Attached files
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EX-32.2 - EXHIBIT 32.2 - 99 CENTS ONLY STORES LLC | ex32_2.htm |
EX-31.2 - EXHIBIT 31.2 - 99 CENTS ONLY STORES LLC | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - 99 CENTS ONLY STORES LLC | ex32_1.htm |
EX-31.1 - EXHIBIT 31.1 - 99 CENTS ONLY STORES LLC | ex31_1.htm |
EX-23.1 - EXHIBIT 23.1 - 99 CENTS ONLY STORES LLC | ex23_1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
T
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the Quarterly Period Ended December 26, 2009
Or
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 1-11735
99¢
ONLY STORES
(Exact
name of registrant as specified in its charter)
California
|
95-2411605
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
4000
Union Pacific Avenue,
City
of Commerce, California
|
90023
(Zip
Code)
|
(Address
of principal executive offices)
|
Registrant's
telephone number, including area code: (323) 980-8145
Former
name, address and fiscal year, if changed since last report
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 T No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes £ No £
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
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £
|
Accelerated filer T
|
Non-accelerated filer £
|
Smaller reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No T
Indicate
the number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date.
Common
Stock, No Par Value, 69,041,315 Shares as of February 1, 2010
99¢ ONLY STORES
Form
10-Q
Table
of Contents
Part
I - Financial Information
Page
|
||
Item
1.
|
4 | |
4 | ||
5 | ||
6 | ||
7 | ||
Item
2.
|
24 | |
Item
3.
|
31 | |
Item
4.
|
31 | |
Part
II – Other Information
|
||
Item
1.
|
33 | |
Item
1A.
|
33 | |
Item
2.
|
33 | |
Item
3.
|
33 | |
Item
4.
|
34 | |
Item
5.
|
34 | |
Item
6.
|
34 | |
35 |
FORWARD-LOOKING
INFORMATION
This
Report on Form 10-Q contains statements that constitute “forward-looking
statements” within the meaning of Section 21E of the Securities Exchange Act and
Section 27A of the Securities Act. The words “expect,” “estimate,” “anticipate,”
“predict,” “believe” and similar expressions and variations thereof are intended
to identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief or
current expectations of 99¢ Only Stores (the “Company”) and its directors or
officers with respect to, among other things, (a) trends affecting the financial
condition or results of operations of the Company, and (b) the business and
growth strategies of the Company (including the Company’s store opening growth
rate). Readers are cautioned not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those projected in this Report, for the reasons, among others,
discussed in the “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “Risk Factors” Sections. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including the Company’s Annual Report on Form 10-K for the
fiscal year ended March 28, 2009.
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
99¢ ONLY STORES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
December 26,
2009
|
March 28,
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$ | 23,255 | $ | 21,930 | ||||
Short-term
investments
|
147,542 | 93,049 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $406 and $44 at
December 26, 2009 and March 28, 2009, respectively
|
2,115 | 2,490 | ||||||
Income
taxes receivable
|
1,431 | 1,161 | ||||||
Deferred
income taxes
|
32,861 | 32,861 | ||||||
Inventories,
net
|
177,853 | 151,928 | ||||||
Assets
held for sale
|
7,587 | 7,753 | ||||||
Other
|
3,977 | 4,038 | ||||||
Total
current assets
|
396,621 | 315,210 | ||||||
Property
and equipment, net
|
274,917 | 271,286 | ||||||
Long-term
deferred income taxes
|
32,946 | 35,685 | ||||||
Long-term
investments in marketable securities
|
16,162 | 26,351 | ||||||
Deposits
and other assets
|
15,086 | 14,341 | ||||||
Total
assets
|
$ | 735,732 | $ | 662,873 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 48,092 | $ | 36,009 | ||||
Payroll
and payroll-related
|
14,694 | 13,731 | ||||||
Sales
tax
|
7,911 | 5,334 | ||||||
Other
accrued expenses
|
25,067 | 23,342 | ||||||
Workers’
compensation
|
47,098 | 44,364 | ||||||
Current
portion of capital lease obligation
|
69 | 65 | ||||||
Total
current liabilities
|
142,931 | 122,845 | ||||||
Deferred
rent
|
9,007 | 10,318 | ||||||
Deferred
compensation liability
|
4,085 | 2,995 | ||||||
Capital
lease obligation, net of current portion
|
467 | 519 | ||||||
Other
liabilities
|
1,866 | 2,339 | ||||||
Total
liabilities
|
158,356 | 139,016 | ||||||
Commitments
and contingencies
|
||||||||
Shareholders’
Equity:
|
||||||||
Preferred
stock, no par value – authorized, 1,000,000 shares; no shares issued or
outstanding
|
— | — | ||||||
Common
stock, no par value – authorized, 200,000,000 shares; issued and
outstanding, 69,028,825 shares at December 26, 2009 and 68,407,486 shares
at March 28, 2009
|
240,176 | 231,867 | ||||||
Retained
earnings
|
337,674 | 294,081 | ||||||
Other
comprehensive loss
|
(474 | ) | (2,091 | ) | ||||
Total
shareholders’ equity
|
577,376 | 523,857 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 735,732 | $ | 662,873 |
The
accompanying notes are an integral part of these consolidated financial
statements.
99¢ ONLY STORES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
(Unaudited)
For the Third Quarter Ended
|
For the Three Quarters
Ended
|
|||||||||||||||
December 26,
2009
|
December 27,
2008
|
December 26,
2009
|
December 27,
2008
|
|||||||||||||
Net
Sales:
|
||||||||||||||||
99¢
Only Stores
|
$ | 348,902 | $ | 340,988 | $ | 985,568 | $ | 943,105 | ||||||||
Bargain
Wholesale
|
10,217 | 10,093 | 30,348 | 30,676 | ||||||||||||
Total
sales
|
359,119 | 351,081 | 1,015,916 | 973,781 | ||||||||||||
Cost
of sales (excluding depreciation and amortization expense shown separately
below)
|
204,218 | 208,248 | 597,843 | 591,385 | ||||||||||||
Gross
profit
|
154,901 | 142,833 | 418,073 | 382,396 | ||||||||||||
Selling,
general and administrative expenses:
|
||||||||||||||||
Operating
expenses
|
109,317 | 117,109 | 328,301 | 353,010 | ||||||||||||
Depreciation
and amortization
|
6,985 | 8,835 | 20,803 | 26,236 | ||||||||||||
Total
selling, general and administrative expenses
|
116,302 | 125,944 | 349,104 | 379,246 | ||||||||||||
Operating
income
|
38,599 | 16,889 | 68,969 | 3,150 | ||||||||||||
Other
(income) expense:
|
||||||||||||||||
Interest
income
|
(244 | ) | (835 | ) | (855 | ) | (3,067 | ) | ||||||||
Interest
expense
|
32 | 370 | 207 | 778 | ||||||||||||
Other-than-temporary
investment impairment due to credit losses
|
— | — | 843 | — | ||||||||||||
Other
|
— | 227 | (18 | ) | 1,582 | |||||||||||
Total
other (income) expense, net
|
(212 | ) | (238 | ) | 177 | (707 | ) | |||||||||
Income
before provision for income taxes and income attributed to noncontrolling
interest
|
38,811 | 17,127 | 68,792 | 3,857 | ||||||||||||
Provision
for income taxes
|
14,326 | 4,674 | 25,199 | 972 | ||||||||||||
Net
income including noncontrolling interest
|
24,485 | 12,453 | 43,593 | 2,885 | ||||||||||||
Net
income attributable to noncontrolling interest
|
— | — | — | (1,357 | ) | |||||||||||
Net
income attributable to 99¢ Only Stores
|
$ | 24,485 | $ | 12,453 | $ | 43,593 | $ | 1,528 | ||||||||
Earnings
per common share attributed to 99¢ Only Stores:
|
||||||||||||||||
Basic
|
$ | 0.36 | $ | 0.18 | $ | 0.64 | $ | 0.02 | ||||||||
Diluted
|
$ | 0.35 | $ | 0.18 | $ | 0.63 | $ | 0.02 | ||||||||
Weighted
average number of common shares outstanding:
|
||||||||||||||||
Basic
|
68,788 | 69,985 | 68,596 | 70,021 | ||||||||||||
Diluted
|
69,728 | 70,177 | 69,266 | 70,084 |
The
accompanying notes are an integral part of these consolidated financial
statements.
99¢ ONLY STORES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts
in thousands)
(Unaudited)
For the Three Quarters
Ended
|
||||||||
December 26,
2009
|
December 27,
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income including noncontrolling interest
|
$ | 43,593 | $ | 2,885 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
20,803 | 26,236 | ||||||
(Gain)
loss on disposal of fixed assets
|
(605 | ) | 341 | |||||
Gain
on sale of partnership asset
|
— | (760 | ) | |||||
Long-lived
asset impairment
|
431 | 10,355 | ||||||
Investments
impairment
|
843 | 1,677 | ||||||
Excess
tax (benefit) deficiency from share-based payment
arrangements
|
(933 | ) | 7 | |||||
Deferred
income taxes
|
1,077 | (1,133 | ) | |||||
Stock-based
compensation expense
|
5,652 | 2,488 | ||||||
Changes
in assets and liabilities associated with operating
activities:
|
||||||||
Accounts
receivable
|
375 | 189 | ||||||
Inventories
|
(25,266 | ) | (36,981 | ) | ||||
Deposits
and other assets
|
103 | 788 | ||||||
Accounts
payable
|
11,506 | 22,259 | ||||||
Accrued
expenses
|
6,797 | 9,894 | ||||||
Accrued
workers’ compensation
|
2,734 | 78 | ||||||
Income
taxes
|
(270 | ) | (133 | ) | ||||
Deferred
rent
|
(1,311 | ) | (448 | ) | ||||
Other
long-term liabilities
|
(474 | ) | — | |||||
Net
cash provided by operating activities
|
65,055 | 37,742 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property and equipment
|
(24,410 | ) | (26,797 | ) | ||||
Proceeds
from sale of fixed assets
|
905 | 257 | ||||||
Purchases
of investments
|
(64,032 | ) | (50,158 | ) | ||||
Sales
of investments
|
21,213 | 48,483 | ||||||
Proceeds
from sale of partnership asset
|
— | 2,218 | ||||||
Acquisition
of partnership assets
|
— | (4,566 | ) | |||||
Net
cash used in investing activities
|
(66,324 | ) | (30,563 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Repurchases
of common stock
|
— | (901 | ) | |||||
Repurchases
of common stock related to issuance of Performance Stock
Units
|
(1,761 | ) | — | |||||
Acquisition
of noncontrolling interest of a partnership
|
(275 | ) | — | |||||
Payments
of capital lease obligation
|
(48 | ) | (45 | ) | ||||
Proceeds
from exercise of stock options
|
3,745 | 54 | ||||||
Excess
tax benefit (deficiency) from share-based payment
arrangements
|
933 | (7 | ) | |||||
Net
cash provided by (used in) financing activities
|
2,594 | (899 | ) | |||||
Net
increase in cash
|
1,325 | 6,280 | ||||||
Cash
and cash equivalents - beginning of period
|
21,930 | 9,462 | ||||||
Cash
and cash equivalents - end of period
|
$ | 23,255 | $ | 15,742 |
The
accompanying notes are an integral part of these consolidated financial
statements.
99¢ ONLY STORES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Basis
of Presentation and Summary of Significant Accounting
Policies
|
The
accompanying unaudited consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America (“GAAP”). However, certain information and footnote disclosures normally
included in financial statements prepared in conformity with GAAP have been
omitted or condensed pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). These statements should be read in conjunction with
the Company's audited financial statements for the fiscal year ended March 28,
2009 (“fiscal 2009”) and notes thereto included in the Form 10-K. In the opinion
of the Company’s management, these interim consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair statement of the consolidated financial position and results of
operations for each of the periods presented. The results of operations and cash
flows for such periods are not necessarily indicative of results to be expected
for the full year ending March 27, 2010 (“fiscal 2010”).
Fiscal
Periods
The
Company follows a fiscal calendar consisting of four quarters with 91 days, each
ending on the Saturday closest to the calendar quarter-end, and a 52-week fiscal
year with 364 days, with a 53-week year every five to six years. Unless
otherwise stated, references to years in this report relate to fiscal years
rather than calendar years. The Company’s fiscal year 2010 (“fiscal
2010”) began on March 29, 2009 and will end on March 27, 2010 and fiscal 2009
began on March 30, 2008 and ended March 28, 2009. The third quarter ended
December 26, 2009 (“third quarter of fiscal 2010”) and third quarter ended
December 27, 2008 (“third quarter of fiscal 2009”) were each comprised of 91
days. The period ended December 26, 2009 (“the first three quarters
of fiscal 2010”) and the period ended December 27, 2008 (“the first three
quarters of fiscal 2009”) were each comprised of 273 days.
Nature
of Business
The
Company is incorporated in the State of California. The Company is an extreme
value retailer of primarily consumable and general merchandise with an emphasis
on name-brand products. As of December 26, 2009, the Company operated
273 retail stores with 204 in California, 32 in Texas, 25 in Arizona, and 12 in
Nevada. The Company is also a wholesale distributor of various
consumable products.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
subsidiaries and variable interest entities required to be consolidated in
accordance with GAAP. Intercompany accounts and transactions between
the consolidated companies have been eliminated in consolidation.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash
For
purposes of reporting cash flows, cash includes cash on hand and at the stores
and cash in financial institutions. Cash balances held at financial
institutions are generally in excess of federally insured limits. The
Company has not experienced any losses in such accounts. These accounts are only
insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The
Company places its temporary cash investments with what it believes to be high
credit, quality financial institutions and limits the amount of credit exposure
to any one financial institution.
Allowance
for Doubtful Accounts
In
connection with its wholesale business, the Company evaluates the collectability
of accounts receivable based on a combination of factors. In cases where the
Company is aware of circumstances that may impair a specific customer’s ability
to meet its financial obligations subsequent to the original sale, the Company
will record an allowance against amounts due and thereby reduce the net
recognized receivable to the amount the Company reasonably believes will be
collected. For all other customers, the Company recognizes allowances for
doubtful accounts based on the length of time the receivables are past due,
industry and geographic concentrations, the current business environment and the
Company’s historical experiences.
Investments
The
Company’s investments in debt and equity securities are classified as available
for sale and are comprised primarily of marketable investment grade government
and municipal bonds, corporate bonds and equity securities, auction rate
securities, asset-backed securities, commercial paper and money market
funds. The Company has included its auction rate securities in
non-current assets on the Company’s consolidated balance sheets as of December
26, 2009 and March 28, 2009. See Note 3, “Investments.”
Investment
securities are recorded as required by Accounting Standard Codification (“ASC”)
320, “Accounting for Certain Investments in Debt and Equity Securities” (“ASC
320”), previously referred to as Statement of Financial Accounting Standards
(“SFAS”) No. 115. Investments are adjusted for the amortization of
premiums or discounts to maturity and such amortization is included in interest
income. The Company follows ASC 320-10-35, “Subsequent
Measurement of Investments in Debt and Equity” (“ASC 320-10-35”),
previously discussed in FASB Staff Position (“FSP”) 115-1/124-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments”, to assess whether its investments with unrealized loss
positions are other than temporarily impaired. The Company complies
with the presentation and disclosure requirements of the other-than-temporary
impairment for debt securities as discussed in ASC 320-10-65, “Transition
Related to Recognition and Presentation of Other-Than-Temporary Impairments”
(“ASC 320-10-65”), previously referred to as FSP FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary
Impairments”. Realized gains and losses and declines in values judged
to be other-than- temporary are determined based on the specific identification
method and are reported in the statements of income.
Available
for sale securities are initially recorded at cost and periodically adjusted to
fair value with any changes in fair value during a period excluded from earnings
and reported as a charge or credit, net of tax effects, to other comprehensive
income or loss in the Consolidated Statements of Shareholders’
Equity. A decline in the fair value of any available for sale
security below cost deemed to be other-than-temporary will be reported as a
reduction of the carrying amount to fair value. The impairment is
charged to earnings and a new cost basis of the security is
established. Cost basis is established and maintained utilizing the
specific identification method.
Inventories
Inventories
are valued at the lower of cost (first in, first out) or market. Valuation
allowances for obsolete and excess inventory and shrinkage are also recorded.
Shrinkage is estimated as a percentage of sales for the period from the last
physical inventory date to the end of the applicable period. Such estimates are
based on experience and the most recent physical inventory results. The
valuation allowances for obsolete and excess inventory in many locations
(including various warehouses, store backrooms, and sales floors of all its
stores), require management judgment and estimates that may impact the ending
inventory valuation and valuation allowances that may affect the reported gross
margin for the period.
At times,
the Company also makes large block purchases of inventory that it plans to sell
over a period of longer than twelve months. As of December 26, 2009
and March 28, 2009, the Company held inventory of specific products identified
that it expected to sell over a period that exceeds twelve months of
approximately $4.9 million and $4.2 million, respectively, which is included in
deposits and other assets in the consolidated financial
statements.
Property
and Equipment
Property
and equipment are carried at cost and are depreciated or amortized on a
straight-line basis over the following useful lives:
|
Owned
buildings and improvements
|
Lesser
of 30 years or the estimated useful life of the
improvement
|
|
Leasehold
improvements
|
Lesser
of the estimated useful life of the improvement or remaining lease
term
|
|
Fixtures
and equipment
|
3-5
years
|
|
Transportation
equipment
|
3-5
years
|
|
Information
technology systems
|
For
major corporate systems, estimated useful life up to 7 years; for
functional stand alone systems, estimated useful life up to 5
years
|
The
Company’s policy is to capitalize expenditures that materially increase asset
lives and expense ordinary repairs and maintenance as incurred.
Long-Lived
Assets
In
accordance with ASC 310 “Accounting for the Impairment or Disposal of Long-lived
Assets” (“ASC 310”), previously referred to as SFAS No. 144, the Company
assesses the impairment of long-lived assets annually or when events or changes
in circumstances indicate that the carrying value may not be recoverable.
Recoverability is measured by comparing the carrying amount of an asset to
expected future net cash flows generated by the asset. If the carrying amount of
an asset exceeds its estimated undiscounted future cash flows, the carrying
amount is compared to its fair value and an impairment charge is recognized to
the extent of the difference. Factors that the Company considers important which
could individually or in combination trigger an impairment review include the
following: (1) significant underperformance relative to expected historical or
projected future operating results; (2) significant changes in the manner of the
Company’s use of the acquired assets or the strategy for the Company’s overall
business; and (3) significant changes in the Company’s business strategies
and/or negative industry or economic trends. On a quarterly basis, the Company
assesses whether events or changes in circumstances occur that potentially
indicate that the carrying value of long-lived assets may not be recoverable.
Considerable management judgment is necessary to estimate projected future
operating cash flows. Accordingly, if actual results fall short of
such estimates, significant future impairments could result. During
the third quarter of fiscal 2010, the Company did not record any asset
impairment charges. During the first three quarters of fiscal 2010,
due to the underperformance of one store in California, the Company concluded
that the carrying value of its long-lived assets was not recoverable and
accordingly recorded an asset impairment charge of $0.4
million. During the first three quarters of fiscal 2009, the Company
recorded impairment charges of $10.4 million because it concluded that the
carrying value of certain long-lived assets was not
recoverable. These charges consisted of a leasehold improvements
impairment charge of $10.1 million related to the Company’s Texas Operations and
an impairment charge of approximately $0.2 million related to the
underperformance of a store in California. See Note 11 to
Consolidated Financial Statements for further information regarding the
leasehold impairment charge related to Company’s Texas operations.
Lease
Acquisition Costs
The
Company follows the policy of capitalizing allowable expenditures that relate to
the acquisition and signing of its retail store leases. These costs are
amortized on a straight-line basis over the applicable lease term.
Income
Taxes
The
Company utilizes the liability method of accounting for income taxes as set
forth in ASC 740 “Accounting for Income Taxes” (“ASC 740”), previously referred
to as SFAS No. 109. Under the liability method deferred tax assets
and liabilities are recognized using enacted tax rates for the effect of
temporary differences between the book and tax bases of recorded assets and
liabilities. ASC 740 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some portion
or all of the net deferred tax assets will not be realized. The
Company’s ability to realize deferred tax assets is assessed throughout the year
and a valuation allowance is established accordingly.
Stock-Based
Compensation
The
Company has a stock incentive plan in effect under which the Company grants
stock options and Performance Stock Units (“PSUs”). The Company
accounts for stock-based compensation expense under the fair value recognition
provisions of ASC 718, “Share-Based Payment” (“ASC 718”), previously referred to
as SFAS 123(R). ASC 718 requires companies to estimate the fair value
of share-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense ratably over the requisite service
periods. The Company estimates the fair value for each option award
as of the date of grant using the Black-Scholes option pricing model. The
Black-Scholes model considers, among other factors, the expected life of the
award and the expected volatility of the Company’s stock price. Stock options
are granted to employees at exercise prices equal to the fair market value of
the Company’s stock at the dates of grant. The Company recognizes the
stock-based compensation expense ratably over the requisite service periods,
which is generally a vesting term of three years. Stock options typically have a
term of 10 years. The fair value of the PSUs is based on the stock price on the
grant date. The compensation expense related to PSUs is recognized
only when it is probable that the performance criteria will be met.
Revenue
Recognition
The
Company recognizes retail sales in its retail stores at the time the customer
takes possession of merchandise. All sales are net of discounts and returns, and
exclude sales tax. Wholesale sales are recognized in accordance with the
shipping terms agreed upon on the purchase order. Wholesale sales are typically
recognized free on board ("FOB") origin where title and risk of loss pass to the
buyer when the merchandise leaves the Company's distribution
facility.
The
Company has a gift card program. The Company records the sale of gift cards as a
current liability and recognizes a sale when a customer redeems a gift
card. The liability for outstanding gift cards is recorded in accrued
expenses. The Company has not recorded any breakage income related to its gift
card program.
Cost
of Sales
Cost of
sales includes the cost of inventory, freight in, inter-state warehouse
transportation costs, obsolescence, spoilage, scrap and inventory shrinkage, and
is net of discounts and allowances. The Company receives various cash discounts,
allowances and rebates from its vendors. Such items are included as reductions
of cost of sales as merchandise is sold. The Company does not include
purchasing, receiving, and distribution warehouse costs in its cost of sales.
Due to this classification, the Company's gross profit rates may not be
comparable to those of other retailers that include costs related to their
distribution network in cost of sales.
Operating
Expenses
Selling,
general and administrative expenses include purchasing, receiving, inspection
and warehouse costs, the costs of selling merchandise in stores (payroll and
associated costs, occupancy and other store-level costs), distribution costs
(payroll and associated costs, occupancy, transportation to and from stores and
other distribution-related costs) and corporate costs (payroll and associated
costs, occupancy, advertising, professional fees, and other corporate
administrative costs).
Leases
The
Company recognizes rent expense for operating leases on a straight-line basis
(including the effect of reduced or free rent and rent escalations) over the
applicable lease term. The difference between the cash paid to the
landlord and the amount recognized as rent expense on a straight-line basis is
included in deferred rent. Cash reimbursements received from
landlords for leasehold improvements and other cash payments received from
landlords as lease incentives are recorded as deferred rent. Deferred
rent related to landlord incentives is amortized as an offset to rent expense
using the straight-line method over the applicable lease term.
For store
closures where a lease obligation still exists, the Company records the
estimated future liability associated with the rental obligation on the cease
use date (when the store is closed) in accordance with ASC 420, “Accounting for
Costs Associated with Exit or Disposal Activities” (“ASC 420”), previously
referred to as SFAS No. 146. Liabilities are established at the cease
use date for the present value of any remaining operating lease obligations, net
of estimated sublease income, and at the communication date for severance and
other exit costs, as prescribed by ASC 420. Key assumptions in
calculating the liability include the timeframe expected to terminate lease
agreements, estimates related to the sublease potential of closed locations, and
estimation of other related exit costs. If actual timing and potential
termination costs or realization of sublease income differ from our estimates,
the resulting liabilities could vary from recorded amounts. These
liabilities are reviewed periodically and adjusted when necessary.
During
the first quarter of fiscal 2010, the Company accrued $1.4 million in lease
termination costs associated with the closing of some of its Texas
stores. The Company also accrued $1.3 million in lease termination
costs associated with the closing of four of its Texas stores during the fourth
quarter of fiscal 2009 and lease termination costs for one contracted
store. The Company paid approximately $1.0 million related to the
above mentioned lease termination costs accruals during the first three quarters
of fiscal 2010. See Note 11 to Consolidated Financial Statements for
further information regarding the lease termination charges related to the
Company’s Texas operations.
Self-insured
Workers’ Compensation Liability
The
Company self-insures for workers’ compensation claims in California and Texas.
The Company establishes a liability for losses of both estimated known and
incurred but not reported insurance claims based on reported claims and
actuarial valuations of estimated future costs of reported and incurred but not
yet reported claims. Should an amount of claims greater than anticipated occur,
the liability recorded may not be sufficient and additional workers’
compensation costs, which may be significant, could be incurred. The Company has
not discounted the projected future cash outlays for the time value of money for
claims and claim-related costs when establishing its workers’ compensation
liability in its financial reports for December 26, 2009 and March 28,
2009.
Pre-Opening
Costs
The
Company expenses, as incurred, all pre-opening costs related to the opening of
new retail stores.
Advertising
The
Company expenses advertising costs as incurred except the costs associated with
television advertising which are expensed the first time the advertising takes
place. Advertising expenses were $1.2 million and $1.1 million for
the third quarter of fiscal 2010 and 2009, respectively. Advertising
expenses were $3.0 and $3.6 million for the first three quarters of fiscal 2010
and 2009, respectively.
Statements
of Cash Flows
Cash
payments for income taxes were $20.9 million and $1.1 million for the first
three quarters of fiscal 2010 and 2009, respectively. Non-cash
investing activities included $0.6 million and $1.4 million in fixed assets
purchase accruals for the first three quarters of fiscal 2010 and 2009,
respectively. Non-cash investing activities for the first three
quarters of fiscal 2009 included $9.3 million of partnership foreclosure trustee
sale proceeds. Non-cash financing activities for the first three
quarters of fiscal 2009 included a $7.3 million loan payment.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash and cash
equivalents, short-term and long-term marketable securities, accounts
receivable, accounts payable, accruals and other liabilities. Cash
and cash equivalents, short-term and long-term marketable securities are
measured and recorded at fair value. Accounts receivable and other receivables
are financial assets with carrying values that approximate fair
value. Accounts payable and other accrued expenses are financial
liabilities with carrying values that approximate fair value. The
Company believes all of the financial instruments’ recorded values approximate
fair market value because of their nature and respective durations.
The
Company complies with the provisions of ASC 820, “Fair Value Measurements and
Disclosures” (“ASC 820”), previously referred to as SFAS No. 157. ASC
820 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements required under other
accounting pronouncements. ASC 820-10-35, “Fair Value Measurements and
Disclosures- Subsequent Measurement” (“ASC 820-10-35”), clarifies that fair
value is an exit price, representing the amount that would be received from the
sale of an asset or paid to transfer a liability in an orderly transaction
between market participants. ASC 820-10-35 also requires that a fair value
measurement reflect the assumptions market participants would use in pricing an
asset or liability based on the best information available. Assumptions include
the risks inherent in a particular valuation technique (such as a pricing model)
and/or the risks inherent in the inputs to the model. The Company
also follows ASC 825 “Interim Disclosures about Fair Value of Financial
Instruments”, previously referred to as FAS 107-1 to expand required
disclosures.
ASC
820-10-35 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). The three levels of the fair value hierarchy
under ASC 820-10-35 are described below:
Level 1:
Defined as observable inputs such as quoted prices in active markets for
identical assets or liabilities.
Level 2:
Defined as observable inputs other than Level 1 prices. These include
quoted prices for similar assets or liabilities in an active market, quoted
prices for identical assets and liabilities in markets that are not active, or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities.
Level 3:
Defined as unobservable inputs in which little or no market data exists,
therefore requiring an entity to develop its own assumptions.
The
Company utilizes the best available information in measuring fair value. The
following table summarizes, by level within the fair value hierarchy, the
financial assets and liabilities recorded at fair value on a recurring basis as
of December 26, 2009 (in thousands):
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
ASSETS
|
||||||||||||||||
Available
for sale investments
|
$ | 163,704 | $ | 106,279 | $ | 47,049 | $ | 10,376 | ||||||||
Other
assets – assets that fund deferred compensation
|
$ | 4,085 | $ | 4,085 | — | — | ||||||||||
LIABILITIES
|
||||||||||||||||
Other
long-term liabilities – deferred compensation
|
$ | 4,085 | $ | 4,085 | — | — |
Level 1
investments include money market funds and perpetual preferred stocks of $104.7
million and $1.5 million, respectively. The fair value of money
market funds and perpetual preferred stocks are based on quoted market prices in
an active market and there are no restrictions on the redemption of money market
funds or perpetual preferred stocks. Level 1 also includes deferred
compensation liabilities and the assets that fund our deferred compensation
include investments in trust funds. The investments were classified
as Level 1. The fair values of these funds are based on quoted market
prices in an active market.
Level 2
investments include municipal bonds, asset-backed securities and corporate bonds
of $39.7 million, $4.1 million and $3.3 million, respectively. The
fair value of municipal bonds, asset-backed securities and corporate bonds are
based on quoted prices for similar assets or liabilities in an active
market.
Level 3
investments include auction rate securities of $10.4 million. The
fair value of auction rate securities is based on the valuation from an
independent securities valuation firm by using applicable methods and techniques
for this class of security.
The
valuation of the auction rate securities is based on Level 3 unobservable inputs
which consist of recommended fair values provided by Houlihan Smith &
Company, an independent securities valuation firm. These securities
are held as “available-for-sale” in the Company’s consolidated balance
sheet. Based on the estimated fair value, an other-than-temporary
impairment related to credit losses of $0.6 million was recognized in earnings
for the first three quarters of fiscal 2010 for the Company’s auction rate
securities. Due to the uncertainty surrounding liquidity in the
auction rate securities market, the Company has classified these auction rate
securities as long-term assets on the consolidated balance
sheets.
The
following table summarizes the activity for the period of changes in fair value
of the Company’s Level 3 investments (in thousands):
Auction
Rate Securities
|
Fair Value Measurements Using Significant
Unobservable Inputs
(Level 3)
|
|||||||
Third Quarter
|
Year-to-Date
|
|||||||
Description
|
||||||||
Beginning
balance
|
$ | 10,328 | $ | 10,722 | ||||
Transfers
into Level 3
|
— | — | ||||||
Total
realized/unrealized losses:
|
||||||||
Included
in earnings
|
— | (568 | ) | |||||
Included
in other comprehensive loss
|
272 | 1,168 | ||||||
Sales
and redemptions
|
(224 | ) | (946 | ) | ||||
Ending
balance
|
$ | 10,376 | $ | 10,376 | ||||
Total
amount of unrealized losses for the period included in other comprehensive
loss attributable to the change in fair market value relating to assets
still held at the reporting date
|
$ | 272 | $ | 1,168 |
Comprehensive
Income
ASC 220
“Reporting Comprehensive Income”, previously referred to as SFAS No. 130,
establishes standards for reporting and displaying comprehensive income and its
components in the consolidated financial statements. Accumulated other
comprehensive income includes unrealized gains or losses on
investments.
2.
|
Property
and Equipment, net
|
The
following table provides details of property and equipment (in
thousands):
December 26,
2009
|
March 28,
2009
|
|||||||
Property
and equipment
|
||||||||
Land
|
$ | 70,523 | $ | 69,162 | ||||
Buildings
|
88,606 | 85,860 | ||||||
Buildings
improvements
|
65,193 | 61,438 | ||||||
Leasehold
improvements
|
122,331 | 118,634 | ||||||
Fixtures
and equipment
|
120,808 | 115,866 | ||||||
Transportation
equipment
|
6,054 | 5,297 | ||||||
Construction
in progress
|
23,999 | 17,752 | ||||||
Total
property and equipment
|
479,514 | 474,009 | ||||||
Less:
accumulated depreciation and amortization
|
(222,597 | ) | (202,723 | ) | ||||
Property
and equipment, net
|
$ | 274,917 | $ | 271,286 |
3.
|
Investments
|
The
following tables summarize the investments in marketable securities (in
thousands):
December 26, 2009
|
||||||||||||||||
Cost or Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
|||||||||||||
Available
for sale:
|
||||||||||||||||
Commercial
paper and money market
|
$ | 104,744 | $ | — | $ | — | $ | 104,744 | ||||||||
Auction
rate securities
|
10,836 | 39 | (499 | ) | 10,376 | |||||||||||
Municipal
bonds
|
39,671 | 7 | — | 39,678 | ||||||||||||
Asset-backed
securities
|
4,359 | 4 | (244 | ) | 4,119 | |||||||||||
Corporate
securities
|
4,882 | 92 | (187 | ) | 4,787 | |||||||||||
Total
|
$ | 164,492 | $ | 142 | $ | (930 | ) | $ | 163,704 | |||||||
Reported
as:
|
||||||||||||||||
Short-term
investments
|
$ | 147,542 | ||||||||||||||
Long-term
investments in marketable securities
|
16,162 | |||||||||||||||
Total
|
$ | 163,704 |
March 28, 2009
|
||||||||||||||||
Cost or Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
|||||||||||||
Available
for sale:
|
||||||||||||||||
Commercial
paper and money market
|
$ | 73,564 | $ | — | $ | — | $ | 73,564 | ||||||||
Auction
rate securities
|
12,348 | — | (1,626 | ) | 10,722 | |||||||||||
Municipal
bonds
|
20,457 | 47 | (11 | ) | 20,493 | |||||||||||
Asset-backed
securities
|
8,822 | 11 | (377 | ) | 8,456 | |||||||||||
Corporate
securities
|
7,693 | — | (1,528 | ) | 6,165 | |||||||||||
Total
|
$ | 122,884 | $ | 58 | $ | (3,542 | ) | $ | 119,400 | |||||||
Reported
as:
|
||||||||||||||||
Short-term
investments
|
$ | 93,049 | ||||||||||||||
Long-term
investments marketable securities
|
26,351 | |||||||||||||||
Total
|
$ | 119,400 |
The
auction rate securities the Company holds generally are short-term debt
instruments that provide liquidity through a Dutch auction process in which
interest rates reset every 7 to 35 days. Beginning in February 2008,
auctions of the Company’s auction rate securities failed to sell all securities
offered for sale. Consequently, the principal associated with these
failed auctions will not be accessible until a successful auction occurs, a
buyer is found outside of the auction process, the issuers redeem the
securities, the issuers establish a different form of financing to replace these
securities or final payments come due to long-term contractual
maturities. For each unsuccessful auction, the interest rate moves to
a rate defined for each security. Currently, the Company is uncertain
when the liquidity issues related to its remaining auction rate securities will
improve. Accordingly, the Company has included $10.4 million and $10.7 million
of its auction rate securities in non-current assets on the Company’s balance
sheet as of December 26, 2009 and March 28, 2009 respectively.
The
following table summarizes maturities of marketable fixed-income securities
classified as available for sale as of December 26, 2009 (in
thousands):
Amortized Cost
|
Estimated Fair Value
|
|||||||
Due
within one year
|
$ | 42,747 | $ | 42,802 | ||||
Due
after one year through five years
|
292 | 336 | ||||||
Due
after five years
|
14,990 | 14,286 | ||||||
$ | 58,029 | $ | 57,424 |
Realized
gains from the sale of marketable securities for the third quarter and the first
three quarters of fiscal 2010 were less than $0.1 million. Realized
gains from the sales of available for sale securities for the first three
quarters of fiscal 2009 were $0.3 million. There were no realized
gains from the sales of available for sale securities for the third quarter of
fiscal 2009. The Company recorded an investment impairment charge
related to credit losses of approximately $0.8 million for the first three
quarters of fiscal 2010. There was no impairment charge related to
credit losses in the third quarter of fiscal 2010. The Company
recognized $1.7 million in impairment charges primarily related to a Lehman
Brothers corporate bond of $0.6 million and a Lehman Brothers perpetual
preferred stock of $1.0 million during the first three quarters of fiscal
2009. There was no impairment charge during the third quarter of
fiscal 2009.
Non-tax
effected net unrealized losses relating to securities that were recorded as
marketable securities were $0.8 million as of December 26,
2009. Non-tax effected net unrealized losses relating to securities
that were recorded as marketable securities were $3.5 million as of March 28,
2009. The tax effected gains on net unrealized holdings of marketable
securities were $0.2 million and $1.6 million for the third quarter and the
first three quarters of fiscal 2010, respectively. The tax effected losses on
net unrealized holdings of marketable securities were $0.8 million and $1.7
million for the third quarter and the first three quarters of fiscal 2009,
respectively. These tax effected gains and losses are included in
other comprehensive income.
Proceeds
from the sales of marketable securities were $6.8 million and $21.2 million for
the third quarter and the first three quarters of fiscal 2010,
respectively. Proceeds from the sales of marketable securities were
$18.9 million and $48.5 million for the third quarter and the first three
quarters of fiscal 2009, respectively.
The
following table presents the length of time securities were in continuous
unrealized loss positions, but were not deemed to be other-than-temporarily
impaired (in thousands):
Less than 12 Months
|
12 Months or Greater
|
|||||||||||||||
Fair Value
|
Gross Unrealized Losses
|
Fair Value
|
Gross Unrealized Losses
|
|||||||||||||
December 26, 2009
|
||||||||||||||||
Municipal
bonds
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Asset-backed
securities
|
1,124 | (5 | ) | 2,149 | (239 | ) | ||||||||||
Corporate
securities
|
— | — | 1,530 | (187 | ) | |||||||||||
Auction
rate securities
|
— | — | 9,510 | (499 | ) | |||||||||||
$ | 1,124 | $ | (5 | ) | $ | 13,189 | $ | (925 | ) |
As of
December 26, 2009, there were less than $0.1 million of unrealized losses for
less than twelve months, and $0.9 million of losses for twelve months or greater
pertained to 27 securities that were primarily caused by interest rate
fluctuations and changes in current market conditions.
During
the first three quarters of fiscal 2010, the Company recorded approximately $0.6
million and $0.3 million of other-than-temporary impairment charges related to
credit losses on its auction rate securities and Bank of America perpetual
preferred stock, respectively. The Company did not have any
non-credit related other-than-temporary losses on its perpetual preferred stock
and auction rate securities. Accordingly, the Company’s other
comprehensive income (loss) does not include any charges related to the
non-credit portion of its perpetual preferred stock and auction rate
securities.
The
following table sets forth a reconciliation of the changes in credit losses
recognized in earnings during the third quarter and the first three quarters of
fiscal 2010 (in thousands):
For the Third Quarter Ended
|
For the Three Quarters
Ended
|
|||||||
December 26,
2009
|
December 26,
2009
|
|||||||
Total
gross unrealized losses on other-than-temporary impaired
securities
|
$ | — | $ | 843 | ||||
Portion
of losses recognized in comprehensive income (before
taxes)
|
— | — | ||||||
Net
other-than-temporary impairment losses recognized in net
earnings
|
$ | — | $ | 843 |
4.
|
Comprehensive
Income (Loss) Attributed to 99¢ Only
Stores
|
The
following table sets forth the calculation of comprehensive income (loss)
attributed to 99¢ Only Stores, net of tax effects for the periods indicated (in
thousands):
For the Third Quarter Ended
|
For the Three Quarters
Ended
|
|||||||||||||||
December 26,
2009
|
December 27,
2008
|
December 26,
2009
|
December 27,
2008
|
|||||||||||||
Net
income attributable to 99¢ Only Stores
|
$ | 24,485 | $ | 12,453 | $ | 43,593 | $ | 1,528 | ||||||||
Unrealized
holding (losses) gains on marketable securities, net of tax effects of
$164 and $1,078 for the third quarter and the first three quarters of
fiscal 2010, respectively
|
245 | (760 | ) | 1,112 | (2,441 | ) | ||||||||||
Reclassification
adjustment, net of tax effects
|
— | (70 | ) | 505 | 742 | |||||||||||
Total
unrealized holding (losses) gains, net
|
245 | (830 | ) | 1,617 | (1,699 | ) | ||||||||||
Total
comprehensive income (loss) attributable to 99¢ Only
Stores
|
$ | 24,730 | $ | 11,623 | $ | 45,210 | $ | (171 | ) |
5.
|
Earnings
Per Share Attributed to 99¢ Only
Stores
|
“Basic”
earnings per share are computed by dividing net income by the weighted average
number of shares outstanding for the period. “Diluted” earnings per share are
computed by dividing net income by the total of the weighted average number of
shares outstanding plus the dilutive effect of outstanding equity awards
(applying the treasury stock method).
The
following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
For the Third Quarter Ended
|
For the Three Quarters
Ended
|
|||||||||||||||
December 26,
2009
|
December 27,
2008
|
December 26,
2009
|
December 27,
2008
|
|||||||||||||
Net
income attributable to 99¢ Only Stores
|
$ | 24,485 | $ | 12,453 | $ | 43,593 | $ | 1,528 | ||||||||
Weighted
average number of common shares outstanding – basic
|
68,788 | 69,985 | 68,596 | 70,021 | ||||||||||||
Dilutive
effect of outstanding stock options and performance stock
units
|
940 | 192 | 670 | 63 | ||||||||||||
Weighted
average number of common shares outstanding – diluted
|
69,728 | 70,177 | 69,266 | 70,084 | ||||||||||||
Basic
earnings per share attributable to 99¢ Only Stores
|
$ | 0.36 | $ | 0.18 | $ | 0.64 | $ | 0.02 | ||||||||
Diluted
earnings per share attributable to 99¢ Only Stores
|
$ | 0.35 | $ | 0.18 | $ | 0.63 | $ | 0.02 |
For the
third quarter of fiscal 2010, 2.5 million of outstanding stock options were
anti-dilutive and were excluded from the calculation of the weighted average
number of common shares outstanding. For the third quarter of fiscal
2009, 3.1 million outstanding stock options were anti-dilutive and were excluded
from the calculation of the weighted average number of common shares
outstanding. For the first three quarters of fiscal 2010, 2.5 million
outstanding stock options were anti-dilutive and were excluded from the
calculation of the weighted average number of common shares
outstanding. For the first three quarters of fiscal 2009, 5.3 million
outstanding stock options were anti-dilutive and were excluded from the
calculation of the weighted average number of common shares
outstanding.
6.
|
Stock-Based
Compensation
|
The
Company has one plan that provides for stock-based compensation (the 1996 Stock
Option Plan, as amended). The plan is a fixed plan, which provides for the
granting of non-qualified and incentive stock options as well as other types of
equity-based awards. An aggregate of 17,000,000 shares of the
Company’s common stock may be issued pursuant to all awards under the plan, of
which 2,535,000 were available as of December 26, 2009 for future awards. Awards
may be granted to officers, employees, non-employee directors and consultants of
the Company. All stock option grants are made at fair market value at the date
of grant or at a price determined by the Compensation Committee of the Company’s
Board of Directors, which consists exclusively of independent members of the
Board of Directors. Stock options typically vest over a three-year period,
one-third one year from the date of grant and one-third per year thereafter,
though an exception was made by the Compensation Committee on June 6,
2006, when it granted stock options that vested in equal halves over a two year
period. Stock options typically expire ten years from the date of
grant. The plan will expire in 2011. The Compensation Committee has
also approved grants of Performance Stock Units discussed further below (also
see the Company’s Form 8-K filed on January 16, 2008).
Stock
Option Activity
Option
activity under the Company’s stock option plan in the first three quarters of
fiscal 2010 is set forth below:
Number of Shares
|
Weighted-Average Exercise
Price
|
Weighted-Average Remaining Contractual
Life
|
Aggregate Intrinsic Value
|
|||||||||||||
Options
outstanding at the beginning of the period
|
5,450,000 | $ | 16.15 | |||||||||||||
Granted
|
36,000 | $ | 13.52 | |||||||||||||
Exercised
|
(371,000 | ) | $ | 10.09 | ||||||||||||
Cancelled
|
(483,000 | ) | $ | 16.97 | ||||||||||||
Outstanding
at the end of the period
|
4,632,000 | $ | 16.53 | 4.79 | $ | 8,585,000 | ||||||||||
Exercisable
at the end of the period
|
4,135,000 | $ | 17.56 | 4.38 | $ | 5,896,000 |
For the
third quarter and the first three quarters of fiscal 2010, the Company incurred
non-cash stock-based compensation expense related to stock options of $0.3
million and $1.0 million, respectively, which was recorded as operating
expense. For the third quarter and the first three quarters of fiscal
2009, the Company incurred non-cash stock-based compensation expense related to
stock options of $0.7 million and $2.5 million, respectively, which was recorded
as operating expense. As of December 26, 2009, there was $1.1 million
of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Company’s stock option plan. That
cost is expected to be recognized over a weighted-average period of 1.2 years.
The total fair value of shares vested during the first three quarters of fiscal
2010 and 2009 was $1.7 million and $4.2 million, respectively.
Performance
Stock Units
During
the fourth quarter of fiscal 2008, the Compensation Committee of the Company's
Board of Directors granted performance stock units to certain officers and other
key personnel of the Company as a long-term, stock-based performance incentive
award. The PSUs will be eligible for conversion, on a one-for-one
basis, to shares of the Company’s common stock based on (1) attainment of one or
more of eight specific performance goals during the performance period
(consisting of fiscal years 2008 through 2012), (2) continuous employment with
the Company, and (3) certain vesting requirements. As of December 26,
2009, the Company had 1.2 million PSUs outstanding. The following table
summarizes the PSUs activity in the first three quarters of fiscal
2010:
Number of Shares
|
Weighted Average Fair Value
|
|||||||
PSUs
outstanding at the beginning of the period
|
1,563,000 | $ | 6.86 | |||||
Granted
|
65,000 | $ | 14.13 | |||||
Forfeited
|
(98,000 | ) | $ | 8.20 | ||||
Issued
|
(377,000 | ) | $ | 6.86 | ||||
Outstanding
at the end of the period
|
1,153,000 | $ | 7.15 | |||||
Vested
at the end of the period
|
158,000 | $ | 7.36 |
The fair
value of the PSUs is based on the stock price on the grant date. The
compensation expense related to PSUs is recognized only when it is probable that
the performance criteria will be met. Based on the Company’s
financial results, the Company started to recognize compensation expense related
to PSUs starting with the first quarter of fiscal 2010 as this was the first
quarter that it appeared probable that certain performance conditions would be
met. For the third quarter and the first three quarters of fiscal
2010, the Company incurred non-cash stock-based compensation expense related to
PSUs of $1.3 million and $4.7 million, respectively, which was recorded as
operating expense. The Company did not incur non-cash stock-based compensation
expense related to PSUs during the third quarter and the first three quarters of
fiscal 2009. There were 0.5 million PSUs vested during the first
three quarters of fiscal 2010 of which 0.4 million PSUs were issued during the
first three quarters of fiscal 2010. As of December 26, 2009, the
unvested future compensation expense, assuming all the performance criteria will
be met for the performance period through fiscal year 2012, was $8.2
million.
7.
|
Variable
Interest Entities
|
The
Company was the primary beneficiary of a variable interest entity known as the
La Quinta Partnership to develop a shopping center in La Quinta, California,
where the Company leased a store. As of March 29, 2008, this entity
had $9.0 million in assets and $7.4 million in liabilities, including a bank
loan for $7.3 million, which is shown on the Company’s fiscal 2008 year-end
consolidated balance sheet. In January 2008, the Company received a buy-sell
offer from the managing member of the La Quinta Partnership. The
Company accepted the offer to sell its interest to the minority partner on
January 30, 2008. After the timeline for completion of this offer
passed, the Company notified the managing member that the managing member was in
default of closing the transaction within the agreed-upon
timeframe. In addition, the partnership had a $7.5 million loan,
including principal of $7.3 million and accrued interest of $0.2 million, due to
a bank on June 1, 2008, in which the partnership was in default. In
December 2008, the bank foreclosed on the shopping
center. Eighty-nine percent of the land and all of the
buildings were sold in the foreclosure sales for $9.3 million. The
proceeds of $9.3 million included the Company’s purchase of the land and
building related to its store for approximately $2.9 million and the rest of the
center was sold for $6.4 million to a third party, except for a small parcel of
undeveloped land which remains in the partnership at this time. As a
result of the foreclosure, the bank received $7.9 million, including principal,
interest and penalties. The partnership’s loss from the foreclosure
sales of the shopping center was $0.8 million. Of the $0.8 million
loss, the Company recognized its share of the loss of approximately $0.5 million
in the third quarter of fiscal 2009. In accordance with ASC 810, the
Company included the partner’s share of the loss of approximately $0.3 million
in its operating expenses during the third quarter of fiscal 2009. As
a result of the foreclosure of the shopping center, the Company became the
managing partner of the partnership. The Company has consolidated
this partnership as of March 28, 2009. The Company purchased its
noncontrolling partner’s share of the partnership which consisted of a small
parcel of land for approximately $0.3 million during the third quarter of fiscal
2010. The acquisition was recorded as an equity transaction in
accordance with the guidance of ASC 810-10-45. Due to the purchase of
noncontrolling partner’s share of the partnership, the Company became the sole
owner of the partnership.
The
Company also had an interest in another partnership known as the Wilshire
Alvarado Partnership which the Company consolidated at March 29, 2008 in
accordance with ASC 810. The assets of the partnership consisted of real estate
with a carrying value of approximately $1.5 million and there was no mortgage
debt or other significant liabilities associated with the entity, other than
notes payable to the Company. The balance sheet effect of
consolidating this entity at March 29, 2008 was a reclassification of
approximately $1.5 million from investments to property and equipment with no
corresponding impact on the Company’s recorded liabilities. In
November 2008, the Company purchased its partner’s share of this partnership,
consisting of one of the Company’s leased stores with an approximate carrying
value of $1.5 million. The Company paid approximately $1.6 million, including
estimated selling costs, to acquire its partner’s share in the partnership. The
Company increased its building and land value by approximately $1.6 million as
result of this purchase. Due to the purchase of the primary asset of the
partnership, the Company became the sole owner of the
partnership.
At March
29, 2008, the Company had an interest in an additional partnership known as the
Reseda Partnership which consisted of real estate with a carrying value of
approximately $1.2 million. The balance sheet effect of consolidating
this entity at March 29, 2008 was a reclassification of approximately $1.2
million from investments to assets held for sale with no corresponding impact on
the Company’s recorded liabilities. In April 2008, the partnership
sold its primary asset, with an approximate carrying value of $1.2 million, to a
third party. The Company's lease for the store in this partnership
continued after the sale and the Company's operation of that store was
unaffected by the transaction. Net proceeds to the Company of the
sale were $2.2 million. The transaction was recorded as a sale
leaseback in the first quarter of fiscal 2009. The partnership’s gain
from the sale of real estate was approximately $2.4 million, of which the
Company’s net gain was approximately $1.0 million. Of the $1.0 million net gain,
the Company recognized approximately $0.2 million in the first quarter of fiscal
2009 and approximately $0.8 million is being recognized over the remaining lease
term of 46 months. In accordance with ASC 810, the Company had included the
partner’s share of the gain of approximately $1.4 million in its operating
expenses during the first quarter of fiscal 2009. Additionally, the
proceeds of the sale were distributed to the partners in April 2008, and the
Company had included $1.4 million of minority interest in its Consolidated
Statements of Operations for the first quarter of fiscal 2009. As a
result of the sale of the primary asset of the partnership, the Company is no
longer a primary beneficiary and therefore has not consolidated the remaining
immaterial assets of the partnership as of March 28, 2009 and December 26,
2009.
8.
|
New
Accounting Standards
|
In
September 2006, the FASB issued ASC 820. ASC 820 establishes a
framework for measuring fair value, and expands disclosure about such fair value
measurements. The Company adopted this guidance at the beginning of the first
quarter of fiscal 2009 except for those non-recurring measurements for
non-financial assets and non-financial liabilities subject to the partial
deferral. The adoption of this guidance did not have an impact on the Company’s
financial position or operating results. The Company adopted
non-recurring measurements for non-financial assets and non-financial
liabilities at the beginning of fiscal 2010. The adoption of this
guidance for non-financial assets and liabilities did not have a material impact
on the Company’s consolidated financial position or results of
operations.
In
December 2007, the FASB issued ASC 805 “Business Combinations” (“ASC 805”),
previously referred to as SFAS No. 141 (revised 2007), This
guidance changes the requirements for an acquirer’s recognition and measurement
of the assets acquired and liabilities assumed in a business
combination. The Company adopted this guidance at the beginning of
fiscal 2010. The adoption of this guidance did not have a material
impact on the Company’s consolidated financial position or results of
operations.
In
December 2007, the FASB issued ASC No. 810 “Transition Related to Noncontrolling
Interests in Consolidated Financial Statements” (“ASC 810”), previously referred
to as SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements — an amendment of Accounting Research Bulletin (“ARB”) No.
51 . The guidance requires that noncontrolling (minority) interests
be reported as a component of equity, that net income attributable to the parent
and to the non-controlling interest be separately identified in the income
statement, that changes in a parent’s ownership interest while the parent
retains its controlling interest be accounted for as equity transactions, and
that any retained noncontrolling equity investment upon the deconsolidation of a
subsidiary be initially measured at fair value. The Company adopted
this guidance at the beginning of fiscal 2010. Other than the change
in presentation of noncontrolling interests, the adoption of this guidance had
no impact on the Company’s consolidated financial position or results of
operations.
In April
2008, the FASB issued ASC 350 “Determination of the Useful Life of Intangible
Assets” (“ASC 350”), previously referred to as FSP SFAS No.
142-3. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The intent of this guidance is to improve the
consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the asset in a
business combination. The Company adopted this guidance at the
beginning of fiscal 2010. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial position or results of
operations.
In June
2009, the FASB issued ASC 105 “FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles” (“ASC 105”) concerning
the organization of authoritative guidance under U.S. GAAP. This is a
replacement of The Hierarchy of GAAP (formally SFAS 162). The
Codification has become the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. On the
effective date, the Codification superseded all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become
non-authoritative. The Codification became effective for the Company
in its second quarter of fiscal 2010. As the Codification is not
intended to change or alter existing U.S. GAAP, it did not have any impact on
the Company’s consolidated financial statements.
In April
2009, the FASB issued ASC 825 “Disclosure About Fair Value of Financial
Instruments” (“ASC 825”), previously referred to as FSP FAS No. 107-1 extends
the disclosure requirements to interim period financial statements, in addition
to the existing requirements for annual periods and reiterates requirement to
disclose the methods and significant assumptions used to estimate fair value.
The Company adopted this guidance in the first quarter of fiscal
2010. The adoption of this guidance did not have a material impact on
the Company’s consolidated financial position or results of
operations.
In April
2009, the FASB issued ASC 320-10-65. This guidance modifies the
requirements for recognizing other-than-temporarily impaired debt securities and
changes the existing impairment model for such securities. This guidance also
requires additional disclosures for both annual and interim periods with respect
to both debt and equity securities. Under the guidance, impairment of debt
securities will be considered other-than-temporary if an entity (1) intends to
sell the security, (2) more likely than not will be required to sell the
security before recovering its cost, or (3) does not expect to recover the
security’s entire amortized cost basis (even if the entity does not intend to
sell). The guidance further indicates that, depending on which of the above
factor(s) causes the impairment to be considered other-than-temporary, (1) the
entire shortfall of the security’s fair value versus its amortized cost basis or
(2) only the credit loss portion would be recognized in earnings while the
remaining shortfall (if any) would be recorded in other comprehensive income.
This guidance requires entities to initially apply the provisions of the
standard to previously other-than-temporarily impaired debt securities existing
as of the date of initial adoption by making a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption. The
cumulative-effect adjustment potentially reclassifies the noncredit portion of a
previously other-than-temporarily impaired debt security held as of the date of
initial adoption from retained earnings to accumulated other comprehensive
income. The Company adopted this guidance in the first quarter of
fiscal 2010. The adoption of this statement resulted in the
recognition of approximately $0.6 million and $0.3 million of
other-than-temporary impairment charges related to credit losses on its auction
rate securities and Bank of America perpetual preferred stock, respectively,
during the first three quarters of fiscal 2010.
In April
2009, the FASB issued ASC 820-10-35. This guidance requires (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. This guidance also
amends certain disclosure to require, among other things, disclosures in interim
periods of the inputs and valuation techniques used to measure fair value. The
Company adopted this guidance in the first quarter of fiscal
2010. The adoption of this guidance did not have a material impact on
the Company’s consolidated financial position or results of
operations.
In May
2009, the FASB issued ASC 855 “Subsequent Events” (“ASC 855”), previously
referred to as SFAS No. 165. This
guidance is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date—that is, whether that date
represents the date the financial statements were issued or were available to be
issued. The Company adopted this guidance in the first quarter of
fiscal 2010. The adoption of this guidance did not have any impact on
the Company’s consolidated financial position or results of
operations.
In June
2009, the FASB issued ASC 860“Accounting for Transfers of
Financial Assets” (“ASC 860”), previously referred to as SFAS No.
166. The guidance eliminates the concept of a “qualifying
special-purpose entity” and changes the requirements for derecognizing financial
assets. The Company will adopt Statement No. 166 at beginning of fiscal 2011.
The adoption of this statement is not expected to have a material impact on the
Company’s consolidated financial position or results of operations.
In June
2009, the FASB issued ASC 810 “Consolidation of Variable Interest Entities”
(“VIE”) (“ASC 810”), previously referred to as SFAS No. 167. This
guidance amends current U.S. GAAP by: requiring ongoing reassessments of whether
an enterprise is the primary beneficiary of a VIE; amending the quantitative
approach previously required for determining the primary beneficiary of the VIE;
modifying the guidance used to determine whether an entity is a VIE; adding an
additional reconsideration event (e.g. troubled debt restructurings) for
determining whether an entity is a VIE; and requiring enhanced disclosures
regarding an entity’s involvement with a VIE. The Company will adopt
this guidance at the beginning of fiscal 2011. The adoption of this guidance is
not expected to have a material impact on the Company’s consolidated financial
position or results of operations.
In August
2009, the FASB released new Accounting Standard Update (“ASU”) 2009-05 under ASC
820 “Fair Value Measurement” concerning measuring liabilities at fair
value. The new guidance provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using certain
valuation techniques. Additionally, it clarifies that a reporting
entity is not required to adjust the fair value of a liability for the existence
of a restriction that prevents the transfer of the liability. This
new guidance is effective for the first reporting period after its issuance,
however earlier application is permitted. The Company adopted this
new guidance in the third quarter of fiscal 2010. The adoption of
this guidance did not have any impact on the Company’s consolidated financial
position or results of operations.
In
December 2009, the FASB released Accounting Standard Update (“ASU”) 2009-17
under ASC 810 “Consolidation of Variable Interest Entities”. This
update consists of amendments to the FASB Statement No. 167, which was issued by
the Board in June 2009. The amendments are intended to improve
financial reporting by enterprises involved with variable interest
entities. This update is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after November 15,
2009. The Company will adopt this update at the beginning of fiscal
2011. The adoption of this guidance is not expected to have a
material impact on the Company’s consolidated financial position or results of
operations.
9.
|
Commitments
and Contingencies
|
Credit
Facilities
The
Company has no debt outstanding as of December 26, 2009 and March 28, 2009 and
does not maintain any other credit facilities with any financial
institutions.
Workers’
Compensation
The
Company self-insures its workers' compensation claims in California and Texas
and provides for losses of estimated known and incurred but not reported
insurance claims. At December 26, 2009 and March 28, 2009, the
Company had recorded a liability of $47.0 million and $44.3 million,
respectively, for estimated workers’ compensation claims in
California. The Company has limited self-insurance exposure in Texas
and had recorded a liability of approximately $0.1 million at December 26, 2009
and March 28, 2009 for workers’ compensation claims in Texas. The
Company purchases workers’ compensation insurance coverage in Arizona and
Nevada.
Legal
Matters
The
Company is subject to private lawsuits, administrative proceedings and claims
that arise in our ordinary course of business. A number of these
lawsuits, proceedings and claims may exist at any given time. While
the resolution of a lawsuit, proceeding or claim may have an impact on our
financial results for the period in which it is resolved, in management’s
opinion, none of these matters arising in the ordinary course of business are
expected to have a material adverse effect on the Company’s financial position,
results of operations, or overall liquidity. Legal actions taken by
private entities or taken or contemplated by governmental entities are reported
case by case below if they could potentially have a material adverse effect on
the Company. In accordance with ASC 450 “Accounting for
Contingencies” (“ASC 450”), previously referred to as SFAS No. 5, the Company
records a liability when it is both probable that a liability has been incurred
and the amount of the loss can be reasonably estimated, and, if such a liability
is recorded for a matter disclosed in this item, the amount of the liability is
also reported. These provisions for contingent liabilities are
reviewed at least quarterly and are adjusted to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel and other
information and events pertaining to a particular case. Litigation is
inherently unpredictable. The status of legal matters and reserves
for such matters have been estimated through the date of this
report.
The
district attorneys of two California counties and one city attorney have
notified the Company that they are planning a possible civil action against the
Company alleging that its .99 cent pricing policy, adopted in September 2008,
constitutes false advertising and/or otherwise violates California's pricing
laws. In response to this notification and an associated invitation
from these governmental entities, the Company provided a detailed position
statement with respect to its pricing structure. If such an action is
brought, we cannot predict the outcome of such an action or the amount of
potential loss, if any. We believe our pricing structure is lawful,
and that our .99 cent pricing policy has an established precedent to the similar
.9 cent pricing policy used for decades by gas stations across the country. We
believe our .99 cent pricing policy has been well publicized with items properly
price signed in the stores such that it would not cause a reasonable consumer to
be deceived, and, if such an action is brought, we intend to vigorously defend
it.
10.
|
Stock
Repurchase Program
|
On June
11, 2008, the Company announced that our Board of Directors had approved a share
repurchase program for the purchase of up to $30 million of shares of our common
stock. Under the authorization, the Company may purchase shares from
time to time in the open market or in privately negotiated transactions in
compliance with the applicable rules and regulations of the Securities and
Exchange Commission. However, the timing and amount of such purchases
will be at the discretion of management, and will depend on market conditions
and other considerations which may change. The Company has used and
plans to continue to use existing cash to fund the repurchases. As of
December 26, 2009, the Company had approximately $17.1 million that remained
authorized and available to repurchase shares of Company’s common stock under
this program. The Company did not make any common stock repurchases
for the first three quarters of fiscal 2010.
The
Company issues performance stock units as part of our equity incentive
plans. The number of shares issued on the date the performance stock
units vest is net of the statutory withholding requirements that the Company
pays in cash to the appropriate taxing authorities on behalf of the
employees. During the third quarter of fiscal 2010, the Company
withheld approximately 51,700 shares to satisfy $0.7 million of employee tax
obligations. During the first three quarters of fiscal 2010, the Company
withheld approximately 128,100 shares to satisfy $1.8 million of employee tax
obligations. Although shares withheld are not issued, they are
treated as common stock repurchases in the Company’s Consolidated Financial
Statements, as they reduce the number of shares that would have been issued upon
vesting.
11.
|
Texas
Market
|
As
announced on September 17, 2008, the Company’s Board of Directors, together with
its management team, made a decision to exit the Texas market. The
Company’s exit plan anticipated that it would cease all Texas operations and
complete the sale of its assets within one year. The determination to
take this action resulted after a thorough review of sales and profit
performance of the Company’s Texas stores and net recovery of capital based on
the state of the real estate market at that time. As a result of the
decision to close its Texas operations, the Company recognized an impairment
charge of approximately $10.1 million related to leasehold improvements
associated with leased stores during the second quarter of fiscal
2009. This non-cash charge was recorded within selling, general and
administrative expenses in the consolidated statements of
operations. During the third quarter of fiscal 2009, the Company also
recognized and paid severance expenses of approximately $1.4 million related to
Texas operations.
On
September 29, 2008, the Company announced that in response to a proposal by the
Company’s Chairman, Dave Gold, to acquire the Company’s Texas operations, the
Company’s Board of Directors formed a special committee of independent board
members to consider this proposal as well as other proposals or alternatives to
accomplish the exit plan. On January 31, 2009, following evaluation
of Dave Gold’s proposal by the special committee, the Board adopted the
recommendation of the special committee to decline to further pursue the
proposal.
In the
course of the Board’s deliberations, the Board noted that same-store sales in
Texas had increased at a rate of 8.6% during the four-week period ended January
24, 2009, compared to a rate of 0.8% during the five-week period ended December
27, 2008. In light of this significant improvement in sales results
and the state of the economy, the Board concluded it would be prudent to
continue to observe sales and other financial results in Texas for a limited
period before taking permanent actions that would effectively close off any
opportunity to continue the Texas operations. After additional
discussions following the January 31, 2009 Board meeting, the Board voted on
February 2, 2009
to continue operations in approximately two thirds of its Texas stores, and
continue to operate its Texas distribution center to support these stores, in
order to allow the Board to continue to monitor sales trends and other financial
results in those stores. As a result, the Company closed four of its Texas
stores during the fourth quarter of fiscal 2009. During the fourth
quarter of fiscal 2009, the Company accrued $1.3 million in lease termination
costs associated with the closing of four of its Texas stores and lease
termination costs for one contracted store. In the first quarter of
fiscal 2010, the Company also closed 11 of its Texas stores and accrued $1.4
million in lease termination costs associated with the closing of these 11
stores. The Company paid approximately $1.0 million related to the above
mentioned lease termination costs accruals during the first three quarters of
fiscal 2010. The Company expects to pay the remainder of lease
termination costs accrued by the end of fiscal 2011. The actual
amount of non-cash and cash charges incurred by the Company in connection with
the closing of these Texas stores during the fourth quarter of fiscal 2009 and
the first quarter of fiscal 2010 may be different than the amounts estimated by
the Company, and there can be no assurance that satisfactory agreements with
landlords can be achieved to keep all the Company’s remaining Texas stores
open. The Company also closed one additional Texas store during the
second quarter of fiscal 2010.
Following
a six-month period during which the Company’s management and its Board of
Directors monitored sales trends and other financial results of the Company’s
remaining Texas operations, the Board of Directors analyzed such trends and
results, as well as other data related to the potential long-term financial
implications of such trends and results, including the fact that, since February
2009, the year-over-year same-store sales of the Company’s Texas stores
increased substantially, to 23.6% for the first quarter of fiscal
2010. On August 4, 2009, the Board voted to continue operations in
Texas and that the Board’s prior decision announced on September 17, 2008 to
wind down and close the Company’s Texas operations, shall be of no further force
or effect. As of
December 26, 2009, the Company operated 32 stores in Texas.
12.
|
Assets
Held for Sale
|
Assets
held for sale consist primarily of the Company’s warehouse in Eagan,
Minnesota. The book value of the warehouse at December 26, 2009 was
$7.4 million. Although the Company anticipates selling the warehouse
in excess of its book value, no assurance can be given as to how much the
warehouse will be sold for. In addition, assets held for sale also
includes a parcel of land with a book value of $0.2 million. In
October 2009, the Company sold a small property for $0.3 million which was
classified as an asset held for sale at March 28, 2009.
13.
|
Other
Current Liabilities
|
Other
current liabilities as of December 26, 2009 and March 28, 2009 are as
follows:
December 26,
2009
|
March 28,
2009
|
|||||||
(Amounts
in thousands)
|
||||||||
Accrued
legal reserves and fees
|
$ | 1,210 | $ | 2,421 | ||||
Accrued
property taxes
|
3,360 | 3,148 | ||||||
Accrued
utilities
|
4,003 | 3,808 | ||||||
Accrued
rent and related expenses
|
6,143 | 4,641 | ||||||
Accrued
accounting fees
|
612 | 1,205 | ||||||
Accrued
advertising
|
411 | 405 | ||||||
Accrued
outside services
|
941 | 1,628 | ||||||
Accrued
bank fees
|
703 | 580 | ||||||
Accrued
repairs and maintenance
|
427 | 484 | ||||||
Accrued
income taxes payable
|
2,576 | 327 | ||||||
Other
|
4,681 | 4,695 | ||||||
Total
other current liabilities
|
$ | 25,067 | $ | 23,342 |
14.
|
Subsequent
Events
|
The
Company evaluated subsequent events through the time of filing this Quarterly
Report on Form 10-Q on February 3, 2010. The Company is not aware of
any significant events that would have a material impact on its Consolidated
Financial Statements.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
99¢ Only
Stores (the “Company”) is an extreme value retailer of primarily consumable and
general merchandise with an emphasis on name-brand products. The
Company’s stores offer a wide assortment of regularly available consumer goods
as well as a broad variety of first-quality closeout merchandise.
For the
third quarter of fiscal 2010, the Company had net sales of $359.1 million,
operating income of $38.6 million and net income of $24.5
million. Sales increased during the third quarter of fiscal 2010
primarily due to a 3.1% increase in same-store sales, the full quarter effect of
five new stores opened in fiscal 2009, the effect of five new stores opened in
fiscal 2010 and the re-opening of one Texas store which was closed due to a
hurricane. The increase in sales was partially offset by the effect
of closing 17 stores in Texas. For the first three quarters of fiscal
2010, the Company had net sales of $1,015.9 million, operating income of $69.0
million and net income of $43.6 million. Sales increased during the first three
quarters of fiscal 2010, primarily due to a 4.1% increase in same-store sales,
the full year effect of 19 new stores opened in fiscal 2009, the effect of five
new stores opened in fiscal 2010 and re-opening of one Texas store which was
closed due to a hurricane. The increase in the sales during the first three
quarters of fiscal 2010 was partially offset by the effect of closing 17 stores
in Texas.
For the
first three quarters of fiscal 2010, the Company opened five stores in
California and re-opened one store in Texas, which was closed due to a
hurricane. The Company plans to open three stores during the fourth
quarter of fiscal 2010, all in California.
The
Company believes that near-term growth in sales for the remainder of fiscal 2010
will result from new store openings and increases in same-store
sales.
Critical
Accounting Policies and Estimates
The
Company’s critical accounting policies reflecting management’s estimates and
judgments are described in Item 7 (Management’s Discussion and Analysis of
Financial Condition and Results of Operations) of its Annual Report on Form 10-K
for the year ended March 28, 2009, filed with the Securities and Exchange
Commission on June 10, 2009.
Results
of Operations
The
following discussion defines the components of the statement of
income.
Net Sales: Revenue is
recognized at the point of sale for retail sales. Bargain Wholesale sales
revenue is recognized on the date merchandise is shipped. Bargain Wholesale
sales are primarily shipped free on board shipping point.
Cost of Sales: Cost of sales
includes the cost of inventory, freight in, inter-state warehouse transportation
costs, inventory shrinkage (obsolescence, spoilage, and shrink), and is net of
discounts and allowances. The Company receives various cash discounts,
allowances and rebates from its vendors. Such items are included as
reductions of cost of sales as merchandise is sold. The Company does not include
purchasing, receiving, distribution, warehouse costs and transportation to and
from stores in its cost of sales, which totaled $16.9 million and $19.4 million
for the third quarter of fiscal 2010 and 2009, respectively and totaled $49.8
million and $56.8 million for the first three quarters of fiscal 2010 and 2009,
respectively. Due to this classification, the Company's gross profit
rates may not be comparable to those of other retailers that include costs
related to their distribution network in cost of sales.
Selling, General and Administrative
Expenses: Selling, general and administrative expenses include
purchasing, receiving, inspection and warehouse costs, the costs of selling
merchandise in stores (payroll and associated costs, occupancy and other
store-level costs), distribution costs (payroll and associated costs, occupancy,
transportation to and from stores, and other distribution-related costs), and
corporate costs (payroll and associated costs, occupancy, advertising,
professional fees, stock-based compensation expense and other corporate
administrative costs). Depreciation and amortization is also included in
selling, general and administrative expenses.
Other (Income) Expense: Other
(income) expense relates primarily to the interest income on the Company’s
marketable securities, net of interest expense on the Company’s capitalized
lease and the impairment charge related to the Company’s marketable
securities.
The
following table sets forth selected income statement data of the Company
expressed as a percentage of net sales for the periods indicated (percentages
may not add up due to rounding):
For the Third Quarter Ended
|
For the Three Quarters
Ended
|
|||||||||||||||
December 26,
2009
|
December 27,
2008
|
December 26,
2009
|
December 27,
2008
|
|||||||||||||
NET
SALES:
|
||||||||||||||||
99¢
Only Stores
|
97.2 | % | 97.1 | % | 97.0 | % | 96.8 | % | ||||||||
Bargain
Wholesale
|
2.8 | 2.9 | 3.0 | 3.2 | ||||||||||||
Total
sales
|
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
COST
OF SALES (excluding depreciation and amortization expense as shown
separately below)
|
56.9 | 59.3 | 58.8 | 60.7 | ||||||||||||
Gross
profit
|
43.1 | 40.7 | 41.2 | 39.3 | ||||||||||||
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES:
|
||||||||||||||||
Operating
expenses
|
30.4 | 33.4 | 32.3 | 36.3 | ||||||||||||
Depreciation
and amortization
|
1.9 | 2.5 | 2.0 | 2.7 | ||||||||||||
Total
selling, general and administrative expenses
|
32.4 | 35.9 | 34.4 | 38.9 | ||||||||||||
Operating
income
|
10.7 | 4.8 | 6.8 | 0.3 | ||||||||||||
OTHER
(INCOME) EXPENSE:
|
||||||||||||||||
Interest
income
|
(0.1 | ) | (0.2 | ) | (0.1 | ) | (0.3 | ) | ||||||||
Interest
expense
|
— | 0.1 | — | 0.1 | ||||||||||||
Other-than-temporary
investment impairment due to credit losses
|
— | — | 0.1 | — | ||||||||||||
Other
|
— | 0.1 | — | 0.2 | ||||||||||||
Total
other (income) expense, net
|
(0.1 | ) | (0.1 | ) | — | (0.1 | ) | |||||||||
Income
before provision for income taxes and income attributed to noncontrolling
interest
|
10.8 | 4.9 | 6.8 | 0.4 | ||||||||||||
Provision
for income taxes
|
4.0 | 1.3 | 2.5 | 0.1 | ||||||||||||
Net
income including noncontrolling interest
|
6.8 | 3.5 | 4.3 | 0.3 | ||||||||||||
Net
income attributable to noncontrolling interest
|
— | — | — | (0.1 | ) | |||||||||||
NET
INCOME ATTRIBUTABLE TO 99¢ ONLY STORES
|
6.8 | % | 3.5 | % | 4.3 | % | 0.2 | % |
Third
Quarter Ended December 26, 2009 Compared to Third Quarter Ended December 27,
2008
Net Sales: Net sales increased
$8.0 million, or 2.3%, to $359.1 million for the third quarter of fiscal 2010
compared to $351.1 million for the third quarter of fiscal
2009. Retail sales increased $7.9 million, or 2.3%, to $348.9 million
for the third quarter of fiscal 2010 compared to $341.0 million for the third
quarter of fiscal 2009. The increase in retail sales for the third
quarter of fiscal 2010 was primarily due to an increase of $10.0 million in
same-store sales. The full quarter effect of five new stores opened
in fiscal 2009 increased retail sales by $1.6 million and the effect of five new
stores opened in fiscal 2010 and the re-opening of one Texas store which was
closed due to a hurricane increased sales by $6.5 million for the third quarter
of fiscal 2010. The increase in sales was partially offset by a
decrease in sales of approximately $10.1 million due to the effect of the
closing of 17 stores in Texas, as described in Note 11 to Consolidated Financial
Statements (“Texas Market”).
The
Company’s same-store sales increased 3.1% for the third quarter of fiscal 2010
compared to the third quarter of fiscal 2009. The number of overall
same-store sales transaction counts increased by 4.5% and the average
transaction size decreased to $9.70 from $9.83 for the third quarter of fiscal
2010.
Gross Profit: Gross profit
increased $12.1 million, or 8.5%, to $154.9 million for the third quarter of
fiscal 2010 compared to $142.8 million for the third quarter of fiscal
2009. As a percentage of net sales, overall gross margin increased to
43.1% for the third quarter of fiscal 2010 compared to 40.7% for the third
quarter of fiscal 2009. The increase in gross profit margin was
primarily due to a decrease in shrinkage to 1.9% of net sales in the third
quarter of fiscal 2010 from 3.0% of net sales in the third quarter of fiscal
2009. This reduction in shrinkage is primarily due to a one time
reduction in shrink reserves of $1.4 million for Texas based on the shrink
analysis performed at the end of the quarter, lower overall shrink as a result
of the trend of physical inventories taken during the third quarter of fiscal
2010, and a decrease in recorded scrap from perishables. In
addition, the increase in gross profit margin was also due to a decrease in cost
of products sold to 54.9% of net sales for the third quarter of fiscal 2010
compared to 55.6% of net sales for the third quarter of fiscal 2009, due to a
favorable shift in product mix and new buying and merchandising initiatives to
drive sales of higher margin items. The remaining change was made up
of increases and decreases in other less significant items included in cost of
sales.
Operating
Expenses: Operating expenses decreased by $7.8 million, or
6.7%, to $109.3 million for the third quarter of fiscal 2010 compared to $117.1
million for the third quarter of fiscal 2009. As a percentage of net
sales, operating expenses decreased to 30.4% for the third quarter of fiscal
2010 from 33.4% for the third quarter of fiscal 2009. Of the 300
basis points decrease in operating expenses as a percentage of net sales, retail
operating expenses decreased by 110 basis points, corporate expenses decreased
by 60 basis points, distribution and transportation decreased by 80 basis points
and other items decreased by 50 basis points as described below.
Retail
operating expenses for the third quarter of fiscal 2010 decreased as a
percentage of net sales by 110 basis points to 21.9% of net sales, compared to
23.0% of net sales for the third quarter of fiscal 2009. The majority
of the decrease as a percentage of net sales was due to lower payroll-related
expenses as a result of improvement in labor productivity and due to the
implementation of new cost control methods resulting in lower utilities and
supplies costs.
Distribution
and transportation expenses for the third quarter of fiscal 2010 decreased as a
percentage of net sales by 80 basis points to 4.7% of net sales, compared to
5.5% of net sales for the third quarter of fiscal 2009. The decrease
as a percentage of net sales was primarily due to improvements in labor
efficiencies, improved processing methods, lower fuel costs and improved trailer
utilization.
Corporate
operating expenses for the third quarter of fiscal 2010 decreased as a
percentage of net sales by 60 basis points to 3.2% of net sales, compared to
3.8% of net sales for the third quarter of fiscal 2009. The decrease as a
percentage of net sales was primarily due to cost control measures and lower
consulting and professional fees.
The
remaining operating expenses decreased as a percentage of net sales by 50 basis
points to 0.5% of net sales, compared to 1.0% of net sales for the third quarter
of fiscal 2009. The decrease in other operating expenses compared to
the third quarter of fiscal 2009 was primarily due to a severance charge of
approximately $1.4 million in the third quarter of fiscal 2009 related to the
Company’s Texas operations, as well as recording a loss on a foreclosure sale of
the shopping center owned by a Company’s partnership of $0.8
million during the third quarter of fiscal 2009. These decreases were
partially offset by an increase in stock based compensation expense of $0.9
million in the third quarter of fiscal 2010 compared to third quarter of fiscal
2009, primarily related to performance stock unit expense.
Depreciation and Amortization:
Depreciation and amortization decreased $1.8 million, or 20.9%, to $7.0 million
for the third quarter of fiscal 2010 compared to $8.8 million for the third
quarter of fiscal 2009. The decrease was primarily a result of
closing 17 stores in Texas and also due to the assets that became fully
depreciated in existing stores compared to the amount of new depreciable assets
added as a result of new store openings. Depreciation as a
percentage of net sales decreased to 1.9% from 2.5% of net sales for the reasons
discussed above as well as due to sales improvements.
Operating Income: Operating
income was $38.6 million for the third quarter of fiscal 2010 compared to
operating income of $16.9 million for the third quarter of fiscal
2009. Operating income as a percentage of net sales was 10.7% for the
third quarter of fiscal 2010 compared to 4.8% for the third quarter of fiscal
2009. This was primarily due to changes in gross margin and operating expenses
discussed above.
Other Expense/Income, net:
Other income was flat at $0.2 million for the third quarter of fiscal
2010 and fiscal 2009. The interest income for the third quarter of
fiscal 2010 decreased to $0.2 million from $0.8 million for the third quarter of
fiscal 2009, primarily due to lower interest rates. This
decrease in interest income was offset by a decrease in interest expense of
approximately $0.4 million and decreases in other miscellaneous expenses of $0.2
million for the third quarter of fiscal 2010 compared to the third quarter of
fiscal 2009.
Provision for Income Taxes:
The provision for income taxes was $14.3 million for the third quarter of fiscal
2010 compared to $4.7 million for the third quarter of fiscal 2009, due to the
increase in pre-tax income. The effective tax rate of the provision
for income taxes was approximately 36.9% for the third quarter of fiscal 2010,
compared to 27.2% for the third quarter of fiscal 2009. There
was no material change in the net amount of unrecognized tax benefits in the
third quarter of fiscal 2010.
Net Income: As a result of the
items discussed above, net income for the third quarter of fiscal 2010 was $24.5
million compared to a net income of $12.5 million for the third quarter of
fiscal 2009. Net income as a percentage of net sales was 6.8% for the
third quarter of fiscal 2010 compared to net income of 3.5% for third quarter of
fiscal 2009.
The
First Three Quarters Ended December 26, 2009 Compared to the First Three
Quarters Ended December 27, 2008
Net Sales: Net sales increased
$42.1 million, or 4.3%, to $1,015.9 million for the first three quarters of
fiscal 2010 compared to $973.8 million for the first three quarters of fiscal
2009. Retail sales increased $42.5 million, or 4.5%, to $985.6
million for the first three quarters of fiscal 2010 compared to $943.1 million
for the first three quarters of fiscal 2009. The increase in retail
sales for the first three quarters of fiscal 2010 was primarily due to an
increase of $36.9 million in same-store sales. The full year effect
of 19 new stores opened in fiscal 2009 increased retail sales by $19.5 million,
and the effect of five new stores opened in the first three quarters of fiscal
2010 and one Texas store re-opened which was closed due to a hurricane increased
sales by $12.4 million for the first three quarters of fiscal
2010. The increase in sales was partially offset by a decrease in
sales of approximately $26.3 million due to the effect of the closing of 17
stores in Texas, as described in Note 11 to Consolidated Financial Statements
(“Texas Market”).
The
Company’s same-store sales increased 4.1% for the first three quarters of fiscal
2010 compared to the first three quarters of fiscal 2009. The number
of overall same-store sales transaction counts increased by 4.6% and the average
transaction size decreased to $9.57 from $9.62 for the first three quarters of
fiscal 2010.
Gross Profit: Gross profit
increased $35.7 million, or 9.3%, to $418.1 million for the first three quarters
of fiscal 2010 compared to $382.4 million for the first three quarters of fiscal
2009. As a percentage of net sales, overall gross margin increased to
41.2% for the first three quarters of fiscal 2010 compared to 39.3% for the
first three quarters of fiscal 2009. The increase in gross profit
margin was primarily due to a decrease in cost of products sold to 55.9% of net
sales for the first three quarters of fiscal 2010 compared to 57.2% of net sales
for the first three quarters of fiscal 2009, due to a favorable shift in product
mix, and new buying and merchandising initiatives to drive sales of higher
margin, as well as the September 2008 increase in all of the Company’s price
points by adding 99/100 of one cent to every price point (i.e., 99¢ increased to
99.99¢). In addition, the increase in gross profit margin was also
due to a decrease in shrinkage to 2.8% of net sales in fiscal 2010 compared to
3.1% in fiscal 2009, primarily due to a decrease in recorded scrap from
perishables and a reduction in the shrink reserves based on the physical
inventories taken during the first three quarters of fiscal 2010. The
remaining change was made up of decreases and increases in other less
significant items included in cost of sales.
Operating
Expenses: Operating expenses decreased by $24.7 million, or
7.0%, to $328.3 million for the first three quarters of fiscal 2010 compared to
$353.0 million for the first three quarters of fiscal 2009. As a
percentage of net sales, operating expenses decreased to 32.3% for the first
three quarters of fiscal 2010 from 36.3% for the first three quarters of fiscal
2009. Of the 400 basis points decrease in operating expenses as a
percentage of net sales, retail operating expenses decreased by 160 basis
points, corporate expenses decreased by 70 basis points, distribution and
transportation decreased by 90 basis points and other items decreased by 80
basis points as described below.
Retail
operating expenses for the first three quarters of fiscal 2010 decreased as a
percentage of net sales by 160 basis points to 23.0% of net sales, compared to
24.6% of net sales for the first three quarters of fiscal 2009. The
majority of the decrease as a percentage of net sales was due to lower
payroll-related expenses as a result of improvement in labor productivity and
lower turn-over during the first three quarters of fiscal 2010, as well as lower
utilities and supplies costs during this period. These decreases were
partially offset by slight increases in costs related to taxes and licenses as a
percentage of net sales.
Distribution
and transportation expenses for the first three quarters of fiscal 2010
decreased as a percentage of net sales by 90 basis points to 4.9% of net sales,
compared to 5.8% of net sales for the first three quarters of fiscal
2009. The decrease as a percentage of net sales was primarily due to
improvements in labor efficiencies, improved processing methods, lower fuel
costs and improved trailer utilization.
Corporate
operating expenses for the first three quarters of fiscal 2010 decreased as a
percentage of net sales by 70 basis points to 3.5% of net sales, compared to
4.2% of net sales for the first three quarters of fiscal 2009. The decrease as a
percentage of net sales was primarily due to cost control measures, lower
consulting and professional fees, and lower payroll-related
expenses.
The
remaining operating expenses for the first three quarters of fiscal 2010
decreased as a percentage of net sales by 80 basis points to 0.8% of net sales,
compared to 1.6% of net sales for the first three quarters of fiscal
2009. The decrease in the other operating expenses compared to the
first three quarters of fiscal 2009 was primarily due to a reduction in an asset
impairment charge of $9.9 million, and a severance charge of approximately $1.4
million related to the Company’s Texas operations, as well
as recording of a $0.8 million loss on a foreclosure sale of the
shopping center owned by a Company’s partnership, partially offset by recording
the Company’s share of a gain on a sale of the primary asset of another
partnership of approximately $0.2 million and also including the partnership’s
gain of approximately $1.4 million during the first three quarters of fiscal
2009.
The
decreases in the first three quarters of fiscal 2010 compared to the first three
quarters of fiscal 2009 were partially offset by an increase of $3.2 million in
stock-based compensation expense primarily related to performance stock unit
expense, and lease termination and closing costs of approximately $1.4 million
related to the closure of 11 Texas stores during the first three quarters of
fiscal 2010.
Depreciation and Amortization:
Depreciation and amortization decreased $5.4 million, or 20.6%, to $20.8 million
for the first three quarters of fiscal 2010 compared to $26.2 million for the
first three quarters of fiscal 2009. The decrease was primarily a
result of closing 17 stores in Texas and also due to the assets that became
fully depreciated in existing stores compared to the amount of new depreciable
assets added as a result of new store openings. Depreciation as
a percentage of net sales decreased to 2.0% from 2.7% of net sales for the
reasons discussed above as well as due to sales improvements.
Operating Income: Operating
income was $69.0 million for the first three quarters of fiscal 2010 compared to
operating income of $3.2 million for the first three quarters of fiscal
2009. Operating income as a percentage of net sales was 6.8% for the
first three quarters of fiscal 2010 as compared to operating income as a
percentage of net sales of 0.3% for the first three quarters of fiscal
2009. This was primarily due to changes in gross margin and operating
expenses discussed above.
Other Expense/Income, net:
Other expense was $0.2 million for the first three quarters of fiscal
2010 compared to other income of $0.7 million for the first three quarters of
fiscal 2009. The decrease in other income was primarily due to lower
interest income which decreased to $0.9 million for the first three quarters of
fiscal 2010 from $3.1 million for the first three quarters of fiscal 2009,
primarily due to lower interest rates. The decrease in other income
for the first three quarters of fiscal 2010 was partially offset by a decrease
of $0.9 million in investment impairment charge related to the Company’s
available for sale securities. The Company recorded an investment
impairment charge related to credit losses of approximately $0.8 million for the
first three quarters of fiscal 2010 compared to an investment impairment charge
of $1.7 million for the first three quarters of fiscal 2009 related to the
Company’s available for sale securities. See Note 3 to Consolidated
Financial Statements for further discussion of investments. The decrease was also
offset by lower interest expense of $0.2 million for the first three quarters of
fiscal 2010 compared to interest expense of $0.8 million for the first three
quarters of fiscal 2009. The remaining decrease in other income is
due to decreases and increases in less significant items included in other
income and loss.
Provision for Income Taxes:
The provision for income taxes was $25.2 million for the first three quarters of
fiscal 2010 compared to $1.0 million for the first three quarters of fiscal
2009. The effective tax rate of the provision for income taxes was
approximately 36.6% for the first three quarters of fiscal 2010, compared to a
benefit of 21.0% for the first three quarters of fiscal 2009 (excluding the
discrete tax item described below). The Company recorded a
valuation allowance of approximately $1.4 million related to certain Texas tax
credits during the first three quarters of fiscal 2009. The Company
believes that a significant amount of this benefit will not be
realized. There was no material change in the net amount of
unrecognized tax benefits in the first three quarters of fiscal
2010.
Net Income: As a result of the
items discussed above, net income for the first three quarters of fiscal 2010
was $43.6 million compared to a net income of $1.5 million for the first three
quarters of fiscal 2009. Net income as a percentage of net sales was
4.3% for the first three quarters of fiscal 2010 compared to net income of 0.2%
for first three quarters of fiscal 2009.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company funds its operations principally from cash provided by operations,
short-term investments and cash on hand, and has generally not relied upon
external sources of financing. The Company’s capital requirements result
primarily from purchases of inventory, expenditures related to new store
openings, including purchases of land, and working capital requirements for new
and existing stores. The Company takes advantage of closeout and
other special-situation opportunities, which frequently result in large volume
purchases, and as a consequence its cash requirements are not constant or
predictable during the year and can be affected by the timing and size of its
purchases.
Net cash
provided by operations during the first three quarters of fiscal 2010 and 2009
was $65.1 million and $37.7 million, respectively, consisting primarily of $70.9
million and $42.1 million, respectively, of net income adjusted for non-cash
items. During the first three quarters of fiscal 2010, the Company
used cash of $4.1 million for working capital and used cash of $1.7 million for
other activities. During the first three quarters of fiscal 2009, the Company
used cash of $2.3 million for working capital and used cash of $2.1 million in
other activities. Net cash used by working capital activities for the
first three quarters of fiscal 2010 primarily reflects the increase in
inventories, decrease in deferred rent, increase in income taxes receivable and
decrease in other liabilities. The increase in inventories was
primarily due to the increase in sales. These uses of working capital were
partially offset by increases in accounts payable and accrued
expenses. Net cash used for working capital activities for the first
three quarters of fiscal 2009 primarily reflects the increases in inventories
and deferred rent. The increase in inventories was primarily due to
the increase in sales and number of stores. These uses of working capital were
partially offset by increases in accounts payable and accrued
expenses.
Net cash
used in investing activities during the first three quarters of fiscal 2010 and
2009, was $66.3 million and $30.6 million, respectively. In the first
three quarters of fiscal 2010 and 2009, the Company used $24.4 million and $26.8
million, respectively, for the purchase of property and
equipment. The Company purchased $64.0 million and received proceeds
of $21.2 million from the sales and maturities of investments during the first
three quarters of fiscal 2010. The Company received proceeds of $0.9
million from disposal and sale of fixed assets during the first three quarters
of fiscal 2010. The Company purchased $50.2 million and received
proceeds of $48.5 million from the sales and maturities of investments during
the first three quarters of fiscal 2009. In addition, the investing
activities in the first three quarters of fiscal 2009 reflect the proceeds of
$2.2 million from the sale of the assets of the Company’s partnerships as well
as $0.3 million from the disposal of fixed assets.
Net cash
provided in financing activities during the first three quarters of fiscal 2010
was $2.6 million, which is composed primarily of proceeds received of $3.7
million from exercise of stock options partially offset by payments $1.8 million
related to the issuance of performance stock units as part of the Company’s
equity incentive plan. The number of shares issued upon vesting of
performance stock units is net of the statutory withholding requirements that
the Company pays in cash to the appropriate taxing authorities on behalf of the
employees. During the first three quarters of fiscal 2010, the
Company withheld approximately 128,100 shares to satisfy $1.8 million of
employee tax obligations. Although shares withheld are not issued,
they are treated as common stock repurchases in the Company’s Consolidated
Financial Statements, as they reduce the number of shares that would have been
issued upon vesting. The Company also paid approximately $0.3 million
to acquire the remaining noncontrolling interest in a partnership during the
first three quarters of fiscal 2010. Net cash used in financing
activities during first three quarters of fiscal 2009 was $0.9 million,
primarily related to repurchase of Company’s common stock. In
the first three quarters of fiscal 2009, there were no exercises of
non-qualified stock options.
The
Company estimates that total capital expenditures in fiscal 2010 will be
approximately $41.8 million and relate principally to property acquisitions of
approximately $19.5 million, $14.9 million for leasehold improvements, fixtures
and equipment for new store openings, and $7.4 million for other capital
projects including information technology. The Company intends to fund its
liquidity requirements for the next 12 months out of net cash provided by
operations, short-term investments, and cash on hand.
In June
2008, based on the
Company’s outlook, cash position, and stock price relative to potential value,
the Company's Board of Directors authorized a share repurchase program for the
purchase of up to $30 million of the Company's common stock. Under the
authorization, the Company may purchase shares from time to time in the open
market or in privately negotiated transactions in compliance with the applicable
rules and regulations of the Securities and Exchange
Commission. However, the timing and amount of such purchases, if any,
will be at the discretion of management, and will depend on market conditions
and other considerations which may change. The Company has
approximately $17.1 million that remained authorized and available to repurchase
shares of Company’s common stock under this program. The Company had
no share purchases during the first three quarters ended December 26,
2009.
The
Company issues performance stock units as part of its equity incentive
plans. The number of shares issued on the date the performance stock
units vest is net of the statutory withholding requirements that the Company
pays in cash to the appropriate taxing authorities on behalf of our
employees. During the third quarter and the first three quarters of
fiscal 2010, the Company withheld approximately 51,700 shares and 128,100
shares, respectively, to satisfy $0.7 million and $1.8 million, respectively, of
employee tax obligations. Although shares withheld are not issued,
they are treated as common stock repurchases in the Company’s Consolidated
Financial Statements, as they reduce the number of shares that would have been
issued upon vesting.
Off-Balance
Sheet Arrangements
As of
December 26, 2009, the Company had no off-balance sheet
arrangements.
Contractual
Obligations
A summary
of the Company’s contractual obligations is provided in the Company’s Annual
Report on Form 10-K for the year ended March 28, 2009. During the
first three quarters of fiscal 2010, there was no material change in Company’s
contractual obligations as previously disclosed.
Lease
Commitments
The
Company leases various facilities under operating leases (except for one
location that is classified as a capital lease) which expire at various dates
through 2031. The lease agreements generally contain renewal options
and/or provide for fixed rent escalations or increases based on the Consumer
Price Index. Total minimum lease payments under each of these lease agreements,
including scheduled increases, are charged to operations on a straight-line
basis over the term of each respective lease. Most leases require the Company to
pay property taxes, maintenance and insurance. Rental expense charged to
operations for the third quarter of fiscal 2010 and 2009 was $14.5 million and
$14.8 million, respectively. Rental expense charged to operations for
the first three quarters of fiscal 2010 and 2009 was $45.4 million and $44.5
million, respectively. The Company typically seeks leases with a
five-year to ten-year term and with multiple five-year renewal
options. A large majority of the Company’s store leases were entered
into with multiple renewal periods, which are typically five years and
occasionally longer.
Variable
Interest Entities
The
Company was the primary beneficiary of a variable interest entity known as the
La Quinta Partnership to develop a shopping center in La Quinta, California,
where the Company leased a store. As of March 29, 2008, this entity
had $9.0 million in assets and $7.4 million in liabilities, including a bank
loan for $7.3 million, which is shown on the Company’s fiscal 2008 year-end
consolidated balance sheet. In January 2008, the Company received a buy-sell
offer from the managing member of the La Quinta Partnership. The
Company accepted the offer to sell its interest to the minority partner on
January 30, 2008. After the timeline for completion of this offer
passed, the Company notified the managing member that the managing member was in
default of closing the transaction within the agreed-upon
timeframe. In addition, the partnership had a $7.5 million loan,
including principal of $7.3 million and accrued interest of $0.2 million, due to
a bank on June 1, 2008, in which the partnership was in default. In
December 2008, the bank foreclosed on the shopping
center. Eighty-nine percent of the land and all of the
buildings were sold in the foreclosure sales for $9.3 million. The
proceeds of $9.3 million included the Company’s purchase of the land and
building related to its store for approximately $2.9 million and the rest of the
center was sold for $6.4 million to a third party, except for a small parcel of
undeveloped land which remains in the partnership at this time. As a
result of the foreclosure, the bank received $7.9 million, including principal,
interest and penalties. The partnership’s loss from the foreclosure
sales of the shopping center was $0.8 million. Of the $0.8 million
loss, the Company recognized its share of the loss of approximately $0.5 million
in the third quarter of fiscal 2009. In accordance with ASC 810, the
Company included the partner’s share of the loss of approximately $0.3 million
in its operating expenses during the third quarter of fiscal 2009. As
a result of the foreclosure of the shopping center, the Company became the
managing partner of the partnership. The Company has consolidated
this partnership as of March 28, 2009. The Company purchased its
noncontrolling partner’s share of the partnership which consisted of a small
parcel of land for approximately $0.3 million during the third quarter of fiscal
2010. The
acquisition was recorded as an equity transaction in accordance with the
guidance of ASC 810-10-45. Due to the purchase of noncontrolling
partner’s share of the partnership, the Company became the sole owner of the
partnership.
The
Company also had an interest in another partnership known as the Wilshire
Alvarado Partnership which the Company consolidated at March 29, 2008 in
accordance with ASC 810. The assets of the partnership consisted of real estate
with a carrying value of approximately $1.5 million and there was no mortgage
debt or other significant liabilities associated with the entity, other than
notes payable to the Company. The balance sheet effect of
consolidating this entity at March 29, 2008 was a reclassification of
approximately $1.5 million from investments to property and equipment with no
corresponding impact on the Company’s recorded liabilities. In
November 2008, the Company purchased its partner’s share of this partnership,
consisting of one of the Company’s leased stores with an approximate carrying
value of $1.5 million. The Company paid approximately $1.6 million, including
estimated selling costs, to acquire its partner’s share in the partnership. The
Company increased its building and land value by approximately $1.6 million as
result of this purchase. Due to the purchase of the primary asset of the
partnership, the Company became the sole owner of the
partnership.
At March
29, 2008, the Company had an interest in an additional partnership known as the
Reseda Partnership which consisted of real estate with a carrying value of
approximately $1.2 million. The balance sheet effect of consolidating
this entity at March 29, 2008 was a reclassification of approximately $1.2
million from investments to assets held for sale with no corresponding impact on
the Company’s recorded liabilities. In April 2008, the partnership
sold its primary asset, with an approximate carrying value of $1.2 million, to a
third party. The Company's lease for the store in this partnership
continued after the sale and the Company's operation of that store was
unaffected by the transaction. Net proceeds to the Company of the
sale were $2.2 million. The transaction was recorded as a sale
leaseback in the first quarter of fiscal 2009. The partnership’s gain
from the sale of real estate was approximately $2.4 million, of which the
Company’s net gain was approximately $1.0 million. Of the $1.0 million net gain,
the Company recognized approximately $0.2 million in the first quarter of fiscal
2009 and approximately $0.8 million is being recognized over the remaining lease
term of 46 months. In accordance with ASC 810, the Company had included the
partner’s share of the gain of approximately $1.4 million in its operating
expenses during the first quarter of fiscal 2009. Additionally, the
proceeds of the sale were distributed to the partners in April 2008, and the
Company had included $1.4 million of minority interest in its Consolidated
Statements of Operations for the first quarter of fiscal 2009. As a
result of the sale of the primary asset of the partnership, the Company is no
longer a primary beneficiary and therefore has not consolidated the remaining
immaterial assets of the partnership as of March 28, 2009 and December 26,
2009.
Seasonality
and Quarterly Fluctuations
The
Company has historically experienced and expects to continue to experience some
seasonal fluctuations in its net sales, operating income, and net income. The
highest sales periods for the Company are the Christmas, Halloween and Easter
seasons. A proportionately greater amount of the Company’s net sales and
operating and net income is generally realized during the quarter ended on or
near December 31. The Company’s quarterly results of operations may also
fluctuate significantly as a result of a variety of other factors, including the
timing of certain holidays such as Easter, the timing of new store openings and
the merchandise mix.
New
Authoritative Pronouncements
Information
regarding new authoritative preannouncements is contained in Note 8 to the
consolidated financial statements for the quarter ended December 26, 2009, which
is incorporated herein by this reference.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
The
Company is exposed to interest rate risk for its investments in marketable
securities but management believes the risk is not material. At
December 26, 2009, the Company had $59.0 million in securities maturing at
various dates through May 2046, with approximately 72.6% maturing within one
year. The Company’s investments are comprised primarily of marketable
investment grade government and municipal bonds, corporate bonds, auction rate
securities, asset-backed securities, commercial paper, money market funds and
certain perpetual preferred stocks with periodic recurring dividend payments
that are 0.9% of the Company’s investment portfolio. The Company
generally holds investments until maturity, and therefore should not bear any
interest risk due to early disposition. The Company does not enter into any
derivative or interest rate hedging transactions. At December 26,
2009, the fair value of investments approximated the carrying
value. Based on the investments outstanding at December 26, 2009, a
1.0% increase in interest rates would reduce the fair value of the Company’s
total investment portfolio by approximately $0.4 million or 0.3%.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The
Company evaluated the effectiveness of its disclosure controls and procedures as
of the end of the period covered by this Report, under the supervision and with
the participation of the Company’s management, pursuant to Rule 13a-15(b) of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act").
Based on this evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer each concluded that due to the material weakness in inventory
accounting, the Company’s disclosure controls and procedures were not effective
as of December 26, 2009.
As
described in the Company's Form 10-K for the fiscal year ended March 28, 2009,
there was an internal control weakness surrounding the Company’s inventory
accounts. The Company did not maintain accurate records of specific item
quantity and location of its inventory and therefore relied primarily on
physical counting of inventory and its existing transactional controls. The
nature, size and number of locations make it infeasible to physically count the
entire inventory every quarter. These factors in combination with control
deficiencies surrounding inventory accounts related to store physical count
procedures and deficiencies related to maintenance of standard costs result in a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
Changes
in Internal Control Over Financial Reporting
During
the third quarter of fiscal 2010, the Company made changes in its internal
control over financial reporting in the area of its inventory accounts that are
reasonably likely to materially affect its internal control over financial
reporting. The Company has carried out the following significant
remediation activities in the third quarter of fiscal 2010:
|
·
|
Designed
an officer level Enterprise Risk Management process that enhances the top
down control environment
|
|
·
|
Implemented
controls over changes in inventory item costs, the approval of those
changes, and accounting for the impact of changes in inventory item
cost
|
|
·
|
Established
procedures to book cost variances on a timely
basis
|
|
·
|
Implemented
procedures to enhance the accuracy of the cycle counting process for the
Company’s main City of Commerce area warehouse
system
|
|
·
|
Implemented
distribution center bin test counts to validate perpetual
inventory
|
|
·
|
Implemented
procedures to book cycle count results for all warehouses on a monthly
basis
|
|
·
|
Implemented
an inventory roll-forward process that quantifies differences between the
inventory sub-ledger and the general ledger to provide trend and
statistical analysis of variances
|
|
·
|
Enhanced
the merchandise accrual process to increase
accuracy
|
PART
II OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
The
Company is subject to private lawsuits, administrative proceedings and claims
that arise in our ordinary course of business. A number of these
lawsuits, proceedings and claims may exist at any given time. While
the resolution of a lawsuit, proceeding or claim may have an impact on our
financial results for the period in which it is resolved, in management’s
opinion, none of these matters arising in the ordinary course of business are
expected to have a material adverse effect on the Company’s financial position,
results of operations, or overall liquidity. Legal actions taken by
private entities or taken or contemplated by governmental entities are reported
case by case below if they could potentially have a material adverse effect on
the Company. In accordance with ASC 450, the Company records a
liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated, and, if such a liability is
recorded for a matter disclosed in this item, the amount of the liability is
also reported. These provisions for contingent liabilities are
reviewed at least quarterly and are adjusted to reflect the impacts of
negotiations, settlements, rulings, advice of legal counsel and other
information and events pertaining to a particular case. Litigation is
inherently unpredictable. The status of legal matters and reserves
for such matters have been estimated through the date of this
report.
The
district attorneys of two California counties and one city attorney have
notified the Company that they are planning a possible civil action against the
Company alleging that its .99 cent pricing policy, adopted in September 2008,
constitutes false advertising and/or otherwise violates California's pricing
laws. In response to this notification and an associated invitation
from these governmental entities, the Company provided a detailed position
statement with respect to its pricing structure. If such an action is
brought, we cannot predict the outcome of such an action or the amount of
potential loss, if any. We believe our pricing structure is lawful,
and that our .99 cent pricing policy has an established precedent to the similar
.9 cent pricing policy used for decades by gas stations across the country. We
believe our .99 cent pricing policy has been well publicized with items properly
price signed in the stores such that it would not cause a reasonable consumer to
be deceived, and, if such an action is brought, we intend to vigorously defend
it.
Item
1A.
|
Risk
Factors
|
Reference
is made to Item IA. Risk Factors, in the Company’s Form 10-K for the year ended
March 28, 2009, for information regarding the most significant factors affecting
the Company’s operations. There have been no material changes in these factors
through December 26, 2009.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None
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
|
|
Consent
of Independent Valuation Firm
|
|
Certification
of Chief Executive Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
Certification
of Chief Financial Officer as required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended.
|
|
Certification
of Chief Executive Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as amended.
|
|
Certification
of Chief Financial Officer as required by Rule 13a-14(b) of the Securities
Exchange Act of 1934, as
amended.
|
SIGNATURE
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 thereto
duly authorized.
99¢
ONLY STORES
|
|
Date:
February 3, 2010
|
/s/ Robert Kautz
|
Robert
Kautz
|
|
Chief
Financial Officer
|
35