UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the fiscal year ended February 3, 2007
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from ______ to ______
Commission
File No. 1-14035
Stage
Stores, Inc.
(Exact
name of registrant as specified in its charter)
|
NEVADA
(State
or other jurisdiction of incorporation or organization)
|
91-1826900
(I.R.S.
Employer Identification No.)
|
|
10201
MAIN STREET, HOUSTON, TEXAS
(Address
of principal executive offices)
|
77025
(Zip
Code)
|
Registrant's
telephone number, including area code: (800)
579-2302
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock ($0.01 par value)
|
NYSE
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
þ
No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No þ
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 þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filer þ
Accelerated Filer o
Non-accelerated Filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No þ
As
of
July 29, 2006 (the last business day of the registrant's most recently completed
second quarter), the aggregate market value of the voting common stock of the
registrant held by non-affiliates of the registrant was $784,953,097 (based
upon
the closing price of the registrant’s common stock as reported by the New York
Stock Exchange on July 28, 2006).
As
of March 29, 2007, there were 43,412,330 shares of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the definitive proxy statement relating to the registrant’s Annual Meeting of
Shareholders to be held on June 7, 2007 (the "Proxy Statement") are incorporated
by reference into Part II and Part III of this Form 10-K.
2
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No.
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Item
1.
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4
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Item
1A.
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10
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Item
1B.
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13
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Item
2.
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14
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3.
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15
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4.
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5.
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15
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Item
6.
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19
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Item
7.
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21
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Item
7A.
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33
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8.
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33
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9.
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33
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9A.
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Item
10.
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36
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Item
11.
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38
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Item
12.
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38
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Item
13.
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14.
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38
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15.
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41
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F-1
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References
to a particular year are to the Stage Stores, Inc.’s fiscal year, which is the
52 or 53 week period ending on the Saturday closest to January 31st of the
following calendar year. For example, a reference to "2004" is a
reference to the fiscal year ended January 29, 2005, “2005” is a reference to
the fiscal year ended January 28, 2006, a reference to "2006" is a
reference to the fiscal year ending February 3, 2007, and a reference to “2007”
is a reference to the fiscal year ending February 2, 2008. 2004
and 2005 consisted of 52 weeks while 2006 consisted of 53 weeks and 2007 will
consist of 52 weeks.
PART
I
Overview
Stage
Stores, Inc. (the “Company” or
“Stage Stores”) is a Houston, Texas-based regional, specialty department store
retailer offering moderately priced, nationally recognized brand name and
private label apparel, accessories, cosmetics and footwear for the entire
family. As of February 3, 2007, the Company operated 655 stores
located in 33 states. The Company operates under the Stage, Bealls
and Palais Royal names throughout the South Central states, and under the
Peebles name throughout the Mid-Atlantic, Southeastern, Midwestern and New
England states. With an average store size of approximately 18,500 selling
square feet, the Company's principal focus is on consumers in small and mid-size
markets which the Company believes are under-served and less
competitive. Utilizing a ten mile radius from each store,
approximately 67% of the Company's stores are located in small towns and
communities with populations below 50,000 people, while an additional 19% of
the
Company's stores are located in mid-sized communities with populations between
50,000 and 150,000 people. The remaining 14% of the Company's stores are located
in metropolitan areas, such as Houston and San Antonio, Texas. The
Company believes that it is able to differentiate itself from the competition
in
the small and mid-size communities in which it operates by offering consumers
access to basic as well as fashionable, brand name merchandise not typically
carried by other retailers in the same market area. In the highly
competitive metropolitan markets in which it operates, the Company competes
against other national department store chains, which similarly offer moderately
priced, brand name and private label merchandise. As a way of
differentiating itself from the competition in these larger metropolitan
markets, the Company offers consumers a high level of customer service in
convenient locations.
Website
Access to Reports
The
Company makes available, free of
charge, through its website, among other things, corporate governance documents,
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports as soon as reasonably practicable
after they have been electronically filed with the Securities and Exchange
Commission ("SEC"). They can be obtained by accessing the Company’s
website at www.stagestores.com, clicking on “Investor Relations”, then
“SEC filings”, then the report to be obtained. Information contained
on the Company’s website is not part of this Annual Report on Form
10-K.
History
The
Company was formed in 1988 when the management of Palais Royal, together with
several venture capital firms, acquired the family-owned Bealls and Palais
Royal
chains, both of which were originally founded in the 1920's. At the
time of the acquisition, Palais Royal operated primarily larger stores, which
were located in and around the Houston metropolitan area while Bealls operated
primarily smaller stores, which were principally located in rural Texas
towns. Over the next five years, the Company concentrated on
integrating the two businesses, identifying their respective strengths and
developing and refining its growth strategy. During this period, the
Company developed a growth strategy that was focused on expanding the Company's
presence in small markets across the country through new store openings and
strategic acquisitions.
During
2003, the Company made the strategic decision to sell its private label credit
card portfolio. On September 12, 2003, the Company sold its portfolio
of private label credit card accounts, as well as other assets related to its
private label credit card program, to World Financial Network National Bank
and
ADS Alliance Data Systems, Inc., subsidiaries of Alliance Data Systems
Corporation, and realized net proceeds of approximately $172.0 million, which
included prepaid marketing funds. This transaction allowed the
Company to eliminate the distractions associated with managing and financing
its
own credit card operations, while at the same time maintain the important
relationship that it has with its private label credit card
customers.
On
November 4, 2003, the Company redeployed the proceeds from the sale of its
private label credit card portfolio and acquired Peebles Inc. (“Peebles”), which
at the time was a privately held, similarly focused retail company headquartered
in South Hill, Virginia (the "Peebles Acquisition"), which then operated 136
stores in seventeen Mid-Atlantic, Southeastern and Midwestern states under
the
Peebles name. The purchase price for Peebles was $174.6 million,
including acquisition costs and net of cash acquired and debt
assumed. The Peebles Acquisition has been accounted for under the
purchase method of accounting, and accordingly, the results of operations of
Peebles have been included in the Company's consolidated financial statements
from the date of acquisition. In order to maximize the potential of
the Peebles Acquisition, the Company has maintained what it believes is the
highly recognizable Peebles name on the stores. With the addition of
Peebles, the Company believes that it has strengthened its position as one
of
the leading retailers of branded family apparel in small town
America. The Company further believes that the Peebles Acquisition
creates new opportunities for unit growth and geographical expansion and
improves its competitive position.
On
February 27, 2006, the Company acquired privately held B.C. Moore & Sons,
Incorporated (“B.C. Moore”). In purchasing B.C. Moore, the Company
acquired 78 retail locations, which are located in small markets throughout
Alabama, Georgia, North Carolina and South Carolina (the “B.C. Moore
Acquisition”, and collectively with the Peebles Acquisition, the
“Acquisitions”). The Company successfully completed the conversion of
69 of the acquired stores to its Peebles name and format in 2006. The remaining
nine non-converted locations were closed. The B.C. Moore Acquisition
expands and strengthens the Company’s position in the Southeastern United
States, and is consistent with its corporate strategy of increasing the
concentration of its store base into smaller markets.
Operations
Stores.
As of February 3, 2007, the Company operated 655 stores located in 33
states. The Company operates under the Stage, Bealls and Palais Royal
names throughout the South Central states, and under the Peebles name throughout
the Mid-Atlantic, Southeastern, Midwestern and New England
states. Although the Company's stores may be operated under any one
of its four names, depending on the geographical market, the Company operates
the vast majority of its stores under one concept and one
strategy. Utilizing a ten mile radius from each store, approximately
67% of the Company's stores are located in small towns and communities with
populations below 50,000 people, while an additional 19% of the Company's stores
are located in mid-sized communities with populations between 50,000 and 150,000
people. The remaining 14% of the Company's stores are located in
metropolitan areas, such as Houston and San Antonio, Texas.
In
targeting small and mid-size
markets, the Company has developed a store format, which is smaller than
typical department stores yet large enough to offer a well edited, but broad
selection of merchandise. With an average store size of approximately
18,500 selling square feet, approximately 80% of the Company's stores are
located in strip shopping centers in which they are typically one of the anchor
stores. In addition, 14% of the Company's stores are located in local
or regional shopping malls, while the remaining 6% are located in either free
standing or downtown buildings. The Company attempts to locate its
stores by, or in the vicinity of, other tenants that it believes will help
attract additional foot traffic to the area, such as grocery stores, drug stores
or major discount stores such as Wal-Mart.
The
Company's typical interior store layouts and visual merchandising displays
are
designed to create a friendly, modern department store
environment. The Company's carefully edited assortment of merchandise
is divided into distinct departments within each store which are clearly marked
and easy to navigate as a result of the Company's standard "racetrack"
configuration. In this configuration, the various merchandise
departments are situated throughout the store in such a way that a central
loop,
or "racetrack", is created, which the Company believes helps enhance the
customer's shopping experience by providing an open, easy-to-shop
interior.
Expansion
Strategy. The cornerstone of the Company's growth strategy
continues to be to identify locations in small and mid-size markets that meet
its demographic, competitive and profitability criteria. The Company
believes that the long-term potential of its smaller markets is positive and
wants to be well positioned in these markets with locations that are convenient
to its customers. During 2006, the Company opened a total of 108
stores. Sixty-nine of the 2006 openings were converted B.C. Moore
stores. Thirty-five of the 2006 openings were organic stores and included the
Company’s entry into the states of Massachusetts and Michigan. Three
of the stores were re-openings of stores that the Company closed in 2005 due
to
damage they sustained from Hurricane Rita, and the final store was a reopening,
in a new location, of a store that was also closed in 2005.
The
number of new stores opened by state in 2006 was as follows:
|
State
|
|
Number
of
Stores
|
|
Alabama
|
|
12
|
|
Arizona
|
|
2
|
|
Colorado
|
|
1
|
|
Georgia
|
|
26
|
|
Indiana
|
|
1
|
|
Kentucky
|
|
1
|
|
Louisiana
|
|
1
|
|
Massachusetts
|
|
1
|
|
Michigan
|
|
4
|
|
Mississippi
|
|
2
|
|
New
Jersey
|
|
1
|
|
New
York
|
|
3
|
|
North
Carolina
|
|
11
|
|
Ohio
|
|
2
|
|
Pennsylvania
|
|
6
|
|
South
Carolina
|
|
25
|
|
Tennessee
|
|
1
|
|
Texas
|
|
6
|
|
Vermont
|
|
1
|
|
Virginia
|
|
1
|
|
|
|
108
|
The
Company believes that there are sufficient opportunities in small and mid-size
markets to continue with its new store growth into the foreseeable future,
and
that it is well positioned to capitalize on those opportunities. During 2007,
the Company anticipates opening approximately 45 new stores. It
anticipates increasing the number of new store openings to approximately 70
per
year beginning in 2008. The actual number of stores opened will be
dependent upon the availability of suitable locations and prevailing business
conditions.
To
support its store growth, the Company increased the productivity and processing
capacity of its South Hill, Virginia distribution center in 2005 with the
addition of new sortation equipment and a new warehouse management
system. The Company has also initiated a site selection process for a
third distribution center to support its planned geographic expansion of its
store base and accelerated square footage growth plans, with an expected
start-up in mid-2008.
Expansion,
Relocation and Remodeling. In addition to opening new stores,
the Company has continued to invest in the expansion, relocation and remodeling
of its existing stores. The Company believes that remodeling keeps
its stores looking fresh and up-to-date, which enhances its customers' shopping
experience and helps maintain and improve its market share in those market
areas. Store remodeling projects can range from updating and
improving in-store lighting, fixtures, wall merchandising and signage, to more
extensive expansion projects. Relocations improve the stores’ site
selection and helps them capitalize on incremental sales potential. During
2006,
the Company completed nine relocations, three expansions and seven remodels
of
stores and expects to complete between 22 and 26 expansions and relocations
and
10 remodels of stores during 2007.
Store
Closures. The Company closed three locations during 2006. The Company
periodically reviews the trend of individual store performance and will close
a
store if the expected store performance does not support the required investment
of capital at that location.
Store
Operations. For span-of-control purposes, the Company's stores are divided
into distinct regions and districts. There are currently seven
regions. Within these seven regions, there are currently a total of
48 districts. The number of stores that each District Manager
oversees depends on their proximity to each other and generally varies from
a
low of nine stores to a high of 16 stores. Each store is managed
by a team consisting of a Manager and a number of Assistant Managers, which
is
dependent on the size of the store. The selling floor staff within
each store consists of both full-time and part-time associates, with temporary
associates added during peak selling seasons. The Company believes
that this structure provides an appropriate level of oversight, management
and
control over its store operations.
Customer
Service. A primary corporate objective is to provide exceptional customer
service through conveniently located stores staffed with well-trained and
motivated sales associates. In order to ensure consistency of
execution, each sales associate is evaluated based on the attainment of specific
customer service standards, such as offering prompt and knowledgeable
assistance, suggesting complementary items, helping customers open private
label
credit card accounts and establishing consistent contact with customers to
facilitate repeat business. The Company monitors the quality of its
service by utilizing "secret shoppers". The results of these customer
surveys are shared and discussed with the appropriate sales associates so that
excellent service can be recognized and, conversely, counseling can be used
if
improvements are needed. To further reinforce the Company's focus on
customer service, the Company has various programs in place to recognize
associates for providing outstanding customer service. The Company
further extends its service philosophy through the design of its stores, as
discussed above, and in most locations by locating the Store Manager on the
selling floor to increase accessibility to customers.
Competitive
Advantages. As a result of its small and mid-size market focus, the Company
generally faces less competition for its brand name apparel because consumers
in
these markets typically are able to shop for branded merchandise only in
regional malls, which are typically located more than 30 miles
away. In those small and mid-size markets where the Company does
compete for brand name apparel sales, competition generally comes from local
retailers, small regional chains and to a lesser extent, national department
stores. The Company believes it has a competitive advantage over
local retailers and small regional chains due to its: (i) broader selection
of
brand name merchandise, (ii) distinctive retail concept, (iii) economies of
scale, (iv) strong vendor relationships and (v) private label credit card
program. The Company also believes it has a competitive advantage in
small and mid-size markets over national department stores due to its experience
with smaller markets. In addition, due to minimal merchandise
overlap, the Company generally does not directly compete for branded apparel
sales with national discounters such as Wal-Mart. In the highly
competitive metropolitan markets in which it operates, the Company competes
against other national department store chains, which similarly offer moderately
priced, brand name and private label merchandise. As a way of
differentiating itself from the competition in these larger markets, the Company
offers consumers a high level of customer service in convenient
locations. In addition, over the years, the Company has endeavored to
nurture customer loyalty and foster name recognition through loyalty and direct
marketing programs.
Merchandising
Strategy. The Company's merchandising strategy focuses on
matching merchandise assortments and offerings with customers' aspirations
for
fashionable, quality brand name apparel. Further, care is given to
avoid duplication and to ensure in-stock position on size and color in all
merchandise selections. The Company offers a well edited selection of
moderately priced, branded merchandise within distinct merchandise categories,
such as women's, men's and children's apparel, as well as accessories, cosmetics
and footwear. The merchandise selection ranges from basics, including
denim, underwear and foundations, to more upscale and fashionable clothing
offerings. Merchandise mix may also vary from store to store to
accommodate differing demographic factors. Approximately 86% of sales
consist of nationally recognized brands such as Levi Strauss, Nike, Tommy
Hilfiger, Liz Claiborne, Calvin Klein, Chaps, Polo Jeanswear, Estee Lauder,
Clinique, Elizabeth Arden, Nautica, K-Swiss, Reebok and New Balance, while
the
remaining 14% of sales consist of the Company’s private label
merchandise. The Company's private label portfolio includes
twenty-one brands, which are developed and sourced through its membership in
Associated Merchandising Corporation and Li-Fung Cooperative Buying Services,
as
well as through contracts with third party vendors. The Company's
private label brands offer quality merchandise and excellent
value. The Company expects to expand its private label business over
time to approximately 18% of sales. The Company’s top 100 vendors
currently account for approximately 47% of annual sales. Merchandise
purchased from Associated Merchandising Corporation represented approximately
5%
of the Company’s 2006 and 2005 sales. The Company's merchandising
activities are conducted from its corporate headquarters in Houston, Texas
for
its Bealls, Palais Royal and Stage locations, and from its South Hill, Virginia
administrative offices for its Peebles locations.
In
January 2007, the Company announced certain strategic initiatives that it will
be undertaking in its women’s plus sizes, footwear and cosmetics
areas. The Company believes that these initiatives will lead to
increased sales in these categories of business. In its plus sizes
business, the Company plans to drive additional growth through further
improvement, expansion and enhancement of the merchandise mix and product
selection, supported by expanded selling floor space. In its footwear
business, the Company plans to grow sales through improved breadth of style
and
brand selections for family footwear. In its cosmetics business, the
Company plans to increase sales through the continued roll-out of desired
treatment products from suppliers such as Estee Lauder, Clinique and
Lancome. In addition to these strategic initiatives, the Company
plans to develop a tool which will help it maximize the generation of sales
and
gross margin per square foot by better allocating selling square footage among
its various categories of business.
The
following table sets forth the distribution of net sales between the Company's
various merchandise categories, which was the same for both 2006 and
2005:
|
Department
|
%
of Sales
|
|||
|
Men's/Young
Men's
|
19%
|
|||
|
Misses
Sportswear
|
17
|
|||
|
Children's
|
12
|
|||
|
Footwear
|
12
|
|||
|
Junior
Sportswear
|
9
|
|||
|
Accessories
|
8
|
|||
|
Cosmetics
|
6
|
|||
|
Special
Sizes
|
6
|
|||
|
Dresses
|
4
|
|||
|
Intimates
|
3
|
|||
|
Home
& Gifts
|
3
|
|||
|
Outerwear,
Swimwear and Other
|
1
|
|||
|
100%
|
||||
Marketing
Strategy. The
Company's primary target customers are women who are 25 and older with annual
household incomes of over $35,000 who the Company believes are the primary
decision makers for their family’s clothing purchases. The Company's
broad based marketing strategy is designed to establish brand loyalty,
convenience and promotional positioning. The Company uses a
multi-media advertising approach, including newspapers, direct mail, radio
and
television, to position its stores as the local destination for basic and
fashionable moderately priced brand name merchandise. In addition,
the Company promotes its private label credit card and attempts to create strong
customer loyalty through continuous one-on-one communication with its core
private label credit card holders. The Company's best private label
credit card customers are recognized and rewarded through its VIP credit card
program, as discussed below, that creates greater customer retention and
promotes increased purchasing activity. In addition to the
information gathered from its private label credit card customers, the Company
is able to capture data on selected check, debit and other third party credit
card customers and incorporate this data into its marketing and merchandising
programs. The Company currently captures customer data on
approximately 54% of its sales. To complement its marketing efforts,
the Company encourages local store involvement in local community
activities.
One
of the Company’s ongoing strategic
initiatives is to try to increase sales at its Peebles stores by $5.00 per
selling square foot per year through, among other things, proper inventory
levels supported by proven marketing and sales promotion
programs. This initiative was undertaken in 2005 and the Company
successfully met its goal during that year. In 2006, the Company’s
sales per square foot growth goal at its Peebles stores was not met as a result
of their negative comparable store sales during the first half of the year
due
to these stores operating with lower than desired inventory levels throughout
that period (see Management’s Discussion and Analysis in Part II, Item
7). In the second half of 2006, the issue was rectified and the
Company expects to be back on track with this initiative in 2007.
Private
Label Credit Card. The
Company considers its private label credit card program to be an important
component of its retailing concept because it (i) enhances customer loyalty,
(ii) allows the Company to identify and regularly contact its best customers
and
(iii) creates a comprehensive database that enables the Company to implement
detailed, segmented marketing and merchandising strategies for each
store. Frequent private label credit card users, through the
Company's VIP credit card program, enjoy an increasing array of
benefits. The Company's most active charge customers are awarded a
bronze, silver or gold VIP card based on their level of annual
purchases. Depending on their level, holders of these cards receive
such benefits as discounted or free gift-wrapping, special promotional discounts
and invitations to private "VIP Only" sales. In addition, new holders
of the Company's credit card receive a 10% discount the first time they use
their new card. To encourage associates to focus on getting customers
to open new Company credit card accounts, the Company provides increasing
incentive award payments based on the number of new private label credit card
accounts activated. The penetration rate for the Company's private
label credit card was approximately 31% and 32% of net sales in 2006
and 2005, respectively.
Merchandise
Distribution. The Company currently distributes all merchandise
to its stores through its two distribution centers, which are located in
Jacksonville, Texas, and South Hill, Virginia. The Company's
Jacksonville distribution center has 435,000 square feet of processing area
and
currently services all of the Company’s Bealls, Palais Royal, and Stage stores
and approximately 100 of the westernmost Peebles stores. The
Company's South Hill distribution center, which has 162,240 square feet of
processing area, currently serves the Company’s remaining Peebles stores. As a
result of the Jacksonville distribution center servicing the Peebles’ western
market stores, this has provided additional capacity for the South Hill
distribution center to support planned new growth in the Peebles’ eastern
markets.
Incoming
merchandise received at the
distribution centers is inspected for quality control purposes. The
Company has formal guidelines for vendors with respect to shipping, receiving
and invoicing for merchandise. Vendors that do not comply with the
guidelines are charged specified fees depending upon the degree of
non-compliance. These fees are intended to be a deterrent to
non-compliance, as well as to offset higher costs associated with the processing
of such merchandise.
The
Company’s two distribution centers
are equipped with modern sortation equipment to support distribution of
quantities to meet specific store needs. The same merchandising and
warehouse management systems are used at all corporate and distribution center
locations which allows support of stores by either distribution
center. The configurations of the distribution centers permit daily
shipments to stores with the majority of stores receiving merchandise within
one
day of shipment from the distribution centers. The Company
utilizes a third party contract carrier to deliver merchandise from both of
its
Jacksonville and South Hill facilities to its stores.
The
Company believes that, due to its
accelerated unit, geographic and square footage growth plans, it will be
necessary to open a third distribution center in the near future. As
a result, the Company has initiated a site selection process to identify the
optimum location for this new facility, with an expected start-up in
mid-2008. The Company believes that it will spend approximately $4.1
million in 2007 on its new distribution center, with additional expenditures
of
$7.5 - $12.0 million in 2008. The Company currently plans on leasing
a facility with approximately 150,000 – 200,000 square feet, which would be
capable of supporting approximately 300 stores. With this additional
processing and distribution capacity, the Company will be able to supply
merchandise to over 1,100 stores located in markets all across the
country.
Information
Systems. The Company supports its retail concept by using
multiple, highly integrated systems in areas such as merchandising, store
operations, distribution, sales promotion, personnel management, store design
and accounting.
The
Company's core merchandising systems assist in planning, ordering, allocating
and replenishing merchandise assortments for each store, based on specific
characteristics and recent sales trends. The price change management
system allows the Company to identify and mark down slow moving
merchandise. The replenishment/fulfillment system allows the Company
to maintain planned levels of in-stock positions in basic items such as jeans
and underwear. In addition, a fully integrated warehouse management
system is in place in both the Jacksonville and South Hill distribution
centers.
The
Company utilizes state-of-the-art point-of-sale systems with bar code scanning,
electronic credit authorization, instant credit and gift card processing in
its
stores. These systems also allow the Company to capture customer
specific sales data for use in its merchandising, marketing and loss prevention
systems, while quickly servicing its customers. The Company also
utilizes an automated store personnel scheduling system that analyzes historical
sales trends to schedule sales staff to match customer traffic patterns, thereby
minimizing store labor costs.
The
Company replaced the “legacy” Peebles merchandise management system previously
used in South Hill with the Retek merchandise management system used in Houston
at the end of 2005. In addition, the Company is implementing a
new inventory planning and allocation system, which is expected to be functional
in late 2007. This system is expected to assist in
optimizing product assortments on a store-by-store basis with greater accuracy
to enhance sales and earnings potential. The initial impact and
benefits are expected to begin in the first quarter of 2008.
Employees.
At February 3, 2007, the Company employed a total of 14,608 employees
broken down as follows:
|
|
Hourly
|
Salaried
|
Total
|
|||||||||
|
|
|
|
|
|||||||||
|
Stores
|
12,042
|
1,084
|
13,126
|
|||||||||
|
Administrative
offices
|
273
|
637
|
910
|
|||||||||
|
Distribution
centers
|
532
|
40
|
572
|
|||||||||
|
|
||||||||||||
|
Total
|
12,847
|
1,761
|
14,608
|
|||||||||
Employee
levels will vary during the
year as the Company traditionally hires additional employees and increases
the
hours of part-time employees during peak seasonal selling
periods. There are no collective bargaining agreements in effect with
respect to any of the Company's employees. The Company believes that
it maintains a good relationship with its employees.
Seasonality. The
Company's business is seasonal and sales traditionally are lower during the
first three quarters of the fiscal year (February through October) and higher
during the last quarter of the fiscal year (November through
January). The fourth quarter usually accounts for slightly more than
30% of the Company's annual sales, with the other quarters accounting for
approximately 22% to 24% each. Working capital requirements fluctuate
during the year as well and generally reach their highest levels during the
third and fourth quarters.
Trademarks. The
Company regards its trademarks and their protection as important to its
success. In addition to the Bealls, Palais Royal, Peebles and Stage
trademarks, the United States Patent and Trademark Office (the “USPTO”) has
issued federal registrations to the Company for the following
trademarks: Absolutely Active, Cape Classic, Cape Classic LTD,
Casual Options, Graphite, Hannah, Hidden Fantasies, Meherrin River Outfitters,
Private Expressions, Signature Studio, Sun River Clothing Co., Sun River
Footwear, Rebecca Malone, Specialty Kids, Specialty Girl, Whispers, Miss Becky,
Croft Classics, Croft’s, Pebblebrook, and Thomas & Ashemore. The
Company has also filed applications with the USPTO seeking federal registrations
for the following trademarks: Specialty Baby, Rebecca Malone Bath & Body and
Design, On Stage and Whispers Bath & Body.
Forward
Looking Statements
Certain
statements in this Form 10-K contain or may contain forward-looking statements
that are subject to known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by these forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause actual results to differ
materially from those in the forward-looking statements. These
factors include, but are not limited to, the ability of the Company and its
subsidiaries to maintain normal trade terms with vendors, the ability of the
Company and its subsidiaries to comply with the various covenant requirements
contained in the Company's Revolving Credit Facility, the demand for apparel
and
other factors. The demand for apparel and sales volume can be
affected by significant changes in economic conditions, including an economic
downturn, employment levels in the Company’s markets, consumer confidence,
energy and gasoline prices, and other factors influencing discretionary consumer
spending. Other factors affecting the demand for apparel and sales
volume include unusual weather patterns, an increase in the level of competition
in the Company's market areas, competitors' marketing strategies, changes in
fashion trends, changes in the average cost of merchandise purchased for resale,
availability of product on normal payment terms and the failure to achieve
the
expected results of the Company's merchandising and marketing plans as well
as
its store opening plans. The occurrence of any of the above could
have a material and adverse impact on the Company's operating
results. Most of these factors are difficult to predict accurately
and are generally beyond the Company's control. Readers should
consider the areas of risk described in connection with any forward-looking
statements that may be made in this Form 10-K. Readers should
carefully review the Form 10-K in its entirety, including but not limited to
the
Company's financial statements and the notes thereto and the risks described
in
this Item 1A. Except for the Company's ongoing obligations to
disclose material information under the Federal securities laws, the Company
undertakes no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events. For any forward-looking statements contained in
any document, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The
Company faces the risk of a highly competitive retail apparel industry, which
may result in the loss of customers, increased spending on marketing and
advertising and reduced revenues. The retail apparel
business is highly competitive. Although competition varies widely
from market to market, the Company faces the risk of increased competition,
particularly in its more highly populated markets from national, regional and
local department and specialty stores. Some of the Company's
competitors are considerably larger than the Company and have substantially
greater financial and other resources. Although the Company offers
brands that are not available at certain other retailers, including regional
and
national department stores, there can be no assurance that existing or new
competitors will not carry similar branded merchandise in the future, which
could have a material and adverse effect on the Company's business, financial
condition and cash flows.
An
economic downturn, decline in consumer confidence or unusual weather patterns
could negatively impact the Company's business and financial
condition. A substantial portion of the Company's operations
is located in the South Central and Mid-Atlantic states. In addition,
many of the Company's stores are situated in small towns and rural environments
that are substantially dependent upon the local economy. The retail
apparel business is dependent upon the level of consumer spending, which may
be
adversely affected by an economic downturn, or a decline in consumer confidence,
employment levels in the Company’s markets, energy and gasoline prices and other
factors influencing discretionary consumer spending. An economic
downturn or decline in consumer confidence, particularly in the South Central
and Mid-Atlantic states and any state (such as Texas or Louisiana) from which
the Company derives a significant portion of its net sales, could have a
material and adverse effect on the Company's business, financial condition
and
cash flows, including affecting demand for the Company's products.
The
Company's success depends, in part,
upon its ability to anticipate and respond to changing consumer preferences
and
fashion trends in a timely manner. Although the Company attempts to
stay abreast of emerging lifestyles and consumer preferences affecting its
merchandise, any sustained failure by the Company to identify and respond to
such trends could have a material and adverse effect on the Company's business,
financial condition and cash flows.
The
Company's business is seasonal and sales traditionally are lower during the
first three quarters of the fiscal year (February through October) and higher
during the last quarter of the fiscal year (November through
January). The fourth quarter usually accounts for slightly more than
30% of the Company's annual sales, with the other quarters accounting for
approximately 22% to 24% each. Working capital requirements fluctuate
during the year as well and generally reach their highest levels during the
third and fourth quarters.
The
Company's business depends, in
part, on normal weather patterns across its markets. Any unusual
weather patterns in the Company's markets can have a material and adverse impact
on the Company's business, financial condition and cash flows.
War,
acts of terrorism, public health issues and natural disasters may create
uncertainty and may result in reduced revenues. The
Company cannot predict, with any degree of certainty, what effect, if any,
war,
acts of terrorism, public health issues and natural disasters, if any, will
have
on the Company, its operations, the other risk factors discussed herein and
the
forward-looking statements made by the Company in this Annual Report on Form
10-K. However, the consequences of these events could have a material
and adverse effect on the Company's business, financial condition and cash
flows.
Government
laws and regulations could adversely impact the Company’s business, financial
condition and cash flows. The Company, like other
businesses, is subject to various federal, state and local government laws
and
regulations including, but not limited to, tax laws, which may be changed from
time to time in response to economic or political conditions. The Company cannot
predict whether existing laws or regulations, as currently interpreted or as
reinterpreted in the future, or future laws and regulations, could materially
and adversely affect the results of its operations, financial condition and
cash
flows.
The
Company cannot guarantee that it will reach its targets for opening new stores
or that the new stores, including those opened through acquisition, will operate
profitably when opened. The success of the Company's
expansion strategy depends upon many factors, including the ability of the
Company to obtain suitable sites for new stores at acceptable costs, to hire,
train and retain qualified personnel and to integrate new stores into existing
information systems and operations. The Company cannot guarantee that
it will reach its targets for opening new stores or that such stores, including
those opened through acquisition, will operate profitably when
opened. If the Company fails to effectively implement its expansion
strategy, it could have a material and adverse effect on the Company's business,
financial condition and cash flows.
If
the Company is not able to
obtain merchandise product on normal trade terms, its business, financial
condition, and cash flows could be adversely
impacted. The Company is highly dependent on
obtaining merchandise product on normal trade terms. If the Company
does not meet its performance objectives, the Company's key vendors and factors
may become more restrictive in granting trade credit by either reducing the
Company's credit lines or shortening payment terms. The tightening of
credit from the vendor or factor community could have a material adverse impact
on the Company's business, financial condition and cash
flows.
A
catastrophic event affecting
any of the Company's buying, distribution or other corporate operations could
adversely impact the use of those facilities and could result in reduced
revenues and loss of customers. The Company's
buying, distribution and other corporate operations are in highly centralized
locations. The Company's operations could be materially and adversely
affected if a catastrophic event (such as, but not limited to, fire, hurricanes
or floods) impacts the use of these facilities. There can be no
assurances that the Company would be successful in obtaining alternative
servicing facilities in a timely manner if such a catastrophic event should
occur.
A
disruption of the Company’s information technology systems could have a material
adverse impact on the Company’s business and financial condition. The
Company is heavily dependent on its information technology systems for day
to
day business operations. In addition, as part of the Company's normal
course of business, it collects processes and retains sensitive and confidential
customer information. Today’s information technology risks are largely external
and their consequences affect the entire Company. Potential risks
include, but are not limited to, the following: (i) an intrusion by a hacker,
(ii) the introduction of malware (virus, Trojan, spyware), (iii) hardware
failure, (iv) outages due to software defects, and (v) human
error. Although the Company runs anti-virus and anti-spyware
software and take other steps to ensure that its information technology
systems will not be disabled or otherwise disrupted, there can be no assurances
that disruptions will not occur. The consequences of a disruption, depending
on
the severity, could have a material adverse affect on the Company’s business and
financial condition and could expose the Company to civil, regulatory and
industry actions and possible judgments, fees and fines. In addition,
any security breach involving the misappropriation, loss or other unauthorized
disclosure of confidential customer information could severely damage the
Company’s reputation, expose it to the risks of legal proceedings, disrupt its
operations and otherwise adversely affect the Company’s business and financial
condition.
Covenants
in the Company’s Revolving Credit Facility agreement may impose operating
restrictions, impede or adversely affect the Company’s ability to pay dividends
or repurchase common shares and raise capital through the sale of stock and
other securities. The Company’s Revolving Credit Facility
agreement contains covenants which, among other things, restrict (i) the amount
of additional debt or capital lease obligations, (ii) the amount of capital
expenditures, payment of dividends and repurchase of common stock under certain
circumstances and (iii) related party transactions. In addition, any
material or adverse developments affecting the business of the Company could
significantly limit its ability to meet its obligations as they become due
or to
comply with the various covenant requirements contained in the Company's
Revolving Credit Facility agreement.
If
the Company's trademarks are successfully challenged, the outcome of those
disputes could require the Company to abandon one or more of its
trademarks. The Company regards
its trademarks and their protection as important to its
success. However, the Company cannot be sure that any trademark held
by it will give it a competitive advantage or will not be challenged by third
parties. Although the Company intends to vigorously protect its
trademarks, the cost of litigation to uphold the validity and prevent
infringement of trademarks can be substantial and the outcome of those disputes
could require the Company to abandon one or more of its
trademarks.
A
work slowdown, stoppage or other disruption by employees of carriers, shippers
and other providers of merchandise transportation services could have a material
adverse effect on the Company’s business and financial
condition. The Company’s vendors rely on shippers, carriers
and other providers of merchandise transportation services (collectively
“Transportation Providers”) to deliver merchandise from their manufacturers,
both in the United States and abroad, to the vendors’ distribution centers in
the United States. The Company’s vendors and the Company also rely on
Transportation Providers to transport merchandise from the vendors’ distribution
centers to the Company’s distribution centers. The Company also
relies on Transportation Providers to transport merchandise from its
distribution centers to its stores. However, if work slowdowns,
stoppages or other disruptions affect the transportation of merchandise between
the vendors and their manufacturers, especially those manufacturers outside
the
United States, or between the vendors and the Company, the Company’s business,
financial condition and cash flows could be adversely affected.
Any
devaluation of the Mexican peso, or imposition of restrictions on the access
of
citizens of Mexico to the Company’s stores, could adversely impact the Company’s
business and financial condition. Approximately 4% of the Company’s
stores are located in cities that either border Mexico or that the Company
considers to be in close proximity to Mexico. The Company estimates
that approximately 8% of its 2006 sales were derived from these
stores. While purchases in these stores are made in United States
dollars, a devaluation of the Mexican peso could negatively affect the exchange
rate between the peso and the dollar, which would result in reduced purchasing
power on the part of the Company’s customers who are citizens of
Mexico. In that event, revenues attributable to these stores could be
reduced. In addition, due to global uncertainties, including threats
or acts of terrorism, it is possible that tighter restrictions may be imposed
by
the Federal government on the ability of citizens of Mexico to cross the border
into the United States. In that case, revenues attributable to the
Company’s stores regularly frequented by citizens of Mexico could be
reduced.
None.
The
Company's corporate headquarters
are located in a leased 130,000 square foot building in Houston, Texas, while
it
owns the 28,000 square foot Peebles office building located in South Hill,
Virginia. The Company also owns its distribution centers in
Jacksonville, Texas and South Hill, Virginia.
At
February 3, 2007, the Company
operated 655 stores, located in 33 states, as follows:
|
State
|
Number
of Stores
|
|
|
Alabama
|
21
|
|
|
Arizona
|
7
|
|
|
Arkansas
|
19
|
|
|
Colorado
|
2
|
|
|
Connecticut
|
1
|
|
|
Delaware
|
3
|
|
|
Florida
|
2
|
|
|
Georgia
|
28
|
|
|
Illinois
|
2
|
|
|
Indiana
|
7
|
|
|
Iowa
|
1
|
|
|
Kansas
|
6
|
|
|
Kentucky
|
16
|
|
|
Louisiana
|
50
|
|
|
Maryland
|
7
|
|
|
Massachusetts
|
1
|
|
|
Michigan
|
4
|
|
|
Mississippi
|
14
|
|
|
Missouri
|
13
|
|
|
New
Hampshire
|
1
|
|
|
New
Jersey
|
6
|
|
|
New
Mexico
|
19
|
|
|
New
York
|
8
|
|
|
North
Carolina
|
26
|
|
|
Ohio
|
20
|
|
|
Oklahoma
|
33
|
|
|
Pennsylvania
|
19
|
|
|
South
Carolina
|
28
|
|
|
Tennessee
|
19
|
|
|
Texas
|
227
|
|
|
Vermont
|
4
|
|
|
Virginia
|
33
|
|
|
West
Virginia
|
8
|
|
|
Total
|
655
|
Stores
range in size from approximately
5,100 to 52,000 selling square feet, with the average being approximately 18,500
selling square feet. The Company's stores are primarily located in
strip shopping centers. The majority of leases provide for a base
rent plus payments for expenses incurred by the landlord, such as common area
maintenance and insurance. Certain leases provide for contingent
rents that are not measurable at inception. These contingent rents
are primarily based on a percentage of sales that are in excess of a
predetermined level. The Company leases all but three of its
stores.
On
August
16, 2006, the Company announced that it had decided to delay the release
of its
second quarter results pending the completion of an internal review of its
inventory valuation methodology.
On
October 24, 2006, the Company reported that it had completed its review of
the
Company’s inventory valuation methodology. Based upon this review process, and
with the concurrence of the Audit Committee of the Company’s Board of Directors,
the Company concluded that its historical use of the retail method of inventory
valuation (the “retail method”) that had been used in reporting results of
operations during and for periods preceding fiscal 2005 was acceptable, and
that, other than an immaterial error related to historical accounting for
credits received from vendors for handling charges at the Company’s distribution
centers, which the Company corrected in the second quarter of 2006, no errors
had occurred in previously issued financial statements. Therefore, no
restatements of the Company’s previously issued financial statements for 2005 or
earlier years were required. However, as described in Note 2 to the Consolidated
Financial Statements, and as also reported in its October 24, 2006 press
release, the Company changed its method of accounting for merchandise
inventories from the retail method to the weighted average cost method (the
“cost method”) effective with the beginning of 2006.
On
August
21, 2006, the Company received a letter from the staff of the SEC’s Division of
Enforcement (the “Staff”) indicating that it was conducting a non-public inquiry
concerning the Company’s internal review of its historical inventory accounting
practices referenced in its August 16, 2006 press release. Following the
October
24, 2006 announcement, the Company provided the Staff with requested materials
regarding its internal review. On January 31, 2007, the Company received
a
second letter from the Staff seeking additional information related to the
Company's previously announced review. The Company has responded to this
and
subsequent requests and continues to fully cooperate with the Staff. The
Staff
has informed the Company that the informal inquiry
should
not be construed as an indication by the SEC or the Staff that any violation
of
law has occurred.
Although
the Company cannot predict the outcome of this matter, it does not expect
that
this informal inquiry will have a material adverse effect on its previously
reported consolidated financial condition or results of operations.
From
time
to time, the Company and its subsidiaries are involved in various legal
proceedings arising in the ordinary course of their
business. Management does not believe that any pending legal
proceedings, either individually or in the aggregate, are material to the
financial position, results of operations or cash flows of the Company or
its
subsidiaries.
No
matters were submitted to a vote of
security holders during the quarter ended February 3, 2007.
Market
Information
Prior
to
March 16, 2006, the principal market for the Company's common stock was the
NASDAQ National Market, where it traded under the symbol "STGS". On
March 16, 2006, the Company began trading on the New York Stock Exchange under
the symbol “SSI.” The following table sets forth the high and low
sales prices per share of the Company's common stock for each quarter in 2006
and 2005 as reported on the NASDAQ National Market prior to March 16, 2006
and
the New York Stock Exchange since that date:
|
Common
Stock Market Price *
|
||||||||
|
2006
|
High
|
Low
|
||||||
|
First
Quarter
|
$ |
20.73
|
$ |
18.14
|
||||
|
Second
Quarter
|
22.54
|
19.10
|
||||||
|
Third
Quarter
|
22.42
|
17.06
|
||||||
|
Fourth
Quarter
|
23.36
|
19.75
|
||||||
|
2005
|
||||||||
|
First
Quarter
|
$ |
18.38
|
$ |
16.39
|
||||
|
Second
Quarter
|
21.38
|
16.55
|
||||||
|
Third
Quarter
|
20.51
|
15.79
|
||||||
|
Fourth
Quarter
|
21.59
|
17.74
|
||||||
*
Stock
prices are restated to reflect the impact of the Company’s 3-for-2 stock splits
which were paid in the form of a stock dividend on August 19, 2005 and January
31, 2007.
Holders
As
of
March 29, 2007, there were 535 holders of record of the Company’s common
stock.
Dividends
The
Company initiated a quarterly cash dividend of $0.017 per share during the
third
quarter of 2005 and during the second quarter of 2006 the Company increased
its
quarterly cash dividend to $0.033 per share. Dividend payments during 2006
totaled $4.9 million. On March 2, 2007, the Company announced that
its Board of Directors declared a quarterly cash dividend of $0.05 per share
on
the Company's common stock. While the Company expects to continue
payment of quarterly dividends, the declaration and payment of future dividends
by the Company are subject to the discretion of the Board. Any future
determination to pay dividends will depend on the Company's results of
operations and financial condition, as well as meeting certain criteria under
its Revolving Credit Facility (as defined in Liquidity and Capital Resources)
and other factors deemed relevant by the Board.
Securities
Authorized For Issuance Under Equity Compensation Plans
Information
regarding equity compensation plans under “Securities
Authorized For Issuance Under Equity Compensation Plans” in the
Proxy
Statement is incorporated herein by reference.
Stock
Price Performance
Graph
The
annual changes for the period shown
in the following graph are based on the assumption that $100 had been invested
in Stage Stores stock, the S&P 500 Stock Index and the S&P 500 Retail
Index on February 1, 2002 and that all quarterly dividends were reinvested
at
the average of the closing prices at the beginning and end of the
quarter. The total cumulative dollar returns shown on the graph
represent the value that such investments would have had on February 2, 2007
(the last trading date in fiscal 2006). The calculations exclude
trading commissions and taxes.
|
Date
|
Stage
Stores, Inc.
|
S&P
500 Index
|
S&P
500 Retail Index
|
|||||||||
|
2/1/2002
|
$ |
100.00
|
$ |
100.00
|
$ |
100.00
|
||||||
|
1/31/2003
|
$ |
67.17
|
$ |
76.25
|
$ |
71.53
|
||||||
|
1/30/2004
|
$ |
119.91
|
$ |
100.80
|
$ |
106.11
|
||||||
|
1/28/2005
|
$ |
143.26
|
$ |
104.38
|
$ |
120.92
|
||||||
|
1/27/2006
|
$ |
165.62
|
$ |
114.39
|
$ |
130.40
|
||||||
|
2/2/2007
|
$ |
186.72
|
$ |
129.07
|
$ |
148.62
|
||||||
Stock
Repurchase Program
Prior
to
January 5, 2007, the Company’s Board of Directors had approved various stock
repurchase programs, all of which have been
completed. On January 5, 2007, the Company’s Board of Directors
approved an additional stock repurchase program authorizing the Company to
repurchase up to $50.0 million of its outstanding common stock (the “2007 Stock
Repurchase Program”), of which approximately $46.2 million remained available
for repurchase as of February 3, 2007. Under these programs additional amounts
of outstanding common stock could be repurchased using proceeds of the exercise
of employee stock options. At February 3, 2007, approximately $7.9
million was available to the Company for stock repurchases with proceeds from
the exercise of employee stock options.
The
following is a summary of repurchase activity completed under the various
repurchase programs through February 3,
2007
(in thousands):
|
Stock
Repurchase Programs
|
Date
Approved
|
Date
Completed
|
Amount
|
Shares
Repurchased
(1)
|
||||||
|
2002
Stock Repurchase Programs
|
July
29, 2002 & September 19, 2002
|
February
1, 2003
|
$ |
25,000
|
2,586
|
|||||
|
2003
Stock Repurchase Program
|
October
1, 2003
|
May
25, 2004
|
50,000
|
3,116
|
||||||
|
2005
Stock Repurchase Program
|
July
5, 2005
|
October
29, 2005
|
30,000
|
1,686
|
||||||
|
2007
Stock Repurchase Program
|
January
5, 2007
|
Active
|
3,773
|
174
|
||||||
|
108,773
|
7,562
|
|||||||||
|
Stock
repurchases using proceeds from the exercise of employee
stock
options
|
56,210
|
3,146
|
||||||||
|
Total
|
$ |
164,983
|
10,708
|
|||||||
(1)
Shares repurchased are restated to reflect the impact of the 3-for-2 stock
splits on August 19, 2005 and January 31, 2007.
The
following table is a summary of repurchase activity during the fourth quarter
of
2006:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced
Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under
the Plans or
Programs
|
||||||||||||
|
October
29, 2006 to November 25, 2006
|
-
|
$ |
-
|
-
|
$ |
6,474,262
|
||||||||||
|
November
26, 2006 to December 30, 2006
|
-
|
$ |
-
|
-
|
$ |
7,126,906
|
||||||||||
|
December
31, 2006 to February 3, 2007
|
174,274
|
$ |
21.65
|
174,274
|
$ |
54,168,709
|
||||||||||
|
Total
|
174,274
|
$ |
21.65
|
174,274
|
||||||||||||
The
following sets forth selected consolidated financial data for the periods
indicated. The selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements included
herein. All amounts are stated in thousands, except for per share
data and number of stores.
|
|
Fiscal
Year
|
|||||||||||||||||||||
|
|
2002
|
2003
(1)
|
|
2004
|
2005
|
2006
(1)(2)
|
||||||||||||||||
|
Statement
of operations data:
|
|
|
|
|
|
|
||||||||||||||||
|
Net
sales
|
$ |
875,557
|
$ |
972,212
|
|
$ |
1,243,851
|
$ |
1,344,100
|
$ |
1,550,180
|
|||||||||||
|
Cost
of sales and related buying, occupancy and distribution
expenses
|
611,293
|
694,055
|
|
884,291
|
952,680
|
1,096,693
|
||||||||||||||||
|
|
||||||||||||||||||||||
|
Gross
profit
|
264,264
|
278,157
|
|
359,560
|
391,420
|
453,487
|
||||||||||||||||
|
Selling,
general and administrative expenses
|
176,202
|
200,713
|
|
274,265
|
296,543
|
352,870
|
||||||||||||||||
|
Store
opening costs
|
1,271
|
3,068
|
|
2,172
|
3,210
|
7,825
|
||||||||||||||||
|
Interest,
net
|
1,777
|
2,509
|
|
2,515
|
2,958
|
5,011
|
||||||||||||||||
|
Gain
on sale of private label credit card portfolio, net
|
-
|
(12,218 | ) |
|
-
|
-
|
-
|
|||||||||||||||
|
|
|
|||||||||||||||||||||
|
Income
before income tax expense
|
85,014
|
84,085
|
|
80,608
|
88,709
|
87,781
|
||||||||||||||||
|
Income
tax expense
|
31,455
|
30,691
|
|
29,220
|
32,822
|
32,479
|
||||||||||||||||
|
|
|
|||||||||||||||||||||
|
Net
income
|
$ |
53,559
|
$ |
53,394
|
|
$ |
51,388
|
$ |
55,887
|
$ |
55,302
|
|||||||||||
|
|
|
|||||||||||||||||||||
|
Basic
earnings per common share (3)
|
$ |
1.22
|
$ |
1.25
|
|
$ |
1.25
|
$ |
1.38
|
$ |
1.33
|
|||||||||||
|
Basic
weighted average common shares (3) outstanding
|
43,988
|
42,757
|
|
41,136
|
40,569
|
41,559
|
||||||||||||||||
|
|
|
|||||||||||||||||||||
|
Diluted
earnings per common share (3)
|
$ |
1.14
|
$ |
1.18
|
|
$ |
1.15
|
$ |
1.27
|
$ |
1.25
|
|||||||||||
|
Diluted
weighted average common shares (3)outstanding
|
47,158
|
45,413
|
|
44,763
|
44,040
|
44,111
|
||||||||||||||||
|
|
|
|||||||||||||||||||||
|
Margin
and other data:
|
|
|||||||||||||||||||||
|
Gross
profit margin (4)
|
30.2 | % | 28.6 | % |
|
28.9 | % | 29.1 | % | 29.3 | % | |||||||||||
|
Selling,
general and administrative expense rate (5)
|
20.1 | % | 20.6 | % |
|
22.0 | % | 22.1 | % | 22.8 | % | |||||||||||
|
Capital
expenditures
|
$ |
47,880
|
$ |
46,432
|
|
$ |
47,890
|
$ |
75,168
|
$ |
71,914
|
|||||||||||
|
Construction
allowances from landlords
|
3,908
|
9,488
|
|
3,104
|
13,302
|
8,946
|
||||||||||||||||
|
Stock
repurchases
|
25,461
|
7,666
|
|
61,701
|
48,687
|
21,579
|
||||||||||||||||
|
Proceeds
from exercise of stock options and warrants,including tax
benefit
|
1,537
|
10,393
|
|
20,437
|
15,498
|
45,359
|
||||||||||||||||
|
Cash
dividends per share
|
-
|
-
|
|
-
|
0.03
|
0.12
|
||||||||||||||||
|
|
|
|||||||||||||||||||||
|
Store
data:
|
|
|||||||||||||||||||||
|
Comparable
store sales growth (6)
|
1.6 | % | (4.1 | %) |
|
2.5 | % | 5.4 | % | 3.5 | % | (2) | ||||||||||
|
Store
openings
|
14
|
170
|
(7)
|
22
|
36
|
108
|
(8) | |||||||||||||||
|
Store
closings
|
2
|
6
|
|
11
|
15
|
3
|
||||||||||||||||
|
Number
of stores open at end of period
|
354
|
518
|
|
529
|
550
|
655
|
||||||||||||||||
|
Total
selling area square footage at end of period
|
6,079
|
9,914
|
|
10,001
|
10,377
|
12,124
|
||||||||||||||||
|
February
1,
2003
|
January
31,
2004
|
January
29,
2005
|
January
28,
2006
|
February
3,
2007
|
||||||||||||||||
|
Balance
sheet data (at end of period)
|
||||||||||||||||||||
|
Working
capital
|
$ |
273,486
|
$ |
230,538
|
$ |
225,161
|
$ |
222,510
|
$ |
253,668
|
||||||||||
|
Total
assets
|
534,136
|
669,091
|
686,999
|
731,653
|
824,986
|
|||||||||||||||
|
Debt
obligations
|
882
|
13,119
|
3,178
|
3,053
|
16,614
|
|||||||||||||||
|
Stockholders'
equity
|
411,006
|
470,338
|
481,273
|
501,832
|
571,408
|
|||||||||||||||
___________________________________________________________
|
(1)
|
The
financial results of Peebles and B.C. Moore have been included in
the
Company's consolidated financial statements from November 2, 2003
and
February 26, 2006, respectively, the effective dates of the Acquisitions
for accounting purposes.
|
|
(2)
|
Fiscal
year 2006 includes 53 weeks. Comparable store sales growth for
2006 has been determined based on a comparable 52-week
period.
|
|
(3)
|
The
share and per share information for all periods presented have
been restated to reflect the 3-for-2 stock splits
which were paid in the form of a stock dividend on August
19, 2005 and January 31, 2007.
|
|
(4)
|
Depreciation
expense associated with store locations, information systems and
the
distribution centers are included as a component of cost of
sales. Depreciation expense included in cost of sales as a rate
of sales was 1.1%, 1.5%, 2.1%, 2.1% and 2.2% in the years 2002, 2003,
2004, 2005 and 2006, respectively. The increase in depreciation
expense over this period as a rate of sales is the result of the
(i)
Peebles Acquisition on November 4, 2003 with the associated increase
in
depreciable assets, (ii) B.C. Moore Acquisition on February 27, 2006
with
the associated increase in depreciable assets, (iii) capital expenditures
since the Company’s emergence from bankruptcy in 2001 and (iv) the
relatively low depreciation basis of fixed assets associated with
the
stores which were open at the time of emergence from bankruptcy in
2001
due to the application of fresh-start
reporting.
|
|
(5)
|
SG&A
expenses in fiscal years 2002 and 2003 included, as an offset to
selling,
general and administrative expenses, the net income contribution
from the
Stage private label credit card portfolio prior to its sale on September
12, 2003, which included service charge and late fee income, operating
expenses incurred by the Company in origination of credit, customer
service and collection activities, interest expense on securitization
facility borrowings and certain other items (collectively “Net Credit
Income”). Net Credit Income in fiscal years 2002 and 2003 was
2.2% and 1.4% of sales,
respectively.
|
SG&A
expense in 2006 increased as a rate of sales primarily due to the higher
SG&A expenses, as a rate of sales, for the B.C. Moore stores prior to their
conversion and re-opening as Peebles stores totaling $22.8 million, which among
other things, included the fee earned by the liquidator that managed operations
of the stores during this period.
|
(6)
|
Comparable
store sales growth is based on sales growth for those stores which
have
been opened at least fourteen months prior to the reporting
period. These results do not include comparable store
performance of stores acquired in the Acquisitions prior to the date
of
the Acquisitions.
|
|
(7)
|
Includes
136 stores acquired in the Peebles
Acquisition.
|
|
(8)
|
Includes
69 stores acquired in the B.C. Moore
Acquisition.
|
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
General
Stage
Stores is a Houston, Texas-based regional, specialty department store retailer
offering moderately priced, nationally recognized brand name and private label
apparel, accessories, cosmetics and footwear for the entire
family. As of February 3, 2007, the Company operated 655 stores
located in 33 states under the Stage, Bealls and Palais Royal names throughout
the South Central states, and under the Peebles name throughout the Midwestern,
Southeastern, Mid-Atlantic and New England states. The Company's
principal focus is on consumers in small and mid-size markets which the Company
believes are under-served and less competitive. The Company believes
that it is able to differentiate itself from the competition in the small and
mid-size markets in which it operates by offering consumers access to basic
as
well as fashionable brand name merchandise not typically carried by other
retailers in the same market area. In the highly competitive
metropolitan markets in which it operates, the Company competes against national
department store chains, which similarly offer moderately priced, brand name
and
private label merchandise. As a way of differentiating itself from
the competition in these larger metropolitan markets, the Company endeavors
to
offer consumers a high level of customer service in convenient
locations.
On
February 27, 2006, the Company acquired 100% of the common stock of privately
held B.C. Moore & Sons, Incorporated (“B.C. Moore”). In
purchasing B.C. Moore, the Company acquired 78 retail locations, which are
located in small markets throughout Alabama, Georgia, North Carolina and South
Carolina (the “B.C. Moore Acquisition”). The acquired B. C. Moore
stores went through several phases of operation during 2006. The
stores operated as usual through April, at which time, starting about every
two
weeks, a different group of stores began inventory liquidation
sales. Upon the completion of their liquidation activities, which ran
for about eight to nine weeks, the stores went dark. During this dark
period, which lasted three to four weeks for each store, the 69 continuing
stores were remodeled as necessary, re-inventoried with Peebles merchandise
assortments, new signs installed, and then reopened as Peebles
stores. The Company completed the conversion of 69 of the
acquired stores to its Peebles name and format in the third
quarter. The remaining 9 non-converted stores were
closed. The Company believes that the B.C. Moore Acquisition expands
and strengthens its position in the Southeastern United States, and is
consistent with its corporate strategy of increasing the concentration of its
store base into smaller markets.
The
financial information, discussion
and analysis that follow should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere herein.
Results
of Operations
The
following table sets forth the
results of operations as a percent of sales for the periods indicated (2004
and
2005 consisted of 52 weeks while 2006 consisted of 53 weeks):
|
Fiscal
Year
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of sales and related buying, occupancy and distribution
expenses
|
70.7
|
70.9
|
71.1
|
|||||||||
|
Gross
profit margin
|
29.3
|
29.1
|
28.9
|
|||||||||
|
Selling,
general and administrative expenses
|
22.8
|
22.1
|
22.0
|
|||||||||
|
Store
opening costs
|
0.5
|
0.2
|
0.2
|
|||||||||
|
Interest,
net
|
0.3
|
0.2
|
0.2
|
|||||||||
|
Income
before income tax
|
5.7
|
6.6
|
6.5
|
|||||||||
|
Income
tax expense
|
2.1
|
2.4
|
2.3
|
|||||||||
|
Net
income
|
3.6 | % | 4.2 | % | 4.2 | % | ||||||
2006
Compared to 2005
Sales
for
2006 increased 15.3% to $1,550.2 million from $1,344.1 million for 2005.
Comparable store sales, which are sales in stores open at least fourteen months
prior to the reporting period, increased 3.5% during the first 52 weeks of
2006
(“2006 comparable store sales”) as compared to a 5.4% increase in
2005. The increase in total sales of $206.1 million was driven by the
Company’s 2006 comparable store sales gain, which accounted for $44.7 million of
the increase, as well as $98.5 million in sales generated by the new and newly
converted stores that were not in the comparable store sales base during 2006,
and sales of $62.1 million contributed by the acquired B.C. Moore stores during
the period from February 26, 2006 (the effective date of the B.C. Moore
Acquisition for accounting purposes) through the completion of their
conversion to Peebles stores in the third quarter of 2006. In
addition, sales during the fifty-third week of 2006 accounted for $21.4 million
of the increase. Offsetting these sales gains somewhat was the loss
of $20.6 million in sales from closed stores, including the four stores closed
due to damage sustained from Hurricane Rita, that were in operation during
2005.
Comparable
store sales increase by quarter is presented below:
|
Fiscal
Year
|
||||||||
|
2006
|
2005
|
|||||||
|
1st
Quarter
|
3.2 | % | 4.9 | % | ||||
|
2nd
Quarter
|
4.5
|
7.0
|
||||||
|
3rd
Quarter
|
4.1
|
3.9
|
||||||
|
4th
Quarter
|
2.5 | * |
5.6
|
|||||
|
Total
Year
|
3.5 | * |
5.4
|
|||||
*
Excludes the impact of the 14th week
in the 4th quarter
and the
impact of the 53rd week
in
2006.
The
Company achieved 2006 comparable store sales increases in each of its key
merchandise categories (i.e., those categories comprising greater than 5%
of
sales). Special sizes, cosmetics, and accessories provided the most significant
increase in 2006 comparable store sales. On a market population
basis, utilizing a ten mile radius from each store, in 2006 the Company achieved
overall comparable store sales increases in each of its three market store
groups. In its small market stores, or those in market areas with
populations of less than 50,000, 2006 comparable store sales increased 3.6%
as
compared to 5.8% in 2005. In its mid-sized market stores, or those in
market areas with populations of 50,000 to 150,000, 2006 comparable stores
sales
increased by 3.5% as compared to 6.0% in 2005. In its large market
stores, or those in market areas with populations greater than 150,000, 2006
comparable store sales increased 3.3% as compared to 3.7% in 2005.
During
the first half of 2006, the Company operated with lower than desired merchandise
levels at its Peebles stores, which led to negative comparable store sales
at
these stores during that period. The Company experienced learning
curve issues related to the implementation of the new Peebles merchandising
and
warehouse management systems in early 2006. These purchase order and
processing problems slowed the flow of goods during the early part of the
year,
which in conjunction with insufficient planned inventory levels in certain
categories of business, contributed to the Peebles comparable stores having
lower than desired inventory levels during the first half of
2006. The Company believes that, although comparable store sales were
up 3.8% during the first half of the year, driven by good demand for its
seasonal and clearance merchandise assortments, strength of the energy sector
economy in the related states of Texas, Oklahoma, New Mexico and Louisiana,
and
the hurricane recovery driven sales in certain markets in Texas, Louisiana
and
Mississippi (which generally lasted until the anniversary of the storms in
September of 2006), comparable store sales could have been better if not
for the
issues at its Peebles stores. In the third quarter, inventory levels
in its Peebles stores were raised to appropriate levels and, as a result,
these
stores produced comparable store sales gains during the second half of the
year. Looking forward into 2007, the Company believes that its
comparable store sales performance during the first half of the year will
benefit from easier comparisons to 2006 due to the weakness experienced in
its
Peebles stores as a result of their inventory issues, offset somewhat by
tougher
comparisons for its stores located in the hurricane recovery areas of the
Gulf
Coast. Comparisons to 2006 should normalize during the second half of
2007.
The
following is a summary of the changes between 2006 and 2005 in the components
of
cost of sales, expressed as a percent of sales:
|
|
Increase
(Decrease) in the Components of Cost of Sales
|
|||||||||||||||||||
|
|
Quarter
1 2006
|
Quarter
2 2006
|
Quarter
3 2006
|
Quarter
4 2006
|
Full
Year 2006
|
|||||||||||||||
|
Increase
(decrease) in cost of sales under former retail method:
|
|
|
|
|
|
|||||||||||||||
|
Merchandise
cost of sales
|
(0.8 | )% | 0.1 | % | 0.6 | % | (1.6 | )% | (0.5 | )% | ||||||||||
|
Buying,
occupancy and distribution expenses
|
(0.1 | ) |
1.6
|
0.6
|
(1.1 | ) |
0.1
|
|||||||||||||
|
Subtotal
|
(0.9 | ) |
1.7
|
1.2
|
(2.7 | ) | (0.4 | ) | ||||||||||||
|
Impact
on merchandise cost of sales due to the changes in accounting principles
to the cost method
|
5.5
|
(1.4 | ) |
-
|
(2.3 | ) |
0.2
|
|||||||||||||
|
Increase
(decrease) in cost of sales and related buying, occupancy and distribution
expenses rate
|
4.6 | % | 0.3 | % | 1.2 | % | (5.0 | )% | (0.2 | )% | ||||||||||
The
Company changed its method of accounting for merchandise inventories from the
retail method to the weighted average cost method (the “cost method”) during the
second quarter of 2006, retrospectively applied as of the beginning of
2006. In connection with the change in its method of accounting for
merchandise inventories to the cost method, the Company also changed its
accounting policy related to its historical treatment of certain distribution
center costs associated with preparing inventory for sale, such as distribution
payroll, benefits, occupancy, depreciation, and other direct operating expenses,
and now capitalizes these related costs into inventory and recognizes these
expenses as the related inventory turns. Reported results for periods
prior to 2006 have not been adjusted as the period-specific information required
to value inventory on the cost method is not determinable. See Note 2
to the Consolidated Financial Statements. Accordingly, gross profit in 2006
is
not comparable to 2005 due to the different inventory accounting methods used
in
each period. This is due to the fact that the cost of sales
under the former retail method, which was in use prior to 2006, was based on
an
average margin realized on an entire department, which was affected by the
seasonal changes in the mark-up percentages of inventory on hand at the end
of
each quarter while cost of sales under the cost method, which was adopted in
2006, represents the weighted average cost of the individual item
sold. Another factor is the different approaches to the valuation of
clearance inventory between the cost method and the historical retail
method. The impact of the accounting changes was a $2.6 million
decrease in gross profit in 2006. Gross profit before the impact of the
accounting changes increased 16.5% to $456.1 million in 2006 from $391.4 million
in 2005. Gross profit, as a percent of sales, was 29.3% in 2006 under
the cost method as compared to 29.1% in 2005 under the retail
method.
The
decrease in the cost of sales rate of 0.4% before the change in accounting
principles was primarily attributable to improved merchandise margins, which
benefited from a higher maintained mark-up from increased purchase order mark-on
as compared to prior year and better leverage from higher sales on buying,
occupancy, and distribution expenses excluding the effect of
the $4.3 million charge to cost of sales for the correction of an
accounting error related to distribution handling credits. The prior year and
first quarter impact of $3.8 million was recorded in the second quarter of
2006,
of which $3.3 million related to prior years. See Note 3 to the
Consolidated Financial Statements for further discussion regarding the
correction of this error.
Selling,
general and administrative (“SG&A”) expenses in 2006 increased $56.4
million, or 19.0%, to $352.9 million from $296.5 million in
2005. The overall increase in SG&A expenses from 2005 was
primarily due to increases in store expenses as a result of higher sales and
increased store count, including the acquired B.C. Moore stores. As a
percent of sales, SG&A expenses increased to 22.8% in 2006 as compared to
22.1% in 2005. The increase in the SG&A rate of 0.7% in 2006 was
principally due to higher SG&A expenses, as a rate of sales, for
the B.C. Moore stores prior to their conversion and re-opening
as Peebles stores totaling $22.8 million, which among other things,
included the fee earned by the liquidator that managed operations of the stores
during this period. Increases in SG&A expenses in 2006 also
included (i) higher expenses of $4.2 million associated with long-term incentive
equity awards, which includes the expensing of stock options that began in
the
first quarter of 2006 (ii) higher professional fees and other expenses of $1.3
million associated with the Company’s inventory valuation methodology review,
(iii) increased property insurance premiums of $1.5 million due to claims
activity related to last year’s hurricanes and (iv) increased other personnel
related costs, including salaries and relocation costs as compared to
2005. These increases in SG&A expenses were partially offset by
reimbursements that the Company received in the current year totaling
approximately $4.0 million for its hurricane related losses and approximately
$4.6 million of gift card and merchandise credit breakage income discussed
more
fully below.
The
Company records deferred revenue on its balance sheet for the sale of gift
cards
and recognizes this revenue upon the redemption of gift cards in net
sales. The Company similarly records deferred revenue on its balance sheet
for merchandise credits issued related to customer returns and recognizes this
revenue upon the redemption of the merchandise credits. Unredeemed gift
cards and merchandise credits, net of estimated breakage, are recorded as a
liability. Gift card and merchandise credit breakage income
(“breakage income”) is recognized based upon historical redemption patterns and
represents the balance of gift cards and merchandise credits for which the
Company believes the likelihood of redemption is remote. The Company’s
gift cards and merchandise credits are considered to be a large pool of
homogeneous transactions. During the fourth quarter of 2006, the
Company accumulated enough historical data for the first time to determine
the
breakage rate of approximately 4% and objectively determine the estimated time
period of actual redemptions. As a result, the Company recognized
approximately $4.6 million of breakage income in the fourth quarter of
2006. As 2006 was the first year in which the Company recognized breakage
income, the amount recognized includes the breakage income related to gift
cards
sold and merchandise credits issued since the inception of the program.
This income is recorded as other income and is included in the Consolidated
Statement of Income as a reduction in Selling, General and Administrative
Expenses. At current issuance levels for gift card and merchandise
credits, the Company anticipates recognizing breakage income of approximately
$1.1 million annually.
Store
opening costs in 2006 of $7.8 million, which include expenses associated with
the rent holiday on new and relocated stores, relate to the 39 new stores opened
and nine stores relocated during 2006 as well as expenses associated with the
transition and conversion of the 69 former B.C. Moore stores into Peebles stores
during 2006. In 2005, the Company incurred $3.2 million in store
opening costs related to the 36 new stores opened and 16 stores
relocated.
Net
interest expense was $5.0 million
in 2006 as compared to $3.0 million in 2005. The increase is
reflective of higher average borrowings during 2006, primarily related to the
B.C. Moore acquisition and store conversion activities, as well as an increase
in the weighted average interest from 5.6% in 2005 to 6.9% in
2006. Interest expense is principally comprised of interest on
borrowings under the Company’s Revolving Credit Facility (as defined in
“Liquidity and Capital Resources”), related letters of credit and commitment
fees, amortization of debt issue costs and interest on financing lease
obligations.
The
Company’s effective tax rate was
37.0% in both 2006 and 2005, which resulted in income tax expense of $32.5
million in 2006 as compared to income tax expense of $32.8 million in
2005. The Company’s effective tax rate is currently estimated to be
37.3% in 2007.
As
a result of the foregoing, the Company had net income of $55.3 million in 2006
as compared to net income of $55.9 million in 2005.
2005
Compared to 2004
Sales
for 2005 increased 8.1% to
$1,344.1 million from $1,243.9 million for 2004. The increase in
total sales was a combination of the beneficial impact of the $64.6 million
comparable store sales increases and $52.4 million additional sales generated
by
new stores not yet in the comparable stores base offset somewhat by the impact
of closed stores.
Comparable
store sales increase (decrease) by quarter are presented below.
|
Fiscal
Year
|
||||||||
|
2005
|
2004
|
|||||||
|
1st
Quarter
|
4.9 | % | 4.5 | % | ||||
|
2nd
Quarter
|
7.0
|
(3.2 | ) | |||||
|
3rd
Quarter
|
3.9
|
4.3
|
||||||
|
4th
Quarter
|
5.6
|
4.0
|
||||||
|
Total
Year
|
5.4
|
2.5
|
||||||
Comparable
store sales, which are sales in stores that have been open at least fourteen
months prior to the reporting period increased by 5.4% in 2005 as compared
to a
2.5% increase in 2004. Sales results in the first half of 2005
benefited from an increased investment in selected categories of merchandise
to
support new initiatives as well as the increased investment in inventory at
the
Peebles stores as part of a program to increase sale productivity in those
stores. In the third quarter of 2005, the Company’s sales in its Gulf
Coast region stores were negatively impacted during the periods of time that
Hurricanes Katrina and Rita were making landfall, which was primarily in
September. Beginning in October and throughout the fourth quarter of
2005, the Company experienced a significant sales rebound in the market area
most impacted by the storms, as those affected by the storms replenished their
wardrobes. In addition, the Company benefited in the fourth quarter
of 2005 from the sales of University of Texas football national championship
related apparel.
The
Company achieved comparable store sales gains during 2005 in most of its key
merchandise categories (i.e., those categories contributing greater than 5%
of
sales), namely special sizes, accessories, young men’s, cosmetics, men’s, and
misses sportswear. Conversely, the Company’s outerwear, home &
gifts and dresses & suits each had comparable store sales
decreases. On a market population basis utilizing a ten mile radius
from each store, the Company experienced positive comparable store sales results
in all of its market stores. In its small market stores, or those in
market areas of less than 50,000 people, comparable store sales increased
5.8%. In its mid-size market stores, or those in market areas of
50,000 to 150,000 people, comparable store sales increased 6.0%. In
its large market stores, or those in market areas with populations greater
than
150,000, comparable store sales increased 3.7%.
Gross
profit increased 8.8% to $391.4 million for 2005 from $359.6 million for
2004. Gross profit, as a percent of sales, increased to 29.1% for
2005 from 28.9% for 2004. The increase in gross margin rate was due
to improved merchandise margins, as the buying, store occupancy and distribution
expenses were flat with the prior year. The following is a summary of
the changes between 2005 and 2004 in the components of cost of sales, expressed
as a percent of sales:
|
Increase
(decrease) of the components of cost of sales
|
||||||||||||||||||||
|
Quarter
1
2005
|
Quarter
2
2005
|
Quarter
3
2005
|
Quarter
4
2005
|
Full
Year
2005
|
||||||||||||||||
|
Merchandise
cost of sales, including shrink expense
|
(0.3 | )% | (0.3 | )% | (0.1 | )% | (0.2 | )% | (0.2 | )% | ||||||||||
|
Buying,
occupancy and distribution expenses
|
-
|
(0.4 | ) |
-
|
0.3
|
-
|
||||||||||||||
|
Total
cost of sales, and related buying, occupancy
and distribution expenses
|
(0.3 | )% | (0.7 | )% | (0.1 | )% | 0.1 | % | (0.2 | )% | ||||||||||
The
decrease in buying, occupancy and
distribution expenses in the second quarter was principally due to a $1.2
million reduction of estimated obligations to landlords for contingent rent
and
store real estate taxes. The increase in buying, occupancy and
distribution expenses during the fourth quarter was principally driven by
non-recurring costs, such as severance and lease termination costs, related
to
the closure of the Knoxville distribution center.
SG&A
expenses for 2005 increased
8.1% to $296.5 million from $274.3 in 2004 and, as a percent of sales, increased
to 22.1% from 22.0% in 2004. SG&A expenses for 2005 increased
from 2004 primarily as a result of higher sales, increases in the number of
stores in operation in 2005, and increased advertising costs. The
increase in SG&A expenses for 2005 included charges of $2.7 million due
under employment agreements for payments associated with the continuing
consolidation of the Peebles management and operation
functions. SG&A also included an increase of $3.2 million in
incentive compensation over 2004. The increase in incentive
compensation is reflective of the operating results in each year as compared
to
the Company’s targeted operating results for each of the respective
years.
These
above increases were somewhat offset by a $3.0 million credit to SG&A
expense in 2005 that resulted from the reduction in the previously recorded
liability associated with the sale of the Peebles private label credit card
portfolio in March 2004. The Company sold this private label credit
card portfolio to World Financial Network National Bank (the
"Bank"). At closing, the Company received consideration of
approximately $34.8 million, which approximated the amount of account balances
outstanding at the time of closing. Under the terms of the Amended
and Restated Program Agreement dated March 5, 2004 (the “Amended and Restated
Program Agreement”), the Company is obligated to reimburse the Bank up to a
total of $3.5 million, based on the non-attainment of a defined net portfolio
yield performance during the first three years after the sale (the “measurement
period”), with a calculation of the cumulative amount due related to this
obligation on each of the first three anniversary dates of the
agreement. At the time of the sale, an estimated liability of $3.5
million was recorded for this potential obligation. The Company paid
the Bank approximately $0.5 million on the initial anniversary date after the
sale, which reduced the recorded liability to $3.0 million, as a result of
the
actual net portfolio yield falling below the defined net portfolio yield during
the initial year of the measurement period. Based on the improving
trend in the actual net portfolio yield during 2005, the Company recorded a
benefit of $3.0 million to reverse the remaining recorded liability related
to
the Peebles private label credit card portfolio. As a result of the
improvement in the portfolio yield, the Company received back the $0.5 million
paid on the first anniversary date as well as an additional $0.8 million related
to excess collected yield above the defined portfolio yield performance under
a
50% sharing arrangement provided under terms of the Amended and Restated Program
Agreement through the second measurement period in March 2006. The
Company expects to receive an additional approximately $1.4 million in April
2007 after the third and final measurement period in March 2007. As such, the
Company expects to record a $2.7 million gain in the first quarter of 2007
as
this will no longer be a gain contingency.
SG&A
expenses were also impacted by
an increase in the premium received associated with sales generated by use
of
the Stage division private label credit card. Beginning in October 1,
2004, under terms of the Amended and Restated Program Agreement, the Company
receives a premium or pays a discount on sales generated using the Stage
division private label credit card, based on the performance of the Stage
portfolio that was sold in September 2003. The Company realized $4.9
million and $1.9 million of premium on Stage division credit sales under the
Amended and Restated Program Agreement related to this agreement during 2005
and
2004, respectively.
Store
opening costs in 2005 of $3.2
million, which include expenses associated with the rent holiday on new and
relocated stores, relate to the 36 new stores opened and the 16 stores relocated
during 2005. Store opening costs of $2.2 million incurred in 2004
relate to the 22 new stores opened and the six stores relocated during
2004.
Net
interest expense for 2005 increased
20% to $3.0 million for the current year from $2.5 million in
2004. The increase is reflective of higher borrowings related to an
increase in capital expenditures, continued stock repurchase activity and
seasonal borrowings, as well as a weighted average interest rate increase from
3.5% in 2004 to 5.6% in 2005. Interest expense is principally
comprised of interest on borrowings under the Company’s Revolving Credit
Facility, letters of credit and commitment fees, amortization of debt issue
costs and interest on capital and finance lease obligations.
The
Company's effective tax rate in
2005 was 37%, resulting in income tax expense of $32.8 million in 2005, as
compared to income tax expense of $29.2 million in 2004, during which its
effective tax rate was 36.25%.
As
a result of the foregoing, the
Company had net income of $55.9 million for 2005, as compared to net income
of
$51.4 million for 2004, an increase of 8.8%.
Seasonality
and Inflation
Historically,
the Company's business is
seasonal and sales traditionally are lower during the first three quarters
of
the fiscal year (February through October) and higher during the last quarter
of
the fiscal year (November through January). The fourth quarter
usually accounts for slightly more than 30% of the Company's annual sales,
with
the other quarters accounting for approximately 22% to 24%
each. Working capital requirements fluctuate during the year and
generally reach their highest levels during the third and fourth
quarters. The Company does not believe that inflation had a material
effect on its results of operations during the past three
years. However, there can be no assurance that the Company’s business
will not be affected by inflation in the future.
The
following table shows quarterly information (unaudited) for the Company (in
thousands, except per share amounts):
|
Fiscal
Year 2006
|
||||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||
|
Net
sales
|
$ |
343,541
|
$ |
362,104
|
$ |
353,348
|
$ |
491,187
|
||||||||
|
Gross
profit
|
99,670
|
95,578
|
100,310
|
157,929
|
||||||||||||
|
Net
income
|
$ |
9,045
|
$ |
3,853
|
$ |
2,798
|
$ |
39,606
|
||||||||
|
Basic
earnings per common share
|
$ |
0.23
|
$ |
0.10
|
$ |
0.07
|
$ |
0.91
|
||||||||
|
Diluted
earnings per common share
|
$ |
0.21
|
$ |
0.09
|
$ |
0.06
|
$ |
0.88
|
||||||||
|
Basic
weighted average shares
|
39,880
|
40,033
|
42,511
|
43,651
|
||||||||||||
|
Diluted
weighted average shares
|
43,500
|
43,542
|
44,384
|
44,954
|
||||||||||||
|
Fiscal
Year 2005
|
||||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||
|
Net
sales
|
$ |
310,060
|
$ |
309,430
|
$ |
306,044
|
$ |
418,566
|
||||||||
|
Gross
profit
|
104,162
|
82,769
|
90,715
|
113,774
|
||||||||||||
|
Net
income
|
$ |
20,522
|
$ |
6,513
|
$ |
9,146
|
$ |
19,706
|
||||||||
|
Basic
earnings per common share
|
$ |
0.50
|
$ |
0.16
|
$ |
0.23
|
$ |
0.50
|
||||||||
|
Diluted
earnings per common share
|
$ |
0.46
|
$ |
0.15
|
$ |
0.21
|
$ |
0.45
|
||||||||
|
Basic
weighted average shares
|
41,201
|
40,838
|
40,545
|
39,693
|
||||||||||||
|
Diluted
weighted average shares
|
44,960
|
44,729
|
44,253
|
43,404
|
||||||||||||
See
Note
2 to the Consolidated Financial Statements regarding changes in accounting
principles related to merchandise inventories and Note 3 to the Consolidated
Financial Statements regarding correction of error in accounting for
distribution handling credits. Accordingly, gross profit by quarter
for 2006 and 2005 are not comparable. The following is a summary of
the impact of the changes in accounting principles and correction of error
on
gross profit by quarter:
|
|
Increase
(Decrease) to Gross Profit
|
|||||||||||||||||||
|
|
Q1
|
Q2
|
Q3
|
Q4
|
Total
|
|||||||||||||||
|
Change
to cost method
|
$ | (19,500 | ) | $ |
5,171
|
$ | (1,324 | ) | $ |
13,172
|
$ | (2,481 | ) | |||||||
|
Capitalization
of certain distribution center costs
|
743
|
(100 | ) |
1,176
|
(1,959 | ) | (140 | ) | ||||||||||||
|
Correction
of error in accounting for distribution handling credits
|
-
|
(4,105 | ) | (1,167 | ) |
1,012
|
(4,260 | ) | ||||||||||||
|
|
$ | (18,757 | ) | $ |
966
|
$ | (1,315 | ) | $ |
12,225
|
$ | (6,881 | ) | |||||||
Liquidity
and Capital Resources
The
Company's liquidity is currently provided by (i) existing cash balances, (ii)
operating cash flows, (iii) normal trade credit terms from the vendor and factor
community and (iv) its Revolving Credit Facility.
The
Company has a senior secured revolving credit facility (the "Revolving Credit
Facility"), which matures on August 21, 2008, that provides for borrowings
up to
a maximum of $250.0 million. Borrowings under the Revolving Credit
Facility are limited to the availability under a borrowing base that is
determined principally on eligible inventory as defined by the Revolving Credit
Facility agreement. The daily interest rates under the Revolving
Credit Facility are determined by a prime rate or Eurodollar rate plus an
applicable margin as set forth in the Revolving Credit Facility
agreement. Inventory and cash and cash equivalents are pledged as
collateral under the Revolving Credit Facility. The Revolving Credit
Facility supports the Company's outstanding letters of credit requirements,
and
is also used by the Company to provide financing for working capital, capital
expenditures, and other general corporate purposes. Outstanding
borrowings at February 3, 2007 under the Revolving Credit Facility were $13.6
million. Excess borrowing availability at February 3, 2007 under the
Revolving Credit Facility, net of letters of credit outstanding of $13.6
million, was $177.5 million. For 2006, the weighted average
interest rate on outstanding borrowings and the average daily borrowings under
the Revolving Credit Facility were 6.9% and $42.5 million,
respectively.
The
Revolving Credit Facility contains covenants that, among other things, restrict,
based on required levels of excess availability, (i) the amount of additional
debt or capital lease obligations, (ii) the amount of capital expenditures,
payment of dividends and repurchase of common stock under certain circumstances
and (iii) related party transactions. The Company continually
monitors its liquidity position and compliance with those
covenants.
The
Company had $55.2 million in cash provided from operating activities in
2006. Net income, adjusted for non-cash expenses such as depreciation
and amortization, deferred income taxes, amortization of debt issue costs,
stock
compensation expense, stock option income tax benefits and excess tax benefits
from stock-based compensation, provided cash of approximately $110.7
million. Changes in operating assets and liabilities used net cash of
approximately $68.9 million, which included a $47.8 million increase in
merchandise inventories primarily to support the new stores opened in
2006. Additionally, cash flows from operating activities included
construction allowances from landlords of $8.9 million, which funded a portion
of the Company’s capital expenditures related to store leasehold improvements in
new and relocated stores, and $4.4 million from the sale of the credit card
portfolio acquired in connection with the B.C. Moore Acquisition.
On
February 27, 2006, the Company acquired 100% of the common stock of privately
held B.C. Moore & Sons, Incorporated primarily utilizing funds available to
it under its Revolving Credit Facility. The purchase price of the
acquisition was approximately $35.6 million, net of cash acquired.
During
2006, the Company repurchased approximately 1.0 million shares of its common
stock at a cost of approximately $21.6 million, which included $3.8 million
under the 2007 Stock Repurchase Program and $17.8 million funded using proceeds
from the exercise of employee stock options, including the tax benefits that
resulted from the option exercises. At February 3, 2007,
approximately $46.2 million was available to the Company for stock repurchase
under the 2007 Stock Repurchase Program while approximately $7.9 million was
available to the Company for stock repurchase with proceeds and related tax
benefits from the exercise of employee stock options.
In
August
2006, the remaining approximately 3.3 million outstanding warrants were
exercised prior to their expiration on August 23, 2006. Proceeds from
the exercise of these warrants totaled approximately $27.3 million.
The
Company initiated a quarterly cash dividend of $0.017 per share during the
third
quarter of 2005. During the second quarter of 2006 the Company increased its
quarterly cash dividend to $0.033 per share. Dividend payments
during 2006 totaled $4.9 million. On March 2, 2007, the
Company announced that its Board of Directors declared a quarterly cash dividend
of $0.05 per share on the Company's common stock. While the Company expects
to
continue payment of quarterly dividends (which at the current rate would
approximate $9.0 million in 2007), the declaration and payment of future
dividends by the Company are subject to the discretion of the
Board. Any future determination to pay dividends will depend on the
Company’s results of operations and financial condition, as well as meeting
certain criteria under its Revolving Credit Facility and other factors deemed
relevant by the Board.
Capital
expenditures for 2006 were $71.9 million as compared to $75.2 million in
2005. The Company opened 108 new stores and relocated nine stores in
2006 as compared to 36 stores opened and 16 stores relocated in
2005. The Company received construction allowances from landlords of
$8.9 million in 2006 to fund a portion of the capital expenditures related
to
store leasehold improvements in new and relocated stores, while $13.3 million
was received from landlords in 2005. These funds have been recorded
as a deferred rent credit in the balance sheet and will be recorded as an offset
to rent expense over the lease term commencing with the date the allowances
were
earned. 2005 capital expenditures also included approximately $12.1
million associated with the installation of new sortation equipment and a new
warehouse management system in the South Hill Virginia distribution center
and
the conversion of the Peebles merchandise management system from the “legacy”
system to the Stage merchandise management system used in Houston,
Texas. Management currently estimates capital expenditures in 2007,
net of construction allowances to be received from landlords, will be
approximately $95.0 million. The expenditures will be for the opening
of approximately 45 new stores, relocations and expanded stores and initial
expenditures on a third distribution center.
The
Company anticipates increasing the number of new store openings to approximately
70 per year beginning in 2008. The Company believes that, due to its
accelerated unit, geographic and square footage growth plans, it will be
necessary to open a third distribution center in the near future. As
a result, the Company has initiated a site selection process to identify the
optimum location for this new facility, with an expected start-up in
mid-2008. The Company believes that it will spend approximately $4.1
million in 2007 on its new distribution center, with additional expenditures
of
$7.5 - $12.0 million in 2008. The Company currently plans on leasing
a facility with approximately 150,000 – 200,000 square feet, which would be
capable of supporting approximately 300 stores. With this additional
processing and distribution capacity, the Company will be able to supply
merchandise to over 1,100 stores located in markets all across the
country.
While
there can be no assurances, management believes that there should be sufficient
liquidity from cash flows from operations and availability under the Revolving
Credit Facility to cover both the Company's short-term and long-term funding
needs.
Contractual
Obligations
The
Company has numerous contractual commitments for purchases of merchandise
inventories, services arising in the ordinary course of business, letters of
credit, Revolving Credit Facility service and leases. Presented below
is a summary of the Company's contractual obligations as of February 3, 2007
(in
thousands). These items are discussed in further detail in Note 7 and
Note 12 to the Consolidated Financial Statements.
|
Payment
Due by Period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
Than
One
Year
|
1-3
Years
|
4-5
Years
|
More
than 5
Years
|
|||||||||||||||
|
Revolving
Credit Facility (1)
|
$ |
13,635
|
$ |
-
|
$ |
13,635
|
$ |
-
|
$ |
-
|
||||||||||
|
Documentary
letters of credit (2)
|
2,400
|
2,400
|
-
|
-
|
-
|
|||||||||||||||
|
Capital
and finance lease obligations
|
2,979
|
86
|
217
|
292
|
2,384
|
|||||||||||||||
|
Operating
lease obligations (undiscounted) (3)
|
406,483
|
57,232
|
113,001
|
84,569
|
151,681
|
|||||||||||||||
|
Other
purchase obligations (4)
|
22,270
|
10,545
|
11,690
|
35
|
-
|
|||||||||||||||
|
Total
contractual cash obligations
|
$ |
447,767
|
$ |
70,263
|
$ |
138,543
|
$ |
84,896
|
$ |
154,065
|
||||||||||
|
(1)
|
The
Company had $13.6 million of outstanding borrowings at February 3,
2007. The Revolving Credit Facility matures August 21,
2008. Borrowings and repayments will occur in future
periods.
|
|
(2)
|
These
documentary letters of credit support the importing of private label
merchandise. The Company also had outstanding stand-by letters
of credit that totaled approximately $11.2 million at February 3,
2007, of
which $8.9 million were also issued in support of importing the Company's
private label merchandise. The remaining stand-by letters of
credit of $2.3 million are required to collateralize retained risks
and
deductibles under various insurance programs. The estimated
liability that will be paid in cash related to stand-by letters of
credit
supporting insurance programs are reflected in accrued
expenses. If the Company failed to make payments when due, the
beneficiaries of letters of credit could make demand for payment
under the
letters of credit.
|
|
(3)
|
The
Company has certain operating leases with provisions for step rent
or
escalation payments. The Company records rent expense on a
straight-line basis, evenly dividing rent expense over the lease
term,
including the build-out period, if any, and where appropriate, applicable
available lease renewal option periods. However, this
accounting treatment does not affect the future annual operating
lease
cash obligations as shown herein. The Company records
construction allowances from landlords as a deferred rent credit
when
earned in the Consolidated Balance Sheets. Such deferred rent
credit is amortized over the related term of the lease, commencing
with
the date the Company earns the construction allowance, as a reduction
of
rent expense.
|
Certain
leases provide for contingent rents that are not measurable at
inception. These contingent rents are primarily based on a percentage
of sales that are in excess of a predetermined level. These amounts
are excluded from minimum rent and are included in the determination of total
rent expense when it is probable that the expense has been incurred and the
amount is reasonably estimable.
|
(4)
|
Other
purchase obligations include legally binding contracts such as firm
commitments for utility purchases, capital expenditures, software
acquisition/license commitments and legally binding service
contracts. For the purposes of this table, contractual
obligations for purchase of goods or services are defined as agreements
that are enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing
of the
transaction. If the obligation to purchase goods or services is
noncancelable, the entire value of the contract was included in the
above
table. If the obligation is cancelable, but the Company would
incur a penalty if cancelled, the dollar amount of the penalty was
included as an “other purchase obligation.” The Company fully
expects to receive the benefits of the goods or services in connection
with fulfilling its obligation under these agreements. The
expected timing for payment of the obligations discussed above is
estimated based on current information. Timing of payments and
actual amounts paid may be different depending on the timing of receipt
of
goods or services or changes to agreed upon amounts for some
obligations.
|
In
the
ordinary course of business, the Company enters into arrangements with vendors
to purchase merchandise typically up to six months in advance of expected
delivery. These purchase orders do not contain any significant
termination payments or other penalties if cancelled. As of February
3, 2007, the Company had outstanding purchase orders of $223.2
million.
The
Company’s funding policy for its pension obligations is to make contributions to
maintain the minimum funding requirements in accordance with the Employee
Retirement Income Security Act. The Company may elect to contribute
additional amounts to maintain a level of funding to minimize the Pension
Benefit Guaranty Corporation premium costs or to cover short-term liquidity
needs of the plans in order to maintain current invested
positions. The Company contributed $1.2 million during 2006 and
expects to contribute between $0.9 to $2.1 million during 2007.
Critical
Accounting Policies and Estimates
The
preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The primary estimates underlying the Company's
consolidated financial statements include the valuation of inventory, the
estimated useful life of property, equipment and leasehold improvements, the
valuation of goodwill and intangible asset, the reserve for sales returns,
self-insurance reserves and estimated liability for pension
obligations. The Company cautions that future events rarely develop
exactly as forecast, and the best estimates routinely require
adjustment. Therefore, actual results could differ from these
estimates. Management bases its estimates on historical experience
and on various assumptions which are believed to be reasonable under the
circumstances. The following critical accounting policies affect the
Company's more significant judgments and estimates used in the preparation
of
its consolidated financial statements.
Inventory
valuation. The Company changed its method of accounting for merchandise
inventories from the retail method to the weighted average cost method (the
“cost method”) during the second quarter of 2006, retrospectively applied as of
the beginning of 2006. The Company believes the cost method is preferable as
it
results in an inventory valuation that more closely reflects the acquisition
cost of the Company’s inventory. In addition, the cost method
provides for a better matching of cost of sales with related
sales. Cost of sales under the cost method represents the weighted
average cost of the individual item sold rather than the cost of an item based
on an average margin realized on an entire department as under the retail
method. In connection with the change in its method of accounting for
merchandise inventories to the cost method, the Company also changed its
accounting policy related to its historical treatment of distribution center
costs associated with preparing inventory for sale, such as distribution
payroll, benefits, occupancy, depreciation, and other direct operating expenses,
and now capitalizes these related costs. The Company believes it is preferable
to capitalize these costs as it incorporates a key component of the costs
associated with preparing inventory for sale into the valuation of inventory
on
a cost basis and achieves a better matching of cost of sales with related
sales. See Note 2 to the Consolidated Financial
Statements.
Vendor
allowances. The Company receives consideration from its
merchandise vendors in the form of allowances and
reimbursements. Given the promotional nature of the Company’s
business, the allowances are generally intended to offset the Company’s costs of
handling, promoting, advertising and selling the vendors’ products in its
stores. Vendor allowances related to the purchase of inventory,
including those discussed in Note 3 to the Consolidated Financial Statements,
are recorded as a reduction to the cost of inventory until
sold. Vendor allowances are recognized as a reduction of cost of
goods sold or related selling expense when the purpose for which the vendor
funds were intended to be used has been fulfilled and amounts have been
authorized by vendors.
Self-insurance
reserves. The Company maintains self-insurance retentions with
respect to general liability, workers compensation and health benefits for
its
employees. The Company estimates the accruals for the liabilities
based on industry development factors and historical claim trend
experience. Although management believes adequate reserves have been
provided for expected liabilities arising from the Company's self-insured
obligations, projections of future losses are inherently uncertain, and it
is
reasonably possible that estimates of these liabilities will change over the
near term as circumstances develop.
Frozen
defined benefit
plans. The plans' obligations and related assets are presented
in Note 11 to the Consolidated Financial Statements. The plans'
assets are invested in a combination of equity and debt
securities. Plans' obligations and the annual pension expense are
determined by independent actuaries using a number of
assumptions. Key assumptions in measuring the plans' obligations
include the discount rate applied to future benefit obligations and the
estimated future return on plans' assets. At February 3, 2007
assumptions used were a weighted average discount rate of 6.0% and a weighted
average long-term rate of return on the plans' assets of 7.6%.
Recent
Accounting Standards and Disclosures
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB No. 115” (“SFAS 159”). SFAS 159
permits companies to choose to measure many financial instruments and certain
other items at fair value in order to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to
apply complex hedge accounting provisions. SFAS 159 is effective for
the Company’s fiscal year ending January 31, 2009. The Company is currently
assessing the impact of this statement on its consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for the Company’s fiscal year beginning February 3,
2008. The Company is currently assessing the impact of this statement
on its consolidated financial statements.
In
June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting for uncertainty in income tax positions. FIN 48 requires
that a company recognize in its consolidated financial statements the impact
of
a tax position that is more likely than not to be sustained upon examination
based on the technical merits of the position. FIN 48 is effective
for the Company’s fiscal year beginning February 4, 2007. Any
cumulative effect recorded as a result of adopting FIN 48 will be recorded
as an
adjustment to opening retained earnings. The Company does not expect
the impact of adoption of this statement to have a material impact on its
consolidated financial statements.
In
June 2006, the Emerging Issues Task
Force (“EITF”) reached a consensus on Issue No. 06-03, “How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented
in
the Income Statement,” (“EITF 06-03”). EITF 06-03 concluded that the
presentation of taxes assessed by a governmental authority that are directly
imposed on a revenue-producing transaction between a seller and a customer,
such
as sales, use, value added and certain excise taxes is an accounting policy
decision that should be disclosed in a company’s financial
statements. Additionally, companies that record such taxes on a gross
basis should disclose the amounts of those taxes in interim and annual financial
statements for each period for which an income statement is presented if those
amounts are significant. EITF 06-03 is effective for the Company’s
fiscal year beginning February 4, 2007. The Company does not expect
this statement to have a material impact on its consolidated financial
statements.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets – an amendment of FASB Statement No. 140” (“SFAS
156”). SFAS 156 amends SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities”
(“SFAS 140”). SFAS 156 requires an entity to separately recognize
financial assets as servicing assets or servicing liabilities each time it
undertakes an obligation to service a financial asset by entering into certain
kinds of servicing contracts. The entity must also initially measure
all separately recognized servicing assets and servicing liabilities at fair
value, if practicable. Servicing assets and servicing liabilities
subsequently measured at fair value must be separately presented in the
statement of financial position and additional disclosures are required for
all
separately recognized servicing assets and servicing
liabilities. SFAS 156 is effective for the Company’s fiscal year
beginning February 4, 2007. The Company does not expect this
statement to have a material impact on its consolidated financial
statements.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments — an amendment of FASB Statements No. 133 and
140”(“SFAS 155”). SFAS 155 amends SFAS No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” (“SFAS
133”) and SFAS 140. This Statement also resolves issues addressed in
Statement SFAS 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial
Assets.” SFAS 155 permits fair value remeasurement
for any hybrid financial instrument that contains an embedded derivative
that
otherwise would require bifurcation and clarifies which interest-only strips
and
principal-only strips are not subject to the requirements of
SFAS 133. SFAS 140 is amended to eliminate the prohibition
on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS 155 is effective for all financial instruments
acquired or issued during fiscal years beginning after September 15, 2006.
The Company does not expect this statement to have a material impact on its
consolidated financial statements.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES
ABOUT
MARKET
RISK
|
Borrowings
under the Company's Revolving Credit Facility bear a floating rate of
interest. As of February 3, 2007, outstanding borrowings under the
Company's Revolving Credit Facility were $13.6 million. An increase
in interest rates in the future may have a negative impact on the Company's
results of operations and cash flows. The Company had average daily
borrowings of $42.5 million bearing a weighted average interest rate of 6.9%
during 2006. A hypothetical 10% change in interest rates would have
had a $0.3 million effect on the Company’s annual results of operations and cash
flows.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
See
"Index to Consolidated Financial
Statements of Stage Stores, Inc." included on page F-1 for information required
under this Item 8.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
|
None.
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
As
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934
(the "Exchange Act"), the term "disclosure controls and procedures" means
controls and other procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under
the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
The
Company's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the Company's disclosure controls and procedures and concluded
that the Company's disclosure controls and procedures were effective as of
February 3, 2007.
Changes
in Internal Control over Financial Reporting
There
were no changes in the Company's internal control over financial reporting
that
occurred during the fiscal quarter ended February 3, 2007 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Management's
Annual Report on Internal Control Over Financial Reporting
The
management of Stage Stores, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company as defined
in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act. This system is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in
accordance with accounting principles generally accepted in the United States
of
America.
The
Company's internal control over financial reporting includes those policies
and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of
the
assets of the Company; (ii) provide reasonable assurance that transactions
are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and
expenditures of the Company are being made only in accordance with
authorizations of management and the directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company's assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time.
With
the
participation of the Chief Executive Officer and Chief Financial Officer, the
Company’s management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting based on the framework and
criteria established in Internal Control-Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation, the Company’s management concluded that the Company's
internal control over financial reporting was effective as of February 3,
2007.
Management's
assessment of the effectiveness of the Company's internal control over financial
reporting has been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
|
/s/
JAMES R. SCARBOROUGH
|
/s/
MICHAEL E. McCREERY
|
|
James
R. Scarborough
|
Michael
E. McCreery
|
|
Chairman
and Chief Executive Officer
|
Executive
Vice President and Chief
|
|
April
3, 2007
|
Financial
Officer
|
|
April
3, 2007
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Stage
Stores, Inc.
Houston,
Texas
We
have
audited management's assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that the management
of Stage Stores, Inc. and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of February 3, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in
the
circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A
company's internal control over financial reporting is a process designed by,
or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that
(1)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
In
our
opinion, management's assessment that the Company maintained effective internal
control over financial reporting as of February 3, 2007, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of February 3, 2007, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of
and
for the year ended February 3, 2007, of the Company and our report dated April
3, 2007 expressed an unqualified opinion on those financial statements and
includes explanatory paragraphs relating to the change in the method of
accounting for merchandise inventories, the change in the method of accounting
for certain distribution center costs, and the Company’s adoption of FASB
Statement No. 123(R), Share-based Payment, on January 29, 2006 and FASB
Statement No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans, on February
3, 2007.
/s/DELOITTE
& TOUCHE LLP
Houston,
Texas
April
3,
2007
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information set forth under “Information Relating to Directors, Nominees and
Executive Officers”, under “Information Relating to the Board of Directors and
Committees”, under “Section 16(a) Beneficial Ownership Reporting Compliance”,
under “Audit Committee - Audit Committee Financial Expert”, and under "Code of
Ethics for Senior Officers" in the Proxy Statement is incorporated herein by
reference.
The
following information pertains to the executive officers of the Company as
of
April 2, 2007:
|
Name
|
Age
|
Position
|
||
|
James
R. Scarborough
|
56
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
|
Andrew
T. Hall
|
46
|
President,
Chief Operating Officer
|
||
|
Michael
E. McCreery
|
58
|
Executive
Vice President, Chief Financial Officer, Secretary and
Director
|
||
|
Dennis
E. Abramczyk
|
59
|
Executive
Vice President, Chief Operating Officer of the Peebles
Division
|
||
|
Cynthia
S. Murray
|
49
|
Executive
Vice President, Chief Merchandising Officer of the Stage
Division
|
||
|
Ernest
R. Cruse
|
56
|
Executive
Vice President, Store Operations
|
||
|
Jeffrey
J. Kish
|
42
|
Executive
Vice President, Chief Information Officer
|
||
|
Ron
D. Lucas
|
59
|
Executive
Vice President, Human Resources
|
||
|
Joanne
Swartz
|
47
|
Executive
Vice President, Advertising and Sales Promotion
|
||
|
Gough
H. Grubbs
|
58
|
Senior
Vice President, Logistics and Distribution
|
||
|
Russell
A. Lundy II
|
44
|
Senior
Vice President, Peebles Stores
|
||
|
Richard
E. Stasyszen
|
46
|
Senior
Vice President, Finance and Controller
|
||
|
Mel
B. Ward
|
53
|
Senior
Vice President, Real
Estate
|
Mr.
Scarborough has been Chairman of the Board since August 24, 2001. He
joined the Company as President and Chief Executive Officer in August of
2000. He served as President of the Company until February 20,
2006. Between 1996 and 2000, Mr. Scarborough was President and Chief
Executive Officer of Busy Body, Inc.
Mr.
Hall
joined the Company in February of 2006 as President and Chief Operating
Officer. Previously, he served as Chairman of Foley’s, a
Houston-based division of Federated Department Stores, Inc., from June of 2003
to February 2006. From June of 2002 to June of 2003, he served as
Foley’s Chief Financial Officer. From June 1999 to June 2002, Mr.
Hall was the Chief Financial Officer of Kaufmann’s Department
Stores.
Mr.
McCreery has been a Director of the
Company since August 24, 2001. He joined the Company as Executive
Vice President and Chief Financial Officer in February of 2001. From
1998 to 2001, Mr. McCreery was Senior Vice President and Chief Financial Officer
of Levitz Furniture Company.
Mr.
Abramczyk joined the Company in
March of 1999 as Vice President of men's sportswear and
furnishings. He was promoted to Senior Vice President, General
Merchandise Manager overseeing the Company’s men's, young men's, cosmetics and
shoes departments for the Stage, Bealls and Palais Royal stores in May of
1999. In January of 2000, the children's and intimate apparel
divisions were added to his responsibility. In 2002, he was promoted
to Executive Vice President, General Merchandise Manager. In February of 2006,
he was promoted to the position of Executive Vice President, Chief Operating
Officer of the Peebles Division.
Ms.
Murray joined the Company in August
of 2004 as Executive Vice President, General Merchandise Manager overseeing
the
Company's misses sportswear, junior sportswear, special sizes, accessories,
cosmetics, dresses, home & gifts, outerwear and swimwear departments for the
Stage, Bealls and Palais Royal stores. In February 2006, Ms. Murray
was promoted to Executive Vice President, Chief Merchandising Officer of the
Stage Division. Prior to joining the Company, she served as Senior
Vice President, Merchandising - Stores and Catalog at Talbot's from
1989 to 2004.
Mr.
Cruse, who was promoted to
Executive Vice President, Store Operations of Stage, Bealls and Palais Royal
in
August of 2001, joined Bealls Department Stores, which is now part of Stage
Stores, in 1966 and held various store positions. He served as Senior
Vice President, Regional Manager from 1994 to 1998, as Senior Vice President,
Planning and Allocation from 1999 to 2000, and prior to his promotion to
Executive Vice President, served as Senior Vice President, Director of
Stores.
Mr.
Kish
joined the Company in May of 1999 as Vice President, Systems Development and
was
promoted to Senior Vice President and Chief Information Officer in August of
2000. Mr. Kish was promoted to Executive Vice President and Chief
Information Officer in March of 2006.
Mr.
Lucas joined the Company in July of
1995 as Senior Vice President, Human Resources and was promoted to Executive
Vice President, Human Resources in March of 1998.
Ms.
Swartz joined the Company in
January of 1994 as Vice President, Marketing and was subsequently promoted
to
Senior Vice President, Advertising and Marketing in November of 1995 and to
Executive Vice President, Advertising and Sales Promotion in March of
2005.
Mr.
Grubbs joined the Company in February of 1996 as Vice President, Distribution
and was promoted to Senior Vice President, Logistics & Distribution in April
of 2003.
Mr.
Lundy joined the Company in
November of 2003 as Senior Vice President, Peebles Stores. Previously
he served as Senior Vice President, Stores of PHC Retail Holding Company and
Peebles Inc. since June of 1999.
Mr.
Stasyszen joined the Company in
March of 1998 as Assistant Controller and was subsequently promoted to Vice
President and Controller in February of 1999. In July of 2001, Mr.
Stasyszen was promoted to Senior Vice President, Finance and
Controller.
Mr.
Ward started with
Bealls Department Stores in March of 1979. Since April of 1996,
he has been Senior Vice President, Real Estate.
New
York Stock Exchange Required Disclosures
Because
the Company’s common stock is listed on the New York Stock Exchange (the
“NYSE”), the Company filed with the NYSE an Annual CEO Certification as of
February 6, 2006, regarding the Company’s compliance with the NYSE’s
Corporate Governance listing standards as required by Section 303A.12(a) of
the
NYSE Listed Company Manual. In addition, the Company has filed as
exhibits to this Form 10-K, the certifications of our Chief Executive Officer
and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley
Act
of 2002.
Information
regarding executive compensation under “Information Relating to Board
of Directors and Committees – Compensation Committee Interlocks and Insider
Participation” and “Compensation of Directors and Executive
Officers” in the Proxy Statement is incorporated herein by
reference.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
Information
regarding the security ownership of certain beneficial owners and management
and
related stockholder matters under “Security Ownership of Certain Beneficial
Owners and Management” in the Proxy Statement is incorporated herein by
reference.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information
regarding certain relationships and related transactions under “Transactions
with Related Persons”, “ Information Relating to Directors and Director
Nominees” and “ Information Related to the Board of Directors and
Committees-Standing Committees” in the Proxy Statement is incorporated herein by
reference.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
Information
regarding fees billed to the Company by its independent registered public
accounting firm, Deloitte & Touche LLP, under the heading “Principal
Accountant Fees and Services” in the Proxy Statement is incorporated herein by
reference.
PART
IV
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
(a) Documents
filed as part of this report:
1. Financial
Statements:
See
"Index to Consolidated Financial Statements of Stage Stores, Inc." on page
F-1,
the Report of Independent Registered Public Accounting Firm on page F-2,
and the
Financial Statements on pages F-3 to F-30, of this Form 10-K, all of which
are
incorporated herein by reference.
2.
Financial Statement Schedules:
All
schedules are omitted because they are not applicable or not required or
because
the required information is shown in the Consolidated Financial Statements
or
Notes thereto on pages F-3 to F-30, which are incorporated herein by
reference.
3.
Exhibits Index:
The
following documents are the exhibits to this Form 10-K. For
convenient reference, each exhibit is listed according to the Exhibit Table
of
Item 601 of Regulation S-K.
36
|
Exhibit
Number
|
Description
|
|
3.1
|
Restated
Articles of Incorporation of Stage Stores, Inc. (f/k/a Specialty
Retailers, Inc. (NV)) are incorporated by reference to Exhibit
3.1 of
Stage Stores’ Registration Statement on Form 10 (Commission File No.
000-21011) filed October 29, 2001.
|
|
3.2
|
Amendment
to Articles of Incorporation (Certificate of Change Filed Pursuant
to NRS
78.209 for Nevada Profit Corporation) dated January 23, 2007
is
incorporated by reference to Exhibit 3 of Stage Stores’ Current Report on
Form 8-K (Commission File No. 001-14035) filed January 29,
2007.
|
|
Amended
and Restated By-Laws of Stage Stores, Inc. dated as of March 28,
2007.
|
|
|
4.1
|
Form
of Common Stock Certificate of Stage Stores, Inc. is incorporated
by
reference to Exhibit 4.1 of Stage Stores’ Registration Statement on Form
10 (Commission File No. 000-21011) filed October 29,
2001.
|
|
10.1†
|
Stage
Stores, Inc. Amended and Restated 2001 Equity Incentive Plan
is
incorporated by reference to Appendix B of Stage Stores’ Proxy
Statement on Schedule 14A (Commission File No. 1-14035) filed
April 16, 2004.
|
|
10.2†
|
Form
of Performance Based Share Agreement is incorporated by reference
to
Exhibit 10.1 of Stage Stores’ Current Report on Form 8-K (Commission File
No. 1-14035) filed April 1, 2005.
|
|
10.3†
|
Form
of Nonstatutory Stock Option Agreement is incorporated by reference
to
Exhibit 10.1 of Stage Stores’ Current Report on Form 8-K (Commission File
No. 1-14035) filed April 1, 2005.
|
|
10.4†
|
Stage
Stores Deferred Compensation Plan is incorporated by reference
to Exhibit
10.24 of Stage Stores’ Annual Report on Form 10-K (Commission File No.
1-14035) filed April 23, 2003.
|
|
10.5†
|
Stage
Stores, Inc. 2003 Non-Employee Director Equity Compensation Plan
is
incorporated by reference to Appendix B to Stage Stores’ Proxy Statement
on Schedule 14A (Commission File No. 1-14035) filed April 23,
2003.
|
|
10.6†
|
Form
of Shareholder Agreement for restricted stock under the Stage
Stores, Inc.
2003 Non-Employee Director Equity Compensation Plan is incorporated
by
reference to Exhibit 10.6 of Stage Stores Annual Report on Form
10-K
(Commission File No. 1-14035) filed April 28, 2005.
|
|
10.7
|
Credit
Agreement dated as of August 21, 2003 among Specialty Retailers
(TX) LP,
Stage Stores, Inc. and the named subsidiaries of Stage Stores,
Inc., Fleet
Retail Finance Inc. and the initial lenders named therein, Fleet
National
Bank, and Fleet Securities, Inc. is incorporated by reference
to Exhibit
10.1 of Stage Stores’ Quarterly Report on Form 10-Q (Commission File No.
1-14035) filed August 29, 2003.
|
|
10.8
|
Limited
Waiver and First Amendment to Credit Agreement dated November
4, 2003, by
and among Specialty Retailers (TX) LP, Stage Stores, Inc. and
the named
subsidiaries of Stage Stores, Inc., Fleet Retail Finance Inc.
and the
other lenders named therein is incorporated by reference to Exhibit
10.1
of Stage Stores’ Current Report on Form 8-K (Commission File No. 1-14035)
filed November 12, 2003.
|
|
10.9
|
Second
Amendment to Credit Agreement dated January 10, 2005 by and between
Specialty Retailers (TX) LP, Stage Stores, Inc. and the named
subsidiaries
of Stage Stores, Inc., Fleet National Bank, Fleet Retail Group,
Inc. and
the other lenders named therein (Commission File No. 1-14035)
filed January 29, 2005.
|
|
10.10
|
Third
Amendment to Credit Agreement dated as of December 31, 2005 by
and between
Specialty Retailers (TX) LP, Stage Stores, Inc. and the named
subsidiaries
of Stage Stores, Inc., Bank of America, N.A. (f/k/a Fleet National
Bank),
Fleet Retail Group, Inc. and the other lenders named therein
(Commission
File No 1-14035) filed April 13,
2006.
|
|
10.11
|
Intercreditor
Agreement dated September 12, 2003 among World Financial Network
National
Bank, Specialty Retailers (TX) LP, Stage Stores, Inc. and Fleet
Retail
Finance Inc. is incorporated by reference to Exhibit 2.3 of Stage
Stores’
Current Report on Form 8-K (Commission File No. 1-14035) filed
September
22, 2003.
|
|
10.12
|
First
Amendment to Intercreditor Agreement dated March 5, 2004 by and
among
World Financial Network National Bank, Specialty Retailers (TX)
LP, Stage
Stores, Inc. and Fleet Retail Group, Inc is incorporated by reference
to
Exhibit 10.6 of Stage Stores’ Annual Report on Form 10-K (Commission File
No. 1-14035) filed April 15, 2004.
|
|
10.13
|
Amended
and Restated Private Label Credit Card Program Agreement Between
World
Financial Network National Bank and Stage Stores and Specialty
Retailers
(TX) LP dated as of March 5, 2004 is incorporated by reference
to Exhibit
10.8 of Stage Stores’ Annual Report on Form 10-K (Commission File No.
1-14035) filed April 15, 2004.
|
|
10.14†
|
Employment
Agreement between James Scarborough and Stage Stores, Inc. dated
January
30, 2002 is incorporated by reference to Exhibit 10.17 of Stage
Stores’
Annual Report on Form 10-K (Commission File No. 1-14035) filed
April 12,
2002.
|
|
10.15†
|
Employment
Agreement between Michael McCreery and Stage Stores, Inc. dated
January
30, 2002 is incorporated by reference to Exhibit 10.18 of Stage
Stores’
Annual Report on Form 10-K (Commission File No. 1-14035) filed
April 12,
2002.
|
|
10.17†
|
Employment
Agreement between Dennis Abramczyk and Stage Stores, Inc. dated
January
30, 2002 is incorporated by reference to Exhibit 10.23 of Stage
Stores’
Annual Report on Form 10-K (Commission File No. 1-14035) filed
April 23,
2003.
|
|
10.18†
|
Employment
Agreement between Cynthia Murray and Stage Stores, Inc. dated
August 2,
2004 is incorporated by reference to Exhibit 10 of Stage Stores’ Quarterly
Report on Form 10-Q (Commission File No. 1-14035) filed August
30,
2004.
|
|
10.19†
|
Employment
Agreement between Andrew Hall and Stage Stores, Inc. dated February
10,
2006 is incorporated by reference to Exhibit 10 of Stage Stores’ Current
Report on Form 8-K (Commission File No. 1-14035) filed February
15,
2006.
|
|
14
|
Code
of Ethics for Senior Officers is incorporated by reference to
Exhibit 99.4 of Stage Stores’ Annual Report on Form 10-K (Commission
File No. 1-14035) filed April 23, 2003.
|
|
18
|
Preferability
Letter from Independent Registered Public Accounting Firm dated
October
19, 2006 is incorporated by reference to Exhibit 18 of Stage
Stores’
Quarterly Report on Form 10-Q (Commission File No 1-14035) filed
October
24, 2006.
|
|
Subsidiaries
of Stage Stores, Inc.
|
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
Power
of Attorney.
|
|
|
Certification
of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a)
under
the Securities Exchange Act of 1934, as amended.
|
|
|
Certification
of Chief Financial Officer Pursuant to Rules 13a-14(a) and
15d-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant
to 18
U.S.C. Section 1350.
|
______________________________________________
|
*
|
Filed
electronically herewith.
|
|
†
|
Management
contract or compensatory plan or
arrangement.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
STAGE
STORES, INC.
|
|
|
/s/
James R. Scarborough
|
April
3, 2007
|
|
James
R. Scarborough
|
|
|
Chief
Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
STAGE
STORES, INC.
|
|
|
/s/
Michael E. McCreery
|
April
3, 2007
|
|
Michael
E. McCreery
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
Pursuant
to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
|
*
|
Director
|
April
3, 2007
|
||
|
Alan
Barocas
|
||||
|
*
|
Director
|
April
3, 2007
|
||
|
Scott
Davido
|
||||
|
*
|
Director
|
April
3, 2007
|
||
|
Michael
Glazer
|
||||
|
/s/
Michael E. McCreery
|
Director
|
April
3, 2007
|
||
|
Michael
E. McCreery
|
||||
|
*
|
Director
|
April
3, 2007
|
||
|
John
Mentzer
|
||||
|
*
|
Director
|
April
3, 2007
|
||
|
Margaret
Monaco
|
||||
|
*
|
Director
|
April
3, 2007
|
||
|
William
Montgoris
|
||||
|
*
|
Director
|
April
3, 2007
|
||
|
Sharon
Mosse
|
||||
|
/s/
James R. Scarborough
|
Director
|
April
3, 2007
|
||
|
James
R. Scarborough
|
|
(Constituting
a majority of the Board of Directors)
|
||||
|
*By:
|
/s/
Michael E. McCreery
|
|||
|
Michael
E. McCreery
|
||||
|
Attorney-in-Fact
|
||||
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS OF
STAGE STORES, INC.
|
||
|
Page
Number
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets at Feburary 3, 2007 and January 28, 2006
|
F-3
|
|
|
Consolidated
Statements of Income for the Fiscal Years 2006, 2005 and
2004
|
F-4
|
|
|
Consolidated
Statements of Cash Flows for the Fiscal Years 2006, 2005 and
2004
|
F-5
|
|
|
Consolidated
Statements of Stockholders' Equity for the Fiscal Years 2006, 2005
and
2004
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of
Stage
Stores, Inc.
Houston,
Texas
We
have
audited the accompanying balance sheets of Stage Stores, Inc. and subsidiaries
(the "Company") as of February 3, 2007 and January 28, 2006, and the related
statements of income, stockholders' equity, and cash flows for each of the
three
years in the period ended February 3, 2007. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, such financial statements present fairly, in all material respects,
the
financial position of the Company as of February 3, 2007 and January 28, 2006,
and the results of its operations and its cash flows for each of the three
years
in the period ended February 3, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in “Note 1 – Description of Business and Significant Accounting
Policies” to the consolidated financial statements, the Company adopted FASB
Statement No. 123(R), Share-based Payment, on January 29, 2006; and
FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans, on February 3, 2007.
As
discussed in “Note 2 – Changes in Accounting Principles” to the consolidated
financial statements, the Company changed its method of accounting for
merchandise inventories and its method of accounting for certain distribution
center costs in the year ended February 3, 2007.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of February 3, 2007, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated April
3, 2007 expressed an unqualified opinion on management's assessment of the
effectiveness of the Company's internal control over financial reporting and
an
unqualified opinion on the effectiveness of the Company's internal control
over
financial reporting.
/s/DELOITTE
& TOUCHE LLP
Houston,
Texas
April
3,
2007
F-2
|
Stage
Stores, Inc.
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
(in
thousands, except par values)
|
||||||||
|
February
3, 2007
|
January
28, 2006
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ |
15,866
|
$ |
33,683
|
||||
|
Merchandise
inventories, net
|
332,763
|
283,665
|
||||||
|
Current
deferred taxes
|
23,231
|
24,270
|
||||||
|
Prepaid
expenses and other current assets
|
42,512
|
36,076
|
||||||
|
Total
current assets
|
414,372
|
377,694
|
||||||
|
Property,
equipment and leasehold improvements, net
|
278,839
|
244,091
|
||||||
|
Goodwill
|
95,374
|
79,353
|
||||||
|
Intangible
asset
|
14,910
|
14,910
|
||||||
|
Other
non-current assets, net
|
21,491
|
15,605
|
||||||
|
Total
assets
|
$ |
824,986
|
$ |
731,653
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Accounts
payable
|
$ |
85,477
|
$ |
81,719
|
||||
|
Income
taxes payable
|
-
|
8,968
|
||||||
|
Current
portion of debt obligations
|
86
|
74
|
||||||
|
Accrued
expenses and other current liabilities
|
75,141
|
64,423
|
||||||
|
Total
current liabilities
|
160,704
|
155,184
|
||||||
|
Debt
obligations
|
16,528
|
2,979
|
||||||
|
Deferred
taxes
|
-
|
9,860
|
||||||
|
Other
long-term liabilities
|
76,346
|
61,798
|
||||||
|
Total
liabilities
|
253,578
|
229,821
|
||||||
|
Commitments
and contingencies
|
||||||||
|
Common
stock, par value $0.01, 64,603 shares authorized,
54,343
and 49,550 shares issued, respectively
|
543
|
496
|
||||||
|
Additional
paid-in capital
|
462,745
|
412,290
|
||||||
|
Less
treasury stock - at cost, 10,708 and 9,672 shares,
respectively
|
(165,094 | ) | (143,515 | ) | ||||
|
Accumulated
other comprehensive loss
|
(1,908 | ) | (1,981 | ) | ||||
|
Retained
earnings
|
275,122
|
234,542
|
||||||
|
Stockholders'
equity
|
571,408
|
501,832
|
||||||
|
Total
liabilities and stockholders' equity
|
$ |
824,986
|
$ |
731,653
|
||||
The
accompanying notes are an integral part of
these statements.
F-3
|
Stage
Stores, Inc.
|
|||||||||||||
|
Consolidated
Statements of Income
|
|||||||||||||
|
(in
thousands, except earnings per share)
|
|||||||||||||
|
Fiscal
Year
|
|||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||
|
Net
sales
|
$ |
1,550,180
|
$ |
1,344,100
|
$ |
1,243,851
|
|||||||
|
Cost
of sales and related buying, occupancy and distribution
expenses
|
1,096,693
|
952,680
|
884,291
|
||||||||||
|
Gross
profit
|
453,487
|
391,420
|
359,560
|
||||||||||
|
Selling,
general and administrative expenses
|
352,870
|
296,543
|
274,265
|
||||||||||
|
Store
opening costs
|
7,825
|
3,210
|
2,172
|
||||||||||
|
Interest,
net of income of $175, $226, and $87, respectively
|
5,011
|
2,958
|
2,515
|
||||||||||
|
Income
before income tax
|
87,781
|
88,709
|
80,608
|
||||||||||
|
Income
tax expense
|
32,479
|
32,822
|
29,220
|
||||||||||
|
Net
income
|
$ |
55,302
|
$ |
55,887
|
$ |
51,388
|
|||||||
|
Basic
and diluted earnings per share data:
|
|||||||||||||
|
Basic
earnings per share
|
$ |
1.33
|
$ |
1.38
|
$ |
1.25
|
|||||||
|
Basic
weighted average shares outstanding
|
41,559
|
40,569
|
41,136
|
||||||||||
|
Diluted
earnings per share
|
$ |
1.25
|
$ |
1.27
|
$ |
1.15
|
|||||||
|
Diluted
weighted average shares outstanding
|
44,111
|
44,040
|
44,763
|
||||||||||
The
accompanying notes are an integral part of
these statements.
F-4
|
Stage
Stores, Inc.
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
(in
thousands)
|
||||||||||||
|
Fiscal
Year
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ |
55,302
|
$ |
55,887
|
$ |
51,388
|
||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
45,534
|
41,519
|
36,638
|
|||||||||
|
Gain
on insurance proceeds related to property, equipment
and leasehold
improvements
|
(2,151 | ) |
-
|
-
|
||||||||
|
Deferred
income taxes
|
6,397
|
(1,006 | ) |
4,710
|
||||||||
|
Stock
option income tax benefits
|
7,234
|
4,968
|
7,593
|
|||||||||
|
Stock
compensation expense
|
4,827
|
738
|
272
|
|||||||||
|
Amortization
of debt issue costs
|
447
|
447
|
446
|
|||||||||
|
Excess
tax benefits from stock based compensation
|
(6,925 | ) |
-
|
-
|
||||||||
|
Provision
for bad debts
|
-
|
-
|
311
|
|||||||||
|
Proceeds
from sale of proprietary credit card portfolios,
net
|
4,436
|
-
|
34,764
|
|||||||||
|
Construction
allowances from landlords
|
8,946
|
13,302
|
3,104
|
|||||||||
|
Other
changes in operating assets and liabilities:
|
||||||||||||
|
Decrease
in accounts receivable
|
-
|
-
|
2,880
|
|||||||||
|
Increase
in merchandise inventories
|
(47,814 | ) | (2,077 | ) | (21,901 | ) | ||||||
|
(Increase)
decrease in other assets
|
(7,001 | ) | (17,926 | ) |
1,679
|
|||||||
|
(Decrease)
increase in accounts payable and other liabilities
|
(14,067 | ) |
10,155
|
10,510
|
||||||||
|
Net
cash provided by operating activities
|
55,165
|
106,007
|
132,394
|
|||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Additions
to property, equipment and leasehold improvements
|
(71,914 | ) | (75,168 | ) | (47,890 | ) | ||||||
|
Acquisition
of B.C. Moore, net of cash acquired
|
(35,622 | ) |
-
|
-
|
||||||||
|
Proceeds
from insurance and retirements of property, equipment
and leasehold
improvements
|
2,440
|
2,018
|
16
|
|||||||||
|
Net
cash used in investing activities
|
(105,096 | ) | (73,150 | ) | (47,874 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from (payments on):
|
||||||||||||
|
Borrowings
under revolving credit facility, net
|
13,635
|
-
|
(10,700 | ) | ||||||||
|
Repurchases
of common stock
|
(21,579 | ) | (48,687 | ) | (61,701 | ) | ||||||
|
Finance
lease obligations
|
-
|
-
|
1,650
|
|||||||||
|
Debt
obligations
|
(74 | ) | (125 | ) | (891 | ) | ||||||
|
Exercise
of warrants
|
27,354
|
1,874
|
-
|
|||||||||
|
Exercise
of stock options
|
10,771
|
8,656
|
12,844
|
|||||||||
|
Excess
tax benefits from stock based compensation
|
6,925
|
-
|
-
|
|||||||||
|
Cash
dividends
|
(4,918 | ) | (1,347 | ) |
-
|
|||||||
|
Net
cash provided by (used in) financing activities
|
32,114
|
(39,629 | ) | (58,798 | ) | |||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(17,817 | ) | (6,772 | ) |
25,722
|
|||||||
|
Cash
and cash equivalents:
|
||||||||||||
|
Beginning
of period
|
33,683
|
40,455
|
14,733
|
|||||||||
|
End
of period
|
$ |
15,866
|
$ |
33,683
|
$ |
40,455
|
||||||
|
Supplemental
disclosures:
|
||||||||||||
|
Interest
paid
|
$ |
4,191
|
$ |
2,666
|
$ |
1,870
|
||||||
|
Income
taxes paid
|
$ |
34,920
|
$ |
30,917
|
$ |
8,513
|
||||||
|
Unpaid
liabilities for capital expenditures
|
$ |
4,190
|
$ |
1,340
|
$ |
3,524
|
||||||
The
accompanying notes are an integral part of
these statements.
F-5
|
Stage
Stores, Inc.
|
||||||||||||||||||||||||||||||||
|
Consolidated
Statements of Stockholders' Equity
|
||||||||||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
Common
|
Additional
|
Treasury
|
Comprehensive
|
|||||||||||||||||||||||||||||
|
Stock
|
Paid-in
|
Stock
|
Retained
|
Income
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Shares
|
Amount
|
Earnings
|
(Loss)
|
Total
|
|||||||||||||||||||||||||
|
Balance,
January 31, 2004
|
46,302
|
$ |
463
|
$ |
374,388
|
(3,182 | ) | $ | (33,127 | ) | $ |
128,614
|
$ |
-
|
$ |
470,338
|
||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
51,388
|
-
|
51,388
|
||||||||||||||||||||||||
|
Minimum
pension liability adjustment, net of tax of $0.3 million
|
-
|
-
|
-
|
-
|
-
|
-
|
(451 | ) | (451 | ) | ||||||||||||||||||||||
|
Comprehensive
income
|
50,937
|
|||||||||||||||||||||||||||||||
|
Repurchases
of common stock
|
-
|
-
|
-
|
(3,756 | ) | (61,701 | ) |
-
|
-
|
(61,701 | ) | |||||||||||||||||||||
|
Stock
options exercised
|
1,859
|
19
|
12,825
|
-
|
-
|
-
|
-
|
12,844
|
||||||||||||||||||||||||
|
Stock
option income tax benefits
|
-
|
-
|
7,593
|
-
|
-
|
-
|
-
|
7,593
|
||||||||||||||||||||||||
|
Stock-based
compensation expense
|
-
|
-
|
272
|
-
|
-
|
-
|
-
|
272
|
||||||||||||||||||||||||
|
Recognition
of pre-reorganization deferred tax assets
|
-
|
-
|
990
|
-
|
-
|
-
|
-
|
990
|
||||||||||||||||||||||||
|
Balance,
January 29, 2005
|
48,161
|
$ |
482
|
$ |
396,068
|
(6,938 | ) | $ | (94,828 | ) | $ |
180,002
|
$ | (451 | ) | $ |
481,273
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
55,887
|
-
|
55,887
|
||||||||||||||||||||||||
|
Minimum
pension liability adjustment,
|
||||||||||||||||||||||||||||||||
|
net
of tax of $0.9 million
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,530 | ) | (1,530 | ) | ||||||||||||||||||||||
|
Comprehensive
income
|
54,357
|
|||||||||||||||||||||||||||||||
|
Dividends
on common stock
|
-
|
-
|
-
|
-
|
-
|
(1,347 | ) |
-
|
(1,347 | ) | ||||||||||||||||||||||
|
Repurchases
of common stock
|
-
|
-
|
-
|
(2,734 | ) | (48,687 | ) |
-
|
-
|
(48,687 | ) | |||||||||||||||||||||
|
Warrants
exercised
|
-
|
-
|
1,874
|
-
|
-
|
1,874
|
||||||||||||||||||||||||||
|
Stock
options exercised
|
1,389
|
14
|
8,642
|
-
|
-
|
-
|
-
|
8,656
|
||||||||||||||||||||||||
|
Stock
option income tax benefits
|
-
|
-
|
4,968
|
-
|
-
|
-
|
-
|
4,968
|
||||||||||||||||||||||||
|
Stock-based
compensation expense
|
-
|
-
|
738
|
-
|
-
|
-
|
-
|
738
|
||||||||||||||||||||||||
|
Balance,
January 28, 2006
|
49,550
|
$ |
496
|
$ |
412,290
|
(9,672 | ) | $ | (143,515 | ) | $ |
234,542
|
$ | (1,981 | ) | $ |
501,832
|
|||||||||||||||
|
Cumulative
effect of changes in accounting principles (Note 2)
|
-
|
-
|
-
|
-
|
-
|
(9,804 | ) |
-
|
(9,804 | ) | ||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
55,302
|
-
|
55,302
|
||||||||||||||||||||||||
|
Minimum
pension liability adjustment, net of tax of $0.6 million
|
-
|
-
|
-
|
-
|
-
|
-
|
1,000
|
1,000
|
||||||||||||||||||||||||
|
Comprehensive
income
|
56,302
|
|||||||||||||||||||||||||||||||
|
Cumulative
effect of adoption of SFAS No. 158 net of tax of $(0.6)
million
|
-
|
-
|
-
|
-
|
-
|
-
|
(927 | ) | (927 | ) | ||||||||||||||||||||||
|
Dividends
on common stock
|
-
|
-
|
-
|
-
|
-
|
(4,918 | ) |
-
|
(4,918 | ) | ||||||||||||||||||||||
|
Issuance
of stock award
|
10
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
|
Repurchases
of common stock
|
-
|
-
|
-
|
(1,036 | ) | (21,579 | ) |
-
|
-
|
(21,579 | ) | |||||||||||||||||||||
|
Warrants
exercised
|
3,338
|
33
|
27,321
|
-
|
-
|
-
|
-
|
27,354
|
||||||||||||||||||||||||
|
Stock
options exercised
|
1,445
|
14
|
10,757
|
-
|
-
|
-
|
-
|
10,771
|
||||||||||||||||||||||||
|
Stock
option income tax benefits
|
-
|
-
|
7,234
|
-
|
-
|
-
|
-
|
7,234
|
||||||||||||||||||||||||
|
Stock-based
compensation expense
|
-
|
-
|
4,827
|
-
|
-
|
-
|
-
|
4,827
|
||||||||||||||||||||||||
|
Recognition
of pre-reorganization deferred tax assets
|
-
|
-
|
316
|
-
|
-
|
-
|
-
|
316
|
||||||||||||||||||||||||
|
Balance,
February 3, 2007
|
54,343
|
$ |
543
|
$ |
462,745
|
(10,708 | ) | $ | (165,094 | ) | $ |
275,122
|
$ | (1,908 | ) | $ |
571,408
|
|||||||||||||||
The
accompanying notes are an integral part of these
statements.
F-6
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements
NOTE
1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Description
of business: Stage Stores, Inc. (the “Company”) is a Houston, Texas-based
regional, specialty department store retailer offering moderately priced,
nationally recognized brand name and private label apparel, accessories,
cosmetics and footwear for the entire family. As of February 3, 2007,
the Company operated 655 stores located in 33 states under the Stage, Bealls
and
Palais Royal names throughout the South Central states, and under the Peebles
name throughout the Midwestern, Southeastern, Mid-Atlantic and New England
states.
Principles
of consolidation:
The consolidated financial statements include the accounts of Stage Stores,
Inc.
and its subsidiaries. All intercompany transactions have been
eliminated in consolidation.
Fiscal
year: References to a
particular year are to the Company's fiscal year which is the 52 or 53 week
period ending on the Saturday closest to January 31st of the
following
calendar year. For example, a reference to "2006" is a reference to
the fiscal year ended February 3, 2007. Fiscal years 2005 and 2004
were 52 week years and fiscal 2006 is a 53 week year.
Use
of estimates:The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. On an ongoing basis, the
Company evaluates its estimates, including those related to inventory, deferred
tax assets, goodwill, intangible asset, long-lived assets, sales returns,
pension obligations, self-insurance and contingent
liabilities. Actual results could differ from these
estimates. Management bases its estimates on historical experience
and on various assumptions which are believed to be reasonable under the
circumstances.
Stock
Splits: On January 5, 2007 the Company's Board of Directors
approved a 3-for-2 stock split of the Company’s common stock, $.01 par value,
which was paid in the form of a stock dividend on January 31, 2007 to
shareholders of record at the close of business on January 18,
2007. The Company issued approximately 18.1 million shares of common
stock as a result of the stock split.
On
July
5, 2005, the Company's Board of Directors approved a 3-for-2 stock split of
the
Company’s common stock, $.01 par value, which was paid in the form of a stock
dividend on August 19, 2005 to shareholders of record of the Company’s common
stock at the close of business on August 4, 2005. The Company
issued approximately 10.8 million shares of common stock as a result of the
stock split.
The
share and per share information included in these consolidated financial
statements have been restated to reflect these stock splits for all periods
presented.
Cash
and cash equivalents: The Company considers highly liquid investments with
initial maturities of less than three months to be cash
equivalents.
Concentration
of credit risk:
Financial instruments which potentially subject the Company to concentrations
of
credit risk are primarily cash. The Company's cash management and
investment policies restrict investments to low-risk, highly-liquid securities
and the Company performs periodic evaluations of the relative credit standing
of
the financial institutions with which it deals.
Merchandise
inventories: The
Company values its inventory at the lower of cost or market under a weighted
average cost method (the “cost method”) of accounting effective as of January
29, 2006. Prior to this date, the Company valued its inventory using the retail
method of accounting. See Note 2 for a discussion on changes in
accounting principles.
The
former retail method of accounting
for inventory involved applying a calculated cost-to-retail ratio to the
Company’s retail value of inventories. Based on a review of the
historical clearance markdowns, current business trends, planned clearance
promotion events and the level of ownership of clearance merchandise, an
adjustment to inventory was recorded to reflect additional markdowns which
were
estimated to be necessary to liquidate existing clearance inventories and reduce
inventories to the lower of cost or market.
F-7
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Stock-based
compensation. The Company adopted Statement of Financial
Accounting Standards (“SFAS”)
No. 123(R), “Share-Based Payment,”
(“SFAS 123(R)”) in the first quarter of 2006 using the modified prospective
application method. SFAS 123(R) requires entities to measure the cost
of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost will be recognized
over the period during which the employee is required to provide services in
exchange for the award. See Note 10 for disclosures regarding
stock-based compensation.
Vendor
allowances: The Company
receives consideration from its merchandise vendors in the form of allowances
and reimbursements. Given the promotional nature of the Company’s
business, the allowances are generally intended to offset the Company’s costs of
handling, promoting, advertising and selling the vendors’ products in its
stores. Vendor allowances related to the purchase of inventory, including those
discussed in Note 3, are recorded as a reduction to the cost of inventory until
sold. Vendor allowances are recognized as a reduction of cost of
goods sold or the related selling expense when the purpose for which the vendor
funds were intended to be used has been fulfilled and amounts have been
authorized by vendors.
Property,
equipment and leasehold
improvements: Additions to property, equipment and leasehold improvements
are recorded at cost and depreciated over their estimated useful lives using
the
straight-line method. Property, equipment and leasehold improvements
acquired through the acquisitions of Peebles Inc. (“Peebles”) and B.C. Moore
& Sons, Incorporated (“B.C. Moore”), have been recorded at estimated fair
market values as of the respective date of each acquisition. The
estimated useful lives of leasehold improvements do not exceed the term of
the
related lease, including applicable available renewal options where
appropriate. The estimated useful lives in years are generally as
follows:
|
Buildings
& improvements
|
20
|
|
Store
and office fixtures and equipment
|
5-10
|
|
Warehouse
equipment
|
5-15
|
|
Leasehold
improvements- stores
|
5-12.5
|
|
Leasehold
improvements- corporate office
|
20
|
Impairment
of long-lived asset: Property,
plant and equipment and other long-lived assets, including acquired
definite-lived intangibles and other assets, are reviewed to determine whether
any events or changes in circumstances indicate that the carrying amount of
the
asset may not be recoverable. For long-lived assets to be held and used, the
Company bases its evaluation on impairment indicators such as the nature of
the
assets’ physical condition, the future economic benefit of the asset, any
historical or future profitability measurements and other external market
conditions or factors that may be present. If such impairment indicators are
present or other factors exist that indicate the carrying amount of the asset
may not be recoverable, the Company determines whether an impairment has
occurred through the use of an undiscounted cash flows analysis of the asset
at
the lowest level for which identifiable cash flows exist. If an impairment
has
occurred, the Company recognizes a loss for the difference between the carrying
amount and the estimated fair value of the asset. Management's judgment is
necessary to estimate fair value. Accordingly, actual results could vary
from those estimates.
During
2006, 2005 and 2004, the Company, as a result of its ongoing review of the
performance of its stores, identified certain stores whose cash flow trends
indicated that the carrying value of leasehold improvements may not be fully
recoverable. Impairment charges for these stores of $1.0 million,
$0.6 million and $0.9 million were recorded in cost of sales on the consolidated
statements of income in 2006, 2005 and 2004, respectively. The
charges reflect the difference between these stores' carrying value and fair
value.
Goodwill: Goodwill
represents the excess of consideration over the fair value of tangible and
intangible net assets acquired in connection with the acquisitions of
Peebles and B.C. Moore.
Intangible
asset: In connection with acquisitions, other intangible assets
separate and apart from goodwill are required to be recognized if such assets
arise from contractual or other legal rights or if such assets are separable
from the acquired business. Determining a fair value for such items
requires a high degree of judgment, assumptions and estimates. As a part
of the acquisition of Peebles, the Company acquired the rights to the tradename
and trademark (collectively the “Tradename”) of “Peebles,” which was identified
as an indefinite life intangible. The value of the Tradename was
determined to be $14.9 million at the time of the Peebles
acquisition.
F-8
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Impairment
of goodwill and intangible asset: Goodwill and indefinite life
intangible assets are not amortized but are tested for impairment annually
or
more frequently when indicators of impairment exist. The Company
completed its annual impairment test during the fourth quarter of 2006 and
determined there was no impairment of existing goodwill and intangible
asset.
Debt
issuance
costs: Debt issuance costs of $2.2 million are accounted for as
a deferred charge and amortized over the term of the related financing
agreement. Accumulated amortization was $1.5 million and $1.0 million
at February 3, 2007 and January 28, 2005, respectively.
Financial
instruments: The
Company records all financial instruments at cost. The cost of all
financial instruments approximates fair value.
Revenue
recognition: Revenue from sales is recognized at the time of
sale, net of any returns. The Company records deferred revenue on its balance
sheet for the sale of gift cards and recognizes this revenue upon the redemption
of gift cards in net sales. The Company similarly records deferred revenue
on its balance sheet for merchandise credits issued related to customer returns
and recognizes this revenue upon the redemption of the merchandise
credits.
Gift
card and merchandise credit liability: Unredeemed gift cards and
merchandise credits, net of estimated breakage, are recorded as a liability.
Gift card and merchandise credit breakage income (“breakage income”) is
recognized based upon historical redemption patterns and represents the balance
of gift cards and merchandise credits for which the Company believes the
likelihood of redemption is remote. The Company’s gift cards and
merchandise credits are considered to be a large pool of homogeneous
transactions. During the fourth quarter of fiscal 2006, the Company
accumulated enough historical data for the first time to determine the breakage
rate of approximately 4% and objectively determine the estimated time period
of
actual redemptions. As a result, the Company recognized approximately $4.6
million of breakage income in the fourth quarter of fiscal 2006. As 2006
was the first year in which the Company recognized breakage income, the amount
recognized includes the breakage income related to gift cards sold and
merchandise credits issued since the inception of the various programs.
This income is recorded as other income and is included in the Consolidated
Statement of Income as a reduction in selling, general and administrative
expenses.
Store
opening
expenses: Costs related to the opening of new stores are
expensed as incurred. Store opening expenses include the rent accrued
during the rent holiday period on new and relocated stores.
Advertising
expenses:
Advertising costs are charged to operations when the related advertising takes
place. Advertising costs were $54.8 million, $48.9 million and $43.7
million, for 2006, 2005 and 2004, respectively, which are net of advertising
allowances received from vendors of $10.9 million, $9.6 million and $8.7
million, respectively.
Rent
expense: The
Company records rent expense on a straight-line basis over the lease term,
including the build out period, and where appropriate, applicable available
lease renewal option periods. The difference between the payment and
expense in any period is recorded as deferred rent in other long-term
liabilities in the Consolidated Balance Sheets. The Company records
construction allowances from landlords when earned as a deferred rent credit
in
other long-term liabilities. Such deferred rent credit is amortized
over the related term of the lease, commencing the date the Company earns the
construction allowance, as a reduction of rent expense. The deferred
rent credit was $38.3 million and $31.3 million as of February 3, 2007 and
January 28, 2006, respectively.
Certain
leases provide for contingent
rents that are not measurable at inception. These contingent rents
are primarily based on a percentage of sales that are in excess of a
predetermined level. These amounts are excluded from minimum rent and
are included in the determination of total rent expense when it is probable
that
the expense has been incurred and the amount is reasonably
estimable.
Income
taxes: The provision
for income taxes is computed based on the pretax income included in the
Consolidated Statements of Income. The asset and liability approach
is used to recognize deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the carrying amounts for
financial reporting purposes and the tax basis of assets and
liabilities. A valuation allowance is established if it is more
likely than not that some portion of the deferred tax asset will not be
realized. See Note 13 for additional disclosures regarding income
taxes and deferred income taxes.
F-9
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Earnings
per share: Basic earnings per share is computed using the weighted average
number of common shares outstanding during the periods. Diluted
earnings per share is computed using the weighted average number of common
shares as well as all potentially dilutive common share equivalents
outstanding. Stock options, stock appreciation rights (“SARS”) and
non-vested stock grants were the only potentially dilutive share
equivalents the Company had outstanding at February 3, 2007. The
Company’s earnings per share computations for 2006, 2005 and 2004 were impacted
by warrants outstanding and exercised during 2006.
The
following table summarizes the components used to determine total diluted shares
(in thousands):
|
Fiscal
Year
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Basic
weighted average shares outstanding
|
41,559
|
40,569
|
41,136
|
|||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options, SARS and non-vested stock grants
|
1,428
|
1,610
|
1,833
|
|||||||||
|
Warrants
|
1,124
|
1,861
|
1,794
|
|||||||||
|
Diluted
weighted average shares outstanding
|
44,111
|
44,040
|
44,763
|
|||||||||
The
following table summarizes the number of options and SARS to purchase shares
of
common stock that were outstanding but were not included in the computation
of
diluted earnings per share because the exercise price of the options and SARS
was greater than the average market price of the common shares (in
thousands):
|
Fiscal
Year
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Number
of anti-dilutive options and SARS outstanding
|
43
|
357
|
445
|
|||||||||
Recent
accounting standards: In February 2007, the Financial Accounting Standards
Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB No. 115”
(“SFAS 159”). SFAS 159 permits companies to choose to measure many
financial instruments and certain other items at fair value in order to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for the Company’s fiscal year
ending January 31, 2009. The Company is currently assessing the impact of this
statement on its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans” (“SFAS
158”). SFAS 158 requires an employer to recognize an asset for a
plan’s over funded status or a liability for a plan’s under funded status,
measure a plan’s assets and its obligations that determine its funded status as
of the date of the employer’s fiscal year-end, and recognize changes in the
funded status in the year in which the changes occur. The Company
adopted this statement during fiscal 2006. See Note
11. Effective for fiscal years ending after December 15, 2008,
SFAS 158 requires a company to measure the funded status of a plan as of the
date of its year-end statement of financial position. As of the end of 2008,
the
Company will be required to measure the funded status of its plans as of
January 31, 2009. The Company is currently assessing the impact of
the change in the measurement date provision of this statement on its
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for the Company’s fiscal year beginning February 3,
2008. The Company is currently assessing the impact of this
statement on its consolidated financial
statements.
F-10
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108 Quantifying Misstatements (“SAB 108”), which
provides guidance for quantifying financial statement misstatements. SAB 108,
establishes the use of the dual approach that requires quantification of
financial statement errors based on the effects of the errors in both the
balance sheet and the income statement. SAB 108 is effective for
public companies for the first fiscal year ending after November 15, 2006.
SAB
108 permits public companies to record the cumulative effect of initially
applying the dual approach in the first year ending after November 15, 2006,
by
recording the necessary correcting adjustments to the carrying values of the
assets and liabilities as of the beginning of the year with the offsetting
adjustment recorded to the opening balance of retained earnings. The
Company adopted SAB 108 in 2006. The adoption of SAB 108 did not have an impact
on the Company’s consolidated financial statements.
In
June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the
accounting for uncertainty in income tax positions. FIN 48 requires
that a company recognize in its consolidated financial statements the impact
of
a tax position that is more likely than not to be sustained upon examination
based on the technical merits of the position. FIN 48 is effective
for the Company’s fiscal year beginning February 4, 2007. Any
cumulative effect recorded as a result of adopting FIN 48 will be recorded
as an
adjustment to opening retained earnings. The Company does not expect
the impact of adoption of this statement to have a material impact on its
consolidated financial statements.
In
June 2006, the Emerging Issues Task
Force (“EITF”) reached a consensus on Issue No. 06-03, “How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented
in
the Income Statement,” (“EITF 06-03”). EITF 06-03 concluded that
the presentation of taxes assessed by a governmental authority that are directly
imposed on a revenue-producing transaction between a seller and a customer,
such
as sales, use, value added and certain excise taxes is an accounting policy
decision that should be disclosed in a company’s financial
statements. Additionally, companies that record such taxes on a gross
basis should disclose the amounts of those taxes in interim and annual financial
statements for each period for which an income statement is presented if those
amounts are significant. EITF 06-03 is effective for the Company’s
fiscal year beginning February 4, 2007. The Company does not expect
this statement to have a material impact on its consolidated financial
statements.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets – an amendment of FASB Statement No. 140” (“SFAS
156”). SFAS 156 amends SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities”
(“SFAS 140”). SFAS 156 requires an entity to separately recognize
financial assets as servicing assets or servicing liabilities each time it
undertakes an obligation to service a financial asset by entering into certain
kinds of servicing contracts. The entity must also initially measure
all separately recognized servicing assets and servicing liabilities at fair
value, if practicable. Servicing assets and servicing liabilities
subsequently measured at fair value must be separately presented in the
statement of financial position and additional disclosures are required for
all
separately recognized servicing assets and servicing
liabilities. SFAS 156 is effective for the Company’s fiscal year
beginning February 4, 2007. The Company does not expect this
statement to have a material impact on its consolidated financial
statements.
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments — an amendment of FASB Statements No. 133 and
140” (“SFAS 155”). SFAS 155 amends SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”) and SFAS 140. This Statement also resolves issues addressed in
Statement SFAS 133 Implementation Issue No. D1, “Application of
Statement 133 to Beneficial Interests in Securitized Financial
Assets.” SFAS 155 permits fair value remeasurement
for any hybrid financial instrument that contains an embedded derivative
that
otherwise would require bifurcation and clarifies which interest-only strips
and
principal-only strips are not subject to the requirements of
SFAS 133. SFAS 140 is amended to eliminate the prohibition
on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. SFAS 155 is effective for all financial instruments
acquired or issued during fiscal years beginning after September 15, 2006.
The Company does not expect this statement to have a material impact on its
consolidated financial statements.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections” (“SFAS 154”). SFAS 154 requires retrospective
application to prior periods’ financial statements of changes in accounting
principle and correction of errors. The Company adopted this statement during
2006. See Note 2 to the Consolidated Financial
Statements.
F-11
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
NOTE
2 – CHANGES IN ACCOUNTING PRINCIPLES
The
Company changed its method of accounting for merchandise inventories from the
retail method to the weighted average cost method (the “cost method”) during the
second quarter of 2006, retrospectively applied as of the beginning of 2006.
The
Company believes the cost method is preferable as it results in an inventory
valuation that more closely reflects the acquisition cost of the Company’s
inventory. In addition, the cost method provides for a better
matching of cost of sales with related sales. Cost of sales under the
cost method represents the weighted average cost of the individual item sold
rather than the cost of an item based on an average margin realized on an entire
department as under the retail method. In connection with the change
in its method of accounting for merchandise inventories to the cost method,
the
Company also changed its accounting policy related to its historical treatment
of distribution center costs associated with preparing inventory for sale,
such
as distribution payroll, benefits, occupancy, depreciation, and other direct
operating expenses, and now capitalizes these related costs. The Company
believes it is preferable to capitalize these costs as it incorporates a key
component of the costs associated with preparing inventory for sale into the
valuation of inventory on a cost basis and achieves a better matching of cost
of
sales with related sales. The effect of the changes in accounting
principles for periods prior to 2006 is not determinable as the period-specific
information required to value inventory on the cost method is not available
for
periods prior to January 29, 2006. As stated in SFAS 154, when it is
impracticable to determine the cumulative effect of applying a change in
accounting principle to any prior period, the new accounting principle shall
be
applied as if the changes were made prospectively as of the earliest date
practicable. Therefore, the Company adopted the new methods of
accounting for inventory retrospectively to January 29, 2006, the first day
of
2006. The effect of the changes in accounting principles
on inventory values as of the beginning of 2006 was a net
reduction of $15.6 million, of which $21.5 million was a reduction
related to the change to the cost method, partially offset by a $5.9 million
increase related to capitalizing distribution center
costs. Approximately $9.8 million, net of tax of approximately $5.8
million, was recorded as a reduction of retained earnings in the Statement
of
Stockholders’ Equity as of the beginning of 2006.
The
inventory balance as of the beginning of 2006 is $268.1 million as calculated
under the cost method, including the capitalization of distribution center
costs, which is $15.6 million lower than the inventory balance the Company
reported as calculated under the retail method. The non-cash
reduction in the inventory balance of $15.6 million was due to these accounting
changes and was not an indication of an inventory impairment, as the underlying
retail value of the Company’s inventories was not affected by these accounting
changes.
The
following is a summary of other accounting policies related to merchandise
inventories under the cost method:
Freight
and Other Purchase Costs – The Company includes in inventory the cost of
freight to the Company’s distribution center and to stores as well as duties and
fees related to import purchases.
Lower
of Cost or Market Reserve– The Company maintains a lower of cost or market
reserve for inventory where the cost of an individual item is greater than
the
selling price less a reasonable profit margin net of incremental selling
costs.
Vendor
Allowances– The Company receives consideration from its merchandise vendors
in the form of allowances and reimbursements. Vendor allowances
including those discussed in Note 3 related to the purchase of inventory are
recorded as a reduction to the cost of inventory until sold.
The
changes in accounting principles did not impact net cash provided by operating
activities, net cash used in investing activities, or net cash provided by
financing activities as reported in the Consolidated Statement of Cash
Flows. The following table sets forth the financial statement line
items for the fourteen and fifty-three weeks ended February 3, 2007 that were
affected by the changes in accounting principles:
F-12
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
|
Changes
in Accounting Principles
|
||||||||||||||||
|
Under
Retail Method
|
Change
to Cost Method
|
Capitalization
of Distribution Center Costs
|
As
Adjusted for the Effect of Changes
|
|||||||||||||
|
(in
thousands - except earnings per share)
|
||||||||||||||||
|
Consolidated
Balance Sheet at February 3, 2007
|
||||||||||||||||
|
Merchandise
inventories, net
|
$ |
350,946
|
$ | (23,972 | ) | $ |
5,789
|
$ |
332,763
|
|||||||
|
Current
deferred taxes
|
16,503
|
8,871
|
(2,143 | ) |
23,231
|
|||||||||||
|
Total
current assets
|
425,827
|
(15,101 | ) |
3,646
|
414,372
|
|||||||||||
|
Total
assets
|
836,441
|
(15,101 | ) |
3,646
|
824,986
|
|||||||||||
|
Retained
earnings
|
286,577
|
(15,101 | ) |
3,646
|
275,122
|
|||||||||||
|
Stockholders'
equity
|
582,863
|
(15,101 | ) |
3,646
|
571,408
|
|||||||||||
|
Total
liabilities and stockholders' equity
|
836,441
|
(15,101 | ) |
3,646
|
824,986
|
|||||||||||
|
Consolidated
Statement of Income for fourteen weeks ended February
3, 2007
|
||||||||||||||||
|
Cost
of sales and related buying, occupancy and distribution
expenses
|
344,471
|
(13,172 | ) |
1,959
|
333,258
|
|||||||||||
|
Gross
profit
|
146,716
|
13,172
|
(1,959 | ) |
157,929
|
|||||||||||
|
Income
before income tax
|
51,555
|
13,172
|
(1,959 | ) |
62,768
|
|||||||||||
|
Income
tax expense
|
18,979
|
4,913
|
(730 | ) |
23,162
|
|||||||||||
|
Net
income
|
32,576
|
8,259
|
(1,229 | ) |
39,606
|
|||||||||||
|
Basic
and diluted earnings per share:
|
||||||||||||||||
|
Basic
earnings per share
|
0.75
|
0.19
|
(0.03 | ) |
0.91
|
|||||||||||
|
Diluted
earnings per share
|
0.72
|
0.18
|
(0.03 | ) |
0.88
|
|||||||||||
|
Consolidated
Statement of Income for fifty-three weeks ended February
3,
2007
|
||||||||||||||||
|
Cost
of sales and related buying, occupancy and distribution
expenses
|
1,094,072
|
2,481
|
140
|
1,096,693
|
||||||||||||
|
Gross
profit
|
456,108
|
(2,481 | ) | (140 | ) |
453,487
|
||||||||||
|
Income
before income tax
|
90,402
|
(2,481 | ) | (140 | ) |
87,781
|
||||||||||
|
Income
tax expense
|
33,449
|
(918 | ) | (52 | ) |
32,479
|
||||||||||
|
Net
income
|
56,953
|
(1,563 | ) | (88 | ) |
55,302
|
||||||||||
|
Basic
and diluted earnings per share:
|
||||||||||||||||
|
Basic
earnings per share
|
1.37
|
(0.04 | ) |
-
|
1.33
|
|||||||||||
|
Diluted
earnings per share
|
1.29
|
(0.04 | ) |
-
|
1.25
|
|||||||||||
|
Consolidated
Statement of Cash Flows for fifty-three weeks ended February 3,
2007
|
||||||||||||||||
|
Net
income
|
56,953
|
(1,563 | ) | (88 | ) |
55,302
|
||||||||||
|
Deferred
income taxes
|
7,367
|
(918 | ) | (52 | ) |
6,397
|
||||||||||
|
Increase
in merchandise inventories
|
(50,435 | ) |
2,481
|
140
|
(47,814 | ) | ||||||||||
NOTE
3 – CORRECTION OF ERROR IN ACCOUNTING FOR DISTRIBUTION HANDLING
CREDITS
During
the thirteen weeks ended July 29, 2006, the Company changed its historical
accounting for credits received from vendors for handling charges at the
Company’s distribution centers. The Company had historically
recorded such credits as a reduction, or offset, to distribution center
operating costs. In order to correct its accounting practice to be in
accordance with EITF Issue No. 02-16, “Accounting by a Customer (Including a
Reseller) for Certain Consideration Received by a Vendor”, the Company will
now defer recognition of these credits by recording a reserve against its
inventory value, and will recognize the benefit as the merchandise is
sold. The effect of the error of not previously deferring these
credits received was considered not to be material to the Company’s previously
issued financial statements under SAB No. 99 “Materiality” and APB
Opinion No. 28, “Interim Financial Reporting”. The
Company recorded a $3.8 million non-cash charge to cost of sales in the thirteen
weeks ended July 29, 2006, which represented the cumulative effect of the
correction of the error as of April 29, 2006. The portion of such
correction relating to prior fiscal years of $3.3 million was not considered
material to the Company’s 2006 operating results.
F-13
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
The
following table reflects the impact of deferring the distribution handling
credits by period (in thousands):
|
Cumulative
effect of prior years (recorded in second quarter)
|
$ |
3,275
|
||
|
First
quarter 2006 (recorded in second quarter)
|
519
|
|||
|
Second
quarter 2006
|
311
|
|||
|
Third
quarter 2006
|
1,167
|
|||
|
Fourth
quarter 2006
|
(1,012 | ) |
NOTE
4 – ACQUISITION OF B.C. MOORE
On
February 27, 2006, the Company acquired 100% of the common stock of privately
held B.C. Moore. In purchasing B.C. Moore, the Company acquired 78
retail locations, which are located in small markets throughout Alabama,
Georgia, North Carolina and South Carolina. The Company successfully completed
the conversion of 69 of the acquired stores to its Peebles name and format
in
2006. The remaining 9 non-converted stores were
closed. The acquisition expands and strengthens the Company’s
position in the Southeastern United States, and is consistent with its corporate
strategy of increasing the concentration of its store base into smaller
markets. The purchase price of the acquisition was approximately
$35.6 million, net of cash acquired, and was negotiated as an arms length
transaction between two unrelated entities. The acquisition has been
accounted for under the purchase method of accounting, and accordingly, the
results of operations of B.C. Moore are included in the Company’s consolidated
financial statements from the date of acquisition, which for accounting purposes
was February 26, 2006, the beginning of the Company’s second fiscal
period.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at the date of the acquisition, net of cash acquired (in
thousands):
|
Accounts
receivable
|
$ |
4,533
|
||
|
Merchandise
inventories, net
|
16,846
|
|||
|
Current
deferred taxes
|
5,046
|
|||
|
Prepaid
expenses and other current assets
|
4,564
|
|||
|
Property,
equipment and leasehold improvements
|
5,704
|
|||
|
Long-term
deferred taxes
|
5,318
|
|||
|
Total
assets acquired
|
42,011
|
|||
|
Accounts
payable
|
(7,799 | ) | ||
|
Accrued
expenses and other current liabilities
|
(9,829 | ) | ||
|
Long-term
liabilities
|
(4,782 | ) | ||
|
Total
liabilities assumed
|
(22,410 | ) | ||
|
Net
assets acquired
|
$ |
19,601
|
As
of
February 3, 2007, goodwill of $16.0 million, which is not deductible for tax
purposes, has been recorded related to this acquisition.
NOTE
5 - SALE OF PRIVATE LABEL CREDIT CARD PORTFOLIOS
On
September 12, 2003, the
Company sold the Stage Stores portfolio (the “Stage Portfolio”) of private label
credit card accounts, as well as other assets related to its private label
credit card program, to World Financial Network National Bank (the “Bank”) and
Alliance Data Systems, Inc. (“ADS”). As part of the sale, the Company
entered into a ten year program agreement (the “Program Agreement”) as of the
sale date with ADS. In connection with the sale, the Company received
prepaid marketing funds of $13.3 million, which are being recognized as an
offset to marketing expense pro rata over the ten year term of the
agreement. At February 3, 2007 and January 28, 2006, $7.5 million and
$8.9 million, respectively, of these prepaid marketing funds were recorded
as
non-current liabilities. The Program Agreement was amended and
restated on March 5, 2004 (the “Amended and Restated Program Agreement”) in
connection with the sale of Peebles Inc.’s private label credit card portfolio
as discussed below. Under the agreement as it relates to the Stage
Portfolio, during the initial year credit sales were processed at no charge
(i.e., discount) to the Company. Beginning October 1, 2004, and
adjusted quarterly thereafter based on the then trailing twelve month portfolio
performance, if the defined net yield is above or below the specified range,
the
Company receives a premium or pays a discount on sales generated using the
private label credit card equal to 50% of the excess or shortfall of the
specified yield range divided by the defined portfolio yield turn
rate. The Amended and Restated Program Agreement provides for
automatic one-year renewal terms at expiration. The Company realized
$5.0 million, $4.9 million and $1.9 million of premiums on credit sales
related to this agreement during 2006, 2005, and 2004, respectively which have
been recorded as a reduction to selling, general and administrative
expenses.
F-14
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
On
November 4, 2003, the Company acquired Peebles, a privately held, similarly
focused retail company headquartered in South Hill, Virginia. In this
acquisition, the Company also acquired Peebles' private label credit card
portfolio. On March 5, 2004, the Company sold this private label
credit card portfolio to the Bank. At closing, the Company received
consideration of approximately $34.8 million, which approximated the amount
of
account balances outstanding at the time of closing. Under the terms
of the Amended and Restated Program Agreement, the Company is obligated to
reimburse the Bank up to a total of $3.5 million, based on the non-attainment
of
a defined net portfolio yield performance during the first three years after
the
sale (the “measurement period”), with a calculation of the cumulative amount due
related to this obligation on each of the first three anniversary dates of
the
agreement. At the time of the sale, an estimated liability of $3.5
million was recorded for this potential obligation. The Amended and Restated
Program Agreement also provides for the Company to receive 50% of the excess
collected yield above the defined portfolio yield performance through the third
and final measurement period.
The
Company paid the Bank approximately $0.5 million on the initial anniversary
date
after the sale of the Peebles private label credit card portfolio, which reduced
the recorded liability to $3.0 million, as a result of the actual net portfolio
yield falling below the defined net portfolio yield during the initial year
of
the measurement period. Based on the improving trend in the actual
net portfolio yield during 2005, the Company recorded a benefit of $3.0 million
to reverse the remaining recorded liability related to the Peebles private
label
credit card portfolio. The Company received $1.3 million in
April 2006 after the second anniversary measurement period. This
amount represented repayment of the approximately $0.5 million paid to the
Bank
on the first anniversary measurement period as well as approximately $0.8
million in proceeds as a result of the 50% sharing arrangement on collected
yield above the defined portfolio yield through the second anniversary date
of
the Amended and Restated Program Agreement. However, the
Company has not and will not recognize any additional benefit under the Amended
and Restated Program Agreement until the third year anniversary date in March
2007, as this is considered a gain contingency. Accordingly, the $1.3
million received in April 2006 is recorded as a current liability in the
accompanying balance sheet as of February 3, 2007.
In
connection with the acquisition of B.C. Moore (see Note 4), the Company acquired
the B.C. Moore private label credit card portfolio. On June 30, 2006,
the Company sold this private label credit card portfolio to the
Bank. At closing, the Company received consideration of approximately
$4.4 million and has no further obligation with regard to the sale of this
portfolio.
F-15
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
NOTE
6 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property,
equipment and leasehold improvements were as follows (in
thousands):
|
February
3, 2007
|
January
28, 2006
|
|||||||
|
Land
|
$ |
1,732
|
$ |
1,742
|
||||
|
Buildings
and improvements
|
14,760
|
14,200
|
||||||
|
Fixtures
and equipment
|
252,833
|
209,898
|
||||||
|
Leasehold
improvements
|
176,675
|
141,386
|
||||||
|
446,000
|
367,226
|
|||||||
|
Accumulated
depreciation
|
167,161
|
123,135
|
||||||
| $ |
278,839
|
$ |
244,091
|
|||||
Depreciation
expense was $45.5 million,
$41.2 million and $36.5 million for fiscal years 2006, 2005 and 2004,
respectively.
NOTE
7 - DEBT OBLIGATIONS
Debt
obligations consist of the following (in thousands):
|
February
3, 2007
|
January
28, 2006
|
|||||||
|
Revolving
Credit Facility
|
$ |
13,635
|
$ |
-
|
||||
|
Capital
and finance lease obligations
|
2,979
|
3,053
|
||||||
|
16,614
|
3,053
|
|||||||
|
Less:
Current portion of debt obligations
|
86
|
74
|
||||||
| $ |
16,528
|
$ |
2,979
|
|||||
Minimum
annual payments required under
existing finance lease obligations (net of present value thereof) as of February
3, 2007 are as follows (in thousands):
|
Minimum
Lease Payments
|
Less:
Interest
|
Net
Present Value
|
||||||||||
|
2007
|
$ |
510
|
$ |
424
|
$ |
86
|
||||||
|
2008
|
510
|
410
|
100
|
|||||||||
|
2009
|
510
|
393
|
117
|
|||||||||
|
2010
|
510
|
375
|
135
|
|||||||||
|
2011
|
510
|
353
|
157
|
|||||||||
|
Thereafter
|
3,886
|
1,502
|
2,384
|
|||||||||
|
Total
|
$ |
6,436
|
$ |
3,457
|
$ |
2,979
|
||||||
The
Company has a $250.0 million senior secured revolving credit facility (the
"Revolving Credit Facility") that matures August 21, 2008. Borrowings under
the
Revolving Credit Facility are limited to the availability under a borrowing
base
that is determined principally on eligible inventory as defined by the
Revolving
Credit Facility agreement. The daily interest rates under the
Revolving Credit Facility are determined by a prime rate or Eurodollar
rate plus
an applicable margin as set forth in the Revolving Credit Facility
agreement. Inventory and cash and cash equivalents are pledged as
collateral under the Revolving Credit Facility. The Revolving Credit
Facility is used by the Company to provide financing for working capital,
capital expenditures, interest payments and other general corporate purposes,
as
well as to support its outstanding letters of credit
requirements. During 2006 and 2005, the weighted average interest
rate on outstanding borrowings and the average daily borrowings under the
Revolving Credit Facility were 6.9% and $42.5 million and 5.6% and $19.1
million, respectively.
F-16
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
The
Company also issues letters of
credit to support certain merchandise purchases, which are required to
collateralize retained risks and deductibles under various insurance
programs. The Company had outstanding letters of credit totaling
approximately $13.6 million at February 3, 2007, all of which were
collateralized by the Company's Revolving Credit Facility. These
letters of credit expire within twelve months of issuance. Excess
borrowing availability under the Revolving Credit Facility at February 3, 2007,
net of letters of credit outstanding and outstanding borrowings, was $177.5
million.
The
Revolving Credit Facility contains covenants which, among other things,
restrict, based on required levels of excess availability, (i) the amount of
additional debt or capital lease obligations, (ii) the amount of capital
expenditures, payment of dividends and repurchase of common stock under certain
circumstances and (iii) related party transactions. At February 3,
2007, the Company was in compliance with all of the debt covenants of the
Revolving Credit Facility.
While
infrequent in occurrence, occasionally the Company is responsible for the
construction of leased stores and for paying project costs. Emerging
Issues Task Force (“EITF”) Issue No. 97-10, “The Effect of Lessee
Involvement in Asset Construction,” (“EITF 97-10”) requires the Company to
be considered the owner (for accounting purposes) of this type of project during
the construction period. Such leases are accounted for as finance
lease obligations with the amounts received from the landlord being recorded
in
debt obligations. Interest expense is recognized at a rate that will
amortize the finance lease obligation over the initial term of the
lease. As a result, the Company has recorded approximately $3.0
million as a finance lease obligation for two leases with interest rates ranging
from 12.3% to 16.9% on its Consolidated Balance Sheet related to two store
leases where EITF 97-10 was applicable as of February 3, 2007 and January 28,
2006.
NOTE
8 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The
components of accrued expenses and
other current liabilities were as follows (in
thousands):
|
February
3, 2007
|
January
28, 2006
|
|||||||
|
Accrued
compensation and benefits
|
$ |
22,053
|
$ |
20,091
|
||||
|
Accrued
occupancy
|
9,253
|
8,740
|
||||||
|
Gift
card and merchandise credit liability
|
8,564
|
10,878
|
||||||
|
Sales
and use tax
|
8,015
|
4,940
|
||||||
|
Other
|
27,256
|
19,774
|
||||||
| $ |
75,141
|
$ |
64,423
|
|||||
F-17
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
NOTE
9 - STOCKHOLDERS' EQUITY
Prior
to their expiration on August 23,
2006, 3.3 million of the Company’s warrants were exercised, with one share of
common stock issued for each warrant exercised. Proceeds from the
exercise of these warrants totaled approximately $27.3 million.
Prior
to
January 5, 2007, the Company’s Board of Directors had approved various stock
repurchase programs, all of which have been completed. On January 5, 2007,
the
Company’s Board of Directors approved an additional stock repurchase program
authorizing the Company to repurchase up to $50.0 million of its outstanding
common stock, of which approximately $46.2 million remained available for
repurchase as of February 3, 2007. Under these programs additional amounts
of
outstanding common stock could be repurchased using proceeds from the exercise
of employee stock options. At February 3, 2007, approximately $7.9
million was available to the Company for stock repurchases with proceeds from
the exercise of employee stock options.
Prior
to
January 5, 2007, the Company initiated a quarterly cash dividend of $0.017
per
share during the third quarter of 2005 and during the second quarter of 2006
the
Company increased its quarterly cash dividend to $0.033 per share. On
March 2, 2007, the Company announced that its Board of Directors declared a
quarterly cash dividend of $0.05 per share on the Company's common
stock.
NOTE
10 – STOCK BASED COMPENSATION
In
the
first quarter of 2006, the Company adopted the provisions of SFAS 123(R), using
the modified prospective application method. Accordingly,
compensation expense has been recorded ratably in selling, general and
administrative expense for any remaining unvested stock options as of the
effective date and for any new awards issued thereafter. Prior
periods presented have not been restated.
The
provisions of SFAS 123(R) require an entity to recognize compensation expense
in
an amount equal to the fair value of share-based payments granted to
employees. That cost is recognized in the Consolidated Statements of
Income over the period during which an employee is required to provide service
in exchange for the award. In addition, SFAS 123(R) requires that
excess tax benefits realized from the exercise of stock options be reported
as a
financing cash inflow instead of as a reduction of taxes paid in cash flow
from
operations in the Statement of Cash Flows.
The
following table summarizes the stock compensation expense by type of grant
for
fiscal year 2006 (in thousands, except per share amounts):
|
Fiscal
Year 2006
|
||||
|
Stock
options and SARs
|
$ |
3,198
|
||
|
Non-vested
stock
|
597
|
|||
|
Performance
shares
|
1,032
|
|||
|
|
||||
|
Total
compensation expense
|
4,827
|
|||
|
Related
tax benefit
|
(1,786 | ) | ||
| $ |
3,041
|
|||
|
Earnings
per share:
|
||||
|
Basic
|
$ |
0.07
|
||
|
Diluted
|
0.07
|
|||
As
of
February 3, 2007, the Company had unrecognized compensation cost of $9.9 million
related to stock-based compensation awards granted. That cost is
expected to be recognized over a weighted average period of 2.0
years.
F-18
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Prior
to
the adoption of SFAS 123(R), the Company accounted for stock-based compensation
using the intrinsic value method, prescribed in Accounting Principles Board
Opinion No. 25, “Accounting for Stock Issued to Employees”, and related
interpretations. No stock-based employee compensation cost related to
stock options was reflected in net income in 2005, as all such options granted
had an exercise price equal to the market value of the underlying common stock
on the date of the grant. All options granted were non-qualified
option grants. Net income in 2005, as reported, did include the
compensation expense in selling, general and administrative expense related
to
performance shares and non-vested stock granted to members of senior
management. Compensation expense for the performance shares,
recognized ratably over the performance period, was primarily based on the
anticipated number of shares and the related market value of such shares to
be
awarded at the end of the performance period. Compensation expense
for the shares of stock granted was being recognized ratably over the vesting
period and was based on the market value at the date of grant.
The
following table illustrates the effect on net income and earnings per share
for
fiscal 2005 and 2004, as if the Company had applied the fair value recognition
provisions of SFAS 123, “Accounting for Stock-Based Compensation”, for
the grant of stock-based compensation (in thousands, except per share
amounts):
|
Proforma
|
||||||||
|
Fiscal
Year
|
||||||||
|
2005
|
2004
|
|||||||
|
Net
income, as reported
|
$ |
55,887
|
$ |
51,388
|
||||
|
Add:
Stock-based employee compensation expense included in reported
net income,
net of related tax effects
|
465
|
174
|
||||||
|
Deduct:
Total stock-based employee compensation expense determined
under fair
value based method for all awards, net of related tax
effects
|
(2,515 | ) | (2,874 | ) | ||||
|
Pro
forma net income
|
$ |
53,837
|
$ |
48,688
|
||||
|
Earnings
per share:
|
||||||||
|
Basic
- as reported
|
$ |
1.38
|
$ |
1.25
|
||||
|
Basic
- pro forma
|
1.33
|
1.18
|
||||||
|
Diluted
- as reported
|
$ |
1.27
|
$ |
1.15
|
||||
|
Diluted
- pro forma
|
1.22
|
1.09
|
||||||
The
following table provides the significant weighted average assumptions used
in
determining the estimated fair value at the date of grant under the
Black-Scholes option-pricing model of each type of award granted in fiscal
years
2006, 2005 and 2004:
|
Fiscal
Year
|
||||||
|
2006
|
2005
|
2004
|
||||
|
Expected
volatility
|
32.7%
- 38.1%
|
32.9%-
33.8%
|
27.9-36.0%
|
|||
|
Weighted
average volatility
|
37.0%
|
33.2%
|
30.4%
|
|||
|
Risk
free rate
|
4.7%
- 4.9%
|
3.7%
- 4.8%
|
1.9%
- 3.6%
|
|||
|
Expected
life of options (in years)
|
3.0
- 4.7
|
3.0
- 4.0
|
3.0
- 4.0
|
|||
|
Expected
dividend yield
|
0.3%
- 0.6%
|
0.0%
- 0.2%
|
0.0%
|
|||
The
expected volatility was based on historical volatility for a period equal to
the
award’s expected life. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant. The expected
life (estimated period of time outstanding) of awards granted was estimated
using the historical exercise behavior of employees. The dividend
yield is based on the current dividend payout activity and the current average
market price of the Company’s stock.
F-19
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Stock
Incentive Plan
As
approved by the Company’s shareholders, the Company established the Amended and
Restated 2001 Equity Incentive Plan (the “Equity Incentive Plan”) to reward,
retain, and attract key personnel. The Equity Incentive Plan provides
for grants of nonqualified or incentive stock options, stock appreciation rights
(“SARs”), performance shares or units, stock units, and stock
grants. To fund the Equity Incentive Plan, 12,375,000 shares of the
Company’s common stock have been reserved for issuance upon exercise of
awards.
Stock
Options and SARs
The
right
to exercise stock options and SARs, to be settled by issuance of common stock,
generally vests over four years from the date of grant, with 25% vesting at
the
end of each of the first four years following the date of
grant. Options issued prior to January 29, 2005, will generally
expire if not exercised ten years from the date of the grant while options
and
SARs granted after that date generally expire if not exercised seven years
from
the date of grant. The weighted average grant date fair value for
options and SARs granted during fiscal 2006, 2005 and 2004 is $6.76, $5.95
and
$4.73, respectively.
A
summary
of option and SARs activity under the Equity Incentive Plan as of February
3,
2007, and changes during the fifty-three weeks ended February 3, 2007, are
detailed below:
|
Number
of
Outstanding
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term (years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|||||||||||||
|
Outstanding
at January 28, 2006
|
5,289,443
|
9.72
|
||||||||||||||
|
Granted
|
935,694
|
19.18
|
||||||||||||||
|
Forfeited
|
(214,829 | ) |
14.99
|
|||||||||||||
|
Exercised
|
(1,447,472 | ) |
7.47
|
|||||||||||||
|
Outstanding
at February 3, 2007
|
4,562,836
|
$ |
12.09
|
5.4
|
$ |
46,404
|
||||||||||
|
Vested
or expected to vest at February 3, 2007
|
4,302,468
|
$ |
11.73
|
5.4
|
$ |
45,305
|
||||||||||
|
Exercisable
at February 3, 2007
|
2,798,953
|
$ |
8.39
|
5.0
|
$ |
38,821
|
||||||||||
The
following table summarizes information about stock option awards and SARs that
were not yet vested as of February 3, 2007 as well as changes for the
fifty-three weeks ended February 3, 2007:
|
Stock
Options/ SARs
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||
|
Non-vested
at January 28, 2006
|
1,440,458
|
$ |
4.99
|
|||||
|
Granted
|
935,694
|
6.75
|
||||||
|
Vested
|
(397,440 | ) |
4.65
|
|||||
|
Forfeited
|
(214,829 | ) |
4.67
|
|||||
|
Non-vested
at February 3, 2007
|
1,763,883
|
6.15
|
||||||
The
aggregate intrinsic value of options and SARs, defined as the amount by which
the market price of the underlying stock on the date of exercise exceeds the
exercise price of the option, exercised during fiscal 2006, 2005 and
2004 was $20.0 million, $13.6 million and $19.1 million,
respectively.
F-20
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Non-vested
Stock
The
Company has granted shares of non-vested stock to members of management and
independent directors. None of these grants have been forfeited since
issuance. The following table summarizes information about the
nonvested stock granted by the Company as of February 3, 2007:
|
Period
Granted
|
Shares
Granted
|
Vested
and Issued
|
Shares
Oustanding
|
Grant
Date Fair Value per Share
|
Vesting
Schedule
|
||||||||||||
|
2004
|
22,500
|
22,500
|
$ |
15.79
|
Three-year
cliff
|
||||||||||||
|
Q1
2006
|
45,000
|
(15,000 | ) |
30,000
|
18.74
|
Three-year
ratable
|
|||||||||||
|
Q2
2006
|
38,847
|
38,847
|
21.90
|
Three-year
cliff
|
|||||||||||||
|
Q3
2006
|
7,500
|
7,500
|
21.59
|
Three-year
cliff
|
|||||||||||||
|
Q4
2006
|
2,569
|
2,569
|
22.60
|
Three-year
cliff
|
|||||||||||||
|
Total
|
116,416
|
(15,000 | ) |
101,416
|
|||||||||||||
The
total fair value and aggregate
intrinsic value of non-vested stock that vested during fiscal 2006 was $0.3
million. The weighted-average grant date fair value for
non-vested shares granted in 2006 and 2004 was $20.38 and $15.79,
respectively. The non-vested stock converts one for one to common
stock at the end of the vesting period at no cost to the employee to which
it is
awarded. The payment of the tax liability for the non-vested
shares that vested during fiscal 2006 was satisfied by withholding shares with
a
fair value equal to the tax liability, thus the actual number of shares issued
was 9,532.
Performance
Shares
The
Company has granted performance shares to members of management as a means
of
rewarding them for long-term performance based on shareholder return performance
measures. The actual number of shares to be issued, at no cost to the
grant recipient in exchange for performance shares at the end of the three-year
performance periods, will be based on the level of attainment of specific
performance measures. The actual number of shares that could be issued ranges
from zero to a maximum of two times the number of granted shares outstanding
as
reflected in the table below. Compensation expense based on the fair value
at
grant date and the anticipated number of shares of the Company’s common stock,
determined on a Monte Carlo probability model, is being recorded ratably over
the vesting period. Grant recipients do not have any rights of a
shareholder in the Company with respect to common shares issuable under the
grant until the shares have been issued.
The
following table summarizes information about the performance shares granted
by
the Company as of February 3, 2007:
|
Period
Granted
|
Target
Shares Granted
|
Target
Shares Forfeited
|
Target
Shares Outstanding
|
Grant
Date Fair Value per Share
|
Vesting
Schedule
|
||||||||||||
|
2004
|
41,490
|
(6,255 | ) |
35,235
|
$ |
14.41
|
Three-year
cliff
|
||||||||||
|
2005
|
62,915
|
(1,976 | ) |
60,939
|
17.39
|
Three-year
cliff
|
|||||||||||
|
Q1
2006
|
96,750
|
-
|
96,750
|
19.18
|
Three-year
cliff
|
||||||||||||
|
Q2
2006
|
1,338
|
-
|
1,338
|
20.19
|
Three-year
cliff
|
||||||||||||
|
Total
|
202,493
|
(8,231 | ) |
194,262
|
|||||||||||||
The
weighted-average grant date fair
value for performance stock awards in 2006, 2005 and 2004 was $19.19, $17.39
and
$14.41, respectively and equals the market price on the date of
grant. On March 28, 2007, 27,691 shares of common stock were deemed
to have been earned related to the 2004 performance stock grant.
F-21
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
NOTE
11 - BENEFIT PLANS
401(k)
Plans: The Company has a contributory 401(k)
savings plan (the "401(k) Plan") covering substantially all qualifying
employees. Under the 401(k) Plan, participants may contribute up to
25% of their qualifying earnings, subject to certain
restrictions. The Company currently matches 50% of each participant's
contributions, limited up to 6% of each participant's compensation under the
Plan. The Company may make discretionary matching contributions
during the year. The Company's matching contributions expense for the
401(k) Plan were approximately $1.2 million, $1.1 million and $1.0 million
in
2006, 2005 and 2004, respectively.
Deferred
Compensation Plans: The Company has two deferred compensation
plans (the “Deferred Compensation Plans”) which provide executives, certain
officers and key employees of the Company with the opportunity to participate
in
unfunded, deferred compensation programs that are not qualified under the
Internal Revenue Code of 1986, as amended, (the "Code"). Generally,
the Code and the Employee Retirement Income Security Act of 1974, as amended,
restrict contributions to a 401(k) plan by highly compensated
employees. The Deferred Compensation Plans are intended to allow
participants to defer income on a pre-tax basis. Under the Deferred
Compensation Plans, participants may defer up to 50% of their base salary and
up
to 100% of their bonus and earn a rate of return based on actual investments
chosen by each participant. The Company has established grantor
trusts for the purposes of holding assets to provide benefits to the
participants. The total value of assets held in the grantor trusts at February
3, 2007 and January 28, 2006 recorded in other non-current assets, net were
$17.9 million and $12.8 million, respectively. For the plan involving the
executives and certain officers, the Company will match 100% of each
participant’s contributions, up to 10% of the sum of their base salary and
bonus. For the plan involving other key employees, the Company may
make a bi-weekly discretionary matching contribution. The Company
currently matches 50% of each participant's contributions, up to 6% of the
participant's compensation offset by the contribution the Company makes to
the
participant's 401(k) account, if any. For both plans, Company
contributions are vested 100%. In addition, the Company may, with
approval by the Board of Directors, at its sole discretion, make an additional
employer contribution in any amount with respect to any participant as is
determined in its sole discretion. The Company's matching
contribution expense for the Deferred Compensation Plans was approximately
$1.2
million, $1.1 million, and $1.0 million, for 2006, 2005 and 2004,
respectively. At February 3, 2007 and January 28, 2006, $17.9 million
and $12.8 million, respectively, were included in other long-term liabilities
related to these deferred compensation plans.
Non-Employee
Director Equity Compensation Plan: In 2003, the Company adopted,
and the Company's shareholders approved, the 2003 Non-Employee Director Equity
Compensation Plan. 150,000 shares of the Company’s stock have been
reserved to fund this plan. Under this plan, non-employee Directors
have the option to defer all or a portion of their annual compensation fees
and
to receive such deferred fees in the form of restricted stock or deferred stock
units as defined in this plan. At February 3, 2007 and January 28,
2006, $0.2 million and $0.1 million, respectively, was deferred under this
plan.
Frozen
Defined Benefit Plans: The Company sponsors a defined benefit
plan, which covers substantially all employees who had met eligibility
requirements and were enrolled prior to June 30, 1998 (“the Stage
Plan”). This plan was frozen effective June 30, 1998. In
connection with the acquisition of Peebles, the Company acquired the Employees
Retirement Plan of Peebles Inc., which covers certain participants who, in
1997,
had reached certain age and years of service requirements. This plan
was closed to new participants at February 1, 1998. In connection
with the acquisition of B.C. Moore, the company acquired the Pension Plan of
B.C. Moore & Sons, Inc., which covers certain participants who had reached
certain age and years of service requirements. This plan was closed to new
participants and was frozen effective January 31, 2006. Benefits for
the plans (the "Retirement Plans" or the “Plans”) are administered through trust
arrangements, which provide monthly payments or lump sum
distributions. Benefits under the Plans were based upon a percentage
of the participant's earnings during each year of credited
service. Any service after the date the Plans were frozen will
continue to count toward vesting and eligibility for normal and early retirement
for existing participants. The measurement date used to determine
pension benefit obligations was January 31, 2007 for the plans acquired from
Peebles and B.C. Moore and December 31, 2006 for the Stage Plan.
F-22
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
The
Company adopted SFAS 158 during 2006. The following table summarizes
the impact of the initial adoption of SFAS 158 at February 3, 2007 (in
thousands):
|
Prior
to SFAS 158
|
SFAS
158 Adjustment
|
Post
SFAS 158 Adjustments
|
||||||||||
|
Accrued
benefit liability
|
$ | (11,853 | ) | $ | (1,478 | ) | $ | (13,331 | ) | |||
|
Accumulated
other comprehensive loss
|
1,562
|
1,478
|
3,040
|
|||||||||
The
estimated net loss in accumulated other comprehensive loss that
is projected to be recognized as a component of net periodic benefit cost
during the next fiscal year is not expected to
be material.
F-23
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Information
regarding the Retirement Plans is as follows (in thousands):
|
Fiscal
Year
|
||||||||
|
2006
|
2005
|
|||||||
|
Change
in benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ |
37,312
|
$ |
37,626
|
||||
|
Acquisition
of B.C. Moore, February 27, 2006
|
12,319
|
-
|
||||||
|
Service
cost
|
38
|
49
|
||||||
|
Interest
cost
|
2,627
|
2,090
|
||||||
|
Actuarial
(gain)/loss
|
(2,369 | ) |
1,446
|
|||||
|
Plan
disbursements
|
(2,583 | ) | (3,899 | ) | ||||
|
Settlement
paid
|
(2,881 | ) |
-
|
|||||
|
Projected
benefit obligation at end of year
|
44,463
|
37,312
|
||||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
26,552
|
27,986
|
||||||
|
Acquisition
of B.C. Moore, February 27, 2006
|
6,595
|
-
|
||||||
|
Actual
return on plan assets
|
2,268
|
1,110
|
||||||
|
Employer
contributions
|
1,181
|
1,355
|
||||||
|
Plan
disbursements
|
(2,583 | ) | (3,899 | ) | ||||
|
Settlement
paid
|
(2,881 | ) |
-
|
|||||
|
Fair
value of plan assets at end of year
|
31,132
|
26,552
|
||||||
|
Funded
status
|
(13,331 | ) | (10,761 | ) | ||||
|
Net
actuarial loss
|
-
|
5,251
|
||||||
|
Net
amount recognized
|
N/A
|
$ | (5,510 | ) | ||||
|
Amount
recognized in the consolidated balance sheet consist
of:
|
||||||||
|
Accrued
benefit liability - current portion
|
(947 | ) | (181 | ) | ||||
|
Accrued
benefit liability - non-current portion
|
(12,384 | ) | (8,473 | ) | ||||
|
Accumulated
other comprehensive loss, pre-tax (1)
|
3,040
|
3,144
|
||||||
|
Net
amount recognized
|
N/A
|
$ | (5,510 | ) | ||||
|
Weighed-average
assumptions:
|
||||||||
|
For
determining benefit obligations at year-end:
|
||||||||
|
Discount
rate
|
6.00 | % | 5.50 | % | ||||
|
Rate
of compensation increase (2)
|
3.00 | % | 3.00 | % | ||||
|
For
determining net periodic cost for year:
|
||||||||
|
Discount
rate
|
5.50 | % | 5.75 | % | ||||
|
Rate
of compensation increase (2)
|
3.00 | % | 3.00 | % | ||||
|
Expected
return on assets
|
7.60 | % | 7.94 | % | ||||
(1)Consists
solely of net actuarial loss as there are no prior service costs.
(2)Applicable
only to Peebles plan representing $2.3 million of the total $44.5 million
projected benefit obligation at February 3, 2007.
The
discount rate was selected by benchmarking the approximated cash flows of the
plan to the Citigroup Pension Liability Index, adjusted to the next 25 basis
points. The Company uses long-term historical actual return data
considering the mix of investments that comprise plan assets to develop its
expected return on plan assets. The Plans’ trustees have engaged
investment advisors to monitor performance of the investments of the Plans’
assets and consult with the Plans’ trustees. The Plans’ assets are
invested in funds managed by third party fiduciaries.
F-24
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
The
allocations of Plans’ assets by category are as follows:
|
2007
Target
|
Fiscal
Year
|
|||||||||||
|
Allocation
|
2006
|
2005
|
||||||||||
|
Equity
securities
|
61 | % | 58 | % | 66 | % | ||||||
|
Fixed
income securitities
|
27
|
25
|
16
|
|||||||||
|
Managed
futures (1)
|
7
|
6
|
7
|
|||||||||
|
Market
neutral (2)
|
-
|
-
|
5
|
|||||||||
|
Other
- primarily cash
|
5
|
11
|
6
|
|||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
________________________________________________
(1)
Comprised of separate funds employing diversified long/short
strategies.
(2)Comprised
of separate funds that aim to produce almost the same profit regardless of
market circumstances.
The
Company employs a total return investment approach whereby a mix of equities,
fixed income and managed futures investments are used to maximize the long-term
return on plan assets for a prudent level of risk. The investment
portfolio primarily contains a diversified mix of equity, fixed-income and
managed futures funds. The equity investments are diversified across
U.S. and non-U.S. stocks, as well as growth, value, and small and large
capitalizations. The fixed income securities investments are
diversified across U.S. government securities, high quality corporate securities
and fixed income funds. The managed futures funds employ diversified long/short
investment strategies. Investment risk is measured and monitored on
an ongoing basis through quarterly investment portfolio reviews and annual
liability measurements. The market neutral strategies are one dollar
long / one dollar short to emphasize security selection while reducing the
impact of the equity markets on returns.
The
components of pension cost for the Retirement Plans were as follows (in
thousands):
|
Fiscal
Year
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Net
periodic pension cost for the fiscal year:
|
||||||||||||
|
Service
cost
|
$ |
38
|
$ |
49
|
$ |
47
|
||||||
|
Interest
cost
|
2,627
|
2,090
|
2,221
|
|||||||||
|
Expected
return on plan assets
|
(2,504 | ) | (2,080 | ) | (2,188 | ) | ||||||
|
Net
loss amortization
|
197
|
-
|
-
|
|||||||||
|
Net
periodic pension cost
|
358
|
59
|
80
|
|||||||||
|
(Gain)
or loss due to settlement or curtailment
|
(119 | ) |
27
|
(22 | ) | |||||||
|
Total
pension cost
|
$ |
239
|
$ |
86
|
$ |
58
|
||||||
The
Company’s funding policy is to make contributions to maintain the minimum
funding requirements for its pension obligations in accordance with the Employee
Retirement Income Security Act. The Company may elect to contribute
additional amounts to maintain a level of funding to minimize the Pension
Benefit Guaranty Corporation premium costs or to cover short-term liquidity
needs of the plans in order to maintain current invested
positions. The Company expects to contribute between $0.9 million to
$2.1 million during 2007.
F-25
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
The
following benefit payments are expected to be paid (in thousands):
|
Fiscal
Year
|
||||
|
2007
|
$ |
3,749
|
||
|
2008
|
3,345
|
|||
|
2009
|
3,889
|
|||
|
2010
|
4,008
|
|||
|
2011
|
3,487
|
|||
|
Fiscal
years 2012 - 2016
|
18,391
|
|||
The
accumulated benefit obligation for
the plans was $42.9 million and $35.1 million at February 3, 2007 and January
28, 2006, respectively. The accumulated benefit obligation was
in excess of plan assets for all plans.
NOTE
12 - OPERATING LEASES
The
Company leases stores, its corporate headquarters, and equipment under operating
leases. Such leases generally contain renewable options and require
that the Company pay for utilities, taxes and maintenance expense. A
number of store leases provide for escalating minimum rent. The Company records
rent
expense on a straight-line basis, evenly dividing rent expense over the lease
term, including the build-out period, and where appropriate, applicable
available lease renewal option periods. The difference between the
payment and expense in any period is recorded as deferred rent in other
long-term liabilities in the Consolidated Balance Sheets. The Company
records construction allowances from landlords as a deferred rent credit when
earned in the Consolidated Balance Sheets. Such deferred rent credit
is amortized over the related term of the lease, commencing with the date the
Company earns the construction allowance, as a reduction of rent. Certain leases provide
for
contingent rents that are not measurable at inception. These
contingent rents are primarily based on a percentage of sales that are in excess
of a predetermined level. These amounts are excluded from minimum
rent but are included in the determination of total rent expense when it is
probable that the expense has been incurred and the amount is reasonably
estimable.
The
Company has renewal options for most of its store leases. Rent
expense for operating leases for fiscal years 2006, 2005 and 2004 was $58.2
million, $54.6 million and $52.2 million, respectively, and includes minimum
rentals of $53.8 million, $49.1 million and $46.1 million in 2006, 2005 and
2004, respectively. Rent expense also includes contingent rentals of
$5.9 million, $5.6 million and $5.3 million in 2006, 2005 and 2004,
respectively, and sublease rental income of $0.06 million, $0.04 million and
$0.03 million in 2006, 2005 and 2004, respectively.
Minimum
rental commitments on long-term non-cancelable operating leases at February
3,
2007, net of sub-lease rental income, are as follows (in
thousands):
|
Fiscal
Year
|
||||
|
2007
|
$ |
57,232
|
||
|
2008
|
59,867
|
|||
|
2009
|
53,134
|
|||
|
2010
|
45,512
|
|||
|
2011
|
39,057
|
|||
|
Thereafter
|
151,681
|
|||
|
Total
|
$ |
406,483
|
||
F-26
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
NOTE
13 - INCOME TAXES
All
Company operations are domestic. Income tax expense consisted of the
following (in thousands):
|
Fiscal
Year
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Federal
income tax expense:
|
||||||||||||
|
Current
|
$ |
24,598
|
$ |
32,386
|
$ |
23,579
|
||||||
|
Deferred
|
5,377
|
(2,252
|
) |
3,285
|
||||||||
|
29,975
|
30,134
|
26,864
|
||||||||||
|
State
income tax expense:
|
||||||||||||
|
Current
|
1,199
|
1,444
|
931
|
|||||||||
|
Deferred
|
1,305
|
1,244
|
1,425
|
|||||||||
|
2,504
|
2,688
|
2,356
|
||||||||||
| $ |
32,479
|
$ |
32,822
|
$ |
29,220
|
|||||||
Reconciliation
between the federal income tax expense charged to income before income tax
computed at statutory tax rates and the actual income tax expense recorded
follows (in thousands):
|
Fiscal
Year
|
||||||||||||
|
2006
|
2005
|
2004
|
||||||||||
|
Federal
income tax expense at the statutory rate
|
$ |
30,724
|
$ |
31,048
|
$ |
28,213
|
||||||
|
State
income taxes, net
|
1,627
|
1,747
|
1,532
|
|||||||||
|
Other,
net
|
128
|
27
|
(525 | ) | ||||||||
| $ |
32,479
|
$ |
32,822
|
$ |
29,220
|
|||||||
F-27
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
Deferred
tax assets (liabilities) consist of the following (in thousands):
|
February
3, 2007
|
January
28, 2006
|
|||||||
|
Gross
deferred tax assets
|
||||||||
|
Net
operating loss carryforwards
|
$ |
5,177
|
$ |
2,624
|
||||
|
Accrued
expenses
|
3,808
|
2,918
|
||||||
|
Pension
obligations
|
4,973
|
3,202
|
||||||
|
Lease
obligations
|
14,934
|
12,289
|
||||||
|
Inventory
|
13,494
|
12,590
|
||||||
|
Deferred
compensation
|
8,148
|
4,927
|
||||||
|
Deferred
income
|
7,574
|
8,328
|
||||||
|
58,108
|
46,878
|
|||||||
|
Gross
deferred tax liabilities:
|
||||||||
|
State
income taxes
|
(1,229 | ) | (1,234 | ) | ||||
|
Depreciation
and amortization
|
(30,705 | ) | (28,948 | ) | ||||
|
Other
|
(234 | ) | (102 | ) | ||||
| (32,168 | ) | (30,284 | ) | |||||
|
Valuation
allowance
|
(1,805 | ) | (2,184 | ) | ||||
|
Net
deferred tax assets
|
$ |
24,135
|
$ |
14,410
|
||||
Statement
of Financial Accounting Standards No. 109, “Accounting for Income Taxes,”
(“SFAS 109”) requires recognition of future tax benefits of deferred tax
assets to the extent such realization is more likely than
not. Consistent with the requirements of SFAS 109, the tax benefits
recognized related to pre-reorganization deferred tax assets have been recorded
as a direct addition to additional paid-in-capital. The remaining
valuation allowance of $1.8 million at February 3, 2007, was established for
state net operating losses, which may expire prior to utilization.
The
Company has net operating loss carryforwards for state income tax purposes
of
approximately $36.4 million which, if not utilized, will expire in varying
amounts between 2007 and 2021. The Company has net operating loss carryforwards
for federal income tax purposes of approximately $9.0 million, which,
if not utilized, will expire in varying amounts between 2023 and
2026.
F-28
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
NOTE
14 – SEGMENT REPORTING
The
Company reports in a single
operating segment – the operation of retail department
stores. Revenues from customers are derived from merchandise
sales. The Company does not rely on any major customer as a source of
revenue.
The
following table sets forth the distribution of net sales between the Company’s
various merchandise categories by percentage of sales:
|
Fiscal
Year
|
||||||||||||
|
Department
|
2006
|
2005
|
2004
|
|||||||||
|
Men's/Young
Men's
|
19 | % | 19 | % | 19 | % | ||||||
|
Misses
Sportswear
|
17
|
17
|
17
|
|||||||||
|
Children's
|
12
|
12
|
12
|
|||||||||
|
Footwear
|
12
|
12
|
12
|
|||||||||
|
Junior
Sportswear
|
9
|
9
|
9
|
|||||||||
|
Accessories
|
8
|
8
|
7
|
|||||||||
|
Cosmetics
|
6
|
6
|
6
|
|||||||||
|
Special
Sizes
|
6
|
6
|
5
|
|||||||||
|
Dresses
|
4
|
4
|
5
|
|||||||||
|
Intimates
|
3
|
3
|
4
|
|||||||||
|
Home
& Gifts
|
3
|
3
|
3
|
|||||||||
|
Outerwear,
Swimwear and Other
|
1
|
1
|
1
|
|||||||||
| 100 | % | 100 | % | 100 | % | |||||||
NOTE
15- COMMITMENTS AND CONTINGENCIES
On
August
16, 2006, the Company announced that it had decided to delay the release
of its
second quarter results pending the completion of an internal review of its
inventory valuation methodology.
On
October 24, 2006, the Company reported that it had completed its review of
the
Company’s inventory valuation methodology. Based upon this review process, and
with the concurrence of the Audit Committee of the Company’s Board of Directors,
the Company concluded that its historical use of the retail method of inventory
valuation (the “retail method”) that had been used in reporting results of
operations during and for periods preceding fiscal 2005 was acceptable, and
that, other than an immaterial error related to historical accounting for
credits received from vendors for handling charges at the Company’s distribution
centers, which the Company corrected in the second quarter of 2006, no errors
had occurred in previously issued financial statements. Therefore, no
restatements of the Company’s previously issued financial statements for 2005 or
earlier years were required. However, as described in Note 2, and as also
reported in its October 24, 2006 press release, the Company changed its method
of accounting for merchandise inventories from the retail method to the weighted
average cost method (the “cost method”) effective with the beginning of
2006.
On
August
21, 2006, the Company received a letter from the staff of the SEC’s Division of
Enforcement (the “Staff”) indicating that it was conducting a non-public inquiry
concerning the Company’s internal review of its historical inventory accounting
practices referenced in its August 16, 2006 press release. Following the
October
24, 2006 announcement, the Company provided the Staff with requested materials
regarding its internal review. On January 31, 2007, the Company received
a
second letter from the Staff seeking additional information related to the
Company's previously announced review. The Company has responded to this
and
subsequent requests and continues to fully cooperate with the Staff. The
Staff
has informed the Company that the informal inquiry
should
not be construed as an indication by the SEC or the Staff that any violation
of
law has occurred.
Although
the Company cannot predict the outcome of this matter, it does not expect
that
this informal inquiry will have a material adverse effect on its previously
reported consolidated financial condition or results of operations.
From
time
to time, the Company and its subsidiaries are involved in various legal
proceedings arising in the ordinary course of their
business. Management does not believe that any pending legal
proceedings, either individually or in the aggregate, are material to the
financial position, results of operations or cash flows of the Company or its
subsidiaries.
F-29
Stage
Stores, Inc.
Notes
to Consolidated Financial Statements –
(continued)
NOTE
16 - QUARTERLY FINANCIAL INFORMATION (unaudited)
The
following table shows quarterly
information (in thousands, except per share amounts):
|
Fiscal
Year 2006
|
||||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||
|
Net
sales
|
$ |
343,541
|
$ |
362,104
|
$ |
353,348
|
$ |
491,187
|
||||||||
|
Gross
profit
|
99,670
|
95,578
|
100,310
|
157,929
|
||||||||||||
|
Net
income
|
$ |
9,045
|
$ |
3,853
|
$ |
2,798
|
$ |
39,606
|
||||||||
|
Basic
earnings per common share
|
$ |
0.23
|
$ |
0.10
|
$ |
0.07
|
$ |
0.91
|
||||||||
|
Diluted
earnings per common share
|
$ |
0.21
|
$ |
0.09
|
$ |
0.06
|
$ |
0.88
|
||||||||
|
Basic
weighted average shares
|
39,880
|
40,033
|
42,511
|
43,651
|
||||||||||||
|
Diluted
weighted average shares
|
43,500
|
43,542
|
44,384
|
44,954
|
||||||||||||
|
Fiscal
Year 2005
|
||||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||||||||||
|
Net
sales
|
$ |
310,060
|
$ |
309,430
|
$ |
306,044
|
$ |
418,566
|
||||||||
|
Gross
profit
|
104,162
|
82,769
|
90,715
|
113,774
|
||||||||||||
|
Net
income
|
$ |
20,522
|
$ |
6,513
|
$ |
9,146
|
$ |
19,706
|
||||||||
|
Basic
earnings per common share
|
$ |
0.50
|
$ |
0.16
|
$ |
0.23
|
$ |
0.50
|
||||||||
|
Diluted
earnings per common share
|
$ |
0.46
|
$ |
0.15
|
$ |
0.21
|
$ |
0.45
|
||||||||
|
Basic
weighted average shares
|
41,201
|
40,838
|
40,545
|
39,693
|
||||||||||||
|
Diluted
weighted average shares
|
44,960
|
44,729
|
44,253
|
43,404
|
||||||||||||
See
Note
2 regarding changes in accounting principles related to merchandise inventories
and Note 3 regarding correction of error in accounting for distribution handling
credits. Accordingly, gross profit by quarter for fiscal year 2006
and 2005 are not comparable. The following is a summary of the impact
in 2006 as compared to 2005 of the changes in accounting principles and
correction of error on gross profit by quarter.
|
Increase
(Decrease) to Gross Profit
|
||||||||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
Total
|
||||||||||||||||
|
Change
to cost method
|
$ | (19,500 | ) | $ |
5,171
|
$ | (1,324 | ) | $ |
13,172
|
$ | (2,481 | ) | |||||||
|
Capitalization
of certain distribution center costs
|
743
|
(100 | ) |
1,176
|
(1,959 | ) | (140 | ) | ||||||||||||
|
Correction
of error in accounting for distribution handling credits
|
-
|
(4,105 | ) | (1,167 | ) |
1,012
|
(4,260 | ) | ||||||||||||
| $ | (18,757 | ) | $ |
966
|
$ | (1,315 | ) | $ |
12,225
|
$ | (6,881 | ) | ||||||||
F-30