AMES DEPARTMENT STORES INC filed this 10-Q on 12/12/2000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated
condensed financial statements and footnotes presented in this report.
Results of Operations
The consolidated results of operations, as reported in our Consolidated Condensed Statement of
Operations, for the thirty-nine weeks ended October 30, 1999 include the results of the former Hills
stores during the period they were operated by Gordon Brothers, LLC and The Nassi Group, LLC
under an agency agreement. These firms were engaged to operate the Hills stores until their closure
and to liquidate the merchandise inventories.
As of the quarter ended October 30, 1999, Gordon Brothers, LLC and The Nassi Group, LLC
completed the merchandise liquidation sales in all 155 Hills stores. Subsequent to the liquidation
sales, we closed four of the stores and remodeled the remaining 151 stores. The remodeled stores
were re-opened as Ames stores in three phases: 50 stores in April 1999, 54 stores in July 1999,
and 47 stores in September 1999.
The following tables illustrate the results of Ames' operations for the thirteen and thirty-nine weeks
ended October 28, 2000, as compared to the separate contributions of Ames' and Hills' operations
and the other costs described below to the consolidated results of operations for the thirteen and
thirty-nine weeks ended October 30, 1999.
For the
Thirteen
Weeks Ended For The Thirteen Weeks Ended
October 28, 2000 October 30, 1999
---------------- ------------------------------------------------
(In Thousands) Consolidated Ames Hills Other Total
------------ ---- ----- ----- -----
Net sales $920,321 $883,500 $ - $ - $883,500
Leased department and other income 14,588 10,065 (791) - 9,274
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Total revenue 934,909 893,565 (791) - 892,774
Costs and expenses:
Cost of merchandise sold 689,762 638,455 - - 638,455
Selling, general and administrative expenses 261,856 227,404 7,385 27,560 262,349
Depreciation and amortization expense, net 19,252 15,309 643 1,564 17,516
Interest and debt expense, net 24,098 17,114 17 605 17,736
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Loss before income taxes (60,059) (4,717) (8,836) (29,729) (43,282)
Income tax benefit 22,823 1,698 3,181 10,703 15,582
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Net loss ($ 37,236) ($ 3,019) ($ 5,655) ($19,026) ($27,700)
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For the
Thirty-Nine
Weeks Ended For The Thirty-Nine Weeks Ended
October 28, 2000 October 30, 1999
---------------- ------------------------------------------------
(In Thousands) Consolidated Ames Hills Other Total
------------ ---- ----- ----- -----
Net sales $2,623,012 $2,182,517 $377,117 $ - $2,559,634
Leased department and other income 34,391 26,667 2,577 - 29,244
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Total revenue 2,657,403 2,209,184 379,694 - 2,588,878
Costs and expenses:
Cost of merchandise sold 1,923,567 1,564,965 252,085 - 1,817,050
Selling, general and administrative expenses 757,437 578,269 149,432 74,232 801,933
Depreciation and amortization expense, net 54,189 31,832 11,036 5,335 48,203
Interest and debt expense, net 64,843 36,531 4,179 2,569 43,279
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Loss before income taxes and cumulative effect
adjustment (142,633) (2,413) (37,038) (82,136) (121,587)
Income tax benefit 54,201 869 13,332 29,569 43,770
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Loss before cumulative effect adjustment (88,432) (1,544) (23,706) (52,567) (77,817)
Cumulative effect adjustment, net of tax - - - (1,107) (1,107)
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Net loss ($88,432) ($1,544) ($23,706) ($53,674) ($78,924)
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The Ames column, represents (a) the results of the Ames store base, (b) the results of the converted
Hills stores and (c) certain expenses associated with the acquisition of Hills, including the interest
expense on the acquired Hills senior notes and a pro-rata share of the amortization of the goodwill
recorded in connection with the acquisition.
The Hills column represents (a) the results of operations for the Hills stores during the period that
these stores were operated pursuant to the Gordon Brothers/Nassi agency agreement, including
depreciation and interest expense directly associated with such stores and (b) Hills corporate
overhead expenses, principally the Canton, MA facility.
The Other column represents the expenses incurred during the period of remodeling the Hills stores
(for example, pre-opening expenses incurred during the conversion or "dark" period) as well as
certain other expenses.
The unique circumstances under which Hills operations were conducted through the thirteen and
thirty-nine weeks ended October 30, 1999 distort any direct comparison of the principal
components of Ames consolidated results for the thirteen and thirty-nine weeks ended October 28,
2000 and October 30, 1999. In the discussion that follows, the Ames net sales; leased department
and other income; gross margin; and selling, general and administrative expenses for the thirteen and
thirty-nine weeks ended October 28, 2000 are compared to the Ames results for the thirteen and
thirty-nine weeks ended October 30, 1999, exclusive of the Hills results and other expenses. The
comparison of depreciation and amortization expense and interest and debt expense is on a
consolidated basis.
Ames' net sales increased 4.2% during the third quarter of 2000 compared to the third quarter of
1999. Ames' net sales for the thirty-nine weeks ending October 28, 2000 increased 20.2%
compared to the thirty-nine weeks ended October 30, 1999. Both increases are primarily the result
of the inclusion of all 151 of the converted Hills stores in the Ames store base for the periods in
fiscal 2000 compared to 105 stores for the entire third quarter in fiscal 1999 and an additional 46
stores for a portion of the quarter. These increases are partially offset by decreases in comparable
store sales of 2.6% and 1.6% for the thirteen and thirty-nine weeks ended October 28, 2000.
Leased department and other income increased $4.5 million and $7.7 million for the thirteen and
thirty-nine weeks ended October 28, 2000 compared to the same period in 1999. The increase is
primarily attributable to the inclusion of all 151 Hills stores as previously discussed and the inclusion
of a $2.8 million gain in the third quarter on the disposal of a store lease.
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Gross margin as a percentage of sales declined from 27.7% to 25.1% during the third quarter and
from 28.3% to 26.7% for the year-to-date period compared to the same period in 1999. The
decrease is the result of increased promotional and clearance markdowns as well as a lower
markup on sales resulting from increased logistical costs and changes in merchandise mix.
Selling, general and administrative expenses increased by $34.5 million and $179.2 million for the
thirteen and thirty-nine weeks ended October 28, 2000, compared to the same period in 1999,
primarily as a result of the expanded Ames store base. Excluding the pre-opening expenses included
in the fiscal 2000 selling, general and administrative expenses, expenses as a percentage of sales
increased from 25.7% to 27.4% and 26.5% to 28.0% for those periods. The percentage increase
was primarily a result of lower than expected sales.
Depreciation and amortization expense increased $1.7 million and $6.0 million for the thirteen and
thirty-nine weeks ended October 28, 2000, compared to the same periods in 1999, primarily as a
result of additional depreciation associated with the remodeling expenditures incurred during the
conversion of the former Hills stores.
The increase in interest expense of $6.4 million and $21.6 million for the thirteen and thirty-nine
weeks ended October 28, 2000, compared to the same periods in 1999, is mainly attributable to a
higher level of borrowings under our revolving credit facility as well as interest expense associated
with the Ames senior notes issued in April 1999.
Our estimated annual effective income tax rate for each year was applied to the loss before income
taxes for each period to compute a non-cash income tax benefit. The income tax benefits are
included in current assets in the consolidated condensed balance sheet as of October 28, 2000 and
October 30, 1999.
Liquidity and Capital Resources
Merchandise inventories increased 25.8% from January 29, 2000 due to a seasonal merchandise
build-up. Merchandise inventories decreased 7.2% from October 30, 1999 while the number of
open stores increased by a net of twenty-four. The decrease was primarily a result of inventory
control initiatives.
Trade accounts payable increased 29.3% from January 29, 2000 and decreased 3.1% from
October 30, 1999. The increase from the beginning of the year is due to the holiday season
inventory buildup. The decrease from the same period last year is primarily a result of efforts to
control merchandise inventory levels as previously discussed.
Federal income tax law allows taxpayers, including corporations, to use net operating losses in
future years to reduce taxable income ("net operating loss carryovers"). Our net operating loss
carryovers remaining after fiscal 1999 should offset income on which taxes would otherwise be
payable in the next several years, subject to any limitations imposed by federal income tax law.
Purchases of property and equipment for the thirteen and thirty-nine weeks ended October 28,
2000 totaled $33.8 million and $117.4 million, respectively. Such purchases for the balance of the
year are expected to be approximately $25 million.
Long-term debt as of October 28, 2000 consisted of borrowings under our bank credit facility of
$575.7 million, $200.0 million of the Ames senior notes issued in April 1999 and $44.4 million of
the Hills senior notes. The Ames senior notes and the Hills senior notes are due April 2006 and July
2003, respectively.
Sources of liquidity
Our principal sources of operating funds are our bank credit facility, cash from operations and cash
on hand. We have a bank credit facility revolving line of credit that provided up to $705 million
during the period from July 1, 2000 through November 30, 2000 and, at all other times, provides
for up to $650 million. Borrowings under the bank credit facility are secured by substantially all of
our assets. The credit facility expires on June 30, 2002. Our borrowing rates for the credit facility
are based on either the London Interbank Offered Rate or a reference rate announced by Bank of
America, San Francisco, and may include an additional percentage margin added to both. During
the quarter ended October 28, 2000, our borrowings increased under the credit facility by
approximately $67.3 million. The bank credit facility was amended on November 8, 2000 to modify
our minimum fixed charge coverage ratio covenant requirement and permit the restructuring charges
associated with the closing of up to thirty-three stores. Any non-compliance event prior to
November 8, 2000 was waived and covenants were amended. The peak borrowing level under the
credit facility during the quarter was $611.1 million. We believe the company will have sufficient
sources of cash to meet our financial obligations for the foreseeable future.
Page - 12
Lease Commitments
We are committed under long-term leases for various retail stores, warehouses and equipment
expiring at various dates through 2026 with varying renewal options and escalating rent clauses.
Some leases are classified as capital leases in accordance with generally accepted accounting
principles. We generally pay for real estate taxes, insurance, and specified maintenance costs under
real property leases. Most leases also provide for contingent rent payments, in addition to fixed
lease payments, based on a percentage of sales in excess of specified amounts.
Subsequent Events
On November 9, 2000, we announced the planned closing of thirty-two stores. All but one of the
stores are under-performing stores that we acquired in the Hills acquisition in December 1998. The
other store will be closed as a result of the expiration of its lease. We estimate a restructuring charge
of up to $140 million will be taken in the fourth quarter of this year. The restructuring charge will
include provisions for inventory impairment costs, severance related costs, lease liability payments
over a number of years, asset impairment write-downs and other related charges.
In addition, we announced plans to curtail purchases of property, equipment and other capital items
in fiscal 2001 and to initiate programs to further reduce selling, general and administrative expenses.
Note Concerning Forward-looking Statements
Statements other than those based on historical facts which address activities, events, or
developments that we expect or anticipate may occur in the future are forward-looking statements
which are based upon a number of assumptions concerning further conditions that may ultimately
prove to be inaccurate. Actual events and results may differ materially from anticipated results
described in any forward-looking statements. Our ability to achieve such results is subject to risks
and uncertainties which may include, but are not limited to, the competitive environment in which the
Company operates, the ability of the Company to maintain and improve its sales and gross margins,
regional weather conditions, and the general economic conditions in the geographic areas in which
the Company operates. Consequently, these cautionary statements qualify all of the forward-looking
statements and there can be no assurance that the results or developments anticipated by us will be
realized or that they will have the expected effects on Ames or its business or operations.
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