1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998 Commission file number 1-8897
CONSOLIDATED STORES CORPORATION
A Delaware Corporation
IRS No. 06-1119097
1105 North Market Street, Suite 1300
P. O. Box 8985
Wilmington, Delaware 19899
(302) 478-4896
Indicate 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, and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock $.01 par value per share, outstanding as of
June 5, 1998, was 109,345,962 and there were no shares of Nonvoting Common
Stock, $.01 par value per share outstanding at that date.
FORM 10-Q
2
CONSOLIDATED STORES CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
-----
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II - Other Information
Signature 12
FORM 10-Q Page 2
3
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
May 2, January 31,
1998 1998
- ----------------------------------------------------------------------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,922 $ 41,714
Inventories 1,012,634 910,668
Deferred income taxes 73,525 86,582
Other current assets 91,875 68,510
- ---------------------------------------------------------------------------- --------------
Total current assets 1,209,956 1,107,474
- ---------------------------------------------------------------------------- --------------
Property and equipment - net 627,992 613,478
Other assets 24,772 25,429
- ---------------------------------------------------------------------------- --------------
$1,862,720 $1,746,381
- ---------------------------------------------------------------------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 306,001 $ 280,117
Accrued liabilities and income taxes 91,132 173,208
Current maturities of long-term obligations 12,528 71,943
- ---------------------------------------------------------------------------- --------------
Total current liabilities 409,661 525,268
- ---------------------------------------------------------------------------- --------------
Long-term obligations 315,088 115,281
Deferred income taxes 72,284 71,290
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 2,000 shares, $.01 par value:
none issued
Common stock - authorized 290,000 shares, $.01 par value;
issued 109,219 and 107,796 shares, respectively 1,092 1,078
Nonvoting common stock - authorized 8,000 shares, $.01 par
value; none issued
Additional paid-in capital 364,870 335,038
Retained earnings 699,725 698,426
- ---------------------------------------------------------------------------- --------------
Total stockholders' equity 1,065,687 1,034,542
- ---------------------------------------------------------------------------- --------------
$1,862,720 $1,746,381
- ---------------------------------------------------------------------------- --------------
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 3
4
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
---------------------------
Thirteen weeks ended
---------------------------
May 2, 1998 May 3, 1997
- -------------------------------------------------------- -------------
Net sales $ 823,302 $ 778,338
Costs and expenses:
Cost of sales 483,293 460,973
Selling and administrative expenses 334,595 314,820
Interest expense 4,074 4,874
- -------------------------------------------------------- -------------
821,962 780,667
- -------------------------------------------------------- -------------
Income (loss) before income taxes 1,340 (2,329)
Income taxes 523 (1,005)
- -------------------------------------------------------- -------------
Net income (loss) $ 817 $ (1,324)
======================================================== =============
Income (loss) per common share $ 0.01 $ (0.01)
Income (loss) per common share - diluted $ 0.01 $ (0.01)
Average common shares outstanding 108,501 107,310
Dilutive effect of stock options 4,826 4,240
- -------------------------------------------------------- -------------
Diluted 112,787 111,550
======================================================== =============
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 4
5
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
-----------------------------
Thirteen weeks ended
-----------------------------
May 2, 1998 May 3, 1997
- ----------------------------------------------------------------------------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 817 $ (1,324)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 20,924 19,580
Deferred income taxes 13,232 4,843
Other 18,643 6,849
Change in assets and liabilities (188,329) (242,372)
- ----------------------------------------------------------------------------- -----------
Net cash used in operating activities (134,713) (212,424)
- ----------------------------------------------------------------------------- -----------
INVESTING ACTIVITIES:
Capital expenditures (33,531) (33,125)
Other 326
- ----------------------------------------------------------------------------- -----------
Net cash used in investing activities (33,531) (32,799)
- ----------------------------------------------------------------------------- -----------
FINANCING ACTIVITIES:
Proceeds from credit arrangements 140,477 232,745
Proceeds from exercise of stock options 15,539 8,928
Purchase of Mac Frugal's treasury stock (2,184)
Payments of senior notes and long-term obligations - net (85) (77)
Other 2,521 602
- ----------------------------------------------------------------------------- -----------
Net cash provided by financing activities 158,452 240,014
- ----------------------------------------------------------------------------- -----------
Decrease in cash and cash equivalents $ (9,792) $ (5,209)
============================================================================= ===========
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 40,398 $ 65,198
Interest paid $ 5,777 $ 6,417
The accompanying notes are an integral part of these condensed financial
statements.
FORM 10-Q Page 5
6
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The consolidated condensed financial statements included herein have been
prepared by the company pursuant to the rules and regulations of the Securities
and Exchange Commission. The condensed consolidated balance sheet at May 2,
1998, and the condensed consolidated statements of income and statements of cash
flows for the thirteen week period ended May 2, 1998, have been prepared by the
Company without audit. In the opinion of management, all adjustments necessary
to present fairly the financial position, results of operations, and cash flows
at May 2, 1998, and for the thirteen week periods presented have been made. Such
adjustments consisted only of normal recurring items.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principals
have been omitted or condensed, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that the condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
The results of operations for the period ended May 2, 1998, may not necessarily
be indicative of the operating results for the full year.
NOTE 2 - BUSINESS COMBINATION
- -----------------------------
In January 1998, 23,371,639 common shares were issued in exchange for all
outstanding common shares of Mac Frugal's Bargains - Close-outs, Inc. (Mac
Frugal's) a closeout retailer.
The combination constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, the accompanying financial statements
for the thirteen weeks ended May 3, 1997, have been restated to include the
accounts of Mac Frugal's.
In connection with the Mac Frugal's combination the Company recorded a charge in
the fourth quarter of 1997 to operating expense of $45,000,000 for direct and
other related costs pertaining to the combination. Merger transaction costs were
primarily comprised of fees for professional services, severance and similar
related costs. Additionally, the Company recorded a $70,000,000 charge to cost
of sales in the fourth quarter of 1997 for combination related expenses for
discontinued products, inventory consolidation and retail price equalization for
the combined inventories.
Details of the merger and other related costs before applicable taxes are as
follows:
Provided for Utilized in
in fiscal ---------------------
(In thousands) 1997 1997 1998 Balance
====================================================================================================
Inventory charges included in cost of sales $ 70,000 $ 10,137 $ 52,605 $ 7,258
Merger transaction costs:
Professional fees and services 15,500 9,028 5,021 1,451
Employee severance/termination costs 22,000 12,002 416 9,582
Other 7,500 725 4,274 2,501
- ----------------------------------------------------------------------------------------------------
Total merger transaction costs 45,000 21,755 9,711 13,534
- ----------------------------------------------------------------------------------------------------
$115,000 $ 31,892 $ 62,316 $ 20,792
====================================================================================================
FORM 10-Q Page 6
7
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Management's discussion and analysis has been prepared giving effect to the
pooling of interest business combination with Mac Frugal's Bargains -
Close-outs, Inc. (Mac Frugal's) on January 16, 1998. Accordingly, the thirteen
week period ending May 3, 1997, operating results and cash flows have been
restated to reflect the business combination.
The Company's goal is to build upon its leadership position in closeout
retailing, a growing segment of the retailing industry, and toy retailing by
expanding its market presence in both existing and new markets. The Company
believes that the combination of its strengths in merchandising, purchasing,
site selection, distribution and cost-containment has made it a low-cost, value
retailer well-positioned for future growth.
The Company is the nation's largest closeout retailer and a leading toy retailer
with 2,283 stores located in all 50 states and Puerto Rico. The Company operates
1,031 retail closeout stores under the names Odd Lots, Big Lots, Mac Frugal's
Bargains - Close-outs, and Pic `N' Save (Closeout Stores) and 1,252 retail toy
and closeout toy stores primarily under the names K-B Toys, K-B Toy Works, and
K-B Toy Outlet (Toy Stores). The Company is the largest enclosed shopping
mall-based toy retailer in the United States. As a value retailer focused on
closeout merchandise, the Company seeks to provide the budget-conscious consumer
with a broad range of quality, name-brand products at exceptional values. The
Company's name-brand closeout merchandise primarily consists of products
obtained from manufacturers' excess inventories, which generally result from
production overruns, package changes, discontinued products and returns.
The Company has historically experienced, and expects to continue to experience,
seasonal fluctuations with a significant percentage of its net sales and income
being realized in the fourth fiscal quarter. In addition, the Company's
quarterly results can be affected by the timing of store openings and closings,
the amount of net sales contributed by new and existing stores and the timing of
certain holidays. Quarterly fluctuations in inventory balances are normal
reflecting the opportunistic purchases available at any given time and the
expansion of the Company's store base. Historically, on a per store basis,
inventory levels are lower at the end of the Company's fiscal year and build
through the remaining three quarters of the year to a peak level in the third
quarter. Accounts payable generally follow a trend similar to inventories.
The following table compares components of the statement of income as a percent
of net sales and reflects the number of stores in operation at the end of each
period.
FORM 10-Q Page 7
8
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen weeks ended
-----------------------------
May 2, 1998 May 3, 1997
============================================================================ ==============
Net sales:
Closeout Stores 67.7% 66.3%
Toy Stores 30.9 32.2
- ---------------------------------------------------------------------------- --------------
Total Retail 98.6 98.5
Other 1.4 1.5
- ---------------------------------------------------------------------------- --------------
Total net sales 100.0 100.0
- ---------------------------------------------------------------------------- --------------
Gross Profit:
Closeout Stores 43.5 41.6
Toy Stores 37.1 39.8
- ---------------------------------------------------------------------------- --------------
Total Retail 41.5 41.0
Other 24.9 24.7
- ---------------------------------------------------------------------------- --------------
Total Gross Profit 41.3 40.8
Selling and administrative expenses 40.6 40.4
- ---------------------------------------------------------------------------- --------------
Operating profit 0.7 0.4
Interest expense 0.5 0.6
- ---------------------------------------------------------------------------- --------------
Income (loss) before income taxes 0.2 (0.2)
Income taxes 0.1
- ---------------------------------------------------------------------------- --------------
Net income 0.1% (0.2)%
============================================================================ ==============
Retail stores in operation at end of period:
Closeout 1,031 957
Toy 1,252 1,203
- ---------------------------------------------------------------------------- --------------
2,283 2,160
============================================================================ ==============
THIRTEEN WEEKS ENDED MAY 2, 1998 COMPARED TO THIRTEEN WEEKS ENDED MAY 3, 1997
NET SALES - Net sales increased to $823.3 million for the thirteen week period
ended May 2, 1998, from $778.3 million in the same period of 1997. This 5.8%
increase was primarily attributable to the increased number of stores in
operation during the comparative periods and a .6% comparable store sales
increase.
Net sales and comparable store sales by operating unit were as follows:
FORM 10-Q Page 8
9
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Thirteen weeks ended
-----------------------------
May 2, May 3, Percentage
Operating Segment 1998 1997 Change
============================================= ============== ===============
(In thousands)
Closeout 557,633 516,125 8.0%
Toys 254,496 250,583 1.6
Other 11,173 11,630 (3.9)
- --------------------------------------------- -------------- ---------------
823,302 778,338 5.8%
============================================= ============== ===============
Comparable store sales:
- -----------------------
Closeout 2.5% 5.7%
Toys (3.1) 20.2
- --------------------------------------------- --------------
0.6% 10.4%
============================================= ==============
The decline in Toy Stores comparable sales reflects the reduced sales volume
associated with certain action figures which occurred in the first quarter of
1997 and price adjustments on video and related products.
GROSS PROFIT - Gross profit increased to $340.0 million in the quarter from
$317.4 million in the prior year quarter, an increase of $22.6 million, or 7.1%.
As a percentage of net sales, gross profit increased slightly to 41.3% in the
1998 quarter from 40.8% in the previous year quarter. Closeout Stores gross
profit percentage was 43.5% compared to 41.6% in the prior year period
reflective of a higher initial markup on the mix of inventories at fiscal 1997
year end. Conversely, the decline in Toy Stores gross profit percentage from
39.8% in the 1997 quarter to 37.1% in the first quarter of 1998 is primarily
associated to the merchandise mix at fiscal year end which carried a lower
initial markup than the prior fiscal year end. Components of gross profit as a
percent to each operating segments sales were as follows:
Thirteen weeks ended
------------------------------
Operating Segment May 2, 1998 May 3, 1997
============================================= ==============
Closeout 43.5% 41.6%
Toys 37.1 39.8
Other 24.9 24.7
- --------------------------------------------- --------------
41.3% 40.8%
============================================= ==============
SELLING AND ADMINISTRATIVE EXPENSES - Selling and administrative expenses
increased 6.3% to $334.6 million in the first quarter of 1998 from $314.8
million in the previous year quarter. This increase is primarily attributable to
number of stores in operation. As a percentage of net sales, selling and
administrative expenses increased slightly to 40.6% in 1998 from 40.4% in the
prior year period.
INTEREST EXPENSE - Interest expense declined 16.3% to $4.1 million in the first
quarter of 1998 from $4.9 million in fiscal 1997. The reduction reflects lower
weighted average debt levels for borrowings utilized for inventory purchases,
seasonal operating requirements, and capital projects in addition to a lower
effective interest rate.
FORM 10-Q Page 9
10
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES - The effective tax rate of the Company decreased from 43.2% in the
1997 quarter to 39.0% in the first quarter of 1998. The company anticipates a
39.0% effective rate for the balance of fiscal 1998.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company has been cash flow from
operations and borrowings under available credit facilities. Net cash used by
operations in each of the thirteen week periods ended May 2, 1998, and May 3,
1997, as detailed in the condensed consolidated statements of cash flows, was
$134.7 million and $212.4, respectively. This decrease is mainly attributable to
the planned reduction of inventory levels.
Capital expenditures in 1998 are expected to be approximately $180 million
principally for the anticipated opening of 300 stores plus capital requirements
for warehouse expansion and equipment needs.
As necessary, the Company supplemented its capital and operating cash
requirements in the first quarter with borrowings under available credit
facilities. At May 2, 1998, approximately $313.0 million was available for
borrowings under the Company's $600 million Revolving Credit Facility (Revolver)
and an additional $87.8 million of uncommitted credit facilities were available,
subject to the terms of the Revolver. Subsequent to May 2, 1998, the Company
amended its Revolver increasing availability to $700 million for a five year
period.
The Company continues to believe that it will have adequate resources to fund
ongoing operating requirements and future capital expenditures related to the
expansion of existing businesses and development of new projects. Additionally,
management is not aware of any current trends, events, demands, commitments, or
uncertainties which reasonably can be expected to have a material impact on the
liquidity, capital resources, financial position or results of operations of the
Company.
IMPACT OF YEAR 2000
The Company has been addressing computer software modifications or replacements
to enable transactions to process properly in the year 2000. All necessary
changes are anticipated to occur in a timely manner and the cost will not have a
significant impact on the ongoing results of operations.
FORM 10-Q Page 10
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. Not applicable.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted during the first quarter of the fiscal
year covered by this report to a vote of security holders.
Item 5. Other Information.
The Private Securities Litigation Reform Act of 1995 ("the
Act") provides a safe harbor for forward-looking statements
made by or on behalf of the Company. Certain statements
contained in Management's Discussion and Analysis and in other
Company filings are forward-looking statements. These
statements discuss among other things, expected growth, future
revenues, future cash flows and future performance. Such
statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to
republish revised forward-looking statements to reflect the
occurrence of unanticipated events.
Readers are also urged to carefully review and consider the
various disclosures made by the Company which attempt to
advise interested parties of the factors which affect the
Company's business, including Management's Discussion and
Analysis of Financial Condition and Results of Operations
included in this report, as well as, the Company's periodic
reports on Forms 10-K and 8-K filed with the Securities and
Exchange Commission.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Topic
------------ --------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
Date Topic
----------------- -------------------------------
March Post-Merger financial results
17, 1998 for the merger between a
subsidiary of Consolidated and
Mac Frugal's Bargains -
Close-outs, Inc. on January 16,
1998, which was accounted for
as a pooling of interests.
FORM 10-Q Page 11
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSOLIDATED STORES CORPORATION
-------------------------------
(Registrant)
Dated: June 9, 1998 By: /s/ Michael J. Potter
------------ --------------------------------
Michael J. Potter, Executive Vice
President, Chief Financial
Officer, and Principal Accounting
Officer
FORM 10-Q Page 12
5
3-MOS
JAN-30-1999
FEB-01-1998
MAY-02-1998
31,922
0
0
0
1,012,634
1,209,956
1,023,924
395,932
1,862,720
409,661
315,088
0
0
1,092
1,064,595
1,862,720
823,302
823,302
483,293
334,595
0
0
4,074
1,340
523
817
0
0
0
817
0.01
0.01
