February 3, 2001 and January 29, 2000 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------------------
Deloitte & Touche LLP
Columbus, Ohio
March 26, 2002
F-1
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED BALANCE SHEETS
February 2, 2002 and February 3, 2001
(In Thousands, Except Share Amounts)
- -------------------------------------------------------------------------------------------------------
ASSETS
2/2/02 2/3/01
- -------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and equivalents $35,915 $10,562
Accounts receivable, net 6,650 44,927
Receivables from affiliates 905 9,452
Inventories 396,830 393,577
Prepaid expenses and other assets 15,741 22,290
Deferred income taxes 63,102 51,732
---------- ----------
TOTAL CURRENT ASSETS 519,143 532,540
PROPERTY AND EQUIPMENT, AT COST:
Furniture, fixtures and equipment 246,358 223,675
Leasehold improvements 184,854 176,318
Land and building 801 801
Capital leases 37,413 38,348
---------- ----------
469,426 439,142
Accumulated depreciation and amortization (224,782) (190,103)
--------- ---------
PROPERTY AND EQUIPMENT, NET 244,644 249,039
INVESTMENT IN JOINT VENTURE - 8,292
GOODWILL AND TRADENAMES, NET 60,012 67,056
OTHER ASSETS 56,512 51,082
--------- ----------
TOTAL ASSETS $880,311 $908,009
======== ========
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $149,864 $180,736
Accounts payable to affiliates 8,909 13,655
Accrued expenses:
Compensation 22,410 19,662
Taxes 39,224 31,255
Other 69,296 75,227
Current maturities of long-term obligations 665 603
------------ ------------
TOTAL CURRENT LIABILITIES 290,368 321,138
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES 337,199 326,449
OTHER NONCURRENT LIABILITIES 32,315 10,115
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Common shares, without par value;
80,000,000 authorized; issued, including
treasury shares, 34,227,540 shares and
34,330,863 shares, respectively 145,772 145,659
Retained earnings 82,432 111,155
Deferred compensation expense, net (4,150) (6,448)
Treasury shares at cost, 7,651 shares (59) (59)
Accumulated other comprehensive loss (3,566) -
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 220,429 250,307
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $880,311 $908,009
========= =========
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended February 2, 2002,
February 3, 2001 and January 29, 2000
(in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
For For For
the Year the Year the Year
Ended Ended Ended
2/2/02 2/3/01 1/29/00
52 Weeks 53 Weeks 52 Weeks
- -------------------------------------------------------------------------------------------------------------------------
Net sales, excluding sales of
licensed departments $2,283,878 $2,213,017 $1,670,176
Cost of sales (1,429,455) (1,492,947) (1,039,145)
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 854,423 720,070 631,031
Selling, general and
administrative expenses (888,734) (870,253) (579,314)
License fees 12,228 11,323 8,451
Other operating income 5,739 3,259 5,620
- -------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit (16,344) (135,601) 65,788
Interest expense, net (28,510) (30,480) (10,728)
- -------------------------------------------------------------------------------------------------------------------------
(Loss) income before equity in (loss)
income of joint venture and benefit
(provision) for income taxes (44,854) (166,081) 55,060
Equity in (loss) income of joint venture (406) (1,340) 1,340
- -------------------------------------------------------------------------------------------------------------------------
(Loss) income before benefit
(provision) for income taxes (45,260) (167,421) 56,400
Benefit (provision) for income taxes 16,537 65,630 (22,932)
- -------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (28,723) $ (101,791) $ 33,468
- -------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per share $(0.85) $(3.03) $1.03
Diluted (loss) earnings per share $(0.85) $(3.03) $1.02
The accompanying notes are an integral part of the consolidated financial
statements.