UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended October 31, 2009
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission file number 0-14970
COST PLUS, INC.
(Exact name of registrant as
specified in its charter)
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|
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California
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94-1067973
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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200 4th Street, Oakland, California
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94607
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code (510) 893-7300
(Former name, former address and former 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
x
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 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.
|
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Large accelerated filer
¨
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Accelerated filer
x
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Non-accelerated filer
¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
¨
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
As of December 8, 2009, the number of shares of the registrants Common Stock, $0.01 par value, outstanding was 22,087,113.
COST PLUS, INC.
FORM 10-Q
For the Quarter Ended October 31,
2009
TABLE OF CONTENTS
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
COST PLUS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts, unaudited)
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|
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|
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October 31, 2009
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January 31, 2009
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November 1, 2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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2,913
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|
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$
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3,707
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$
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3,506
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Merchandise inventories, net
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228,114
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218,105
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314,311
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Other current assets
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19,389
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23,446
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23,628
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Total current assets
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250,416
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245,258
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341,445
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Property and equipment, net
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170,938
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|
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195,018
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203,711
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Other assets, net
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4,149
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4,716
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13,889
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Total assets
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$
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425,503
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$
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444,992
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$
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559,045
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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82,516
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|
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$
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75,163
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$
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82,658
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Accrued compensation
|
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13,350
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|
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12,819
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|
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12,211
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Current portion of revolving line of credit
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117,392
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Current portion of long-term debt
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862
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|
823
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|
811
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Other current liabilities
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34,485
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27,680
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36,484
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Total current liabilities
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131,213
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|
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116,485
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249,556
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Long-term portion of revolving line of credit
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94,100
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38,500
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Capital lease obligations
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7,480
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7,133
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7,263
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Long-term debt distribution center obligations
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112,937
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113,588
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113,798
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Other long-term obligations
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26,863
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33,077
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33,878
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Commitments and contingencies
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Shareholders equity:
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Preferred stock, $.01 par value: 5,000,000 shares authorized; none issued and outstanding
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Common stock, $.01 par value: 67,500,000 shares authorized; issued and outstanding 22,087,113; 22,087,113 and 22,087,113 shares
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221
|
|
|
|
221
|
|
|
|
221
|
|
Additional paid-in capital
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171,253
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170,151
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170,223
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Accumulated deficit
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(118,564
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)
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|
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(34,163
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)
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|
(15,894
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)
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Total shareholders equity
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52,910
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136,209
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154,550
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Total liabilities and shareholders equity
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$
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425,503
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$
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444,992
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$
|
559,045
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|
|
|
|
|
|
|
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See notes to condensed consolidated financial statements.
2
COST PLUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
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Three Months Ended
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Nine Months Ended
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October 31, 2009
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November 1, 2008
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October 31, 2009
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November 1, 2008
|
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Net sales
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$
|
181,878
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$
|
202,957
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$
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549,503
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$
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615,494
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Cost of sales and occupancy
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135,935
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|
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149,014
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407,639
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448,807
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Gross profit
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45,943
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53,943
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141,864
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166,687
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Selling, general and administrative expenses
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65,041
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74,830
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194,047
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223,251
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Store closure costs
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|
241
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|
|
|
|
|
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6,317
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|
|
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Store preopening expenses
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223
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|
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|
84
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|
223
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3,228
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|
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|
|
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|
|
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Loss from continuing operations, before interest and taxes
|
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(19,562
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)
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|
|
(20,971
|
)
|
|
|
(58,723
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)
|
|
|
(59,792
|
)
|
Net interest expense
|
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|
2,679
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|
|
|
3,689
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|
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|
8,366
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|
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9,857
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|
|
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Loss from continuing operations before income taxes
|
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|
(22,241
|
)
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|
(24,660
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)
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|
(67,089
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)
|
|
|
(69,649
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)
|
Income tax expense/(benefit)
|
|
|
37
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|
|
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(621
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)
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|
|
397
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|
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(1,266
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)
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|
|
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|
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|
|
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Net loss from continuing operations
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(22,278
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)
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|
|
(24,039
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)
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(67,486
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)
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|
|
(68,383
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)
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Income/(loss) from discontinued operations
|
|
|
221
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|
|
|
(1,728
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)
|
|
|
(16,913
|
)
|
|
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(16,018
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)
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|
|
|
|
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Net loss
|
|
$
|
(22,057
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)
|
|
$
|
(25,767
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)
|
|
$
|
(84,399
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)
|
|
$
|
(84,401
|
)
|
|
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|
|
|
|
|
|
|
|
|
|
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Net loss per weighted average share from continuing operations
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Basic
|
|
$
|
(1.01
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(3.05
|
)
|
|
$
|
(3.10
|
)
|
Diluted
|
|
$
|
(1.01
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(3.05
|
)
|
|
$
|
(3.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per weighted average share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.72
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per weighted average share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.00
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(3.82
|
)
|
|
$
|
(3.82
|
)
|
Diluted
|
|
$
|
(1.00
|
)
|
|
$
|
(1.17
|
)
|
|
$
|
(3.82
|
)
|
|
$
|
(3.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,087
|
|
|
|
22,087
|
|
|
|
22,087
|
|
|
|
22,087
|
|
Diluted
|
|
|
22,087
|
|
|
|
22,087
|
|
|
|
22,087
|
|
|
|
22,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
COST PLUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
October 31, 2009
|
|
|
November 1, 2008
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(84,399
|
)
|
|
$
|
(84,401
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
21,907
|
|
|
|
25,968
|
|
Deferred income taxes
|
|
|
|
|
|
|
(225
|
)
|
Share-based compensation expense
|
|
|
1,102
|
|
|
|
1,430
|
|
Loss on asset disposal
|
|
|
153
|
|
|
|
2,023
|
|
Impairment of property and equipment
|
|
|
536
|
|
|
|
1,106
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Merchandise inventories
|
|
|
(10,009
|
)
|
|
|
(41,456
|
)
|
Income taxes receivable
|
|
|
318
|
|
|
|
13,560
|
|
Other assets
|
|
|
4,278
|
|
|
|
5,149
|
|
Accounts payable
|
|
|
7,977
|
|
|
|
(9,542
|
)
|
Other liabilities
|
|
|
6,273
|
|
|
|
2,160
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(51,864
|
)
|
|
|
(84,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,711
|
)
|
|
|
(13,270
|
)
|
Proceeds from sale of property and equipment
|
|
|
8
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,703
|
)
|
|
|
(13,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Net borrowings under revolving line of credit
|
|
|
55,600
|
|
|
|
99,332
|
|
Principal payments on long-term debt
|
|
|
(612
|
)
|
|
|
(577
|
)
|
Principal payments on capital lease obligations
|
|
|
(1,215
|
)
|
|
|
(1,068
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
53,773
|
|
|
|
97,687
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(794
|
)
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
3,707
|
|
|
|
3,283
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
2,913
|
|
|
$
|
3,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
8,295
|
|
|
$
|
9,035
|
|
|
|
|
|
|
|
|
|
|
Cash paid/(received) for income taxes
|
|
$
|
132
|
|
|
$
|
(13,827
|
)
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
COST PLUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 2009 and November 1, 2008
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared from the records of Cost Plus, Inc. (the Company) and, in the opinion of management, include all
adjustments that are normal and recurring in nature necessary to present fairly the Companys financial position at October 31, 2009 and November 1, 2008, and the interim results of operations for the three months and nine months
ended October 31, 2009 and November 1, 2008, and cash flows for the nine months ended October 31, 2009 and November 1, 2008. The balance sheet at January 31, 2009, presented herein, has been derived from the audited
financial statements of the Company for the fiscal year then ended. The condensed consolidated statement of operations for the three-month and nine-month periods ended November 1, 2008 have been revised to present certain components as
discontinued operations (see Note 3). Unless otherwise indicated, information presented in the notes to the financial statements relates only to the Companys continuing operations.
Accounting policies followed by the Company are described in Note 1 to the audited consolidated financial statements for the fiscal year ended January 31, 2009 in the Companys Annual Report on
Form 10-K. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for
purposes of presenting the interim condensed consolidated financial statements. Such statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the fiscal year ended January 31,
2009.
Including fiscal 2008, the Company has experienced net losses each annual period since fiscal 2006. As of October 31, 2009, the
Company had an accumulated deficit of $118.6 million. For fiscal 2007 and for each annual period since fiscal 2004, the Company had decreases in cash and cash equivalents. There can be no assurance that the business will be profitable in the future
or that additional losses and negative cash flows from operations will not be incurred, which could have a material adverse affect on the Companys financial condition. The Company believes that its existing cash balance, combined with cash
flows from operations and borrowings under its asset-based credit facility, will be sufficient to enable it to meet planned expenditures under the turnaround plan through the next 12 months. The turnaround plan includes, among other things, the
closure of 26 underperforming stores that occurred in the first quarter of fiscal 2009, corporate and distribution center work force reductions that occurred in the fourth quarter of fiscal 2008, delaying new store expansion, reductions in marketing
and capital expenditures, and delaying new hires. The Company is dependent upon its asset-based credit facility to fund operating losses and seasonal inventory purchases. The Company does not plan on fully paying off its asset-based credit facility
during fiscal 2009 or 2010. Access to the Companys asset-based credit facility is dependent upon meeting its debt covenants and not exceeding the borrowing limit of the asset-based credit facility. There can be no assurance that the Company
will achieve or sustain positive cash flows from operations or profitability. If the Company is unable to maintain adequate liquidity, future operations will need to be scaled back or discontinued.
The results of operations for the three-month and nine-month periods ended October 31, 2009, presented herein, are not indicative of the results to be
expected for the full year because of, among other things, seasonal factors in the retail business. The Company has evaluated subsequent events through December 8, 2009, the filing date of this Form 10-Q (see Note 9).
2. CONTINUING OPERATIONS STORE CLOSURE ACTIVITIES
In January 2009, the Board of Directors of the Company approved a plan for the Company to close 26 of its existing stores; eight of these stores are classified within continuing operations. All eight stores classified within continuing
operations were closed during the first quarter of fiscal 2009 and, with the exception of finalizing any lease settlement activities, all store closure activities were completed during the first quarter of fiscal 2009.
5
The costs associated with closing the stores were accounted for in accordance with ASC 420-10, Exit or
Disposal Cost Obligations, in which the liability for the costs associated with an exit or disposal activity is recognized when the liability is incurred. During the third quarter of fiscal 2009, the costs related to closing the eight stores
during the quarter totaled $0.2 million, consisting primarily of estimated lease exit costs net of estimated sublease income. There were no store closure costs in the third quarter of fiscal 2008 relating to closed stores that were classified within
continuing operations.
Additional charges or gains related to the planned disposition of stores may be incurred as a result of changes to
managements current estimates and assumptions. The timing of future transactions and charges related to this disposition are subject to significant uncertainty, including the variability in future vacancy periods, sublease income or
negotiations with landlords regarding buy-out payments on leases.
Following is a year-to-date summary of the reserve for store closures in
continuing operations, which is included in total current liabilities as of October 31, 2009 (in thousands):
|
|
|
|
|
Balance at January 31, 2009
|
|
$
|
|
|
Lease exit costs, net of estimated sublease income
|
|
|
5,442
|
|
Severance and closure costs
|
|
|
875
|
|
Payments for leases and settlements
|
|
|
(1,639
|
)
|
Payments for severance and closure costs
|
|
|
(875
|
)
|
|
|
|
|
|
Balance at October 31, 2009
|
|
$
|
3,803
|
|
|
|
|
|
|
3. DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 2008, the Board of Directors of the Company approved a plan for the Company to close 26 of its existing stores; 18 of these stores are classified within discontinued
operations as they were in eight underperforming media markets that the Company exited. All 18 stores classified within discontinued operations were closed during the first quarter of fiscal 2009 and, with the exception of finalizing any lease
settlement activities, all store closure activities were completed during the first quarter of fiscal 2009. Income from discontinued operations of $221,000 for the third quarter of fiscal 2009 includes remaining lease liability costs related to 13
stores that were closed in the first quarter of fiscal 2008, which are also reported as discontinued operations.
The 18 stores closed in the
first quarter of fiscal 2009 and the 13 stores closed in the first quarter of fiscal 2008 are reported as discontinued operations in accordance with ASC 205-20, Presentation of Financial Statements Discontinued Operations, which
requires the Company to report the results of operations of a component of an entity that either has been disposed of or is classified as held for sale, in discontinued operations. As such, both current and prior year results for these stores are
classified as discontinued operations on the Companys condensed consolidated statements of operations.
Also included in discontinued
operations are the costs associated with closing the stores reported as discontinued operations. These costs were accounted for in accordance with ASC 420-10, Exit or Disposal Cost Obligations and were approximately $16.3 million
for the nine-month period ended October 31, 2009 and $12.6 million for the nine-month period ended November 1, 2008. The recognition of the costs associated with closing the stores requires the Company to make judgments and estimates
regarding the nature, timing, and amount of costs, including estimated lease exit costs net of estimated sublease income, employee severance and various other costs related to the closure of stores. At the end of each quarter, the Company evaluates
the remaining accrual balance to ensure its adequacy.
Additional charges or gains related to the planned disposition of stores may be
incurred as a result of changes to managements current estimates and assumptions. The timing of future transactions and charges related to this disposition are subject to significant uncertainty, including the variability in future vacancy
periods, sublease income or negotiations with landlords regarding buy-out payments on leases.
6
Results from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(In thousands)
|
|
October 31, 2009
|
|
|
November 1, 2008
|
|
|
October 31, 2009
|
|
|
November 1, 2008
|
|
Store sales
|
|
$
|
|
|
|
$
|
10,016
|
|
|
$
|
7,495
|
|
|
$
|
40,274
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales and occupancy
|
|
|
|
|
|
|
7,982
|
|
|
|
5,723
|
|
|
|
30,907
|
|
Operating and administrative expenses
1
|
|
|
49
|
|
|
|
3,390
|
|
|
|
3,907
|
|
|
|
13,611
|
|
Lease exit costs, net of estimated sublease income
1
|
|
|
(270
|
)
|
|
|
372
|
|
|
|
14,218
|
|
|
|
11,195
|
|
Severance and closure costs
1
|
|
|
|
|
|
|
|
|
|
|
560
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
221
|
|
|
|
(1,728
|
)
|
|
|
(16,913
|
)
|
|
|
(16,018
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from discontinued operations, net of tax
|
|
$
|
221
|
|
|
$
|
(1,728
|
)
|
|
$
|
(16,913
|
)
|
|
$
|
(16,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
Costs associated with store exit activities consisting primarily of estimated lease exit costs net of estimated sublease income, employee severance and various other
costs related to the store closures totaled $16.3 million for the nine-month period ended October 31, 2009 and $12.6 million for the nine-month period ended November 1, 2008. For purposes of the table above, $1.5 million and $0.8 million
of the costs associated with store exit activities for the nine-month periods of fiscal 2009 and 2008, respectively, were included in operating and administrative expenses, as these costs related primarily to consulting and administrative services
to close the stores.
|
Following is a year-to-date summary of the reserve for store closures in discontinued operations, which is
included in total current liabilities as of October 31, 2009 and November 1, 2008 respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of the Nine Month Period Ended
|
|
|
|
October 31, 2009
|
|
|
November 1, 2008
|
|
Beginning Balance
|
|
$
|
3,110
|
|
|
$
|
|
|
Lease exit costs, net of estimated sublease income
|
|
|
14,218
|
|
|
|
11,195
|
|
Severance and closure costs
|
|
|
560
|
|
|
|
579
|
|
Payments for leases and settlements
|
|
|
(7,167
|
)
|
|
|
(5,593
|
)
|
Payments for severance and closure costs
|
|
|
(560
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
10,161
|
|
|
$
|
5,602
|
|
|
|
|
|
|
|
|
|
|
4. SHARE-BASED COMPENSATION
The Company accounts for share-based compensation arrangements in accordance with ASC 718-10, Share-Based Payment. Under the provisions of ASC 718-10, the Company is required to measure the
cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on the grant date and then recognized over the period during which services are
required to be provided, usually the vesting period. The Company had share-based compensation expense of $271,000 for the three months ended October 31, 2009 compared to $528,000 for the three months ended November 1,
2008. Share-based compensation expense for the nine months ended October 31, 2009 was $1.1 million compared to $1.4 million for the nine months ended November 1, 2008. Share-based compensation is recorded as a component of selling,
general and administrative expenses. As of October 31, 2009, there was $1.2 million of total unrecognized compensation cost related to unvested share-based compensation that is expected to be recognized over a weighted-average period of
approximately 1.8 years.
There were no stock options granted during the third quarter of fiscal 2009. During the third quarter of fiscal
2008, the Company granted options to purchase 96,000 shares of common stock to its employees and non-employee directors. The weighted average fair value per option granted during the nine-month period ended October 31, 2009 was $0.57. The
weighted average fair value per option granted during the three-month and nine-month periods ended November 1, 2008 was $0.96 and $1.69, respectively. The following table presents the weighted average assumptions used in the
Black-Scholes-Merton option pricing model to value the stock options granted during the nine-month period ended October 31, 2009 and the three-month and nine-month periods ended November 1, 2008:
7
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
November 1, 2008
|
|
|
October 31, 2009
|
|
|
November 1, 2008
|
|
Expected dividend rate
|
|
|
%
|
|
|
%
|
|
|
%
|
Volatility
|
|
65.3
|
%
|
|
83.3
|
%
|
|
55.9
|
%
|
Risk-free interest rate
|
|
2.9
|
%
|
|
1.76
|
%
|
|
2.4
|
%
|
Expected lives (years)
|
|
4.8
|
|
|
4.5
|
|
|
4.8
|
|
5. RECONCILIATION OF BASIC SHARES TO DILUTED SHARES
Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing
net income by the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the potential dilution that could occur if options to purchase common stock were exercised into
common stock.
The following is a reconciliation of the weighted average number of shares (in thousands) used in the Companys basic and
diluted earnings per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Basic
EPS
|
|
|
Effect of Dilutive Stock
Options
(treasury stock method)
|
|
Diluted
EPS
|
|
|
Basic
EPS
|
|
|
Effect of Dilutive Stock
Options
(treasury stock method)
|
|
Diluted
EPS
|
|
October 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
22,087
|
|
|
|
|
|
22,087
|
|
|
|
22,087
|
|
|
|
|
|
22,087
|
|
Amount
|
|
$
|
(1.00
|
)
|
|
$0.00
|
|
$
|
(1.00
|
)
|
|
$
|
(3.82
|
)
|
|
$0.00
|
|
$
|
(3.82
|
)
|
|
|
|
|
|
|
|
November 1, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
22,087
|
|
|
|
|
|
22,087
|
|
|
|
22,087
|
|
|
|
|
|
22,087
|
|
Amount
|
|
$
|
(1.17
|
)
|
|
$0.00
|
|
$
|
(1.17
|
)
|
|
$
|
(3.82
|
)
|
|
$0.00
|
|
$
|
(3.82
|
)
|
Certain options to purchase common stock were outstanding but were not included in the computation of
diluted earnings per share because the effect would be anti-dilutive. For the three-month and nine-month periods ended October 31, 2009 and November 1, 2008, there were 3,463,386 and 3,206,503 anti-dilutive options, respectively.
6. LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
The Companys long-term debt as of October 31, 2009, January 31, 2009, and November 1, 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
October 31, 2009
|
|
|
January 31, 2009
|
|
|
November 1, 2008
|
|
Obligations under sale and leaseback:
|
|
|
|
|
|
|
|
|
|
|
|
|
California distribution centers
|
|
$
|
62,219
|
|
|
$
|
62,642
|
|
|
$
|
62,778
|
|
Virginia distribution center
|
|
|
51,580
|
|
|
|
51,769
|
|
|
|
51,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt distribution center obligations
|
|
|
113,799
|
|
|
|
114,411
|
|
|
|
114,609
|
|
|
|
|
|
Less current portion
|
|
|
(862
|
)
|
|
|
(823
|
)
|
|
|
(811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt distribution center obligations, net
|
|
$
|
112,937
|
|
|
$
|
113,588
|
|
|
$
|
113,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys long-term debt includes financing obligations related to the sale-leaseback of its
distribution centers in Stockton, California and Windsor, Virginia. The Company has accounted for the sale-leaseback transactions as financings whereby the net book value of the assets remain on the Companys consolidated balance sheet. The
Company also recorded a financing obligation which is being amortized over the period of the leases (including option periods) and approximates the discounted value of minimum lease payments under the leases. The monthly lease payments are accounted
for as principal and interest payments on the recorded obligations. For further details on the Companys long-term debt, see Note 6 to the consolidated financial statements in the Companys Annual Report on Form 10-K for the
fiscal year ended January 31, 2009.
8
On June 25, 2007, the Company entered into a secured five-year revolving credit agreement (the
Credit Agreement) with a group of banks that terminated and replaced its existing credit agreements. The Credit Agreement allows for cash borrowings and letters of credit under a secured asset-based credit facility of up to $200.0
million. The amount available for borrowing at any time is limited by a stated percentage of the aggregate amount of the liquidated value of eligible inventory and the face amount of eligible credit card receivables. The Credit Agreement includes
three options to increase the size of the asset-based credit facility by up to $50.0 million in the aggregate. All borrowings and letters of credit under the Credit Agreement are collateralized by all assets presently owned and hereafter-acquired by
the Company. Interest is paid in arrears monthly, quarterly, or over the applicable interest period as selected by the Company, with the entire balance payable on June 25, 2012. Borrowings pursuant to its asset-based credit facility bear
interest, at the Companys election, at a rate equal to either (i) the higher of Bank of Americas prime rate or the federal funds effective rate plus an applicable margin; or (ii) the LIBOR rate plus an applicable margin. The
applicable margin is based on the Companys Average Excess Availability, as defined in the Credit Agreement. In addition, the Company pays a commitment fee on the unused portion of the amount available for borrowing as described in the Credit
Agreement. The Credit Agreement includes limitations on the ability of the Company to, among other things, incur debt, grant liens, make investments, enter into mergers and acquisitions, pay dividends, repurchase its outstanding common stock, change
its business, enter into transactions with affiliates, and dispose of assets including closing stores. The events of default under the Credit Agreement include, among others, payment defaults, cross defaults with certain other indebtedness, breaches
of covenants, loss of collateral, judgments, changes in control, and bankruptcy events. In the event of a default, the Credit Agreement requires the Company to pay incremental interest at the rate of 2.0% and the lenders may, among other remedies,
foreclose on the security (which could include the sale of the Companys inventory), eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash collateral for any letter of
credit obligations. In addition, in the event of a default or if the Companys Average Excess Availability is 15% or less of the borrowing capacity under the asset-based credit facility, the Company will be subject to additional restrictions,
including specific restrictions with respect to its cash management procedures.
The Company uses the borrowings under the Credit Agreement
for working capital, issuance of commercial and standby letters of credit, capital expenditures, and other general corporate purposes. As of October 31, 2009, the Company was in compliance with its loan covenant requirements, had $94.1 million
in borrowings and $11.5 million in outstanding letters of credit, and had remaining credit available under the Credit Agreement of $63.3 million. The Companys business is highly seasonal, reflecting the general pattern associated with the
retail industry of peak sales and earnings during the fourth quarter (Holiday) season, therefore borrowings under the line of credit often peak early in the fourth quarter.
The borrowing base, based on inventory and accounts receivable value less certain reserves, at October 31, 2009, at January 31, 2009 and at November 1, 2008 consisted of the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009
|
|
|
January 31, 2009
|
|
|
November 1, 2008
|
|
Account receivable availability
|
|
$
|
6.1
|
|
|
$
|
8.0
|
|
|
$
|
6.8
|
|
Inventory availability
|
|
|
170.4
|
|
|
|
153.3
|
|
|
|
240.1
|
|
Less: reserves
|
|
|
(7.6
|
)
|
|
|
(10.0
|
)
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowing base
1
|
|
$
|
168.9
|
|
|
$
|
151.3
|
|
|
$
|
237.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate borrowing base is reduced by the following obligations (in millions):
|
|
|
|
|
|
Ending loan balance
|
|
$
|
94.1
|
|
|
$
|
38.5
|
|
|
$
|
117.4
|
|
Outstanding letters of credit
|
|
|
11.5
|
|
|
|
13.5
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
105.6
|
|
|
$
|
52.0
|
|
|
$
|
127.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The availability at October 31, 2009, at January 31, 2009 and at November 1, 2008 was (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowing base
1
|
|
$
|
168.9
|
|
|
$
|
151.3
|
|
|
$
|
200.0
|
|
Less: obligations
|
|
|
(105.6
|
)
|
|
|
(52.0
|
)
|
|
|
(127.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total availability
|
|
$
|
63.3
|
|
|
$
|
99.3
|
|
|
$
|
72.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
Total borrowing base per the calculation above was $237.7 million at November 1, 2008. However, the Credit Agreement limits the borrowing base to $200.0 million.
Therefore, $200.0 million is the adjusted total borrowing base at November 1, 2008.
|
7. INCOME TAXES
The Companys effective tax rate from continuing operations was a provision of 0.4% in the third quarter of fiscal 2009 compared to a benefit of 2.4% in
the third quarter of fiscal 2008. Because the Company has recorded a full valuation allowance on its net deferred tax asset, no federal or state tax benefit has been recorded on its operating loss in the third quarter of fiscal 2009.
The Company accounts for income taxes in accordance with the provisions of ASC 740-10, Income Taxes, which requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amount and the tax bases of the assets and liabilities. The recording of the net deferred tax asset assumes the
realization of such asset in the future; otherwise, a valuation allowance must be recorded to reduce the asset to its net realizable value. The Company considers future pre-tax income and, if necessary, ongoing prudent and feasible tax planning
strategies in assessing the need for such a valuation allowance. The Company has recorded a full valuation allowance as of October 31, 2009 and November 1, 2008.
At January 31, 2009, the Company had $2.0 million in unrecognized tax benefits; the recognition of which would have an impact of $338,000 on the Companys income tax provision. At
October 31, 2009, the Company had $1.3 million in unrecognized tax benefits; the recognition of which would have an impact of $326,000 on the Companys income tax provision. At the end of the third quarter, it is reasonably possible that
the total amounts of unrecognized tax benefits could decrease by $671,000 within the next 12 months due to the expiration of the statute of limitations.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. At October 31, 2009, the Company had accrued $173,000 and $6,000 for the potential
payment of interest and penalties, respectively.
As of October 31, 2009, the Company is subject to U.S. federal income tax examinations
for tax years 2006 and forward, and is subject to state and local tax examinations for tax years 2001 and forward.
8. FAIR VALUE
MEASUREMENTS
The Company adopted ASC 820-10, Fair Value Measurements, for financial assets and financial liabilities beginning
in fiscal 2008 and for nonfinancial assets and liabilities beginning in fiscal 2009.
ASC 820-10 establishes a three-tier fair value
hierarchy, which prioritizes inputs used in measuring fair value. The tiers include:
Level 1 - Quoted prices (unadjusted)
in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices included within Level 1
that are either directly or indirectly observable;
Level 3 - Unobservable inputs which are supported by little or no
market activity.
The fair value of impaired long-lived assets and the initial estimates of store lease exit costs were measured at fair value
on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. Fair value of long-lived assets and store lease exit costs are determined by estimating the amount and timing of net future cash flows (including rental expense for
leased properties, sublease rental income, common area maintenance costs and real estate taxes) and discounting them using a risk-adjusted rate of interest. The Company estimates future cash flows based on its experience and knowledge of the market
in which the store is located and, when necessary, uses real estate brokers.
10
During the third quarter of fiscal 2009, the Company recorded a $536,000 non-cash impairment charge for the
write-down of store assets to fair value in two underperforming stores compared to a $1.1 million non-cash impairment charge for the write-down of store assets to fair value in five underperforming stores during the third quarter of fiscal 2008.
There were no impairment charges for the write-down of store assets during the first six months of fiscal 2009 or fiscal 2008. Additionally, there were no impairments related to financial assets during the first nine months of fiscal 2009 or fiscal
2008.
9. SUBSEQUENT EVENTS
On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was signed into law. The Company expects to receive an income tax refund of approximately $12 million in 2010 related to the additional carry back of the
Companys net operating losses.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources
should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes thereto for the three-month and nine-month periods ended October 31, 2009 and with Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in the Companys Annual Report on Form 10-K for the year ended January 31, 2009. The results of operations for the three-month and nine-month periods ended October 31, 2009,
presented herein, are not indicative of the results to be expected for the full year because of, among other things, seasonal factors in the retail business.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended (the Exchange Act). These forward-looking statements reflect the Companys current beliefs and estimates with respect to future events and the Companys future financial performance, operations and
competitive position and may be identified, without limitation, by use of the words may, should, expects, anticipates, estimates, believes, looking ahead,
forecast, projects, continues, intends, likely, plans and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors
that may cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements, including those set forth in the Annual Report on Form 10-K for the fiscal year ended
January 31, 2009 and elsewhere in this Quarterly Report on Form 10-Q. The reader should carefully consider, together with the other matters referred to herein, the risk factors set forth in the Annual Report on Form 10-K for the fiscal year
ended January 31, 2009 as well as in other documents the Company files with the Securities and Exchange Commission (the SEC). The Company may from time to time make additional written and oral forward-looking statements, including
statements contained in the Companys filings with the SEC. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.
Overview
Cost Plus, Inc. is a leading
specialty retailer of casual home furnishings and entertaining products. The stores feature an ever-changing selection of casual home furnishings, housewares, gifts, decorative accessories, gourmet foods and beverages offered at everyday low prices
and imported from more than 50 countries. Many items are unique and exclusive to the Company.
During the first quarter of fiscal 2009, the
Company exited eight media markets by closing 26 stores, 18 of which are reported in discontinued operations for both the current and prior periods and eight of which are reported in continuing operations. The sales and all costs from operating and
closing the discontinued operations stores have been removed from the results of continuing operations and are reported in discontinued operations for both the current and prior periods. The 13 stores closed in the first quarter of fiscal 2008 are
also reported as discontinued operations. For the third quarter of fiscal 2009, income from discontinued operations was $221,000 compared to a loss of $1.7 million for the third quarter of fiscal 2008. The income from discontinued operations in the
third quarter of fiscal 2009 was primarily the result of adjustments to estimated lease exit costs net of estimated sublease income.
11
Net sales for the third quarter of fiscal 2009 were $181.9 million, a 10.4% decrease from $203.0 million for
the third quarter ended November 1, 2008. Comparable store sales for the quarter decreased 9.1% compared to a decrease of 3.4% last year. The decrease in same store sales was attributable to an 8.8% reduction in the average ticket per customer
primarily due to lower furniture sales and a relatively flat customer count compared to last year.
The Company reported a net loss of $22.1
million in the third quarter of fiscal 2009, or $1.00 per diluted share, compared to a net loss of $25.8 million, or $1.17 per diluted share, for the third quarter last year. The decrease in the net loss was primarily due to a reduction in Selling,
General, and Administrative expenses which resulted from the Companys cost cutting initiatives offset by lower gross profit. Gross profit margin for the third quarter was lower due to decreased leverage of fixed occupancy expenses on lower
same store sales. Reductions in the cost of merchandise were offset by promotional activity required to compete with aggressive discounting among higher end specialty retailers and discount chains.
In the third quarter of fiscal 2009, the Company opened two new stores and closed one store to end the quarter with 270 stores in 30 states.
Results of Operations
The three months
(third quarter) and nine months (year-to-date) ended October 31, 2009 as compared to the three months and nine months ended November 1, 2008.
Net Sales
Net sales consists almost entirely of retail sales, but also includes direct-to-consumer sales and shipping revenue. Net sales decreased $21.1 million, or 10.4%, to $181.9 million for the
third quarter of fiscal 2009 from $203.0 million for the third quarter of fiscal 2008. Year-to-date, net sales were $549.5 million, a 10.7% decrease from $615.5 million for the same period last year. Comparable store sales decreased 9.1% in the
third quarter of fiscal 2009, compared to a decrease of 3.4% in the third quarter of fiscal 2008. The decrease in comparable store sales in the third quarter of fiscal 2009 was attributable to an 8.8% reduction in the average ticket per customer
primarily due to lower furniture sales and a relatively flat customer count compared to last year. Year-to-date, comparable store sales decreased 9.6% compared to a decrease of 0.6% for the same period last year. As of October 31, 2009, the
calculation of comparable store sales included a base of 267 stores. A store is generally included as comparable at the beginning of the fourteenth month after its grand opening. At the end of the third quarter of fiscal 2009, the Company operated
270 stores in 30 states versus 278 stores (after adjusting for the 18 stores now classified as discontinued operations) in 30 states at the end of the third quarter of fiscal 2008.
The Company classifies its sales into home and consumables product lines. For the third quarter of fiscal 2009, home accounted for 61% of total sales versus 63% last year, and consumables accounted for
39% of total sales versus 37% last year.
Cost of Sales and Occupancy
Cost of sales and occupancy, which consists of costs to acquire
merchandise inventory and costs of freight and distribution, as well as certain facilities costs, decreased $13.1 million, or 8.8%, to $135.9 million in the third quarter of fiscal 2009. As a percentage of net sales, total cost of sales and
occupancy increased 130 basis points to 74.7% in the third quarter of fiscal 2009 compared to 73.4% in the third quarter of fiscal 2008. The 130 basis point increase was entirely due to decreased leverage of fixed occupancy expenses on lower
comparable store sales. Year-to-date, total costs of sales and occupancy were $407.6 million and decreased $41.2 million, or 9.2%, compared to the same period in fiscal 2008. As a percentage of net sales, total cost of sales and occupancy for the
year-to-date period increased 130 basis points to 74.2% from 72.9% last year.
Selling, General and Administrative (SG&A)
Expenses
SG&A expenses decreased $9.8 million, or 13.1%, to $65.0 million in the third quarter of fiscal 2009 compared to $74.8 million in the third quarter of fiscal 2008. As a percentage of net sales, SG&A expenses were 35.8% in the
third quarter of fiscal 2009 compared to 36.9% in the third quarter of fiscal 2008. The decrease in SG&A expenses as a percentage of net sales was due to the Companys cost-cutting initiatives, including store closures which resulted in
lower payroll, advertising and other controllable expenses. The decrease was partially offset by decreased leverage on lower comparable store sales. Year-to-date, SG&A expenses decreased $29.2 million, or 13.1%, to $194.0 million compared to
$223.3 million for the same period last year. As a percentage of net sales, year-to-date SG&A expenses decreased 100 basis points to 35.3% compared to 36.3% for the same period last year.
12
During the third quarter of fiscal 2009, the Company recorded a $536,000 non-cash impairment charge for the
write-down of store assets to fair value in two underperforming stores compared to a $1.1 million non-cash impairment charge for the write-down of store assets to fair value in five underperforming stores during the third quarter of fiscal 2008.
Store Closure Costs
Costs related to closing the eight stores classified within continuing operations totaled $241,000 for the third
quarter of fiscal 2009 and $6.3 million year-to-date. There were no store closure costs in the first nine months of fiscal 2008 relating to closed stores that were classified within continuing operations.
Store Preopening Expenses
Store preopening expenses typically include rent expense incurred prior to opening as well as grand opening advertising and
preopening merchandise setup expenses. Preopening expenses for the third quarter of fiscal 2009 were $223,000 compared to $84,000 for the third quarter of fiscal 2008. The Company opened two new stores in the third quarter of fiscal 2009 compared to
no new stores in the same period last year. Year-to-date, preopening expenses for fiscal 2009 were $223,000 compared to $3.2 million for the same period last year, with two new store openings compared to 15 for the same period last year. Store
preopening expenses vary depending on the amount of time between the possession date and the store opening, the particular store site and whether it is located in a new or existing market.
Net interest expense
Net interest expense, which includes interest on capital leases and debt, net of interest earned on investments, was $2.7
million for the third quarter of fiscal 2009 compared to $3.7 million for the third quarter of fiscal 2008. Year-to-date, net interest expense was $8.4 million compared to $9.9 million for the same period last year. The decrease in interest expense
was due to a lower interest rate and lower borrowings under the Companys asset-based credit facility.
Income Taxes
The
Companys effective tax rate from continuing operations was a provision of 0.4% in the third quarter of fiscal 2009 compared to a benefit of 2.4% in the third quarter of fiscal 2008. Because the Company has recorded a full valuation allowance
on its net deferred tax asset, no federal or state tax benefit has been recorded on its operating loss in the third quarter of fiscal 2009.
Liquidity and Capital Resources
The Companys cash and cash equivalents balance was $2.9 million at October 31, 2009
and $3.5 million at November 1, 2008. The Company met its short-term liquidity needs and its capital requirements for the nine-month period ended October 31, 2009 with existing cash and cash provided from financing activities. The
Company believes that the combination of its cash and cash equivalents, cash generated from operations, available borrowings under its asset-based credit facility and the estimated $12 million tax refund will be sufficient to finance its working
capital and other capital projects for the next 12 months.
Including fiscal 2008, the Company has experienced net losses each annual period
since fiscal 2006. As of October 31, 2009, the Company had an accumulated deficit of $118.6 million. For fiscal 2007 and for each annual period since fiscal 2004, the Company had decreases in cash and cash equivalents. There can be no assurance
that the business will be profitable in the future or that additional losses and negative cash flows from operations will not be incurred, which could have a material adverse affect on the Companys financial condition. The Company believes
that its existing cash balance, combined with cash flows from operations and borrowings under its asset-based credit facility, will be sufficient to enable it to meet planned expenditures under the turnaround plan through the next 12 months. The
turnaround plan includes, among other things, the closure of 26 underperforming stores that occurred in the first quarter of fiscal 2009, corporate and distribution center work force reductions that occurred in the fourth quarter of fiscal 2008,
delaying new store expansion, reductions in marketing and capital expenditures, and delaying new hires. The Company is dependent upon its asset-based credit facility to fund operating losses and seasonal inventory purchases. The Company does not
plan on fully paying off its asset-based credit facility during fiscal 2009 or 2010. Access to the Companys asset-based credit facility is dependent upon meeting its debt covenants and not exceeding the borrowing limit of the asset-based
credit facility. There can be no assurance that the Company will achieve or sustain positive cash flows from operations or profitability. If the Company is unable to maintain adequate liquidity, future operations will need to be scaled back or
discontinued.
Cash Flows From Operating Activities
Net cash used in operating activities totaled $51.9 million year-to-date compared
to $84.2 million in the same period last year, a decrease of $32.4 million. The decrease in net cash used in operations compared to last year was primarily due to decreased merchandise inventories and an increase in accounts payable for the first
nine months in fiscal 2009 compared to a decrease during the nine-month period last year due to timing. This decrease was partially offset by a smaller decrease in income taxes receivable compared to the same period last year.
Cash Flows From Investing Activities
Net cash used in investing activities totaled $2.7 million year-to-date, a $10.5 million decrease compared to
the same period last year. Net cash used in investing activities decreased mainly because there was less spending related to new store projects as there were two new stores opened during the first nine months of fiscal 2009 compared to 15 new stores
in the prior year.
13
The Company estimates that fiscal 2009 capital expenditures will approximate $3.2 million; including
approximately $1.6 million for management information systems and distribution center projects, $1.1 million allocated to investments in existing stores and various other corporate projects and $500,000 million for new stores. The Company will
not open any new stores in the fourth quarter of fiscal 2009.
Cash Flows From Financing Activities
Net cash provided by financing
activities was $53.8 million year-to-date compared to $97.7 million in the same period last year. Borrowings under the Companys asset-based credit facility increased $55.6 million as of October 31, 2009 from the level at January 31,
2009, compared to an increase of $99.3 million for the same period last year. Principal payments on long-term debt were $612,000 compared to $577,000 in fiscal 2008 and principal payments on capital lease obligations were $1.2 million compared to
$1.1 million in fiscal 2008.
Revolving Line of Credit
On June 25, 2007, the Company entered into a secured five-year revolving
credit agreement (the Credit Agreement) with a group of banks that terminated and replaced its existing credit agreements. The Credit Agreement allows for cash borrowings and letters of credit under a secured asset-based credit facility
of up to $200.0 million. The amount available for borrowing at any time is limited by a stated percentage of the aggregate amount of the liquidated value of eligible inventory and the face amount of eligible credit card receivables. The Credit
Agreement includes three options to increase the size of the asset-based credit facility by up to $50.0 million in the aggregate. All borrowings and letters of credit under the Credit Agreement are collateralized by all assets presently owned and
hereafter-acquired by the Company. Interest is paid in arrears monthly, quarterly, or over the applicable interest period as selected by the Company, with the entire balance payable on June 25, 2012. Borrowings pursuant to its asset-based
credit facility bear interest, at the Companys election, at a rate equal to either (i) the higher of Bank of Americas prime rate or the federal funds effective rate plus an applicable margin; or (ii) the LIBOR rate plus an
applicable margin. The applicable margin is based on the Companys Average Excess Availability, as defined in the Credit Agreement. In addition, the Company pays a commitment fee on the unused portion of the amount available for borrowing as
described in the Credit Agreement. The Credit Agreement includes limitations on the ability of the Company to, among other things, incur debt, grant liens, make investments, enter into mergers and acquisitions, pay dividends, repurchase its
outstanding common stock, change its business, enter into transactions with affiliates, and dispose of assets including closing stores. The events of default under the Credit Agreement include, among others, payment defaults, cross defaults with
certain other indebtedness, breaches of covenants, loss of collateral, judgments, changes in control, and bankruptcy events. In the event of a default, the Credit Agreement requires the Company to pay incremental interest at the rate of 2.0% and the
lenders may, among other remedies, foreclose on the security (which could include the sale of the Companys inventory), eliminate their commitments to make credit available, declare due all unpaid principal amounts outstanding, and require cash
collateral for any letter of credit obligations. In addition, in the event of a default or if the Companys Average Excess Availability is 15% or less of the borrowing capacity under the asset-based credit facility, the Company will be subject
to additional restrictions, including specific restrictions with respect to its cash management procedures.
The Company uses the borrowings
under the Credit Agreement for working capital, issuance of commercial and standby letters of credit, capital expenditures, and other general corporate purposes. As of October 31, 2009, the Company was in compliance with its loan covenant
requirements, had $94.1 million in borrowings and $11.5 million in outstanding letters of credit, and had remaining credit available under the Credit Agreement of $63.3 million. The Companys business is highly seasonal, reflecting the general
pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) season, therefore borrowings under the line of credit often peak early in the fourth quarter.
Summary Disclosure about Contractual Obligations and Commercial Commitments
Borrowings under the Companys revolving credit line increased by $55.6 million from January 31, 2009 to October 31, 2009. Otherwise, the Company does not believe there were any other
significant changes to its contractual obligations that were not in of the ordinary course of business, from those reported on its Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
14
Critical Accounting Policies
The Companys condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these
statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting
policies that are considered critical may be found in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009, in the Notes to the Consolidated Financial Statements (Note 1) and the Critical Accounting Policies and Estimates
section.
Impact of Recent Accounting Pronouncements
On February 3, 2008, the Company adopted Accounting Standards Codification (ASC) 820-10, Fair Value Measurements.
ASC 820-10 clarifies the definition of fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. Additionally, on February 1,
2009, in accordance with ASC 820-10, the Company adopted the provisions of ASC 820-10 for all other nonfinancial assets and nonfinancial liabilities. Refer to Note 8 within this Quarterly Report on Form 10-Q for additional information.
In June 2009, the FASB approved the FASB Accounting Standards Codification, (Codification), as the single source of authoritative
U.S. GAAP for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which launched July 1, 2009, changes the referencing and organization of accounting guidance and is effective for interim and
annual periods ending after September 15, 2009. Since it is not intended to change or alter existing U.S. GAAP, the Codification is not expected to have any impact on the Companys financial condition or results of operations.
Seasonality
The
Companys business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the fourth quarter (Holiday) selling season. Due to the importance of the Holiday selling season, the
fourth quarter of each fiscal year has historically contributed, and the Company expects it will continue to contribute, a disproportionate percentage of its net sales and most of its net income, if any, for the entire fiscal year.
Available Information
The Companys
website address is
www.worldmarket.com
. The Company has made available through its Internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Definitive Proxy Statement and
Section 16 filings and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.
Cost Plus, Inc. was organized as a California corporation in November 1946.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Companys market risk from those disclosed in the
Companys Form 10-K filed for the fiscal year ended January 31, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Companys management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of its disclosure controls and procedures as of
the end of the period covered by this Quarterly Report on Form 10-Q. The Company maintains disclosure controls and procedures that are designed to ensure that the information disclosed in the reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Companys management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As of October 31, 2009, the Companys
management, including its principal executive officer and principal financial officer, concluded that its disclosure controls and procedures are effective. This conclusion is based on managements evaluation of the effectiveness of the
design and operation of the Companys disclosure controls and procedures.
15
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred during the quarter ended October 31, 2009 that has
materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
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31.1
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Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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32.1
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Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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17
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 thereunto duly authorized.
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COST PLUS, INC.
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Registrant
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Date: December 8, 2009
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By:
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/s/ Jane L. Baughman
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Jane L. Baughman
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Executive Vice President
Chief Financial Officer
(Principal Financial & Accounting Officer)
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INDEX TO EXHIBITS
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31.1
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Certification of the Chief Executive Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification of the Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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32.1
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Certification of the Chief Executive Officer and Chief Financial Officer of the Registration pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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19
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