Attached files
file | filename |
---|---|
EX-31.1 - EXHIBIT 31.1 - JO-ANN STORES INC | c93380exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - JO-ANN STORES INC | c93380exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - JO-ANN STORES INC | c93380exv32w1.htm |
Table of Contents
United States
Securities and Exchange Commission
Securities and Exchange Commission
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 2009
Commission File No. 1-6695
Jo-Ann Stores, Inc.
(Exact name of Registrant as specified in its charter)
Ohio | 34-0720629 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
5555 Darrow Road, Hudson, Ohio | 44236 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (330) 656-2600
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 such filing requirements for the past 90 days. Yes þ No
o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one).
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.): Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: Common Shares, without par value, as of November
27, 2009: 26,801,646
Jo-Ann Stores, Inc.
Form 10-Q Index
For the Quarter Ended October 31, 2009
Form 10-Q Index
For the Quarter Ended October 31, 2009
Page Numbers | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
14 | ||||||||
26 | ||||||||
26 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Jo-Ann Stores, Inc.
Consolidated Balance Sheets
(Unaudited) | ||||||||||||
October 31, | November 1, | January 31, | ||||||||||
2009 | 2008 | 2009 | ||||||||||
(Dollars in millions, except share and per share data) | ||||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 97.7 | $ | 24.8 | $ | 80.6 | ||||||
Inventories |
485.4 | 522.3 | 429.4 | |||||||||
Deferred income taxes |
22.5 | 24.9 | 23.5 | |||||||||
Prepaid expenses and other current assets |
28.1 | 29.0 | 31.7 | |||||||||
Total current assets |
633.7 | 601.0 | 565.2 | |||||||||
Property, equipment and leasehold improvements, net |
297.7 | 311.6 | 314.8 | |||||||||
Goodwill |
11.6 | 11.8 | 11.6 | |||||||||
Other assets |
8.3 | 13.9 | 9.5 | |||||||||
Total assets |
$ | 951.3 | $ | 938.3 | $ | 901.1 | ||||||
Liabilities and Shareholders Equity |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 171.3 | $ | 171.4 | $ | 145.1 | ||||||
Accrued expenses |
115.3 | 104.2 | 112.5 | |||||||||
Total current liabilities |
286.6 | 275.6 | 257.6 | |||||||||
Long-term debt |
47.5 | 112.7 | 66.0 | |||||||||
Long-term deferred income taxes |
1.4 | | 3.2 | |||||||||
Lease obligations and other long-term liabilities |
96.3 | 94.9 | 96.6 | |||||||||
Commitments and contingencies (Note 5) |
||||||||||||
Shareholders equity: |
||||||||||||
Preferred stock, no par value, 5,000,000 shares authorized, none issued |
| | | |||||||||
Common stock, stated value $0.05 per share; 150,000,000 authorized;
issued 29,665,217; 28,859,179 and 28,872,085 shares, respectively |
1.5 | 1.4 | 1.4 | |||||||||
Additional paid-in capital |
225.5 | 209.5 | 211.7 | |||||||||
Retained earnings |
339.9 | 290.0 | 310.4 | |||||||||
566.9 | 500.9 | 523.5 | ||||||||||
Treasury stock, at cost; 3,768,059; 3,662,786 and 3,667,677 shares, respectively |
(47.4 | ) | (45.8 | ) | (45.8 | ) | ||||||
Total shareholders equity |
519.5 | 455.1 | 477.7 | |||||||||
Total liabilities and shareholders equity |
$ | 951.3 | $ | 938.3 | $ | 901.1 | ||||||
See notes to unaudited consolidated financial statements
1
Table of Contents
Jo-Ann Stores, Inc.
Consolidated Statements of Operations
(Unaudited)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in millions, except share and per share data) | ||||||||||||||||
Net sales |
$ | 509.1 | $ | 480.1 | $ | 1,388.5 | $ | 1,329.2 | ||||||||
Cost of sales (exclusive of depreciation and
amortization shown separately below) |
249.3 | 244.8 | 699.2 | 695.3 | ||||||||||||
Gross margin |
259.8 | 235.3 | 689.3 | 633.9 | ||||||||||||
Selling, general and administrative expenses |
202.0 | 199.5 | 585.7 | 575.6 | ||||||||||||
Store pre-opening and closing costs |
2.2 | 4.7 | 8.6 | 10.0 | ||||||||||||
Depreciation and amortization |
14.1 | 13.8 | 42.0 | 40.1 | ||||||||||||
Operating profit |
41.5 | 17.3 | 53.0 | 8.2 | ||||||||||||
Gain on purchase of senior subordinated notes |
(0.1 | ) | (2.1 | ) | (1.3 | ) | (2.1 | ) | ||||||||
Interest expense, net |
1.6 | 2.6 | 4.7 | 7.2 | ||||||||||||
Income before income taxes |
40.0 | 16.8 | 49.6 | 3.1 | ||||||||||||
Income tax provision |
15.9 | 6.6 | 20.1 | 1.6 | ||||||||||||
Net income |
$ | 24.1 | $ | 10.2 | $ | 29.5 | $ | 1.5 | ||||||||
Net income per common share basic |
$ | 0.94 | $ | 0.41 | $ | 1.16 | $ | 0.06 | ||||||||
Net income per common share diluted |
$ | 0.90 | $ | 0.40 | $ | 1.12 | $ | 0.06 | ||||||||
Weighted average shares outstanding (in thousands): |
||||||||||||||||
Basic |
25,737 | 25,044 | 25,518 | 24,792 | ||||||||||||
Diluted |
26,751 | 25,738 | 26,301 | 25,435 | ||||||||||||
See notes to unaudited consolidated financial statements
2
Table of Contents
Jo-Ann Stores, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Thirty-Nine Weeks Ended | ||||||||
October 31, | November 1, | |||||||
2009 | 2008 | |||||||
(Dollars in millions) | ||||||||
Net cash flows provided by operating activities: |
||||||||
Net income |
$ | 29.5 | $ | 1.5 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation and amortization |
42.0 | 40.1 | ||||||
Deferred income taxes |
(0.8 | ) | (0.5 | ) | ||||
Stock-based compensation expense |
6.5 | 7.2 | ||||||
Amortization of deferred financing costs |
0.5 | 0.7 | ||||||
Loss on disposal of fixed assets |
1.1 | 0.9 | ||||||
Gain on purchase of senior subordinated notes |
(1.3 | ) | (2.1 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Increase in inventories |
(56.0 | ) | (50.1 | ) | ||||
Decrease (increase) in prepaid expenses and other current assets |
3.6 | (5.2 | ) | |||||
Increase in accounts payable |
26.2 | 42.0 | ||||||
Increase (decrease) in accrued expenses |
2.8 | (5.8 | ) | |||||
(Decrease) increase in lease obligations, net |
(1.4 | ) | 5.0 | |||||
Increase (decrease) in other long-term liabilities |
1.1 | (0.1 | ) | |||||
Other, net |
0.6 | 1.3 | ||||||
Net cash provided by operating activities |
54.4 | 34.9 | ||||||
Cash flows used for investing activities: |
||||||||
Capital expenditures |
(26.1 | ) | (55.1 | ) | ||||
Cash used for investing activities |
(26.1 | ) | (55.1 | ) | ||||
Net cash flows (used for) provided by financing activities: |
||||||||
Purchase of senior subordinated notes |
(17.0 | ) | (18.0 | ) | ||||
Net change in revolving credit facility |
| 33.1 | ||||||
Proceeds from stock-based compensation plans |
7.2 | 6.0 | ||||||
Other, net |
(1.4 | ) | (1.5 | ) | ||||
Net cash (used for) provided by financing activities |
(11.2 | ) | 19.6 | |||||
Net increase (decrease) in cash and cash equivalents |
17.1 | (0.6 | ) | |||||
Cash and cash equivalents at beginning of period |
80.6 | 25.4 | ||||||
Cash and cash equivalents at end of period |
$ | 97.7 | $ | 24.8 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 5.5 | $ | 8.5 | ||||
Income taxes, net of refunds |
18.3 | 2.2 |
See notes to unaudited consolidated financial statements
3
Table of Contents
Notes to Consolidated Financial Statements (Unaudited)
Jo-Ann Stores, Inc.
Note 1 Basis of Presentation
Jo-Ann Stores, Inc. (the company), an Ohio corporation, is the nations largest specialty
retailer of fabrics and one of the largest specialty retailers of crafts, operating 758 retail
stores in 47 states at October 31, 2009.
The companys fiscal year is a 52- or 53-week period ending on the Saturday closest to
January 31. The fiscal year refers to the year in which the period ends (e.g., fiscal 2010
refers to the year-ended January 30, 2010). The 2010 fiscal year will include 52 weeks. Fiscal
2009 was also a 52-week year.
The consolidated interim financial statements include the accounts of the company and its
subsidiaries and have been prepared without audit, pursuant to the rules of the Securities and
Exchange Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States (U.S. GAAP) have been condensed or omitted pursuant to those rules and regulations,
although the company believes that the disclosures herein are adequate to make the information not
misleading. The financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the companys Annual Report on Form 10-K for the fiscal
year-ended January 31, 2009.
In the opinion of management, the accompanying balance sheets and related interim statements
of operations and cash flows include all adjustments, consisting only of normal recurring items
necessary for their fair presentation in conformity with U.S. GAAP. The preparation of financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Since actual results may
differ from those estimates, the company revises its estimates and assumptions, as new information
becomes available.
Typical of most retail companies, the companys business is seasonal with the majority of
revenues and operating profits generated in the second half of the fiscal year. Accordingly,
earnings or losses for a particular interim period are not indicative of full-year results. Due
to the seasonal nature of the companys business, a comparable balance sheet as of November 1,
2008 has been provided.
Certain amounts in the November 1, 2008 financial statements have been reclassified to
conform to the current year presentation.
The company has evaluated subsequent events through December 8, 2009, the date of the issuance
of the financial statements. There were no subsequent events requiring recognition or disclosure
in the financial statements.
Note 2 Earnings Per Share
Basic earnings per common share are computed by dividing net income by the weighted average
number of shares outstanding during the period. Diluted earnings per common share include the
effect of the assumed exercise of dilutive stock-based awards under the treasury stock method.
4
Table of Contents
The following table presents information necessary to calculate basic and diluted income per
common share (shares in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic common shares |
25,737 | 25,044 | 25,518 | 24,792 | ||||||||||||
Incremental shares from assumed
exercise of stock options |
414 | 262 | 260 | 254 | ||||||||||||
Incremental restricted shares |
600 | 432 | 523 | 389 | ||||||||||||
Diluted common shares |
26,751 | 25,738 | 26,301 | 25,435 | ||||||||||||
For the third quarter and year-to-date period of fiscal 2010, the above calculation of the
diluted net income per common share reflects the impact of stock options that had exercise prices
below the average market price of the companys common shares for the quarter. An average of
117,142 stock options for the third quarter and 630,788 stock options for the year-to-date period
were not included in the computation of diluted net income per common share because the exercise
price of the stock options exceeded the average market price and would have been anti-dilutive.
For the third quarter and year-to-date period of fiscal 2009, the above calculation of the
diluted net income per common share reflects the impact of stock options that had exercise prices
below the average market price of the companys common shares for the quarter. An average of
660,494 stock options for the third quarter and 717,086 stock options for the year-to-date period
were not included in the computation of diluted net income per common share because the exercise
price of the stock options exceeded the average market price and would have been anti-dilutive.
Note 3 Shareholders Equity
During the first nine months of fiscal 2010, shares outstanding increased by 693,000 as
follows:
Common | Additional | Total | |||||||||||||||||||||||||||
Common | Treasury | Stock Stated | Paid-In | Treasury | Retained | Shareholders | |||||||||||||||||||||||
Shares | Shares | Value | Capital | Stock | Earnings | Equity | |||||||||||||||||||||||
(Shares in thousands) | (Dollars in millions) | ||||||||||||||||||||||||||||
Balance, January 31, 2009 |
25,204 | 3,668 | $ | 1.4 | $ | 211.7 | $ | (45.8 | ) | $ | 310.4 | $ | 477.7 | ||||||||||||||||
Net income |
| | | | | 29.5 | 29.5 | ||||||||||||||||||||||
Exercise of stock options |
328 | | | 5.5 | | | 5.5 | ||||||||||||||||||||||
Excess tax benefits (deficits) on
equity compensation |
| | | 0.2 | | | 0.2 | ||||||||||||||||||||||
Stock-based compensation |
342 | | 0.1 | 6.4 | | | 6.5 | ||||||||||||||||||||||
Purchase of common stock |
(100 | ) | 100 | | | (1.6 | ) | | (1.6 | ) | |||||||||||||||||||
Associate Stock Ownership Plan |
123 | | | 1.7 | | | 1.7 | ||||||||||||||||||||||
Year-to-date activity |
693 | 100 | 0.1 | 13.8 | (1.6 | ) | 29.5 | 41.8 | |||||||||||||||||||||
Balance, October 31, 2009 |
25,897 | 3,768 | $ | 1.5 | $ | 225.5 | $ | (47.4 | ) | $ | 339.9 | $ | 519.5 | ||||||||||||||||
As of October 31, 2009, the company had 1,646,364 stock options outstanding and 976,448
restricted stock awards issued that remain subject to vesting.
5
Table of Contents
Note 4 Financing
During the first nine months of fiscal 2010, the company purchased $18.5 million in face value
of the 7.5 percent senior subordinated notes at an average of 92 percent of par. The company
recorded a pre-tax gain of $1.3 million, representing the cash discount received, net of the
related write-off of applicable deferred financing costs.
During the first nine months of fiscal 2009, the company purchased $20.4 million in face value
of the 7.5 percent senior subordinated notes at an average of 88 percent of par. The company
recorded a pre-tax gain of $2.1 million, representing the cash discount received, net of the
related write-off of applicable deferred financing costs.
The market price of the 7.5 percent senior subordinated notes (the Notes) at October 31,
2009 in the high yield debt market was approximately at par value. Accordingly, the fair value of
the Notes approximates the carrying value of approximately $47.5 million.
Note 5 Commitments and Contingencies
On July 21, 2008 a purported wage and hour class action was filed against the company in
Superior Court of the State of California, County of Los Angeles. In the complaint, as amended, six
former company employees, individually and on behalf of the purported class members, alleged, among
other things, that certain current and former California store team leaders employed by the company
since July 21, 2004 were classified improperly as exempt employees (and thus not paid for overtime
work), and that current and former hourly employees employed by the companys California stores
since July 21, 2004 missed rest and meal breaks for which they were not properly compensated and at
times worked off the clock without compensation. In November 2009, the court granted preliminary
approval of a negotiated settlement. The negotiated settlement provides for the payment by the
company of up to $5.0 million, depending on the number of claims that are filed by the purported
class members. As of the end of the quarterly period ended October 31, 2009, the company has fully
reserved for the total amount expected to be incurred by the company in connection with this
litigation and the negotiated settlement.
We are involved in various other litigation matters in the ordinary course of our business.
We do not expect that any of these matters, either individually or in the aggregate, will have a
material adverse effect on our financial condition or results of operations.
Note 6 Segment Reporting
At October 31, 2009, the company operated 228 large-format stores and 530 small-format stores.
At November 1, 2008, the company operated 208 large-format stores and 560 small-format stores.
The company considers stores that generally average more than approximately 24,000 square feet of
retail space as large-format stores. The companys small-format stores generally average less than
approximately 24,000 square feet. The size of the store is not the only decisive factor in
determining its classification as large-format or small-format. The most important distinction for
determining the classification of a large-format store is whether or not stores in the range have
been recently built or remodeled and contain a broad assortment of craft categories.
The companys reportable segments include large-format stores, small-format stores and other.
The financial results of the companys Joann.com Internet business are included in the other
segment. The small-format stores offer a complete selection of fabric and a convenience assortment
of crafts, artificial floral, finished seasonal and home décor merchandise. The large-format
stores offer an expanded and more comprehensive product assortment than the small-format stores.
The large-format stores also generally offer custom framing and educational programs that the
small-format stores do not. The other category includes unallocated corporate assets and overhead
in addition to the operating results of the Joann.com Internet business. The segments are
evaluated based on revenues and operating profit contribution to the total
corporation. All income and expense items below operating profit are not allocated to the
segments and are not disclosed.
6
Table of Contents
As permitted under the Financial Accounting Standards Board (FASB) guidance regarding
segment disclosure, certain information not routinely used in the management of these segments or
information that is impractical to report is not shown. The company does not report assets other
than property, equipment and leasehold improvements by segment because not all assets are allocated
to segments for purposes of measurement by the companys chief operating decision maker.
Large-format | Small-format | |||||||||||||||
(Dollars in millions) | Stores | Stores | Other | Consolidated | ||||||||||||
Thirteen Weeks Ended October 31, 2009 |
||||||||||||||||
Net sales |
$ | 272.0 | $ | 228.5 | $ | 8.6 | $ | 509.1 | ||||||||
Store pre-opening and closing costs |
0.8 | 1.4 | | 2.2 | ||||||||||||
Depreciation and amortization |
7.9 | 2.7 | 3.5 | 14.1 | ||||||||||||
Operating profit (loss) |
37.2 | 40.5 | (36.2 | ) | 41.5 | |||||||||||
Capital expenditures |
2.8 | 5.0 | 1.6 | 9.4 | ||||||||||||
Thirteen Weeks Ended November 1, 2008 |
||||||||||||||||
Net sales |
$ | 250.2 | $ | 221.8 | $ | 8.1 | $ | 480.1 | ||||||||
Store pre-opening and closing costs |
1.6 | 3.1 | | 4.7 | ||||||||||||
Depreciation and amortization |
8.0 | 2.7 | 3.1 | 13.8 | ||||||||||||
Operating profit (loss) |
21.2 | 25.9 | (29.8 | ) | 17.3 | |||||||||||
Capital expenditures |
10.3 | 4.5 | 6.6 | 21.4 | ||||||||||||
Thirty-Nine Weeks Ended October 31, 2009 |
||||||||||||||||
Net sales |
$ | 747.1 | $ | 615.8 | $ | 25.6 | $ | 1,388.5 | ||||||||
Store pre-opening and closing costs |
3.1 | 5.5 | | 8.6 | ||||||||||||
Depreciation and amortization |
23.8 | 7.9 | 10.3 | 42.0 | ||||||||||||
Operating profit (loss) |
73.2 | 83.5 | (103.7 | ) | 53.0 | |||||||||||
Capital expenditures |
7.6 | 10.7 | 7.8 | 26.1 | ||||||||||||
Property, equipment and leasehold
improvements, net |
156.5 | 51.7 | 89.5 | 297.7 | ||||||||||||
Thirty-Nine Weeks Ended November 1, 2008 |
||||||||||||||||
Net sales |
$ | 695.8 | $ | 610.0 | $ | 23.4 | $ | 1,329.2 | ||||||||
Store pre-opening and closing costs |
4.4 | 5.6 | | 10.0 | ||||||||||||
Depreciation and amortization |
23.8 | 7.0 | 9.3 | 40.1 | ||||||||||||
Operating profit (loss) |
42.8 | 62.5 | (97.1 | ) | 8.2 | |||||||||||
Capital expenditures |
21.4 | 12.5 | 21.2 | 55.1 | ||||||||||||
Property, equipment and leasehold
improvements, net |
158.1 | 36.7 | 116.8 | 311.6 |
7
Table of Contents
Note 7 Recent Accounting Pronouncements
In February 2008, the FASB issued an accounting standard update which delayed the effective
date of fair value measurements accounting for non-financial assets and non-financial
liabilities, except for items that are recognized or disclosed at fair value on a recurring basis
(at least annually). The company adopted the standard for its non-financial assets (goodwill,
property and equipment and inventory) during the first quarter ended May 2, 2009.
The companys non-financial assets are not required to be measured at fair value on a
recurring basis. However, if certain triggering events occur, or if an annual impairment test is
required, it may be necessary for the company to evaluate the fair value of its non-financial
assets and record them at the lower of cost or fair value. During the third quarter ended
October 31, 2009, there were no triggering events that prompted an asset impairment test of the
companys non-financial assets or a fair value measurement. Accordingly, the company did not
measure any non-recurring, non-financial assets or recognize any amounts in earnings related to
changes in fair value during the third quarter ended October 31, 2009.
In April 2009, the FASB issued new guidance related to fair value measurements. The
guidance is intended to provide additional direction regarding fair value measurements. Included
in this new guidance are:
| a requirement that disclosures regarding fair value of financial instruments be disclosed on an interim as well as on an annual basis; |
| additional guidance regarding (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly declined and (2) identifying transactions that are not orderly, as well as requiring disclosures in interim periods of the inputs and valuation techniques used to measure fair value. |
This new guidance is effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted. The company adopted these pronouncements beginning in the third
quarter of fiscal 2010. The adoption of this guidance did not have a material impact on the
companys consolidated financial statements.
In May 2009, the FASB issued new guidance that defines subsequent events as events or
transactions that occur after the balance sheet date, but before the financial statements are
issued. It defines two types of subsequent events: recognized subsequent events, which provide
additional evidence about conditions that existed at the balance sheet date; and non-recognized
subsequent events, which provide evidence about conditions that did not exist at the balance
sheet date, but arose before the financial statements were issued. Recognized subsequent events
are required to be recognized in the financial statements, and non-recognized subsequent events
are required to be disclosed. The statement requires entities to disclose the date through which
subsequent events have been evaluated, and the basis for that date. This FASB guidance is
consistent with current practice and did not have any impact on the companys consolidated
financial statements. See Note 1 for the required disclosure.
In
June 2009, the FASB issued Statement of Financial Accounting
Standards No. 168, The FASB Accounting Standards Codification and
Hierarchy of Generally Accepted Accounting Principles a
replacement of FASB Statement No. 162 (SFAS
No. 168). SFAS No. 168 makes the FASB Accounting Standards Codification (the Codification) the single
source of authoritative U.S. accounting and reporting standards, but it does not change U.S.
GAAP. The statement is effective for interim and annual periods ending after September 15, 2009.
The Company adopted this statement as of October 31, 2009. The statement had no impact on the
companys financial position or results of operations.
8
Table of Contents
Note 8 Consolidating Financial Statements (Unaudited)
The companys 7.5 percent senior subordinated notes and credit facility are fully and
unconditionally guaranteed, on a joint and several basis, by the companys wholly-owned
subsidiaries. The senior subordinated notes are subordinated to the companys credit facility.
Effective July 5, 2009, the company restructured its legal entities, resulting in all but one of
its wholly-owned subsidiaries becoming consolidated into the parent entity and the transfer of
certain assets from the parent to a newly-formed subsidiary which became a guarantor of the notes
and credit facility. The guarantor subsidiaries represent the new subsidiary and one remaining
subsidiary that were not consolidated into the parent entity.
Summarized consolidating financial information of the company (excluding its subsidiaries) and
the guarantor subsidiaries as of October 31, 2009 and January 31, 2009 and for the thirteen and
thirty-nine weeks ended October 31, 2009 and November 1, 2008 was as follows:
Consolidating Balance Sheets
October 31, 2009
October 31, 2009
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 97.7 | $ | | $ | | $ | 97.7 | ||||||||
Inventories |
485.4 | | 485.4 | |||||||||||||
Deferred income taxes |
20.3 | 2.2 | 22.5 | |||||||||||||
Prepaid expenses and other current assets |
23.4 | 4.7 | 28.1 | |||||||||||||
Total current assets |
626.8 | 6.9 | | 633.7 | ||||||||||||
Property, equipment and leasehold improvements,
net |
286.9 | 10.8 | 297.7 | |||||||||||||
Goodwill |
| 11.6 | 11.6 | |||||||||||||
Other assets |
4.4 | 3.9 | 8.3 | |||||||||||||
Investment in subsidiaries |
37.4 | | (37.4 | ) | | |||||||||||
Intercompany receivable |
| 21.5 | (21.5 | ) | | |||||||||||
Total assets |
$ | 955.5 | $ | 54.7 | $ | (58.9 | ) | $ | 951.3 | |||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 166.9 | $ | 4.4 | $ | | $ | 171.3 | ||||||||
Accrued expenses |
95.7 | 19.6 | 115.3 | |||||||||||||
Total current liabilities |
262.6 | 24.0 | | 286.6 | ||||||||||||
Long-term debt |
47.5 | | 47.5 | |||||||||||||
Long-term deferred income taxes |
12.5 | (11.1 | ) | 1.4 | ||||||||||||
Lease obligations and other long-term liabilities |
91.9 | 4.4 | 96.3 | |||||||||||||
Intercompany payable |
21.5 | | (21.5 | ) | | |||||||||||
Shareholders equity: |
||||||||||||||||
Preferred stock |
| | | |||||||||||||
Common stock |
1.5 | | 1.5 | |||||||||||||
Additional paid-in capital |
225.5 | | 225.5 | |||||||||||||
Retained earnings |
339.9 | 37.4 | (37.4 | ) | 339.9 | |||||||||||
566.9 | 37.4 | (37.4 | ) | 566.9 | ||||||||||||
Treasury stock, at cost |
(47.4 | ) | | (47.4 | ) | |||||||||||
Total shareholders equity |
519.5 | 37.4 | (37.4 | ) | 519.5 | |||||||||||
Total liabilities and shareholders equity |
$ | 955.5 | $ | 54.7 | $ | (58.9 | ) | $ | 951.3 | |||||||
9
Table of Contents
Note 8 Consolidating Financial Statements (Unaudited) CONTINUED
Consolidating Balance Sheets
January 31, 2009
January 31, 2009
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 55.0 | $ | 25.6 | $ | | $ | 80.6 | ||||||||
Inventories |
206.5 | 222.9 | 429.4 | |||||||||||||
Deferred income taxes |
16.2 | 7.3 | 23.5 | |||||||||||||
Prepaid expenses and other current assets |
25.5 | 6.2 | 31.7 | |||||||||||||
Total current assets |
303.2 | 262.0 | | 565.2 | ||||||||||||
Property, equipment and leasehold improvements,
net |
165.5 | 149.3 | 314.8 | |||||||||||||
Goodwill |
11.6 | | 11.6 | |||||||||||||
Other assets |
(3.9 | ) | 13.4 | 9.5 | ||||||||||||
Investment in subsidiaries |
100.0 | | (100.0 | ) | | |||||||||||
Intercompany receivable |
307.7 | | (307.7 | ) | | |||||||||||
Total assets |
$ | 884.1 | $ | 424.7 | $ | (407.7 | ) | $ | 901.1 | |||||||
Liabilities and Shareholders Equity |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 158.6 | $ | (13.5 | ) | $ | | $ | 145.1 | |||||||
Accrued expenses |
112.5 | | 112.5 | |||||||||||||
Total current liabilities |
271.1 | (13.5 | ) | | 257.6 | |||||||||||
Long-term debt |
66.0 | | 66.0 | |||||||||||||
Long-term deferred income taxes |
(3.4 | ) | 6.6 | 3.2 | ||||||||||||
Lease obligations and other long-term liabilities |
72.7 | 23.9 | 96.6 | |||||||||||||
Intercompany payable |
| 307.7 | (307.7 | ) | | |||||||||||
Shareholders equity: |
||||||||||||||||
Preferred stock |
| | | |||||||||||||
Common stock |
1.4 | | 1.4 | |||||||||||||
Additional paid-in capital |
211.7 | | 211.7 | |||||||||||||
Retained earnings |
310.4 | 100.0 | (100.0 | ) | 310.4 | |||||||||||
523.5 | 100.0 | (100.0 | ) | 523.5 | ||||||||||||
Treasury stock, at cost |
(45.8 | ) | | (45.8 | ) | |||||||||||
Total shareholders equity |
477.7 | 100.0 | (100.0 | ) | 477.7 | |||||||||||
Total liabilities and shareholders equity |
$ | 884.1 | $ | 424.7 | $ | (407.7 | ) | $ | 901.1 | |||||||
10
Table of Contents
Note 8 Consolidating Financial Statements (Unaudited) CONTINUED
Consolidating Statements of Operations
Thirteen Weeks Ended October 31, 2009 and November 1, 2008
Thirteen Weeks Ended October 31, 2009 and November 1, 2008
October 31, 2009 | ||||||||||||||||
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 500.5 | $ | 8.6 | $ | | $ | 509.1 | ||||||||
Cost of sales (exclusive of depreciation and
amortization shown separately below) |
243.2 | 6.1 | | 249.3 | ||||||||||||
Gross margin |
257.3 | 2.5 | | 259.8 | ||||||||||||
Selling, general and administrative expenses |
205.3 | (3.3 | ) | 202.0 | ||||||||||||
Store pre-opening and closing costs |
2.2 | | 2.2 | |||||||||||||
Depreciation and amortization |
12.3 | 1.8 | 14.1 | |||||||||||||
Operating profit |
37.5 | 4.0 | | 41.5 | ||||||||||||
Gain on purchase of senior subordinated notes |
(0.1 | ) | | (0.1 | ) | |||||||||||
Interest expense, net |
1.7 | (0.1 | ) | 1.6 | ||||||||||||
Income before income taxes |
35.9 | 4.1 | | 40.0 | ||||||||||||
Income tax provision |
14.3 | 1.6 | 15.9 | |||||||||||||
Income before equity income |
21.6 | 2.5 | | 24.1 | ||||||||||||
Equity income from subsidiaries |
2.5 | | (2.5 | ) | | |||||||||||
Net income |
$ | 24.1 | $ | 2.5 | $ | (2.5 | ) | $ | 24.1 | |||||||
November 1, 2008 | ||||||||||||||||
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 261.2 | $ | 383.2 | $ | (164.3 | ) | $ | 480.1 | |||||||
Cost of sales (exclusive of depreciation and
amortization shown separately below) |
146.3 | 262.8 | (164.3 | ) | 244.8 | |||||||||||
Gross margin |
114.9 | 120.4 | | 235.3 | ||||||||||||
Selling, general and administrative expenses |
100.9 | 98.6 | 199.5 | |||||||||||||
Store pre-opening and closing costs |
2.8 | 1.9 | 4.7 | |||||||||||||
Depreciation and amortization |
7.2 | 6.6 | 13.8 | |||||||||||||
Operating profit |
4.0 | 13.3 | | 17.3 | ||||||||||||
Gain on purchase of senior subordinated notes |
(2.1 | ) | | (2.1 | ) | |||||||||||
Interest expense, net |
1.2 | 1.4 | 2.6 | |||||||||||||
Income before income taxes |
4.9 | 11.9 | | 16.8 | ||||||||||||
Income tax provision |
1.8 | 4.8 | 6.6 | |||||||||||||
Income before equity income |
3.1 | 7.1 | | 10.2 | ||||||||||||
Equity income from subsidiaries |
7.1 | | (7.1 | ) | | |||||||||||
Net income |
$ | 10.2 | $ | 7.1 | $ | (7.1 | ) | $ | 10.2 | |||||||
11
Table of Contents
Note 8 Consolidating Financial Statements (Unaudited) CONTINUED
Consolidating Statements of Operations
Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008
Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008
October 31, 2009 | ||||||||||||||||
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 1,039.0 | $ | 567.8 | $ | (218.3 | ) | $ | 1,388.5 | |||||||
Cost of sales (exclusive of depreciation and
amortization shown separately below) |
539.9 | 377.6 | (218.3 | ) | 699.2 | |||||||||||
Gross margin |
499.1 | 190.2 | | 689.3 | ||||||||||||
Selling, general and administrative expenses |
439.3 | 146.4 | 585.7 | |||||||||||||
Store pre-opening and closing costs |
6.6 | 2.0 | 8.6 | |||||||||||||
Depreciation and amortization |
29.2 | 12.8 | 42.0 | |||||||||||||
Operating profit |
24.0 | 29.0 | | 53.0 | ||||||||||||
Gain on purchase of senior subordinated notes |
(1.3 | ) | | | (1.3 | ) | ||||||||||
Interest expense, net |
3.4 | 1.3 | 4.7 | |||||||||||||
Income before income taxes |
21.9 | 27.7 | | 49.6 | ||||||||||||
Income tax provision |
10.5 | 9.6 | 20.1 | |||||||||||||
Income before equity income |
11.4 | 18.1 | | 29.5 | ||||||||||||
Equity income from subsidiaries |
18.1 | | (18.1 | ) | | |||||||||||
Net income |
$ | 29.5 | $ | 18.1 | $ | (18.1 | ) | $ | 29.5 | |||||||
November 1, 2008 | ||||||||||||||||
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net sales |
$ | 715.0 | $ | 1,024.0 | $ | (409.8 | ) | $ | 1,329.2 | |||||||
Cost of sales (exclusive of depreciation and
amortization shown separately below) |
407.1 | 698.0 | (409.8 | ) | 695.3 | |||||||||||
Gross margin |
307.9 | 326.0 | | 633.9 | ||||||||||||
Selling, general and administrative expenses |
288.3 | 287.3 | 575.6 | |||||||||||||
Store pre-opening and closing costs |
5.9 | 4.1 | 10.0 | |||||||||||||
Depreciation and amortization |
20.4 | 19.7 | 40.1 | |||||||||||||
Operating (loss) profit |
(6.7 | ) | 14.9 | | 8.2 | |||||||||||
Gain on purchase of senior subordinated notes |
(2.1 | ) | | | (2.1 | ) | ||||||||||
Interest expense, net |
3.2 | 4.0 | 7.2 | |||||||||||||
(Loss) income before income taxes |
(7.8 | ) | 10.9 | | 3.1 | |||||||||||
Income tax (benefit) provision |
(2.9 | ) | 4.5 | 1.6 | ||||||||||||
(Loss) income before equity income |
(4.9 | ) | 6.4 | | 1.5 | |||||||||||
Equity income from subsidiaries |
6.4 | | (6.4 | ) | | |||||||||||
Net income |
$ | 1.5 | $ | 6.4 | $ | (6.4 | ) | $ | 1.5 | |||||||
12
Table of Contents
Note 8 Consolidating Financial Statements (Unaudited) CONTINUED
Consolidating Statements of Cash Flows
Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008
Thirty-Nine Weeks Ended October 31, 2009 and November 1, 2008
October 31, 2009 | ||||||||||||||||
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net cash provided by (used for) operating activities |
$ | 75.3 | $ | (20.9 | ) | $ | | $ | 54.4 | |||||||
Cash flows used for investing activities: |
||||||||||||||||
Capital expenditures |
(21.4 | ) | (4.7 | ) | (26.1 | ) | ||||||||||
Cash used for investing activities |
(21.4 | ) | (4.7 | ) | | (26.1 | ) | |||||||||
Net cash flows used for financing activities: |
||||||||||||||||
Purchase of senior subordinated notes |
(17.0 | ) | | (17.0 | ) | |||||||||||
Proceeds from stock-based compensation plans |
7.2 | | 7.2 | |||||||||||||
Other, net |
(1.4 | ) | | (1.4 | ) | |||||||||||
Net cash used for financing activities |
(11.2 | ) | | | (11.2 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
42.7 | (25.6 | ) | | 17.1 | |||||||||||
Cash and cash equivalents at beginning of period |
55.0 | 25.6 | | 80.6 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 97.7 | $ | | $ | | $ | 97.7 | ||||||||
November 1, 2008 | ||||||||||||||||
Guarantor | ||||||||||||||||
Parent | Subsidiaries | Eliminations | Consolidated | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Net cash provided by operating activities |
$ | 24.1 | $ | 10.8 | $ | | $ | 34.9 | ||||||||
Cash flows used for investing activities: |
||||||||||||||||
Capital expenditures |
(43.3 | ) | (11.8 | ) | (55.1 | ) | ||||||||||
Cash used for investing activities |
(43.3 | ) | (11.8 | ) | | (55.1 | ) | |||||||||
Net cash flows provided by financing activities: |
||||||||||||||||
Purchase of senior subordinated notes |
(18.0 | ) | | (18.0 | ) | |||||||||||
Net change in revolving credit facility |
33.1 | | 33.1 | |||||||||||||
Proceeds from stock-based compensation plans |
6.0 | | 6.0 | |||||||||||||
Other, net |
(1.5 | ) | | (1.5 | ) | |||||||||||
Net cash provided by financing activities |
19.6 | | | 19.6 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
0.4 | (1.0 | ) | | (0.6 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
(1.0 | ) | 26.4 | | 25.4 | |||||||||||
Cash and cash equivalents at end of period |
$ | (0.6 | ) | $ | 25.4 | $ | | $ | 24.8 | |||||||
13
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion is intended to provide the reader with information that will assist in an
overall understanding of our financial statements, changes in certain key indicators in those
financial statements from year to year, the factors that account for those changes and how certain
accounting principles have impacted our financial statements. This discussion should be read in
conjunction with the audited consolidated financial statements and notes to the consolidated
financial statements presented in our fiscal 2009 Annual Report on Form 10-K.
General Overview
We are the nations largest specialty retailer of fabrics and one of the largest specialty
retailers of crafts, serving customers in their pursuit of apparel and craft sewing, crafting, home
decorating and other creative endeavors. Our retail stores feature a variety of competitively
priced merchandise used in sewing, crafting and home decorating projects, including fabrics,
notions, crafts, frames, paper crafting material, artificial floral, home accents, finished
seasonal and home décor merchandise.
As of October 31, 2009, we operated 758 stores in 47 states (228 large-format stores and 530
small-format stores). We consider stores that generally average more than approximately 24,000
square feet of retail space as large-format stores. Our small-format stores generally average less
than approximately 24,000 square feet. The size of the store is not the only decisive factor in
determining its classification as large-format or small-format. The most important distinction is
whether or not stores in the range have been recently built or remodeled and contain a broad
assortment of craft categories.
Our large-format stores offer an expanded and more comprehensive product assortment than our
small-format stores. Our large-format stores also generally offer custom framing and educational
programs that our small-format stores do not. They average approximately 37,400 square feet and
generated average net sales per store of approximately $4.7 million in fiscal 2009. Our
small-format stores offer a complete selection of fabric and a convenience assortment of crafts,
artificial floral, finished seasonal and home décor merchandise. They average approximately
14,700 square feet and generated average net sales per store of approximately $1.5 million in
fiscal 2009.
Executive Overview
During the third quarter of fiscal 2010, we achieved sales, margin and earnings improvement
and our financial results exceeded our original expectations.
Sales growth continues to be driven by our core sewing and craft categories, while our
sourcing, inventory management and expense control initiatives are enabling us to achieve
sustainable gross margin expansion and expense leverage.
We believe our performance is benefiting from three areas:
| Our strategic plan continues to have a positive impact on results. The initiatives to revitalize our store portfolio, enhance our merchandising programs and provide a more compelling in-store shopping experience are all making a meaningful difference for our customers. |
| We believe that the competitive environment is providing an opportunity for us to capture market share. In the specialty retail channel, we believe we are capturing market share from weaker competitors, based on our sales trend relative to other craft and fabric retailers. In addition, Wal-Mart continues to remove fabric departments as they remodel stores. |
14
Table of Contents
| While consumer confidence is still reported to be tenuous, we are beginning to see improving sales trends in some categories that have been struggling through the recession. |
Our same-store sales increased 4.3 percent for the third quarter of fiscal 2010 compared to a
1.5 percent decrease in the prior year. Sales are being driven primarily by increased customer
traffic in both our small and large format stores. Customer traffic increased 4.9 percent during
the third quarter of fiscal 2010, while average ticket was down 0.6 percent and continues to be
pressured by weakness in the custom framing and seasonal categories.
Our sewing business remains very strong with same-store sales growing 8.1 percent during the
third quarter of fiscal 2010. Quilting and sewing notions were the strongest categories.
Same-store sales in our core craft category was also positive for the quarter, as yarn, kids
crafts and jewelry-making performed well. We continued to experience a downward trend in our
seasonal category. In anticipation of the downward trend in our seasonal category, we reduced our
seasonal inventory purchases, which allowed us to improve margin rates over last year.
In addition to sales growth, gross margin expansion was a key factor in our earnings
performance. Gross margin increased by 200 basis points during the third quarter of fiscal 2010.
The following five key factors that we discussed in previous quarters continue to positively impact
gross margin:
| More direct sourcing of products from Asia; |
| Lower transportation expenses; |
| Product cost deflation on imported merchandise; |
| Reduced seasonal and fashion merchandise; and |
| Improvements in markdown controls from our new POS system enhancements. |
We will begin to anniversary the benefits from lower fuel expense, product cost deflation and
some of the system enhancements during the fourth quarter of fiscal 2010. However, we expect
continued year-over-year rate improvement in the fourth quarter of fiscal 2010, due to our ongoing
initiatives as well as the favorable comparison with markdowns taken in the fourth quarter of
fiscal 2009 to sell through seasonal merchandise.
We continued to focus on controlling our expenses during the third quarter of fiscal 2010. As
a percentage of sales, selling, general and administrative expenses (SG&A) improved by 190 basis
points as compared to the same period of the prior year. We implemented more efficient work
processes in our stores and distribution centers, which have lowered our expense structure and we
are seeing the benefit of leverage from our sales growth.
An important factor in both our recent performance and our future growth is the ongoing
revitalization of our store portfolio. We opened four new stores during the third quarter of
fiscal 2010, resulting in a total of 19 stores opened during the first nine months of fiscal 2010.
We also completed 13 remodels and 85 store optimization projects in the third quarter of fiscal
2010. We are on schedule to open 20 new stores, complete 30 store remodels and over 180 store
optimization projects during fiscal 2010.
As a result of these improvements across our key operating metrics, earnings per diluted share
increased to $0.90 during the third quarter of fiscal 2010 compared to $0.40 in the same period of
the prior year.
15
Table of Contents
Recent Developments and Business Update
Outlook for Fiscal 2010
On
November 5, 2009, we updated our same-store sales and earnings per diluted share expectations for fiscal
2010. We are updating
other key assumptions for the full year. Based upon year-to-date results and our operating
assumptions for the remainder of the year our expectations for fiscal 2010 include:
| Same-store sales increase of approximately 2.3% to 2.7% for the year; |
| Gross margin rate improvement for the year greater than our trend for the first nine months of the year; |
| SG&A, as a percentage of net sales, improvement for the year, but less than our trend for the first nine months of the year; |
| Capital expenditures, net of landlord allowances, for the full year of approximately $30 million; |
| Earnings per diluted share in the range of $1.95 to $2.05 for the year (excluding any gains on debt purchases); |
| Free cash flow in the range of $88 to $91 million for the year (free cash flow defined as net income plus depreciation and amortization, stock-based compensation expense and changes in working capital, less capital expenditures); |
| Weighted-average diluted share count of approximately 26.5 million shares for the year. |
Due to our strong financial position and the favorable leasing environment, we will increase
our store activity during fiscal year 2011. We expect to open approximately 30 new stores,
including several small stores averaging 15,000 square feet in small markets where Wal-Mart has
exited the fabric business. We will also increase our store remodeling activity during fiscal
2011. We currently expect to remodel at least 40 stores next year, including downsizing a few of
our over-sized large format stores.
Results of Operations
The following table sets forth our results of operations through operating profit, expressed
as a percentage of net sales. The following discussion should be read in conjunction with our
consolidated interim financial statements and related notes thereto.
Percentage of Net Sales | ||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
Oct 31, | Nov 1, | Oct 31, | Nov 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Gross margin |
51.0 | % | 49.0 | % | 49.6 | % | 47.7 | % | ||||||||
Selling, general and administrative
expenses |
39.7 | % | 41.6 | % | 42.2 | % | 43.3 | % | ||||||||
Store pre-opening and closing costs |
0.4 | % | 1.0 | % | 0.6 | % | 0.8 | % | ||||||||
Depreciation and amortization |
2.7 | % | 2.8 | % | 3.0 | % | 3.0 | % | ||||||||
Operating profit |
8.2 | % | 3.6 | % | 3.8 | % | 0.6 | % | ||||||||
16
Table of Contents
Net
Sales. Net sales represent retail sales, net of estimated returns and exclude sales
taxes. The following tables summarize the year-over-year comparison of our consolidated net sales
and sales by segment for the periods indicated:
Consolidated
Net Sales:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 31, | November 1, | Percentage | October 31, | November 1, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Consolidated net sales |
$ | 509.1 | $ | 480.1 | 6.0 | % | $ | 1,388.5 | $ | 1,329.2 | 4.5 | % | ||||||||||||
Increase from prior year |
$ | 29.0 | $ | 59.3 | ||||||||||||||||||||
Same-store sales
percentage change |
4.3 | % | (1.5 | )% | 2.5 | % | 1.9 | % |
Comparison of the Thirteen Weeks Ended October 31, 2009 to November 1, 2008
Overall, consolidated net sales increased for the third quarter of fiscal 2010. Same-store
sales increased 4.3 percent compared with a same-store sales decease of 1.5 percent for the third
quarter of fiscal 2009. The improvement in same-store sales was driven by a 4.9 percent increase
in customer transactions, partially offset by a 0.6 percent decrease in average ticket as compared
to the third quarter of fiscal 2009. The increase in customer transactions is primarily due to
the performance of new products, modifications we made to our marketing content to deliver a
stronger value message, benefits of our store remodeling and optimization efforts and competitive
withdrawals in the sewing business. Our total store count of 758 at the end of the third quarter
of fiscal 2010 was down ten stores compared to the same period in fiscal 2009; however, total
store square footage increased from 16.0 million square feet at the end of third quarter fiscal
2009 to 16.1 million square feet at the end of third quarter fiscal 2010. In total, we opened
four new stores and closed four stores during the third quarter of fiscal 2010, compared to the
third quarter of fiscal 2009 when we opened 12 new stores and closed 12 stores.
On a category basis, our sewing businesses represented 55 percent of our fiscal 2010 third
quarter net sales volume and increased 8.1 percent on a same-store sales basis over the third
quarter of the prior year. We continued to experience positive same-store sales in the majority of
our fabric and sewing notions merchandise categories.
Our non-sewing businesses represented 45 percent of our fiscal 2010 third quarter net sales
volume and increased approximately 0.1 percent on a same-store sales basis over the third quarter
of the prior year. Growth in our core craft merchandise categories was offset by continued
weakness in seasonal and custom framing merchandise categories.
Comparison of the Thirty-Nine Weeks Ended October 31, 2009 to November 1, 2008
Overall, consolidated net sales increased for the first nine months of fiscal 2010.
Same-store sales increased 2.5 percent compared with a same-store sales increase of 1.9 percent
for the first nine months of fiscal 2009. The improvement in same-store sales was driven by a 4.1
percent increase in customer transactions, partially offset by a 1.6 percent decrease in average
ticket as compared to the first nine months of fiscal 2009. The increase in customer transactions
is primarily due to the performance of new products, continued benefits from modifications we made
to our marketing content to deliver a stronger value message, benefits of our store remodeling and
optimization efforts and competitive withdrawals in the sewing business. In total, we opened 19
new stores and closed 25 stores during the first nine months of fiscal 2010, compared to the first
nine months of fiscal 2009 when we opened 15 new stores and closed 21 stores.
On a category basis, our sewing businesses represented 53 percent of the first nine months of
fiscal 2010 net sales volume and increased 5.4 percent on a same-store sales basis over the first
nine months of the prior year. Similar to our results for the third quarter of fiscal 2010, we
continued to experience positive same-store sales in the majority of our fabric and sewing notions
merchandise categories, especially in quilting and sewing notions, for the first nine months of
fiscal 2010.
17
Table of Contents
Our non-sewing businesses represented 47 percent of our fiscal 2010 first nine months net
sales volume and decreased approximately 0.8 percent on a same-store sales basis over the first
nine months of the prior year. The decrease was primarily due to declines in seasonal categories
and custom framing.
Sales by Segment:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 31, | November 1, | Percentage | October 31, | November 1, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Large-format stores |
||||||||||||||||||||||||
Net sales |
$ | 272.0 | $ | 250.2 | 8.7 | % | $ | 747.1 | $ | 695.8 | 7.4 | % | ||||||||||||
Increase from prior year |
$ | 21.8 | $ | 51.3 | ||||||||||||||||||||
Same-store
sales percentage change |
2.3 | % | (3.8 | )% | 0.7 | % | 0.3 | % | ||||||||||||||||
Small-format stores |
||||||||||||||||||||||||
Net sales |
$ | 228.5 | $ | 221.8 | 3.0 | % | $ | 615.8 | $ | 610.0 | 1.0 | % | ||||||||||||
Increase from prior year |
$ | 6.7 | $ | 5.8 | ||||||||||||||||||||
Same-store sales
percentage change |
6.7 | % | 1.2 | % | 4.7 | % | 3.7 | % | ||||||||||||||||
Other |
||||||||||||||||||||||||
Net sales |
$ | 8.6 | $ | 8.1 | 6.2 | % | $ | 25.6 | $ | 23.4 | 9.4 | % | ||||||||||||
Increase from prior year |
$ | 0.5 | $ | 2.2 |
Comparison of the Thirteen Weeks Ended October 31, 2009 to November 1, 2008
Sales for large-format stores increased for the third quarter of fiscal 2010 primarily due to
the net increase in the number of new stores. The number of large-format stores in operation
increased to 228 at the end of the third quarter of fiscal 2010 from 208 at the end of the same
quarter of fiscal 2009. Large-format stores accounted for approximately 53.4 percent of total
third quarter net sales in fiscal 2010 as compared to 52.1 percent for the same period in the
prior year.
Same-store sales for large-format stores increased 2.3 percent for the quarter, versus a
same-store sales decrease of 3.8 percent in the third quarter last year. The increase in
same-store sales was primarily due to a 4.3 percent increase in customer transactions during the
third quarter of fiscal 2010 as compared to the same quarter last year. The increase in
same-store sales was slightly offset by a decrease in average ticket of approximately 2.0 percent
as compared to the third quarter of fiscal 2009. As compared to small-format stores, large-format
stores have a greater mix of seasonal product and higher ticket items, which had weak performance
during the quarter.
Sales for small-format stores increased for the third quarter of fiscal 2010 due to an
increase in same-store sales. The number of small-format stores in operation decreased to 530 at
the end of the third quarter of fiscal 2010 compared with 560 at the end of the same quarter last
year. Small-format stores accounted for approximately 44.9 percent of total third quarter net
sales in fiscal 2010 as compared to 46.2 percent for the same period in the prior year.
Same-store sales performance for small-format stores increased 6.7 percent compared with a
same-store sales increase of 1.2 percent for the third quarter of fiscal 2009. The increase in
same-store sales was primarily due to a 5.5 percent increase in customer transactions, coupled with
a 1.2 percent increase in average ticket as compared to the third quarter of fiscal 2009. We
continue to see the ongoing benefit from our store remodels, store optimizations and competitive
changes in the sewing business in our small-format stores.
Sales included in our other segment represent sales from Joann.com. Internet sales through
Joann.com accounted for 1.7 percent of third quarter net sales both in fiscal 2010 and the same
period in the prior year.
18
Table of Contents
Comparison of the Thirty-Nine Weeks Ended October 31, 2009 to November 1, 2008
Sales for large-format stores increased for the first nine months of fiscal 2010 primarily
due to the net increase in the number of new stores. Large-format stores accounted for
approximately 53.8 percent of total first nine months net sales in fiscal 2010 as compared to 52.3
percent for the same period in the prior year.
Same-store sales for large-format stores increased 0.7 percent for the first nine months,
versus a same-store sales increase of 0.3 percent in the first nine months of last year. Customer
transactions for large-format stores increased by approximately 3.4 percent, while average ticket
decreased by approximately 2.7 percent, as compared to the first nine months of fiscal 2009.
Large-format stores have a greater mix of seasonal product and higher ticket items, which had weak
performance during the first nine months of the year.
Sales for small-format stores increased for the first nine months of fiscal 2010 due to the
increase in same-store sales. Small-format stores accounted for approximately 44.4 percent of
total first nine months net sales in fiscal 2010 as compared to 45.9 percent for the same period in
the prior year.
Same-store sales performance for small-format stores increased 4.7 percent compared with a
same-store sales increase of 3.7 percent for the first nine months of fiscal 2009. The increase in
same-store sales was primarily due to a 4.8 percent increase in customer transactions, slightly
offset by a 0.1 percent decrease in average ticket as compared to the first nine months of fiscal
2009. We continue to see the ongoing benefit from our store remodels, store optimizations and
competitive changes in the sewing business in our small-format stores.
Internet sales through Joann.com accounted for 1.8 percent of first nine months net sales in
both fiscal 2010 and for the same period in the prior year.
Gross Margin. Gross margins may not be comparable to those of our competitors and other
retailers. Some retailers include all of the costs related to their distribution network in cost
of sales, while we exclude the indirect portion from gross margin and include it within SG&A. We
include distribution costs that are directly associated with the acquisition of our merchandise in
cost of sales. These costs are primarily in-bound and out-bound freight. We incur in-bound
freight costs as a result of merchandise shipments from the vendor to our distribution centers or
directly to our stores via drop shipment. In-bound freight and duties related to import
purchases and internal transfer costs are considered to be direct costs of our merchandise and,
accordingly, are recognized as cost of sales when the related merchandise is sold. We incur
out-bound freight costs when we ship the merchandise to our stores from the distribution centers.
Purchasing and receiving costs, warehousing costs and other costs of our distribution network and
store occupancy costs are considered to be period costs not directly attributable to the value of
merchandise and, accordingly, are expensed as incurred as SG&A.
19
Table of Contents
Gross Margin:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 31, | November 1, | Percentage | October 31, | November 1, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Gross margin |
$ | 259.8 | $ | 235.3 | 10.4 | % | $ | 689.3 | $ | 633.9 | 8.7 | % | ||||||||||||
Increase from prior year |
$ | 24.5 | $ | 55.4 | ||||||||||||||||||||
Percentage of
consolidated net
sales |
51.0 | % | 49.0 | % | 49.6 | % | 47.7 | % |
As a percent of net sales, gross margin increased 200 basis points to 51.0 percent for the
third quarter of fiscal 2010 compared with 49.0 percent for the same quarter last year. The
improvement in our gross margin rate primarily was due to reduced product costs from global
sourcing initiatives, reduced freight costs and lower clearance levels as compared to the same
period of fiscal 2009.
As a percent of net sales, gross margin increased 190 basis points to 49.6 percent for the
first nine months of fiscal 2010 compared with 47.7 percent for the same period last year. As
experienced during the third quarter of fiscal 2010, the improvement in the gross margin rate for
the first nine months of fiscal 2010 primarily was due to reduced product costs from global
sourcing, reduced freight costs and lower clearance levels as compared to the same period of fiscal
2009.
We expect continued year-over-year rate improvement in the fourth quarter of fiscal 2010 due
to our ongoing initiatives as well as the favorable comparison with markdowns taken in the fourth
quarter of fiscal 2009 to sell through seasonal merchandise.
Selling, general and administrative expenses. SG&A expenses include store and administrative
payroll, employee benefits, stock-based compensation, certain distribution costs, store occupancy
costs, advertising and administrative expenses. As mentioned previously, some of our competitors
and other retailers include distribution costs and store occupancy costs in gross margin. The
types of distribution costs that we classify as selling, general and administrative expense include
administrative, occupancy, depreciation, labor and other indirect costs that are incurred to
support the distribution network. These costs are not directly associated with the value of the
merchandise sold in our stores, but rather they relate primarily to the handling of merchandise for
delivery to our stores and are expensed as incurred.
Selling, General and Administrative Expenses:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 31, | November 1, | Percentage | October 31, | November 1, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
SG&A |
$ | 202.0 | $ | 199.5 | 1.3 | % | $ | 585.7 | $ | 575.6 | 1.8 | % | ||||||||||||
Increase from prior year |
$ | 2.5 | $ | 10.1 | ||||||||||||||||||||
Percentage of
consolidated net sales |
39.7 | % | 41.6 | % | 42.2 | % | 43.3 | % |
Distribution costs included within SG&A amounted to $12.8 million and $15.1 million for the
third quarter of fiscal 2010 and 2009, respectively. Store occupancy costs included within SG&A
amounted to $46.7 million and $45.8 million for the third quarter of fiscal 2010 and 2009,
respectively.
For the third quarter of fiscal 2010, SG&A expense, as a percentage of net sales, improved by
190 basis points to 39.7 percent compared with 41.6 percent of net sales in the third quarter last
year. For the first nine months of fiscal 2010, SG&A expense, as a percentage of net sales,
improved by 110 basis points to 42.2 percent compared with 43.3 percent of net sales in the first
nine months of last year. Our improved SG&A leverage reflects our continued focus on controlling
costs, which have increased by 1.8 percent during the first nine months of fiscal 2010, while, for
the same period, net sales increased by 4.5 percent as compared to the first nine months of fiscal
2009.
20
Table of Contents
For the fourth quarter of fiscal 2010, we do not expect the same level of SG&A rate
improvement that we experienced in the first nine months as we begin to anniversary improvements
that we have seen in store payroll and distribution center costs. In addition, we did not incur
any incentive compensation expense during the fourth quarter of fiscal 2009. Based on our
performance during the first nine months of fiscal 2010 as well as our current full-year outlook,
we have incurred incentive compensation expense during the first nine months of fiscal 2010 and
expect to incur incentive compensation expense in the fourth quarter of the current fiscal year.
Distribution costs included within SG&A amounted to $36.6 million and $41.1 million for the
first nine months of fiscal 2010 and 2009, respectively. Store occupancy costs included within
SG&A amounted to $139.7 million and $135.3 million for the first nine months of fiscal 2010 and
2009, respectively.
Store pre-opening and closing costs. Store pre-opening costs are expensed as incurred. These
costs include lease costs recognized prior to the store opening, hiring and training costs for new
employees and processing of initial merchandise. Store closing costs consist of lease termination
costs, lease costs for closed locations, loss on disposal of fixtures and equipment, severance for
employees, third-party inventory liquidator costs and other costs incidental to store closings.
Store pre-opening and closing costs decreased $2.5 million during the third quarter of fiscal
2010 to $2.2 million, compared with $4.7 million in the third quarter of last year. Pre-opening
costs decreased $1.3 million during the third quarter of fiscal 2010 to $1.4 million. During the
third quarter of fiscal 2010 we opened three large-format stores and one small-format store,
whereas in the third quarter of the prior year we opened six large-format stores and six
small-format stores.
Store closing costs decreased $1.2 million during the third quarter of fiscal 2010 to $0.8
million. During the third quarter of fiscal 2010 we closed one large-format store and three
small-format stores as compared to the third quarter of fiscal 2009 when we closed 12 small-format
stores.
Store pre-opening and closing costs decreased $1.4 million during the first nine months of
fiscal 2010 to $8.6 million, compared with $10.0 million in the first nine months of last year.
Pre-opening costs decreased $1.7 million during the first nine months of fiscal 2010 to $4.5
million primarily due to timing of expenditures. During the first nine months of fiscal 2010 we
opened 15 large-format stores and four small-format stores, whereas in the first nine months of the
prior year we opened nine large-format stores and six small-format stores.
Store closing costs increased $0.3 million during the first nine months of fiscal 2010 to $4.1
million. During the first nine months of fiscal 2010 we closed two large-format stores and 23
small-format stores as compared to the first nine months of fiscal 2009 when we closed two
large-format stores and 19 small-format stores.
Depreciation and amortization. Depreciation and amortization expense increased $0.3 million
to $14.1 million in the third quarter of fiscal 2010. The increase primarily is due to incremental
depreciation associated with fiscal 2009 and 2010 expenditures related to technology as well as
spending on new stores and remodels.
Depreciation and amortization expense increased $1.9 million to $42.0 million in the first
nine months of fiscal 2010. The increase primarily is due to incremental depreciation associated
with fiscal 2009 and 2010 expenditures related to technology as well as spending on new stores and
remodels.
21
Table of Contents
Operating Profit (Loss):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 31, | November 1, | Percentage | October 31, | November 1, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Operating profit |
$ | 41.5 | $ | 17.3 | 139.9 | % | $ | 53.0 | $ | 8.2 | 546.3 | % | ||||||||||||
Increase from prior year |
$ | 24.2 | $ | 44.8 |
Operating profit for the third quarter and first nine months of fiscal 2010 increased
primarily due to the improvement in gross margin combined with our continued efforts to control
expenses.
Operating Profit (Loss) by Segment:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||
October 31, | November 1, | Percentage | October 31, | November 1, | Percentage | |||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | Change | 2009 | 2008 | Change | ||||||||||||||||||
Large-format stores |
||||||||||||||||||||||||
Operating profit |
$ | 37.2 | $ | 21.2 | 75.5 | % | $ | 73.2 | $ | 42.8 | 71.0 | % | ||||||||||||
Increase from prior year |
$ | 16.0 | $ | 30.4 | ||||||||||||||||||||
Small-format stores |
||||||||||||||||||||||||
Operating profit |
$ | 40.5 | $ | 25.9 | 56.4 | % | $ | 83.5 | $ | 62.5 | 33.6 | % | ||||||||||||
Increase from prior year |
$ | 14.6 | $ | 21.0 | ||||||||||||||||||||
Other |
||||||||||||||||||||||||
Operating loss |
$ | (36.2 | ) | $ | (29.8 | ) | 21.5 | % | $ | (103.7 | ) | $ | (97.1 | ) | 6.8 | % | ||||||||
Increase from prior year |
$ | (6.4 | ) | $ | (6.6 | ) |
Comparison of the Thirteen Weeks Ended October 31, 2009 to November 1, 2008
The improvement in large-format store operating profit was driven primarily by the $21.8
million increase in store sales volume, which was due primarily to the net increase in the number
of new stores, combined with improvement in gross margin and our continued efforts to control
expenses.
The improvement in small-format store operating profit was driven primarily by a 6.7 percent
increase in same-store sales, which was due partially to the store remodels and optimizations that
occurred during fiscal 2010, combined with improvement in gross margin and our continued efforts
to control expenses.
The other segment includes unallocated corporate overhead in addition to the operating
results of our Internet business. The increase in operating loss during the third quarter of
fiscal 2010 of our other segment is due primarily to an increase in incentive compensation
expense based on our current year performance outlook.
Comparison of the Thirty-Nine Weeks Ended October 31, 2009 to November 1, 2008
The improvement in large-format store operating profit was driven primarily by the $51.3
million increase in store sales volume, which was due to the net increase in the number of new
stores, combined with improvement in gross margin and our continued efforts to control expenses.
The improvement in small-format store operating profit was driven primarily by a 4.7 percent
increase in same-store sales, which was due partially to the store remodels and optimizations that
occurred during fiscal 2010, combined with improvement in gross margin and our continued efforts
to control expenses.
22
Table of Contents
The increase in operating loss during the first nine months of fiscal 2010 of our other
segment is due primarily to an increase in incentive compensation expense based on our current
year performance outlook.
Gain on purchase of senior subordinated notes. In the third quarter of fiscal 2010, we
recorded a pre-tax gain of $0.1 million as a result of the purchase of $3.0 million of our 7.5
percent senior subordinated notes at an average of 98 percent of par, net of the related write-off
of applicable deferred financing costs.
In the first nine months of fiscal 2010, we recorded a pre-tax gain of $1.3 million as a
result of the purchase of $18.5 million of our 7.5 percent senior subordinated notes at an average
of 92 percent of par, net of the related write-off of applicable deferred financing costs.
In the third quarter of fiscal 2009, we recorded a pre-tax gain of $2.1 million as a result of
the purchase of $20.4 million of our 7.5 percent senior subordinated notes at an average of 88
percent of par, net of the related write-off of applicable deferred financing costs.
Interest expense. Interest expense for the third quarter of fiscal 2010 decreased $1.0
million to $1.6 million. The decrease is attributable to lower average debt levels. Our average
debt levels were $49 million in the third quarter of fiscal 2010 versus $117 million in the same
period of the prior year.
Interest expense for the first nine months of fiscal 2010 decreased $2.5 million to $4.7
million. The decrease is attributable to lower average debt levels. Our average debt levels were
$51 million in the first nine months of fiscal 2010 versus $106 million in the same period of the
prior year.
Income taxes. Our effective income tax rates for the third quarters of fiscal 2010 and fiscal
2009 were approximately 39.8 percent and 39.3 percent, respectively. Our effective income tax
rates for the first nine months of fiscal 2010 and fiscal 2009 were approximately 40.5 percent and
51.6 percent, respectively. Our effective tax rate is subject to change based on the mix of income
from different state jurisdictions, which tax at different rates, as well as the change in status
or outcome of uncertain tax positions. We evaluate our effective rate on a quarterly basis and
update our estimate of the full-year effective rate as necessary.
Liquidity and Capital Resources
Our capital requirements are primarily for capital expenditures in connection with new store
openings, store remodels, other infrastructure investments and working capital requirements for
seasonal inventory builds and new store inventory purchases. Working capital requirements
fluctuate during the year and reach their highest levels during the third fiscal quarter as we
increase our inventory in preparation for our peak selling season during the months of September
through December. These requirements are funded through a combination of internally generated cash
flows from operations, credit extended by suppliers and borrowings under our credit facility.
23
Table of Contents
The following table provides cash flow related information for the first nine months of
fiscal 2010 and fiscal 2009:
Dollars in millions | 2010 | 2009 | ||||||
Net cash provided by operating activities |
$ | 54.4 | $ | 34.9 | ||||
Cash used for investing activities |
(26.1 | ) | (55.1 | ) | ||||
Net cash (used for) provided by financing activities |
(11.2 | ) | 19.6 | |||||
Net increase (decrease) in cash and cash equivalents |
$ | 17.1 | $ | (0.6 | ) | |||
Ending cash and cash equivalents |
$ | 97.7 | $ | 24.8 | ||||
Net cash provided by operating activities
Net cash provided by operations increased by $19.5 million to $54.4 million in the first nine
months of fiscal 2010, compared with $34.9 million in the first nine months of fiscal 2009. The
year-over-year increase in cash provided by operations primarily was attributable to a $28.0
million increase in net income for the first nine months of fiscal 2010 as compared to the same
period last year. Inventories increased $56.0 million in the first nine months of fiscal 2010,
compared with a $50.1 million increase in the first nine months of fiscal 2009. Comparing
inventory levels as of the end of the first nine months of fiscal years 2010 and 2009, inventories
decreased $36.9 million, or 7.1 percent, year-over-year. Basic inventories are relatively flat
versus the third quarter of fiscal 2009 with most of the reductions occurring in our fashion and
seasonal inventories.
Cash used for investing activities
Cash used for investing activities totaled $26.1 million in the first nine months of fiscal
2010, compared with $55.1 million in the first nine months of fiscal 2009, and consisted entirely
of capital spending for both periods. Capital expenditures consist of cash expenditures and cash
expenditures reimbursed by landlords. Landlord-reimbursed capital expenditures represent the cost
of assets acquired with landlord lease incentives. Capital expenditures are summarized as
follows:
Thirty-Nine Weeks Ended | ||||||||
October 31, | November 1, | |||||||
Dollars in millions | 2009 | 2008 | ||||||
Cash |
$ | 17.0 | $ | 49.0 | ||||
Cash landlord reimbursed |
9.1 | 6.1 | ||||||
Total |
$ | 26.1 | $ | 55.1 | ||||
During the first nine months of fiscal 2010, we remodeled 26 stores, five of which were
reclassified as a large-format store as a result of the remodel, as compared to the first nine
months of fiscal 2009 when we remodeled 28 stores, five of which were reclassified as large-format
stores as a result of the remodel. We opened 15 large-format stores and four small-format stores
in the first nine months of fiscal 2010 as compared to the first nine months of the prior year
when we opened nine large-format stores and six small-format stores. While store activity has
increased during the first nine months of fiscal 2010, the costs incurred have decreased due
primarily to timing of expenditures and savings due to our continued efforts to control expenses.
Investment in information technology projects and store related expenditures, including store
remodels, represented the majority of the capital spending during the first nine months of fiscal
2010.
24
Table of Contents
Net cash (used for) provided by financing activities
Net cash used for financing activities was $11.2 million during the first nine months of
fiscal 2010, compared with net cash provided by financing activities of $19.6 million during the
same period in fiscal 2009. Long-term debt at the end of the first nine months of fiscal 2010 was
$47.5 million and consisted solely of our 7.5 percent senior subordinated notes. Debt levels
decreased $18.5 million during the first nine months of fiscal 2010, compared with a $12.7 million
increase in debt levels in the first nine months of the
prior year. During the first nine months of fiscal 2010, we purchased $18.5 million in face
value of our notes at an average of 92 percent of par. We recorded a pre-tax gain of $1.3 million,
representing the cash discount received net of the related write-off of applicable deferred
financing costs. During the third quarter of fiscal 2009, we purchased $20.4 million in face value
of our notes at an average of 88 percent of par. We recorded a pre-tax gain of $2.1 million,
representing the cash discount received net of the related write-off of applicable deferred
financing costs. These charges are reflected in the gain on purchase of senior subordinated notes
line item in the statement of operations.
Our liquidity is based, in part, on our debt ratings. As of the end of fiscal 2009, our
long-term unsecured debt was rated B3 by Moodys Investor Services and CCC+ by Standard &
Poors. Moodys rated our outlook as stable while Standard & Poors rated our outlook as positive.
In May 2009, Standard and Poors raised our rating from CCC+ to B- with a stable outlook. The
change in ratings by Standard and Poors reflects its view that our operating results have improved
and the expectation that working capital, free cash flow and debt protection measures will continue
to improve. In September 2009, Moodys raised our rating on our long-term unsecured debt from B3
to B2 with a stable outlook. Moodys attributes the change in ratings to the material
improvement in our financial profile, operating performance and our ability to continue to generate
positive free cash flow. In assessing our credit strength, both Moodys and Standard & Poors
consider our capital structure and financial policies, as well as our consolidated balance sheet
and other financial information. Downgrades of our credit ratings could adversely impact, among
other things, our future borrowing costs, access to capital markets and new store operating lease
costs, although we anticipate no short-term effect under our current credit arrangements.
As of October 31, 2009, we had the ability to borrow $282 million under our credit facility,
subject to the borrowing base calculation. Our debt-to-capitalization ratio was 8.4 percent at
October 31, 2009, 12.1 percent at January 31, 2009 and 19.8 percent at November 1, 2008.
Off-Balance Sheet Transactions
Our liquidity is currently not dependent on the use of off-balance sheet transactions other
than letters of credit and operating leases, which are typical in a retail environment.
Seasonality and Inflation
Our business exhibits seasonality, which is typical for most retail companies. Our net sales
are much stronger in the second half of the year than the first half of the year. Net earnings
are highest during the months of September through December when sales volumes provide significant
operating leverage. Working capital requirements needed to finance our operations fluctuate
during the year and reach their highest levels during the second and third fiscal quarters as we
increase our inventory in preparation for our peak selling season.
We believe that inflation has not had a significant effect on net sales or on our earnings
performance. There can be no assurance, however, that our operating results will not be affected
by inflation in the future.
Critical Accounting Policies
Our condensed consolidated interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. Preparation of these
statements requires management to make judgments and estimates. Some accounting policies have a
significant impact on amounts reported in these financial statements. A summary of significant
accounting policies and a description of accounting policies that are considered critical can be
found in our fiscal 2009 Annual Report on Form 10-K in the notes to the consolidated financial
statements and the Critical Accounting Policies and Estimates section of Managements Discussion
and Analysis of Financial Condition and Results of Operations.
25
Table of Contents
Contractual Obligations
There have been no material changes to the table of contractual obligations and commitments
presented on page 37 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
Cautionary Statement Concerning Forward-Looking Statements
Certain statements contained in this report that are not historical facts are forward-looking
statements within the meaning of that term set forth in the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements, which reflect our current views of future events and
financial performance, involve certain risks and uncertainties. When used herein, the terms
anticipates, plans, estimates, expects, believes, intends, and similar expressions as
they relate to us or future events or conditional verbs such as will, should, would, may,
and could are intended to identify such forward-looking statements. All statements that address
operating performance, events or developments that we expect or anticipate will occur in the future
are forward-looking statements. Our actual results, performance or achievements may differ
materially from those expressed or implied in the forward-looking statements. Risks and
uncertainties that could cause or contribute to such material differences include, but are not
limited to, the items described in Item 1A. Risk Factors of our fiscal 2009 Annual Report on Form
10-K, as updated herein, as well as changes in general economic conditions, the current financial
crisis, the difficulty of predicting the behavior of our customers and the performance of our
business during the current economic downturn, natural disasters and geo-political events, changes
in customer demand, changes in trends in the fabric and craft industry, changes in the competitive
pricing for products, the impact of competitors store openings and closings, our dependence on
suppliers, seasonality, disruptions to the transportation system or increases in transportation
costs, energy costs, our ability to recruit and retain highly qualified personnel, our ability to
manage our inventory, our ability to effectively manage our distribution network, disruptions to
our information systems, our indebtedness and limits on obtaining additional financing, failure to
maintain the security of our electronic and other confidential information, failure to comply with
various laws and regulations, failure to successfully implement the store growth strategy, changes
in accounting standards and effective tax rates, inadequacy of our insurance coverage, volatility
of our stock price, damage to our reputation, and other factors, including other factors discussed
elsewhere in this report. We caution readers not to place undue reliance on these forward-looking
statements. We assume no obligation to update any of the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk of our financial instruments as of October 31, 2009 has not changed
significantly since January 31, 2009. Information regarding our financial instruments and market
risk as of January 31, 2009 is disclosed in our fiscal 2009 Annual Report on Form 10-K.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable
assurance that information required to be disclosed in our reports under the Securities Exchange
Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms, and
that such information is accumulated and communicated to the management of Jo-Ann Stores, Inc.
(the Management), including our Principal Executive Officer and our Principal Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, our Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
26
Table of Contents
In connection with the preparation of this Quarterly Report on Form 10-Q as of October 31,
2009, an evaluation was performed under the supervision and with the participation of our
Management, including the
Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act). Based on that evaluation, our Principal Executive Officer and Principal Financial
Officer have concluded that our disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 21, 2008 a purported wage and hour class action was filed against the company in
Superior Court of the State of California, County of Los Angeles captioned Patti Blair et al. v.
Jo-Ann Stores, Inc. et al., Case No. BC394795. In the complaint, as amended, six former company
employees, individually and on behalf of the purported class members, alleged that certain current
and former California store team leaders employed by the company since July 21, 2004 were
classified improperly as exempt employees (and thus not paid for overtime work), and that current
and former hourly employees employed by the companys California stores since July 21, 2004 missed
rest and meal breaks for which they were not properly compensated and at times worked off the clock
without compensation. The amended complaint alleged other violations of California law arising from
the alleged wage and hour violations. The amended complaint sought substantial monetary damages,
injunctive relief and attorneys fees. On May 19, 2009 the court certified this matter to proceed
as a class action. In September 2009, an agreement in principle, which has been executed by the
company, was negotiated with counsel for the plaintiff. In November 2009, the court granted
preliminary approval of the negotiated settlement. The negotiated settlement provides for the
payment by the company of up to $5.0 million, depending on the number of claims that are filed by
the purported class members. As of the end of the quarterly period ended October 31, 2009, the
company has fully reserved for the total amount expected to be incurred by the company in
connection with this litigation and the negotiated settlement.
We are involved in various other litigation matters in the ordinary course of our business.
We do not expect that any of these matters, either individually or in the aggregate, will have a
material adverse effect on our financial condition or results of operations.
Item 1A. Risk Factors
Except as set forth in our Quarterly Report on Form 10-Q for our fiscal quarter ended May
2, 2009,
there were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for
our fiscal year ended January 31, 2009.
27
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by Jo-Ann Stores, Inc.
Total Number of | Maximum Number | |||||||||||||||
Shares Purchased | of Shares that May | |||||||||||||||
Total Number | Average | as Part of Publicly | Yet Be Purchased | |||||||||||||
of Shares | Price Paid | Announced Plans | Under the Plans or | |||||||||||||
Purchased | per Share | or Programs | Programs | |||||||||||||
August 2 29, 2009 |
3,535 | $ | 23.35 | 1,199,720 | 950,280 | |||||||||||
August 30 October 3, 2009 |
8,164 | $ | 27.48 | 1,207,884 | 942,116 | |||||||||||
October 4 October 31, 2009 |
232 | $ | 27.94 | 1,208,116 | 941,884 | |||||||||||
Total |
11,931 | $ | 26.27 | 1,208,116 | 941,884 | |||||||||||
In December 1998, our Board of Directors authorized a discretionary program that allowed us to
buy back 2,150,000 common shares. That program does not have a stated expiration date. In the
table above, the total number of shares purchased represents shares repurchased directly from the
market, as well as shares repurchased from employees related to the vesting of restricted shares
that were provided to us to satisfy minimum statutory tax withholding requirements.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
a) Exhibits
No. | Exhibit Description | |||
31.1 | Section 302 Certification By Chief Executive Officer |
|||
31.2 | Section 302 Certification By Chief Financial Officer |
|||
32.1 | Section 906 Certification of Principal Executive Officer and
Principal Financial Officer |
28
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JO-ANN STORES, INC. |
||||
DATE: December 8, 2009 | /s/ Darrell Webb | |||
Darrell Webb | ||||
President and Chief Executive Officer | ||||
/s/ James Kerr | ||||
James Kerr | ||||
Executive Vice President and Chief Financial Officer |
29