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 1, 1999 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 7, 1999, was 110,136,210 and there were no shares
of Nonvoting Common Stock, $.01 par value per share outstanding at that
date.
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 14
Page 2
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
May 1, January
1999 30, 1999
=================================================================== ==========
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 72,530 $ 75,906
Inventories 1,157,172 1,096,844
Deferred income taxes 97,436 98,739
Other current assets 92,013 63,686
- ------------------------------------------------------------------- ----------
Total current assets 1,419,151 1,335,175
- ------------------------------------------------------------------- ----------
Property and equipment - net 696,867 683,437
Other assets 26,780 23,912
- ------------------------------------------------------------------- ----------
$2,142,798 $2,042,524
=================================================================== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 382,352 $ 337,368
Accrued liabilities and income taxes 80,446 122,221
Current maturities of long-term obligations 55,061 352
- ------------------------------------------------------------------- ----------
Total current liabilities 517,859 459,941
- ------------------------------------------------------------------- ----------
Long-term obligations 330,525 295,619
Deferred income taxes and other liabilities 102,717 105,062
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 110,069 and 109,524 shares,
respectively 1,101 1,095
Nonvoting common stock - authorized 8,000 shares,
$.01 par value; none issued
Additional paid-in capital 399,122 385,612
Retained earnings 791,474 795,195
- ------------------------------------------------------------------- ----------
Total stockholders' equity 1,191,697 1,181,902
- ------------------------------------------------------------------- ----------
$2,142,798 $2,042,524
=================================================================== ==========
The accompanying notes are an integral part of these
condensed financial statements.
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4
CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER COMMON SHARE DATA)
Thirteen weeks ended
-------------------------
May 1, May 2,
1999 1998
================================================================= ===========
Net sales $ 923,747 $ 823,302
Costs and expenses:
Cost of sales 538,500 483,293
Selling and administrative expenses 386,567 334,595
Interest expense 4,830 4,074
- ----------------------------------------------------------------- -----------
929,897 821,962
- ----------------------------------------------------------------- -----------
Income (loss) before income taxes (6,150) 1,340
Income taxes (benefit) (2,429) 523
- ----------------------------------------------------------------- -----------
Net income (loss) $ (3,721) $ 817
================================================================= ===========
Income (loss) per common share $ (0.03) $ 0.01
Income (loss) per common share - diluted $ (0.03) $ 0.01
Average common shares outstanding 109,840 108,501
Dilutive effect of stock options 4,286
- ----------------------------------------------------------------- -----------
Diluted 109,840 112,787
================================================================= ===========
The accompanying notes are an integral part of these
condensed financial statements.
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Thirteen weeks ended
-----------------------
May 1, May 2,
1999 1998
=================================================================== ==========
OPERATING ACTIVITIES:
Net income (loss) $ (3,721) $ 817
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 21,337 20,924
Deferred income taxes (518) 13,232
Other 3,929 18,643
Change in assets and liabilities (85,415) (188,329)
- ------------------------------------------------------------------- ----------
Net cash used in operating activities (64,388) (134,713)
- ------------------------------------------------------------------- ----------
INVESTING ACTIVITIES:
Capital expenditures (35,375) (33,531)
- ------------------------------------------------------------------- ----------
Net cash used in investing activities (35,375) (33,531)
- ------------------------------------------------------------------- ----------
FINANCING ACTIVITIES:
Proceeds from credit arrangements 89,708 140,477
Proceeds from exercise of stock options 6,772 15,539
Payments of senior notes and long-term obligations (93) (85)
Other 2,521
- ------------------------------------------------------------------- ----------
Net cash provided by financing activities 96,387 158,452
- ------------------------------------------------------------------- ----------
Decrease in cash and cash equivalents $ (3,376) $ (9,792)
=================================================================== ==========
Supplemental Disclosure of Cash Flow Information:
Income taxes paid $ 39,813 $ 40,398
Interest paid $ 6,641 $ 5,777
The accompanying notes are an integral part of these
condensed financial statements.
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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 1,
1999, and the condensed consolidated statements of income and statements of cash
flows for the thirteen week period ended May 1, 1999 and 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 for all 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 30, 1999.
Interim results are not necessarily indicative of results for a full year.
NOTE 2 - SUBSEQUENT EVENT
- -------------------------
On May 19, 1999 the Company announced it will combine forces with BrainPlay.com,
Inc., a leading Internet retailer of children's products, and will form a new
entity: KBToys.com LLC to operate its kbtoys.com toy and related products online
retail business. The new venture will be owned 80% by the Company and 20% by
BrainPlay.com. Operations of the new entity will be based in Denver, CO. at the
existing BrainPlay.com headquarters.
Under terms of the agreement, the Company will contribute $80 million to the new
entity in addition to KB Toys buying, merchandising and other management
expertise. BrainPlay.com will contribute all of its assets including its Web
site, technology infrastructure and management team.
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE
SECURITIES LITIGATION REFORM ACT OF 1995
When used in this discussion and financial statements, the words, "expect(s)",
"feel(s)", "believe(s)", "will", "may", "anticipate(s)", "plans" and similar
expressions are intended to identify forward-looking statements. 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 the following Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this report, as well as, the Company's periodic reports filed with
the Securities and Exchange Commission.
OVERVIEW
The Company is a value retailer focused on closeout merchandise and is the
largest enclosed shopping mall-based toy retailer in the United States. 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.
Located in all 50 states and Puerto Rico the Company operates 2,477 stores and
Online toy shopping primarily under the following names:
Closeout Toy
---------------------------------- --------------
Odd Lots K-B Toys
Big Lots K-B Toy Works
Big Lots Furniture K-B Toy Outlet
Mac Frugal's Bargains - Close-outs kbtoys.com
Pic `N' Save
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.
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Thirteen weeks ended
----------------------
May 1, May 2,
1999 1998
================================================================== ========
Net Sales:
Closeout Stores 68.5% 67.7%
Toy Stores 30.2 30.9
- ------------------------------------------------------------------ --------
Total Retail 98.7 98.6
Other 1.3 1.4
- ------------------------------------------------------------------ --------
Total Net Sales 100.0 100.0
- ------------------------------------------------------------------ --------
Gross Profit:
Closeout Stores 43.6 43.5
Toy Stores 38.2 37.1
- ------------------------------------------------------------------ --------
Total Retail 41.9 41.5
Other 23.8 24.9
- ------------------------------------------------------------------ --------
Total Gross Profit 41.7 41.3
Selling and administrative expenses 41.8 40.6
- ------------------------------------------------------------------ --------
Operating profit (loss) (0.1) 0.7
Interest expense 0.6 0.5
- ------------------------------------------------------------------ --------
Income (loss) before income taxes (0.7) 0.2
Income taxes (benefit) (0.3) 0.1
- ------------------------------------------------------------------ --------
Net income (loss) (0.4)% 0.1%
================================================================== ========
Retail operations at end of period:
Closeout 1,153 1,031
Toy 1,324 1,252
- ------------------------------------------------------------------ --------
2,477 2,283
================================================================== ========
THIRTEEN WEEKS ENDED MAY 1, 1999 COMPARED TO THIRTEEN WEEKS ENDED MAY 2, 1998
NET SALES Net sales increased to $923.7 million for the thirteen week period
ended May 1, 1999, from $823.3 million in the same period of 1998. This 12.2%
increase was primarily attributable to the increased number of stores in
operation during the comparative periods and a 5.6% comparable store sales
increase.
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales and comparable store sales by operating unit were as follows:
Thirteen weeks ended
--------------------
May 1, May 2, Percentage
Operating Segment 1999 1998 Change
======================================== ============ ============
(In thousands)
Closeout $633,058 $557,633 13.5%
Toys 279,168 254,496 9.7
Other 11,521 11,173 3.1
---------------------------------------- ------------ ------------
$923,747 $823,302 12.2%
======================================== ============ ============
Comparable store sales:
-----------------------
Closeout 6.4% 2.5%
Toys 3.7 (3.1)
---------------------------------------- ------------
5.6% 0.6%
======================================== ============
GROSS PROFIT As a percent to net sales, gross profit increased to 41.7% in the
1999 quarter from 41.3% in the previous year quarter. Closeout Stores gross
profit percentage improved to 43.6% compared to 43.5% in the prior year period
and Toy Stores gross profit percentage increased to 38.2% from 37.1% in the
comparative first quarters. Closeout Stores improvement is associated to a
strong sell-through of spring seasonal categories. Toy Stores improvement
reflects a sales reduction of the lower margin video category. Components of
gross profit as a percent to each operating segments sales were as follows:
Thirteen weeks ended
------------------------------
Operating Segment May 1, 1999 May 2, 1998
--------------------------------------------- --------------
Closeout 43.6% 43.5%
Toys 38.2 37.1
Other 23.8 24.9
--------------------------------------------- --------------
41.7% 41.3%
--------------------------------------------- --------------
SELLING AND ADMINISTRATIVE EXPENSES For the first quarter of 1999 selling and
administrative expenses increased $52.0 million to $386.6 million from $334.6
million in the previous year quarter. In contrast to the 12.2% net sales
improvement this 15.5% selling and administrative expense increase reflects
expenditures associated with the greater number of stores in operation and a
higher level of distribution and transportation costs, principally in Closeout
Stores, in the first quarter. As a percentage of net sales, selling and
administrative expenses increased to 41.8% from 40.6% in the prior year period.
INTEREST EXPENSE Interest expense increased to $4.8 million in the first quarter
of 1999 from $4.1 million in fiscal 1998, reflecting higher weighted average
debt for borrowings utilized for inventory purchases, seasonal operating
requirements, and capital projects.
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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 is anticipated to be 39.5% in
fiscal 1999 compared to 39.0% in fiscal 1998. This increase is primarily
associated with state and local taxes.
SUBSEQUENT EVENT
On May 19, 1999 the Company announced it will combine forces with BrainPlay.com,
Inc., a leading Internet retailer of children's products, and will form a new
entity: KBToys.com LLC, to operate its kbtoys.com toy and related products
online retail business. The new venture will be owned 80% by the Company and 20%
by BrainPlay.com. The award winning BrainPlay.com Web site will become
kbtoys.com and will be operated by the management of BrainPlay.com. Operations
of the new entity will be based at the existing BrainPlay.com headquarters in
Denver, CO.
Under terms of the agreement, the Company will contribute $80 million to the new
entity in addition to KB Toys buying, merchandising and other management
expertise. BrainPlay.com will contribute all of its assets including its Web
site, technology infrastructure and management team.
The $80 million of cash being contributed by the Company will be primarily used
to brand and market the kbtoys.com Web site. The Company estimates that its
pretax loss during fiscal 1999 associated with this operation will be between
$40 million to $80 million. The Company plans to offer shares in KBToys.com to
the public in the future.
BrainPlay.com has relationships with leading Internet companies such as AOL,
Yahoo, Women.com, Netscape, Go.com, Xoom and Net Perceptions.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of liquidity for the Company have been cash flow from
operations and as necessary borrowings under available credit facilities.
Working capital at May 1, 1999, was $901.3 million and for the thirteen week
period then ended net cash used by operations was $64.4 million and capital
expenditures were $35.4 million.
The Company has a Revolving Credit Facility which provides senior bank financing
in an aggregate principal amount of up to $700 million. The facility has a
maturity date of May 15, 2003. From time-to-time the Company also utilizes
uncommitted credit facilities, subject to the terms of the Revolving Credit
Facility, to supplement short-term borrowing requirements. At May 1, 1999,
approximately $381.1 million was available for borrowings under the Revolver and
$165.0 million of uncommitted credit facilities were available.
A substantial amount of the Company's $80 million commitment for the KBToys.com
LLC Website operation will be expended in the third quarter of 1999. This and
the anticipated pretax operating losses of the KBToys.com LLC operation for the
balance of fiscal 1999 are not expected to have a significant impact on the
Company's ability 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.
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPACT OF YEAR 2000
The "Year 2000" issue arose because many existing computer programs use a
two-digit format, as opposed to four digits, to refer to a year. These programs,
if not corrected, could fail or create erroneous results after the century date
changes on January 1, 2000, or when otherwise dealing with dates later than
December 31, 1999. This "Year 2000" issue is believed to affect virtually all
companies and organizations, including the Company.
Since 1990 the Company has been evaluating, assessing and adjusting all known
date-sensitive systems and equipment for "Year 2000" compliance. The scope of
this effort includes internally developed information technology (IT) systems,
purchased and leased software, embedded systems, and electronic data interchange
transaction processing. The Company also instituted and maintains strict
policies regarding standards for all Network Servers and software, desktop and
laptop computers, operating systems, desktop software and applications, and
communication routers and hubs. The monitoring of "Year 2000" risks has
significantly enhanced the Company's readiness enabling the quick deployment and
testing of compliant hardware and software as it is developed. In 1996 the
Company initiated a "Year 2000" Compliance Committee which inventoried
internally developed production systems and identified those and the data files
which needed to be modified.
In 1997 all package software applications were evaluated to determine which were
not "Year 2000" compliant and a plan was developed for either updating or
eliminating these applications. Also evaluated to determine "Year 2000"
readiness were all computer hardware and operating systems including AS400's,
RISC 6000's, Tandems, servers, PC's and cash registers. The evaluation phase of
the "Year 2000" project is substantially complete and included both IT, such as
noted above, and non-IT equipment, such as warehouse sortation and security
systems.
Substantially all of the Company's operating IT systems are "Year 2000"
compliant and based on the assessment efforts to date, the Company does not
believe that the "Year 2000" issue will have a material adverse effect on its
financial condition or results of operations. However, all situations cannot be
anticipated and, there can be no assurance of timely compliance by third
parties, such as utility companies, government agencies or merchandise
suppliers, which may have an adverse effect on the Company. The Company operates
a large number of geographically dispersed stores and procures its merchandise
for resale and supplies for operational purposes from a vast network of vendors
located both within and outside the United States. The Company is not dependent
on any one vendor for more than 4% of its merchandise purchases. The established
relationships with key vendors are a valued asset, however, substitute products
for most of the goods available for sale in the closeout stores may be obtained
from other vendors. If certain vendors are unable to deliver product on a timely
basis, due to their own "Year 2000" issues, it is anticipated others would be
capable to deliver similar goods. Approximately 20% of the Company's merchandise
is imported, and any significant disruptions in the global transportation
industry, including a delay in the processing of merchandise through customs,
could cause a material adverse impact on the Company's operations. The Company
intends to allocate internal resources and retain dedicated consultants as
necessary to be ready to take action if these events occur.
To date, the Company has not established a formal contingency plan for possible
"Year 2000" issues. Where needed, the Company will establish contingency plans
based on actual testing experience and assessment of outside risks. It is
expected that any formal contingency plans will be in place by year end.
The Company has incurred to date approximately $4 million of costs to implement
its "Year 2000" compliance program and presently expects to incur not more than
$2 million of additional costs in the aggregate. All of the Company's "Year
2000" compliance costs have been or are expected to be funded from the Company's
operating cash flow. The Company's "Year 2000" compliance budget does not
include material amounts for hardware replacement because the Company has
historically employed a strategy to continually upgrade its mainframe and
midrange com-
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CONSOLIDATED STORES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
puter systems and to update systems with respect to both preexisting operations
and in conjunction with the acquisitions and mergers effected by the Company in
recent years. Consequently, the Company's "Year 2000" budget has not required
the diversion of funds from or the postponement of the implementation of other
planned IT projects.
The cost of the conversions and the completion dates are based on management's
best estimates and may be updated as additional information becomes available.
Readers are referred to cautionary statement for purposes of "Safe Harbor"
provisions of the Securities Litigation Reform Act of 1995 of this report, which
addresses forward-looking statements made by the Company.
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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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Topic
------------ ----------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K. None
Page 13
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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 10, 1999 By: /s/ Michael J. Potter
------------- --------------------------------------------
Michael J. Potter, Executive Vice President,
Chief Financial Officer, and Principal
Accounting Officer
Page 14
5
1,000
3-MOS
JAN-29-2000
JAN-31-1999
MAY-01-1999
72,530
0
0
0
1,157,172
1,419,151
1,146,279
449,412
2,142,798
517,589
330,525
0
0
1,101
1,190,596
2,142,798
923,747
923,747
538,500
386,567
0
0
4,830
(6,150)
(2,429)
(3,721)
0
0
0
(3,721)
(0.03)
(0.03)
