form10q.htm
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
X
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended November 29, 2008
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
to
.
Commission
File Number 1-37917
BURLINGTON COAT FACTORY INVESTMENTS
HOLDINGS, INC.
(Exact
Name of Registrant as Specified in its Charter)
|
|
|
Delaware
|
|
20-4663833
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
|
|
1830
Route 130 North
Burlington,
New Jersey
|
|
08016
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Registrant’s
Telephone Number, Including Area Code: (609) 387-7800
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 No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.” See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Smaller
reporting company ¨
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
January 13, 2009, the registrant had 1,000 shares of common stock outstanding
(all of which are owned by Burlington Coat Factory Holdings, Inc., our holding
company and are not publicly traded).
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Part
I - Financial Information:
|
Page
|
Item
1. Financial Statements (unaudited):
|
|
|
|
Condensed
Consolidated Balance Sheets as of November 29, 2008 and May 31,
2008
|
3
|
|
|
Condensed
Consolidated Statements of Operations - Six and Three Months Ended
November 29, 2008
and
December 1, 2007
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows - Six Months Ended November 29,
2008
and
December 1, 2007
|
5
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
|
|
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
26
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
40
|
|
|
Item
4. Controls and Procedures
|
41
|
|
|
Part
II - Other Information:
|
43
|
|
|
Item
1. Legal Proceedings
|
43
|
|
|
Item
1A. Risk Factors
|
43
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
43
|
|
|
Item
3. Defaults Upon Senior Securities
|
43
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
43
|
|
|
Item
5. Other Information
|
43
|
|
|
Item
6. Exhibits
|
44
|
|
|
SIGNATURES
|
45
|
|
|
*****************
|
|
Part I.
FINANCIAL INFORMATION
Item
1. Financial Statements
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(unaudited)
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
November
29, 2008
|
|
|
May
31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
|
|
|
|
|
|
Restricted
Cash and Cash Equivalents
|
|
|
2,669
|
|
|
|
2,692
|
|
Investment
in Money Market Fund
|
|
|
26,105
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Merchandise
Inventories
|
|
|
928,375
|
|
|
|
719,529
|
|
|
|
|
|
|
|
|
|
|
Prepaid
and Other Current Assets
|
|
|
25,751
|
|
|
|
24,978
|
|
|
|
|
|
|
|
|
|
|
Assets
Held for Disposal
|
|
|
--
|
|
|
|
2,816
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
1,146,759
|
|
|
|
872,493
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net of Accumulated Depreciation
|
|
|
925,597
|
|
|
|
919,535
|
|
|
|
|
|
|
|
|
|
|
Favorable
Leases, Net of Accumulated Amortization
|
|
|
520,148
|
|
|
|
534,070
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
85,261
|
|
|
|
69,319
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
3,249,678
|
|
|
$
|
2,964,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes Payable
|
|
|
2,148
|
|
|
|
5,804
|
|
Other
Current Liabilities
|
|
|
265,724
|
|
|
|
238,866
|
|
Current
Maturities of Long Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Liabilities
|
|
|
144,371
|
|
|
|
110,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
--
|
|
|
|
--
|
|
Capital
in Excess of Par Value
|
|
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
(148,138
|
)
|
|
|
(133,847
|
)
|
Total
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
3,249,678
|
|
|
$
|
2,964,492
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Condensed Consolidated Financial Statements.
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(unaudited)
|
|
(All
amounts in thousands)
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
29, 2008
|
|
|
December
1, 2007
|
|
|
November
29, 2008
|
|
|
December
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Revenue
|
|
|
14,292
|
|
|
|
15,863
|
|
|
|
7,903
|
|
|
|
9,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and Administrative Expenses
|
|
|
571,906
|
|
|
|
529,288
|
|
|
|
306,194
|
|
|
|
278,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
21,765
|
|
|
|
21,380
|
|
|
|
11,083
|
|
|
|
10,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Charges
|
|
|
--
|
|
|
|
7,379
|
|
|
|
--
|
|
|
|
6,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,748,858
|
|
|
|
1,684,996
|
|
|
|
979,026
|
|
|
|
915,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Tax
(Benefit) Expense
|
|
|
(25,141
|
)
|
|
|
(43,798
|
)
|
|
|
31,266
|
|
|
|
39,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax (Benefit) Expense
|
|
|
(10,850
|
)
|
|
|
(16,576
|
)
|
|
|
13,089
|
|
|
|
16,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$
|
(14,291
|
)
|
|
$
|
(27,222
|
)
|
|
$
|
18,177
|
|
|
$
|
23,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes
to Condensed Consolidated Financial Statements.
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
(All
amounts in thousands)
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
November
29, 2008
|
|
|
December
1, 2007
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(14,291 |
) |
|
$ |
(27,222 |
) |
Adjustments
to Reconcile Net Loss to Net Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
61,713 |
|
|
|
61,602 |
|
|
|
|
21,765 |
|
|
|
21,380 |
|
Impairment
Charges
|
|
|
-- |
|
|
|
7,379 |
|
|
|
|
295 |
|
|
|
6,605 |
|
Interest
Rate Cap Contract - Adjustment to Market
|
|
|
338 |
|
|
|
51 |
|
Provision
for Losses on Accounts Receivable
|
|
|
1,377 |
|
|
|
1,324 |
|
Provision
for Deferred Income Taxes
|
|
|
(16,961
|
) |
|
|
(13,303
|
) |
Loss
on Disposition of Fixed Assets and Leaseholds
|
|
|
343 |
|
|
|
807 |
|
Loss on Investment in Money Market Fund
|
|
|
1,667 |
|
|
|
-- |
|
Stock
Option Expense and Deferred Compensation Amortization
|
|
|
2,063 |
|
|
|
532 |
|
Non-Cash
Rent Expense and Other
|
|
|
1,905 |
|
|
|
1,537 |
|
Changes
in Assets and Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(24,579
|
) |
|
|
(17,477
|
) |
|
|
|
(208,846
|
) |
|
|
(160,363
|
) |
Prepaid
and Other Assets
|
|
|
(9,258
|
) |
|
|
(13,124
|
) |
|
|
|
278,572 |
|
|
|
230,677 |
|
Accrued
and Other Liabilities
|
|
|
19,633 |
|
|
|
13,748 |
|
Deferred
Rent Incentives
|
|
|
18,340 |
|
|
|
10,351 |
|
Net
Cash Provided by Operating Activities
|
|
|
134,076 |
|
|
|
124,504 |
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash
Paid for Property and Equipment and Other Assets
|
|
|
(76,977
|
) |
|
|
(47,103
|
) |
Acquisition
of Lease Rights
|
|
|
(2,298
|
) |
|
|
-- |
|
Redesignation
of Cash Equivalents to Investment in Money Market Fund
|
|
|
(56,294
|
) |
|
|
-- |
|
Redemption
of Investment in Money Market Fund
|
|
|
28,522 |
|
|
|
-- |
|
|
|
|
128 |
|
|
|
85 |
|
Net
Cash Used in Investing Activities
|
|
|
(106,919
|
) |
|
|
(47,018
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Long Term Debt - ABL Senior Secured Revolving
Facility
|
|
|
501,451 |
|
|
|
292,001 |
|
Principal
Payments on Long Term Debt
|
|
|
(1,290
|
) |
|
|
(1,181
|
) |
Principal
Payments on Term Loan
|
|
|
-- |
|
|
|
(11,443
|
) |
Principal
Payments on Long Term Debt - ABL Senior Secured Revolving
Facility
|
|
|
(527,051
|
) |
|
|
(347,301
|
) |
|
|
|
-- |
|
|
|
(625
|
) |
|
|
|
|
|
|
|
|
|
Net
Cash Used in Financing Activities
|
|
|
(26,890
|
) |
|
|
(68,549
|
) |
|
|
|
|
|
|
|
|
|
Increase
in Cash and Cash Equivalents
|
|
|
267 |
|
|
|
8,937 |
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
40,101 |
|
|
|
33,878 |
|
Cash
and Cash Equivalents at End of Period
|
|
$ |
40,368 |
|
|
$ |
42,815 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Interest
Paid
|
|
$ |
53,224 |
|
|
$ |
60,972 |
|
Income
Taxes Paid, Net of Refunds
|
|
$ |
8,444 |
|
|
$ |
(727 |
) |
|
|
|
|
|
|
|
|
|
Non-Cash
Investing Activities:
|
|
|
|
|
|
|
|
|
Accrued
Purchases of Property and Equipment
|
|
$ |
1,698 |
|
|
$ |
2,670 |
|
See Notes
to Condensed Consolidated Financial Statements.
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX
AND THREE MONTH PERIODS ENDED NOVEMBER 29, 2008 AND
DECEMBER
1, 2007
(unaudited)
1. Summary
of Significant Accounting Policies.
Basis
of Presentation
The
unaudited Condensed Consolidated Financial Statements include the accounts of
Burlington Coat Factory Investments Holdings, Inc. and all of its subsidiaries
(“Company" or “Holdings”). Holdings has no operations and its only asset is all
of the stock of Burlington Coat Factory Warehouse Corporation. All discussions
of operations in this report relate to Burlington Coat Factory Warehouse
Corporation and its subsidiaries (“BCFWC”), which are reflected in the financial
statements of Holdings. The accompanying financial statements are
unaudited, but in the opinion of management reflect all adjustments (which are
of a normal and recurring nature) necessary for the fair presentation of the
results of operations for the interim periods. The balance sheet at May 31, 2008
has been derived from the audited Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008
(“Fiscal 2008”). The Condensed Consolidated Statement of Cash Flows for the six
months ended December 1, 2007 was revised to present the reclassification of
($0.8) million and $0.1 million out of the line item “Non-Cash Rent Expense and
Other” and into the line items “Accrued and Other Liabilities” and “Prepaid and
Other Assets,” respectively. Because the Company's business is
seasonal in nature, the operating results for the six month period ended
November 29, 2008 are not necessarily indicative of results for the fiscal year
ending May 30, 2009 (“Fiscal 2009”).
Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") have been condensed or omitted. It is
suggested that these Condensed Consolidated Financial Statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for Fiscal 2008.
Principles
of Consolidation
The Condensed Consolidated Financial
Statements include the accounts of Holdings and all of its subsidiaries in which
it has a controlling financial interest through direct ownership of a
majority voting interest. All intercompany accounts and transactions
have been eliminated.
Holdings
was incorporated in the State of Delaware on April 10, 2006. Holdings’
Certificate of Incorporation authorizes 1,000 shares of common stock, par value
of $0.01 per share. All 1,000 shares are issued and outstanding and Burlington
Coat Factory Holdings, Inc. (“Parent”) is the only holder of record of this
stock.
2.
Long Term Debt
Long-term
debt consists of:
|
|
(in thousands)
|
|
|
|
November
29, 2008
|
|
|
May
31,
2008
|
|
Industrial
Revenue Bonds, 6.1% due in semi-annual payments of various amounts from
March 1, 2009 to September 1, 2010
|
|
$ |
2,305 |
|
|
$ |
3,295 |
|
Promissory
Note, 4.4% due in monthly payments of $8 through December
23, 2011
|
|
|
261 |
|
|
|
300 |
|
Promissory
Note, non-interest bearing, due in monthly payments of $17
through January 1, 2012
|
|
|
633 |
|
|
|
733 |
|
Senior
Notes, 11.1% due at maturity on April 15, 2014, semi-annual
interest payments from April 15, 2009 to April 15,
2014
|
|
|
300,502 |
|
|
|
300,207 |
|
Senior
Discount Notes, 14.5% due at maturity on October 15, 2014, semi-annual
interest payments from April 15, 2009 to October 15,
2014
|
|
|
99,309 |
|
|
|
99,309 |
|
$900,000
Senior Secured Term Loan Facility, LIBOR plus 2.3% due in
quarterly payments of $2,250 from November 30, 2008 to May 28,
2013
|
|
|
872,807 |
|
|
|
872,807 |
|
$800,000
ABL Senior Secured Revolving Facility, LIBOR plus spread based on average
outstanding balance
|
|
|
156,000 |
|
|
|
181,600 |
|
Capital
Lease Obligations
|
|
|
25,474 |
|
|
|
25,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,457,291 |
|
|
|
1,483,884 |
|
|
|
|
(8,275 |
) |
|
|
(3,653
|
) |
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current maturities
|
|
$ |
1,449,016 |
|
|
$ |
1,480,231 |
|
The $900
million Senior Secured Term Loan Facility (“Term Loan”) is to be repaid in
quarterly payments of $2.3 million through May 28, 2013. At the end
of each fiscal year, the Company is required to make a payment based on 50% of
the available free cash flow (as defined in the credit agreement governing the
Term Loan). This payment offsets future mandatory quarterly
payments. Based on the available free cash flow for Fiscal 2008, the
Company was not required to make a mandatory payment. The Company was
required to make a payment of $11.4 million based on the available free cash
flow for the fiscal year ended June 2, 2007. This payment offsets the
quarterly payments of $2.3 million through the third quarter of Fiscal 2009 and
$0.2 million of the quarterly payment to be made in the fourth quarter of Fiscal
2009. As a result, the Company is not required to make any cash
payments related to the mandatory quarterly payments until the fourth quarter of
Fiscal 2009.
The
Company’s Term Loan agreement contains financial, affirmative and negative
covenants and requires the Company to, among other things, maintain on the last
day of each fiscal quarter a consolidated leverage ratio not to exceed a maximum
amount. Specifically, the Company’s total debt to Adjusted EBITDA for the four
fiscal quarters most recently ended on or prior to such date, both measures as
defined in the Term Loan agreement, may not exceed 6.2 to 1 at February 28,
2009; 5.75 to 1 at May 30, 2009, August 29, 2009, and November 28, 2009;
5.5 to 1 at February 27, 2010; and 5.25 to 1 at May 29, 2010. Total debt
reflects the outstanding balance of all debt instruments as of the period end
except for the ABL Senior Secured Revolving Facility ("ABL Line of Credit"),
which is determined by the trailing twelve month average month end
balance. Adjusted EBITDA reflects certain adjustments to calculate the
consolidated leverage ratio. Adjusted EBITDA starts with consolidated
net income for the period and adds back (i) depreciation, amortization, and
other non cash charges that were deducted in arriving at consolidated net
income, (ii) the provision for taxes, (iii) interest expense, (iv) advisory
fees, and (v) unusual, non-recurring or extraordinary expenses, losses or
charges as reasonably approved by the administrative agent for such
period.
The $800
million ABL Line of Credit was entered into on April 13, 2006 and is for a
five-year period at an interest rate of LIBOR plus a spread which is determined
by the Company’s annual average borrowings outstanding. The maximum borrowing
under the ABL Line of Credit during the six and three month periods ended
November 29, 2008 was $410.0 million for both periods. In comparison, the
maximum borrowings under the ABL Line of Credit during the six and three month
periods ended December 1, 2007 was $247.2 million for both
periods. Average borrowings during the six and three month periods
ended November 29, 2008 amounted to $260.4 million and $290.1 million,
respectively, at an average interest rate of 4.4% and 4.7%,
respectively. In comparison, average borrowings during the six and
three month periods ended December 1, 2007 amounted to $204.5 million and 200.6
million, respectively, at an average interest rate of 7.2%, for both
periods.
At
November 29, 2008 and May 31, 2008, $156.0 million and $181.6 million,
respectively, were outstanding under this credit facility. Commitment fees of
..25% are charged on the unused portion of the facility and are included in the
line item “Interest Expense” on the Company’s Condensed Consolidated Statements
of Operations. For the six and three months ended November 29, 2008,
the Company repaid $25.6 million and $129.0 million, respectively, net of
borrowings.
Holdings
and certain subsidiaries of BCFWC fully and unconditionally guarantee BCFWC’s
obligations under the $800 million ABL Line of Credit and the $900 million Term
Loan. These guarantees are both joint and several.
As of
November 29, 2008, the Company was in compliance with all of its debt
covenants. The
agreements regarding the ABL Line of Credit and Term Loan, as well as the
indentures governing the BCFWC Senior Notes and Holdings Senior Discount Notes,
contain covenants that, among other things, limit the Company’s ability, and the
ability of the Company’s restricted subsidiaries, to pay dividends on, redeem or
repurchase capital stock; make investments; incur additional indebtedness or
issue preferred stock; create liens; permit dividends or other restricted
payments by the Company’s subsidiaries; sell all or substantially all of the
Company’s assets or consolidate or merge with or into other companies; and
engage in transactions with affiliates.
The
Company had $40.1 million and $45.3 million in deferred financing fees, net of
accumulated amortization, as of November 29, 2008 and May 31, 2008,
respectively, related to its debt instruments recorded in the line item “Other
Assets” on the Company’s Condensed Consolidated Balance
Sheets. Amortization of deferred financing fees amounted to $5.2
million and $2.6 million for the six and three month periods ended November 29,
2008, respectively, compared with $5.1 million and $2.5 million for the six and
three month periods ended December 1, 2007, respectively. These
amounts are recorded in the line item “Amortization” in the Company’s Condensed
Consolidated Statements of Operations.
3. Goodwill
The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." Goodwill amounted to $45.6 million and $42.8 million as of
November 29, 2008 and May 31, 2008, respectively. A reconciliation of
goodwill as reflected in the Company’s Condensed Consolidated Balance
Sheets as of November 29, 2008 and May 31, 2008 is set forth in the table
below:
|
|
(in thousands
)
|
|
|
|
|
|
Goodwill
as of May 31, 2008
|
|
|
|
|
|
|
|
|
|
Increase
in net deferred tax liabilities (a)
|
|
|
|
|
|
|
|
|
|
Goodwill
as of November 29, 2008
|
|
|
|
|
|
|
|
|
|
(a) The
change in deferred income taxes recorded during the six month period ended
November
29, 2008 reflects a change in the Company’s estimate
of the effective state tax rate used to calculate deferred
taxes in accordance with Financial Accounting Standards Board
(“FASB”) Emerging Issues Task Force (“EITF”) Issue 93-7, “Uncertainties
Related to Income Taxes in a Purchase Combination.” This adjustment
has increased goodwill related to the Merger Transaction (as defined in
Note 8 to the Company’s Condensed Consolidated Financial Statements
entitled “Income Taxes”).
|
|
4.
Assets Held for Disposal
Assets
held for disposal represent assets owned by the Company that management has
committed to sell in the near term. The Company had either identified
or was actively seeking out potential buyers for these assets as of May 31,
2008. During the six and three month’s ended November 29, 2008,
certain assets which were previously held for sale at May 31, 2008 no longer
qualified as held for sale due to the fact that, subsequent to May 31, 2008,
there was no longer an active program to locate a buyer. As a result,
the Company reclassified operating stores with a net long-lived asset value of
$2.8 million out of the line item “Assets Held for Disposal” in the Company’s
Condensed Consolidated Balance Sheets into the line items “Property and
Equipment, Net of Accumulated Depreciation” and “Favorable Leases, Net of
Accumulated Amortization.” The reclassification resulted in a charge
against the line item “Other Income, Net” in the Company’s Condensed
Consolidated Statements of Operations of $0.3 million during the six and three
months ended November 29, 2008, reflecting the adjustment for depreciation and
amortization expense that would have been recognized had the asset group been
continuously classified as held and used.
The
assets listed as “Assets Held for Disposal” in the Company’s Condensed
Consolidated Balance Sheet as of May 31, 2008 are comprised of leasehold
improvements and a favorable lease related to one of the Company’s
stores.
Assets
held for disposal were valued at the lower of their carrying value or fair value
as follows on May 31, 2008:
|
|
(in
thousands)
|
|
|
|
May
31, 2008
|
|
|
|
$ |
63 |
|
Favorable
Leases
|
|
|
2,753 |
|
|
|
$ |
2,816 |
|
5. Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement,”
(“SFAS No. 157”) which defines fair value, establishes a framework for
measurement and expands disclosure about fair value measurements. Where
applicable, SFAS No. 157 simplifies and codifies related guidance within
GAAP. In February 2008, the FASB issued FASB Staff Position (“FSP”) SFAS
No. 157-2, “Effective
Date for FASB Statement No. 157” (“FSP SFAS No. 157”) which extended the
application of SFAS No. 157 for all non-recurring fair value measurements of
non-financial assets and non-financial liabilities until fiscal years beginning
after November 15, 2008. The Company elected to apply the FSP SFAS
No. 157 to its non-financial assets and non-financial liabilities that are
valued on a non-recurring basis. The Company is in the process of
evaluating the impact of SFAS No. 157 for non-financial assets and non-financial
liabilities on its Condensed Consolidated Financial Statements. The
adoption of SFAS No. 157 for financial assets and financial liabilities did not
have a material impact on the Company’s Condensed Consolidated
Financial Statements.
SFAS No.
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). SFAS No. 157 classifies the
inputs used to measure fair value into the following hierarchy:
|
Level
1:
|
Quoted
prices for identical assets or liabilities in active
markets.
|
|
Level
2:
|
Quoted
market prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in markets that are
not active; and model-derived valuations whose inputs are observable or
whose significant value drivers are
observable.
|
|
Level
3:
|
Pricing
inputs are unobservable for the assets and liabilities and include
situations where there is little, if any, market activity for the assets
and liabilities.
|
The
inputs into the determination of fair value require significant management
judgment or estimation.
The
Company’s financial assets as of November 29, 2008 include cash equivalents,
interest rate cap agreements, and investments in a money market fund. The
Company does not have any financial liabilities that are measured at fair value
as of November 29, 2008. The carrying value of cash equivalents
approximates fair value due to its short-term nature. The fair value of
the interest rate caps are determined using quotes provided by the respective
bank counterparties that are based on models whose inputs are observable LIBOR
forward interest rate curves. To comply with the provisions of SFAS
No. 157, the Company incorporates credit valuation adjustments to
appropriately reflect both the Company's non-performance risk and the
respective counterparty’s non-performance risk in the fair value measurements.
In adjusting the fair value of the Company's derivative contracts for
the effect of non-performance risk, the Company has considered the impact
of netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees. The fair value of the
investment in the money market fund is determined by using quotes for similar
assets in an active market. As a result, the Company has determined
that the significant majority of the inputs used to value this investment fall
within Level 2 of the fair value hierarchy.
Although the
Company has determined that the majority of the inputs used to
value its derivatives fall within Level 2 of the fair value hierarchy, the
credit valuation adjustments associated with the Company's derivatives
utilize Level 3 inputs, such as estimates of current credit spreads to evaluate
the likelihood of default. As of November 29, 2008, the Company has
assessed the significance of the impact of the credit valuation adjustments on
the overall valuation of its derivative positions and has determined that
the credit valuation adjustments are not significant to the overall valuation
of the Company's derivatives. As a result, the Company has
determined that its derivative valuations in their entirety are classified
as a Level 2 within the fair value hierarchy.
The fair
values of the Company’s financial assets and the hierarchy of the level of
inputs are summarized below:
|
|
(in
thousands)
|
|
Fair
Value
Measurements
at November 29, 2008
|
|
Assets:
|
|
|
|
|
Level
1
|
|
|
|
|
Cash equivalents (including restricted cash)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate cap agreements (a)
|
|
|
|
|
Investment
in Money Market Fund
|
|
|
|
|
|
(a)
|
Included
in “Other Assets” and “Prepaids and Other Current Assets” within the
Company’s Condensed Consolidated Balance Sheets (refer to Note 6 of the
Company’s Condensed Consolidated Financial Statements, entitled
“Derivative Instruments and Hedging Activities” for further discussion
regarding the Company's interest rate cap
agreements).
|
In
September 2008, as part of the Company's overnight cash management
strategy, the Company made investments into The Reserve Primary Fund (“Fund”), a
money market fund registered with the Securities and Exchange Commission (“SEC”)
under the Investment Company Act of 1940, of $56.3 million. On
September 22, 2008, the Fund announced that redemptions of shares of the Fund
were suspended pursuant to an SEC order so that an orderly liquidation may be
effected for the protection of the Fund’s investors. On October 30,
2008, the Fund announced an initial distribution to Fund shareholders pursuant
to which the Company received $28.5 million. Based on the decline in
the value of the Fund, the Company recorded a loss of $1.7 million in
November 2008 related to its investment in the Fund.
On
December 3, 2008, the Fund announced a second distribution to Fund shareholders
pursuant to which the Company received $15.8 million. Under the
Fund’s plan of liquidation (also announced on December 3, 2008), subsequent
periodic distributions will be made to Fund shareholders as cash accumulates in
the Fund until the Fund’s net assets (other than (i) a special reserve
established to satisfy certain costs and expenses of the Fund, including pending
or threatened claims against the Fund, and (ii) net income generated from Fund
holdings since September 15, 2008) have been distributed. Based upon the
maturities of the underlying investments in the Fund, the Company expects
to receive the remaining amount of its investment during the next twelve
months. In the event that the Company does not receive the majority of the
remaining amount of its investment during calendar 2009, the Company may have to
borrow additional cash through the ABL Line of Credit. The investment in
the Fund is classified in the line item entitled “Investment in Money Market
Fund” in the Condensed Consolidated Balance Sheets as of November 29,
2008.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure eligible items (including many financial
instruments and certain other items) at fair value at the specified election
date. Unrealized gains and losses for which the fair value option has been
elected will be reported in earnings at each subsequent reporting
date. The Company adopted this statement on June 1, 2008. The
Company has not elected to measure any financial assets or financial liabilities
at fair value which were not previously required to be measured at fair
value. Therefore, the adoption of SFAS No. 159 had no impact on the
Company’s Condensed Consolidated Financial Statements.
6. Derivative
Instruments and Hedging Activities
The
Company participates in two interest rate cap agreements to manage interest rate
risk associated with its long-term debt obligations. These agreements
are recorded in the line items “Other Assets” and “Prepaids and Other Current
Assets” within the Company’s Condensed Consolidated Balance Sheets. Each
agreement became effective on May 12, 2006. One interest rate cap
agreement has a notional principal amount of $300 million with a cap rate of
7.0% and terminates on May 31, 2011. The other agreement has a
notional principal amount of $700 million with a cap rate of 7.0% and terminates
on May 29, 2009. The Company does not monitor these interest rate cap
agreements for hedge effectiveness.
On
December 20, 2007, the Company entered into an interest rate cap agreement to
limit interest rate risk associated with its future long-term debt
obligations. The agreement has a notional principal amount of $600
million with a cap rate of 7.0% and terminates on May 31, 2011. The
agreement has been recorded in the line item “Other Assets” within the Company’s
Condensed Consolidated Balance Sheets. The agreement will be
effective on May 29, 2009 upon the termination of the Company’s existing $700
million interest rate cap agreement. The Company will determine prior
to the effective date whether it will monitor this interest rate cap agreement
for hedge effectiveness. Until the Company determines the accounting treatment
that will be used, the Company will adjust the interest rate cap to fair value
on a quarterly basis and as a result, gains or losses associated with this
agreement will be included in the line item “Interest Expense” on the Company’s
Condensed Consolidated Statements of Operations.
Losses
associated with the above interest rate cap agreements amounted to $0.3
million and $0.2 million for the six and three month periods ended November 29,
2008, respectively, compared with losses of $0.1 million and $0.2 million for
the six and three month periods ended December 1, 2007. These amounts
are included in the line item “Interest Expense” on the Company’s Condensed
Consolidated Statements of Operations. The fair market value of the interest
rate cap agreements at November 29, 2008 and May 31, 2008 amounted to $0.5
million and $0.8 million, respectively, and are included in the line items
“Other Assets” and “Prepaid and Other Current Assets” in the Company’s Condensed
Consolidated Balance Sheets.
7. Store Exit
Costs
The
Company establishes reserves covering future obligations of closed stores and
stores expected to be closed, including lease and severance
obligations. These reserves are included in the line item “Other
Current Liabilities” in the Company’s Condensed Consolidated Balance
Sheets. These charges are recorded in the line item “Selling and
Administrative Expenses” on the Company’s Condensed Consolidated Statements of
Operations. Reserves at November 29, 2008 and May 31, 2008 consisted
of:
Fiscal
Year Reserve Established
|
|
(in
thousands)
|
|
Balance
at
May
31, 2008
|
|
|
Provisions
|
|
|
Payments
|
|
|
Balance
at
November
29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company believes that these reserves are adequate to cover the expected
contractual lease payments and other ancillary costs related to the closings.
Scheduled rent related payments over the remainder of the contractual obligation
periods are all expected to be paid during Fiscal 2009.
8.
Income Taxes
As of
November 29, 2008, the Company had a current deferred tax asset of $54.1 million
and a non-current deferred tax liability of $453.2 million. As of May
31, 2008, the Company had a current deferred tax asset of $51.4 million and a
non-current deferred tax liability of $464.6 million. Current deferred tax
assets consisted primarily of certain operating costs and inventory related
costs not currently deductible for tax purposes. Non-current deferred
tax liabilities primarily relate to rent expense, pre-opening costs, intangible
costs and depreciation expense where the Company has a future obligation for tax
purposes.
In
accordance with Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting
(“APB 28”) and FASB Interpretation No. 18, Accounting for Income Taxes in
Interim Periods — an interpretation of APB Opinion No. 28 (“FIN 18”), at
the end of each interim period the Company is required to determine the best
estimate of its annual effective tax rate and then apply that rate in providing
for income taxes on a current year-to-date (interim period)
basis. However, in certain circumstances where a reliable estimate
cannot be made, FIN 18 recognizes that “the actual effective tax rate for the
year-to-date may be the best estimate of the annual effective tax rate” and
allows for its use in the current interim period. For the second
quarter ending November 29, 2008, the Company was unable to make a reasonable
estimate of its annual effective tax rate due to significant seasonal
fluctuations of pre-tax income and loss throughout the fiscal year and the
large amount of work opportunity credits relative to the amount of forecasted
pre-tax loss for the year. Therefore, the Company has chosen to use
its actual effective income tax rate of 41.4% (before discrete items), as the
Company believes that this method will yield a more reliable tax provision
calculation.
As of
November 29, 2008 and May 31, 2008, valuation allowances amounted to $4.8
million and related primarily to state tax net operating losses. The Company
believes that it is more likely than not that a portion of the benefit of
the state tax net operating losses will not be realized. The state
net operating losses have been generated in a number of taxing jurisdictions and
are subject to various expiration periods ranging from five to twenty years
beginning with Fiscal 2008. Any tax benefit recognized in
Fiscal 2009 by the use of a state tax net operating loss that was established
prior to the April 13, 2006 merger transaction involving Bain Capital, LLC (the
“Merger Transaction”), where a valuation allowance has been established, will be
recorded first to reduce to zero the goodwill related to the Merger Transaction,
second to reduce to zero other non-current intangible assets and third to reduce
income tax expense. Commencing during the fiscal year ending May 29,
2010, the provisions of SFAS 141R (as defined in Note 19 to the Company’s
Condensed Consolidated Financial Statements entitled “Recent Accounting
Pronouncements”) will be effective for the Company and any future tax benefits
related to the recognition of any state tax net operating losses, where a
valuation allowance has been established, will be recorded to the Company’s
Consolidated Statements of Operations.
As
of November 29, 2008, the Company reported total unrecognized tax benefits in
the line items “Other Current Liabilities” and “Other Liabilities” in the
Company’s Condensed Consolidated Balance Sheet of $36.8 million, of which $8.7
million would affect the Company’s effective tax rate if
recognized. As of May 31, 2008, the Company reported total
unrecognized tax benefits of $38.0 million, of which $8.3 million would affect
the Company’s effective tax rate if recognized. The Company reported
total unrecognized tax benefits of $44.8 million as of June 3, 2007, the date of
the Company’s adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 (“FIN
48”). Due to the potential for resolution of federal and state
examinations, and the expiration of various statutes of limitations, it is
reasonably possible that the Company’s gross unrecognized tax benefit balance
may decrease within the next twelve months by as much as $11.8 million, related
primarily to issues involving deferred revenue and
depreciation.
As a
result of positions taken during a prior period, the Company recorded $1.7
million and $0.9 million of interest and penalties for the six and three
month periods ended November 29, 2008, respectively. In
comparison, for the six and three months ended December 1, 2007, the Company
recorded $2.3 million and $1.3 million of interest and penalties,
respectively. As of November 29, 2008, cumulative interest and
penalties of $18.3 million have been recorded on the Company’s Condensed
Consolidated Balance Sheet. The Company recognizes interest and
penalties related to unrecognized tax benefits as part of income
taxes.
The
Company files tax returns in the U.S. federal jurisdiction and various state
jurisdictions. The Company is open to audit under the statute of
limitations by the Internal Revenue Service for fiscal years 2004 through 2007
and is currently under IRS examination for fiscal years 2004 and
2005. The Company or its subsidiaries’ state income tax returns are
open to audit under the statute of limitations for the fiscal years 2003 through
2007. Refer to Footnote 18 entitled “Income Taxes” in the Company’s
Fiscal 2008 Form 10-K for further information regarding the Company’s tax
positions.
9.
Barter Transactions
The
Company accounts for barter transactions under SFAS No. 153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion Number 29” (“SFAS No. 153”), and EITF 93-11, “Accounting for Barter Transactions
Involving Barter Credits” (“EITF 93-11”). Barter
transactions with commercial substance are recorded at the estimated fair value
of the products exchanged, unless the products received have a more readily
determinable estimated fair value. During November 2008, the Company
exchanged $10.7 million of inventory for certain advertising credits which
are to be used over the next six years, exclusive of the Company’s option to
extend the term an additional two years. This exchange resulted in $10.7 million
of sales and cost of sales in the Company’s Condensed Consolidated Statements of
Operations for the six and three month periods ended November 29,
2008. During the Company’s first quarter of Fiscal 2008, the Company
exchanged $5.2 million of inventory for certain advertising credits, which
were to be used over the subsequent three to five years. As of
November 29, 2008, the Company utilized $2.9 million of the $5.2 million of
advertising credits received in Fiscal 2008.
As of
November 29, 2008, the Company recorded prepaid advertising of $2.1 million in
the line item “Prepaid and Other Current Assets” and $10.9 million in the line
item “Other Assets” in the Company’s Condensed Consolidated Balance
Sheets. As of May 31, 2008, the Company recorded $1.7 million in the
line item “Prepaid and Other Current Assets” and $1.9 million in the line item
“Other Assets” in the Company’s Condensed Consolidated Balance
Sheets.
Barter credit usage for the six and
three month periods ended November 29, 2008 amounted to $1.3 million and $0.9
million, respectively, compared with $0.8 million and $0.7 million,
respectively, for the six and three month periods ended December 1,
2007.
10. Stock
Option and Award Plans and Stock-Based Compensation
On April
13, 2006, the Parent’s Board of Directors adopted the 2006 Management Incentive
Plan (“Plan”). The Plan provides for the granting of service-based and
performance-based stock options and restricted stock to executive officers and
other key employees of the Company and its subsidiaries. Pursuant to
the Plan, employees are granted options to purchase units of common stock in the
Parent. Each unit consists of nine shares of Class A common stock and one
share of Class L common stock of the Parent. The shares comprising a unit are in
the same proportion as the shares of Class A and Class L common stock held
by all stockholders of the Parent. The options are exercisable only
for whole units and cannot be separately exercised for the individual classes of
the Parent’s common stock. As of November 29, 2008 there were 511,122
units reserved under the Plan consisting of 4,600,098 shares of Class A common
stock of Parent and 511,122 shares of Class L common stock of
Parent.
Options
granted during the six month period ended November 29, 2008 are all
service-based awards which were granted in three tranches with exercise prices
as follows: Tranche 1: $100 per unit; Tranche 2: $180 per
unit; and Tranche 3: $270 per unit. The service-based
awards vest 40% on the second anniversary of the award with the remaining amount
vesting ratably over the subsequent three years. The final exercise date for any
option granted is the tenth anniversary of the grant date.
All
options become exercisable upon a change of control, as defined by the Plan.
Unless determined otherwise by the plan administrator, upon cessation of
employment (1) options that have not vested will terminate immediately; (2)
units previously issued upon the exercise of vested options will be callable at
the Company’s option; and (3) unexercised vested options will be exercisable for
a period of 60 days.
As of
November 29, 2008, the Company had 429,500 options outstanding to purchase
units. All options granted to date are service-based awards. On June 4, 2006,
the Company adopted SFAS No. 123R (Revised 2004), “Share-Based Payment” ("SFAS
123R"), using the modified prospective method, which requires companies to
recordstock compensation expense for all non-vested and new awards beginning as
of the adoption date. For the six and three months ended November 29, 2008, the
Company recognized non-cash stock compensation expense of $2.1 million ($1.2
million after tax) and $0.8 million ($0.5 million after tax),
respectively. There were no forfeiture adjustments required during
the six or three months ended November 29, 2008. In comparison,
for the six and three months ended December 1, 2007, the Company recognized
non-cash stock compensation expense of $0.5 million ($0.3 million after tax) and
$0.3 million ($0.2 million after tax), respectively, net of $0.9 million and
$0.4 million of forfeiture adjustments for the respective periods that were
recorded as a result of actual forfeitures being higher than initially
estimated. Non-cash stock compensation expense for all periods is included in
the line item “Selling and Administrative Expense” on the Company’s Condensed
Consolidated Statements of Operations. At November 29, 2008, there was
approximately $10.4 million of unearned non-cash stock-based compensation that
the Company expects to recognize as expense over the next 4.9 years. The
service-based awards are expensed on a straight-line basis over the requisite
service period of five years. At November 29, 2008, 23% of outstanding
options to purchase units have vested.
Stock
option unit transactions are summarized as follows:
|
Number
of
Units
|
|
Weighted
Average
Exercise
Price
Per Unit
|
|
Options
Outstanding May 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding November 29, 2008
|
|
|
|
|
|
The
following table summarizes information about the stock options outstanding under
the Plan as of November 29, 2008:
Option
Units Outstanding
|
Option
Units Exercisable
|
|
|
|
|
|
Range
of
Exercise
Prices
|
|
Number
Outstanding
at
November 29, 2008
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
at
November 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants under the Plan in Fiscal 2008 and Fiscal
2009:
|
|
Six
Months Ended
November
29, 2008
|
|
|
Six
Months Ended
December
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
3.63-4.06%
|
% |
|
|
4.11 |
% |
|
|
|
35
– 42.5% |
% |
|
|
67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
% |
|
|
0.0 |
|
Fair
value of option units granted
|
|
|
|
|
|
|
|
|
|
|
$ |
27.40 |
|
|
$ |
56.65 |
|
|
|
|
26.62 |
|
|
|
42.60 |
|
|
|
|
23.34 |
|
|
|
33.13 |
|
11.
Impairment of Long-Lived Assets
The
Company accounts for impaired long-lived assets in accordance with SFAS No. 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets.” This statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Also,
long-lived assets and certain intangibles to be disposed of should be reported
at the lower of the carrying amount or fair value less cost to sell. The Company
considers historical performance and future estimated results in its evaluation
of potential impairment and then compares the carrying amount of the asset to
the estimated future cash flows expected to result from the use of the asset. If
the carrying amount of the asset exceeds the estimated expected undiscounted
future cash flows, the Company measures the amount of the impairment by
comparing the carrying amount of the asset to its fair value. The estimation of
fair value is measured by discounting expected future cash flows using the
Company’s incremental borrowing rate.
There
were no impairment charges recorded during the six and three month periods
ended November 29, 2008. Impairment charges recorded during each
of the six and three month periods ended December 1, 2007 amounted to $7.4
million and $6.8 million, respectively. The majority of the
impairment charges for both the six and three month periods ended December 1,
2007 are related to the impairment of favorable leases in the amount of $4.7
million related to six of the Company’s stores. The Company also
impaired $1.1 million of leasehold improvements and $1.0 million of furniture
and fixtures related to ten of the Company’s stores for both the six and three
month periods ended December 1, 2007. During the first quarter of
Fiscal 2008, the Company recorded $0.6 million of impairment charges related to
idle equipment. These impairment charges are primarily related to a
decline in operating performance of these stores.
12. Comprehensive
Income/(Loss)
The Company accounts for comprehensive
income/(loss) in accordance with SFAS No. 130, “Reporting
Comprehensive Income.” For the six and three month
period ended November 29, 2008 and the six and three month period ended December
1, 2007, comprehensive income/(loss) consisted of net income/(loss).
13.
Other Revenue
Other
revenue consists of rental income received from leased departments, subleased
rental income, layaway, alteration, dormancy and other service charges and other
miscellaneous items. Layaway, alteration, dormancy and other service
charges (“Service Fees”) amounted to $5.2 million and $3.4 million for the six
and three month periods ended November 29, 2008, respectively, compared with
$6.6 million and $4.2 million for the six and three month periods ended
December 1, 2007, respectively. The decrease in Service Fees is
related to the Company’s decision to cease charging dormancy service fees on
outstanding balances of store value cards (refer to Note 14 of the Company’s
Condensed Consolidated Financial Statements entitled “Store Value Cards” for
further discussion regarding store value cards). Dormancy service
fees contributed $1.8 million and $1.2 million to the Service Fees for the six
and three month period ended December 1, 2007, respectively.
Rental
income from leased departments amounted to $3.6 million and $2.0 million for
each of the six and three month periods ended November 29, 2008,
respectively, compared with $3.5 million and $2.0 million for each of the
six and three month periods ended December 1, 2007, respectively. Subleased
rental income and other miscellaneous revenue items amounted to $5.5 million and
$2.5 million for the six and three month periods ended November 29, 2008,
respectively, compared with $5.8 million and $2.9 million for the six and
three month periods ended December 1, 2007, respectively.
14. Store
Value Cards
Store
value cards include gift cards and store credits issued from merchandise
returns. Store value cards are recorded as a current liability upon
the initial sale, and revenue is recognized when the store value card is
redeemed for merchandise. Store value cards issued by the Company do
not have an expiration date and are not redeemable for
cash. Beginning in September of 2006 through December 29, 2007, if a
store value card remained inactive for greater than thirteen months, the
Company assessed the recipient a monthly dormancy service fee, where allowed by
law, which was automatically deducted from the remaining value of the
card. Dormancy service fee income was recorded as part of the
line item “Other Revenue” in the Company’s Condensed Consolidated
Statements of Operations.
Early in
Fiscal 2008, the Company determined it had accumulated adequate historical data
to determine a reliable estimate of the amount of gift cards that would not be
redeemed. The Company formed a corporation in Virginia (BCF Cards,
Inc.) to issue the Company’s store value cards commencing December 29, 2007
and upon the formation of BCF Cards, Inc., the Company discontinued assessing a
dormancy service fee on inactive store value cards. Instead,
during the third quarter of Fiscal 2008, the Company began estimating and
recognizing store value card breakage income in proportion to actual store value
card redemptions and records such income in the line item “Other Income, Net” in
the Company’s Condensed Consolidated Statements of Operations. The Company
determines an estimated store value card breakage rate by continuously
evaluating historical redemption data. Breakage income is
recognized in proportion to the historical redemption patterns for those store
value cards for which the likelihood of redemption is remote. For the
six and three months ended November 29, 2008, the Company recorded $1.6 million
and $0.8 million, respectively, of store value card breakage
income.
15. Segment
Information
The
Company reports segment information in accordance with SFAS No. 131, “Disclosure about Segments of an
Enterprise and Related
Information.” The Company has identified operating segments at
the store level. However, due to the similar economic characteristics of the
stores, the Company has aggregated the stores into one reporting segment
operating within the United States.
16. Acquisition
of Value City Leases
On
October 3, 2007, Burlington Coat Factory Warehouse Corporation and certain
wholly-owned subsidiaries (“Burlington”) entered into an Agreement to Acquire
Leases and Lease Properties (the “Agreement”) from Retail Ventures,
Inc., an Ohio corporation (“RVI”), together with its wholly-owned subsidiaries,
Value City Department Stores LLC, an Ohio limited liability company (“Value
City” or “VCDS”), and GB Retailers, Inc., a Delaware corporation (“GB Retailers”
and, together with VCDS, the “VCDS Tenants”), and from Schottenstein Stores
Corporation (“SSC”) and certain affiliates of SSC (collectively with SSC, the
“SSC Landlords”). RVI, the VCDS Tenants and the SSC Landlords are collectively
referred to as the “Value City Entities.”
As of
November 29, 2008, the Company was still in negotiation with landlords related
to one of the original 24 leases and six of the original 24 leases have been
removed from the transaction. Included in the seventeen leases
that have been finalized, the Company made arrangements to transfer ten of the
locations to the landlords thereof and entered into leases for such locations
with such landlords, thus reducing the aggregate purchase price of the entire
transaction from $16.0 million to $7.0 million.
17. Commitments
and Contingencies
The
Company is party to various litigation matters arising in the ordinary course of
business. The ultimate legal and financial liability of the Company with respect
to such litigation cannot be estimated with certainty, but management believes,
based on its examination of these matters, experience to date and discussions
with counsel, that the ultimate liability from the Company’s various litigation
matters will not be material to the business, financial condition, results of
operations or cash flows of the Company.
The Company enters into lease
agreements during the ordinary course of business in order to secure favorable
store locations. As of November 29, 2008, the Company committed
to six new lease agreements for locations at which stores are expected to be
opened in Fiscal 2009. The six new stores are expected to have
minimum lease payments of $1.1 million, $4.3 million, $4.3 million, $4.3
million, and $30.5 million for the remainder of Fiscal 2009, and the fiscal
years ended May 29, 2010, May 28, 2011, June 2, 2012 and all subsequent years
thereafter, respectively.
The
Company had letter of credit arrangements with various banks in the amount of
$44.3 million and $28.6 million guaranteeing performance under various lease
agreements, insurance contracts and utility agreements at November 29, 2008 and
December 1, 2007, respectively.
Additionally,
the Company has an outstanding letter of credit in the amount of
$2.4 million and $3.4 million at November 29, 2008 and December 1, 2007,
respectively, guaranteeing its Industrial Revenue Bonds. The Company also
has outstanding letters of credit agreements in the amount of $11.4 million and
$13.2 million at November 29, 2008 and December 1, 2007, respectively, related
to certain merchandising agreements.
18. Subsequent
Events
In an
effort to better align the Company’s resources with its business
objectives, the Company has reviewed all areas of the business to identify
efficiency opportunities to enhance the organization’s performance. The Company
has been progressing on a number of initiatives to provide improved tools and
business processes to the organization. In light of the challenging
economic and retail sales environments, the Company has accelerated the
implementation of several initiatives, including some that have resulted in the
elimination of certain positions and the restructuring of certain other jobs and
functions. This has resulted in the planned reduction of the
Company’s workforce in its corporate office and its stores of approximately
2,300 positions, or slightly less than 9% of the Company’s total workforce. This
reduction in the Company’s workforce will result in a severance charge during
the third quarter of Fiscal 2009 of less than $2.0 million.
As a
result of these various initiatives, the Company plans to reduce its cost
structure in excess of $45 million during the last two quarters of Fiscal 2009.
The majority of these savings are anticipated to result from a more effective
management structure and payroll management in the stores and a reduction of
payroll costs of the Company’s corporate functions. The Company
believes this will allow the business to run more efficiently without
sacrificing the Company’s ability to serve its customers.
The
Company will continue to pursue its growth plans and invest in capital projects
that meet the Company’s required financial hurdles. However, given the
uncertainty of the economy, prudent management of inventory and expenses will
remain a strategic initiative.
19.
Recent Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(revised 2007), “Business Combinations” (“SFAS
No. 141R”). SFAS No.
141R applies to any transaction or other event that meets the definition of a
business combination. Where applicable, SFAS No. 141R establishes
principles and requirements for how the acquirer recognizes and measures
identifiable assets acquired, liabilities assumed, noncontrolling interest in
the acquiree and goodwill or gain from a bargain purchase. In
addition, SFAS No. 141R determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R also applies to prospective
changes in acquired tax assets and liabilities recognized as part of the
Company’s previous acquisitions, by requiring such changes to be recorded as a
component of the income tax provision. This statement is to be applied
prospectively for fiscal years beginning after December 15, 2008. The
Company expects SFAS No. 141R will have an impact on accounting for future
business combinations, once adopted, and on prospective changes, if any, of
previously acquired tax assets and liabilities.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No.
160”). SFAS No. 160 amends ARB No. 51 to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also amends certain of ARB
No. 51’s consolidation procedures for consistency with the requirements of SFAS
No. 141R. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008. The statement shall be applied prospectively as of the
beginning of the fiscal year in which the statement is initially
adopted. The Company currently does not have a non-controlling
interest in any subsidiaries, but will continue to evaluate the impact of SFAS
No. 160 on its future Condensed Consolidated Financial Statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”
(“SFAS No. 161”). SFAS No. 161 amends and expands the
disclosure requirements of SFAS No. 133 with the intent to provide users of
financial statements with an enhanced understanding of: (i) How and why an
entity uses derivative instruments; (ii) How derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (iii) How derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash
flows. This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company is in the process of
evaluating the impact of SFAS No. 161 on its Condensed Consolidated Financial
Statements.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). This
statement identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of
non-governmental entities that are presented in conformity with
GAAP. This statement shall be effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.” The Company is in the process of evaluating the
impact of SFAS No. 162 on its Condensed Consolidated Financial
Statements.
In
October 2008, SFAS 157 was amended by FSP SFAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active” (“FSP SFAS
157-3”). This FSP is effective upon issuance and amends FASB
Statement No. 157, “Fair Value
Measurements,” to clarify its application in an inactive market by
providing an illustrative example to demonstrate how the fair value of a
financial asset is determined when the market for the financial asset is
inactive. FSP SFAS 157-3 did not have a material impact on the
Company’s Condensed Consolidated Financial Statements.
In June
2008, the FASB ratified EITF No. 08-3 “Accounting by Lessees for
Maintenance Deposits” (“EITF 08-3”). EITF 08-3 mandates that
maintenance deposits that may not be refunded should be accounted for as a
deposit. When the underlying maintenance is performed, the deposit is
expensed or capitalized in accordance with the lessee’s maintenance accounting
policy. This EITF is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2008. The
Company is in the process of evaluating the impact of EITF 08-3 on its Condensed
Consolidated Financial Statements.
20.
Condensed Guarantor Data
On April
13, 2006, BCFWC issued $305 million aggregate principal amount of 11 .1% Senior Notes due 2014.
The notes were issued under an indenture issued on April 13, 2006. Holdings and
subsidiaries of BCFWC have fully and unconditionally guaranteed these
notes. These guarantees are both joint and several. The
following Condensed Consolidating Financial Statements present the financial
position, results of operations and cash flows of Holdings, BCFWC, exclusive of
subsidiaries (referred to herein as “BCFW”), and the guarantor subsidiaries. The
Company has one non-guarantor subsidiary that is not wholly-owned and is
considered to be “minor” as that term is defined in Rule 3-10 of Regulation S-X
promulgated by the Securities and Exchange Commission.
Neither
the Company nor any of its subsidiaries may declare or pay cash dividends or
make other distributions of property to any affiliate unless such dividends are
used for certain specified purposes including, among others, to pay general
corporate and overhead expenses incurred by Holdings in the ordinary course of
business, or the amount of any indemnification claims made by any director or
officer of Holdings or the Company, to pay taxes that are due and payable by
Holdings or any of its direct or indirect subsidiaries, or to pay interest on
Holdings Senior Discount Notes, provided that no event of default under
BCFWC’s debt agreements has occurred or will occur as the result of such
interest payment.
Burlington
Coat Factory Investments Holdings, Inc. and
Subsidiaries
|
Condensed
Consolidating Balance Sheets
|
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of November 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
and Other Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net of Accumulated
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Maturities of Long Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
in Excess of Par Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated
Deficit)/ Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burlington Coat Factory Investments
Holdings, Inc. and Subsidiaries
Condensed
Consolidating Balance Sheets
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31, 2008
|
|
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
- |
|
|
$ |
4,114 |
|
|
$ |
35,987 |
|
|
$ |
- |
|
|
$ |
40,101 |
|
Restricted
Cash and Cash Equivalents
|
|
|
- |
|
|
|
- |
|
|
|
2,692 |
|
|
|
- |
|
|
|
2,692 |
|
|
|
|
- |
|
|
|
20,930 |
|
|
|
6,207 |
|
|
|
- |
|
|
|
27,137 |
|
|
|
|
- |
|
|
|
1,354 |
|
|
|
718,175 |
|
|
|
- |
|
|
|
719,529 |
|
|
|
|
- |
|
|
|
14,222 |
|
|
|
37,154 |
|
|
|
- |
|
|
|
51,376 |
|
Prepaid
and Other Current Assets
|
|
|
- |
|
|
|
11,581 |
|
|
|
13,397 |
|
|
|
- |
|
|
|
24,978 |
|
|
|
|
- |
|
|
|
935 |
|
|
|
2,929 |
|
|
|
- |
|
|
|
3,864 |
|
|
|
|
- |
|
|
|
- |
|
|
|
2,816 |
|
|
|
- |
|
|
|
2,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
53,136 |
|
|
|
819,357 |
|
|
|
- |
|
|
|
872,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, Net of Accumulated Depreciation
|
|
|
- |
|
|
|
58,906 |
|
|
|
860,629 |
|
|
|
- |
|
|
|
919,535 |
|
|
|
|
- |
|
|
|
526,300 |
|
|
|
- |
|
|
|
- |
|
|
|
526,300 |
|
Favorable
Leases, Net of Accumulated Amortization
|
|
|
- |
|
|
|
- |
|
|
|
534,070 |
|
|
|
- |
|
|
|
534,070 |
|
|
|
|
- |
|
|
|
42,775 |
|
|
|
- |
|
|
|
- |
|
|
|
42,775 |
|
|
|
|
323,524 |
|
|
|
1,705,185 |
|
|
|
21,025 |
|
|
|
(1,980,415
|
) |
|
|
69,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
323,524 |
|
|
$ |
2,386,302 |
|
|
$ |
2,235,081 |
|
|
$ |
(1,980,415 |
) |
|
$ |
2,964,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
- |
|
|
$ |
337,040 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
337,040 |
|
|
|
|
- |
|
|
|
4,256 |
|
|
|
1,548 |
|
|
|
- |
|
|
|
5,804 |
|
Other
Current Liabilities
|
|
|
- |
|
|
|
128,597 |
|
|
|
110,269 |
|
|
|
- |
|
|
|
238,866 |
|
Current
Maturities of Long Term Debt
|
|
|
- |
|
|
|
2,057 |
|
|
|
1,596 |
|
|
|
- |
|
|
|
3,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
- |
|
|
|
471,950 |
|
|
|
113,413 |
|
|
|
- |
|
|
|
585,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
1,352,557 |
|
|
|
127,674 |
|
|
|
- |
|
|
|
1,480,231 |
|
|
|
|
- |
|
|
|
17,550 |
|
|
|
103,226 |
|
|
|
(10,000
|
) |
|
|
110,776 |
|
|
|
|
- |
|
|
|
220,721 |
|
|
|
243,877 |
|
|
|
- |
|
|
|
464,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Capital
in Excess of Par Value
|
|
|
457,371 |
|
|
|
457,371 |
|
|
|
1,352,271 |
|
|
|
(1,809,642
|
) |
|
|
457,371 |
|
(Accumulated
Deficit)/ Retained Earnings
|
|
|
(133,847
|
) |
|
|
(133,847
|
) |
|
|
294,620 |
|
|
|
(160,773
|
) |
|
|
(133,847
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
323,524 |
|
|
|
323,524 |
|
|
|
1,646,891 |
|
|
|
(1,970,415
|
) |
|
|
323,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
323,524 |
|
|
$ |
2,386,302 |
|
|
$ |
2,235,081 |
|
|
$ |
(1,980,415 |
) |
|
$ |
2,964,492 |
|
Burlington
Coat Factory Investments Holdings, Inc. and
Subsidiaries
|
|
Condensed
Consolidating Statement of Operations
|
|
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended November 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Revenue
|
|
|
-
|
|
|
|
(488)
|
|
|
|
14,780
|
|
|
|
-
|
|
|
|
14,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
-
|
|
|
|
1,189
|
|
|
|
1,040,985
|
|
|
|
-
|
|
|
|
1,042,174
|
|
Selling
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
13,488
|
|
|
|
48,225
|
|
|
|
-
|
|
|
|
61,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income, Net
|
|
|
-
|
|
|
|
(760
|
)
|
|
|
(2,078
|
)
|
|
|
-
|
|
|
|
(2,838
|
)
|
Loss
(Earnings) from Equity Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,291
|
|
|
|
72,204
|
|
|
|
1,611,992
|
|
|
|
50,371
|
|
|
|
1,748,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income Before (Benefit) Provision for Income Taxes
|
|
|
(14,291
|
)
|
|
|
(70,730
|
)
|
|
|
110,251
|
|
|
|
(50,371
|
)
|
|
|
(25,141
|
)
|
(Benefit)
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$
|
(14,291
|
)
|
|
$
|
(14,291
|
)
|
|
$
|
64,662
|
|
|
$
|
(50,371
|
)
|
|
$
|
(14,291
|
)
|
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
|
|
Condensed
Consolidating Statement of Operations
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended November 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Revenue
|
|
|
-
|
|
|
|
(588
|
)
|
|
|
8,491
|
|
|
|
-
|
|
|
|
7,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
-
|
|
|
|
305
|
|
|
|
602,642
|
|
|
|
-
|
|
|
|
602,947
|
|
Selling
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
6,988
|
|
|
|
24,346
|
|
|
|
-
|
|
|
|
31,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income, Net
|
|
|
-
|
|
|
|
(411
|
)
|
|
|
115
|
|
|
|
-
|
|
|
|
(296
|
)
|
Loss
(Earnings) from Equity Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,177
|
)
|
|
|
11,142
|
|
|
|
910,614
|
|
|
|
75,447
|
|
|
|
979,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income Before (Benefit) Provision for Income Taxes
|
|
|
18,177
|
|
|
|
(11,190
|
)
|
|
|
99,726
|
|
|
|
(75,447
|
)
|
|
|
31,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit)
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$
|
18,177
|
|
|
$
|
18,177
|
|
|
$
|
57,270
|
|
|
$
|
(75,447
|
)
|
|
$
|
18,177
|
|
Burlington
Coat Factory Investments Holdings, Inc. and
Subsidiaries
|
Condensed
Consolidating Statement of Operations
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended December 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Revenue
|
|
|
-
|
|
|
|
1,992
|
|
|
|
13,871
|
|
|
|
-
|
|
|
15,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales (Exclusive of Depreciation and Amortization)
|
|
|
-
|
|
|
|
1,149
|
|
|
|
999,789
|
|
|
|
-
|
|
|
1,000,938
|
Selling
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
13,154
|
|
|
|
48,448
|
|
|
|
-
|
|
|
61,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Charges
|
|
|
-
|
|
|
|
-
|
|
|
|
7,379
|
|
|
|
-
|
|
|
7,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(Income), Net
|
|
|
-
|
|
|
|
(802
|
)
|
|
|
(1,699
|
)
|
|
|
-
|
|
|
(2,501)
|
Equity
in (Earnings) Loss of Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,222
|
|
|
|
87,479
|
|
|
|
1,538,476
|
|
|
|
31,819
|
|
|
1,684,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Provision (Benefit) for Income Taxes
|
|
|
(27,222
|
)
|
|
|
(83,621
|
)
|
|
|
98,864
|
|
|
|
(31,819
|
)
|
|
(43,798)
|
Provision
(Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(27,222
|
)
|
|
$
|
(27,222
|
)
|
|
$
|
59,041
|
|
|
$
|
(31,819
|
)
|
$
|
(27,222)
|
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
|
|
Condensed
Consolidating Statement of Operations
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended December 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Revenue
|
|
|
-
|
|
|
|
1,350
|
|
|
|
7,735
|
|
|
|
-
|
|
|
|
9,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales (Exclusive of Depreciation and Amortization)
|
|
|
-
|
|
|
|
687
|
|
|
|
556,476
|
|
|
|
-
|
|
|
|
557,163
|
|
Selling
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
7,295
|
|
|
|
23,550
|
|
|
|
-
|
|
|
|
30,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
Charges
|
|
|
-
|
|
|
|
-
|
|
|
|
6,826
|
|
|
|
-
|
|
|
|
6,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(Income), Net
|
|
|
-
|
|
|
|
(417
|
)
|
|
|
(1,432
|
)
|
|
|
-
|
|
|
|
(1,849
|
)
|
Equity
in (Earnings) Loss of Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,173
|
)
|
|
|
7,974
|
|
|
|
839,028
|
|
|
|
91,871
|
|
|
|
915,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Provision (Benefit) for Income Taxes
|
|
|
23,173
|
|
|
|
(5,515
|
)
|
|
|
114,164
|
|
|
|
(91,871
|
)
|
|
|
39,951
|
|
Provision
(Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
23,173
|
|
|
$
|
23,173
|
|
|
$
|
68,698
|
|
|
$
|
(91,871
|
)
|
|
$
|
23,173
|
|
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
|
|
Condensed
Consolidating Statements of Cash Flows
|
|
(All
amounts in thousands)
|
|
|
|
|
|
For the Six Months Ended
November 29, 2008
|
|
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used In) Provided by Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Money Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
of Money Market Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Long Term Debt - ABL Line of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Payments on Long Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Payments on Long Term Debt - ABL Line of Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By (Used In) Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burlington
Coat Factory Investments Holdings, Inc. and Subsidiaries
|
|
Condensed
Consolidating Statements of Cash Flows
|
|
(All
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Six Months Ended December 1, 2007
|
|
|
|
Holdings
|
|
|
BCFW
|
|
|
Guarantors
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Property and Equipment - Continuing Operations
|
|
|
-
|
|
|
|
(10,400
|
)
|
|
|
(36,703
|
)
|
|
|
-
|
|
|
|
(47,103
|
)
|
Proceeds
Received from Sales of Assets Held for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activity-Other
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
121
|
|
|
|
-
|
|
|
|
85
|
|
Net
Cash Used in Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Long -Term Debt – ABL Senior Secured Revolving
Facility
|
|
|
-
|
|
|
|
292,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
292,001
|
|
Principal
Payments on Long Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
Payments on Long Term Loan
|
|
|
-
|
|
|
|
(11,443
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,443
|
)
|
Principal
Payments on Long Term Debt – ABL Senior Secured Revolving
Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
of Dividends
|
|
|
(625
|
)
|
|
|
(625
|
)
|
|
|
-
|
|
|
|
625
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used in Financing Activities
|
|
|
-
|
|
|
|
(67,368
|
)
|
|
|
(1,181
|
)
|
|
|
-
|
|
|
|
(68,549
|
)
|
(Decrease)
Increase in Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
|
-
|
|
|
|
20,035
|
|
|
|
13,843
|
|
|
|
-
|
|
|
|
33,878
|
|
Cash
and Cash Equivalents at End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
The
Company’s management intends for this discussion to provide the reader with
information that will assist in understanding the Company’s financial
statements, the changes in certain key items in those financial statements from
period to period, and the primary factors that accounted for those changes, as
well as how certain accounting principles affect our financial statements. All
discussions of operations in this report relate to Burlington Coat Factory
Warehouse Corporation (“BCFWC”) and its subsidiaries, which are reflected in the
financial statements of Burlington Coat Factory Investments Holdings, Inc. and
its subsidiaries (hereinafter “we” or “our” or “Holdings”). The following
discussion contains forward-looking information and should be read in
conjunction with the Condensed Consolidated Financial Statements and notes
thereto included elsewhere in this report and in our Annual Report on Form
10-K for the twelve month period ended May 31, 2008 ("2008 10-K"). Our actual
results could differ materially from the results contemplated by these
forward-looking statements due to various factors, including those discussed
under the section of this Item 2 entitled “Safe Harbor Statement.”
Fiscal
Year
We define the 2009 fiscal year (“Fiscal
2009”) and the 2008 fiscal year (“Fiscal 2008”) as the twelve month period
ending on May 30, 2009 and the twelve month period ending on May 31, 2008,
respectively.
Overview
We
experienced an increase in net sales for the three months ended November 29,
2008 compared with the three months ended December 1, 2007. Net sales
were $1,002.4 million for the three months ended November 29, 2008 compared with
$946.6 million for the three months ended December 1, 2007, a 5.9%
increase. The increase is primarily the result of 38 new stores,
exclusive of five store closures (33 new stores, net of store closures), opened
between December 2, 2007 and November 29, 2008 and the impact of the $10.7
million barter transaction that occurred during the three months ended November
29, 2008. These improvements in net sales are partially offset by a
2.1% comparative store sales decrease from the comparative period of a year
ago.
Our gross
margin as a percentage of sales decreased to 39.8% from 41.1% during the three
month period ended November 29, 2008 compared with the three month period ended
December 1, 2007. The decrease in gross margin as a percentage of
sales is due to increased markdowns during the three month period ended November
29, 2008 compared with the three month period ended December 1, 2007 and the
barter transaction that we entered into during the three months ended November
29, 2008. The increased markdowns are inclusive of $11.5 million of
incremental markdowns for Fall seasonal product, which negatively impacted our
gross margin rate by 1.2%. The barter transaction resulted in $10.7
million of sales at no gross margin (Refer to Note 9 to the Condensed
Consolidated Financial Statements entitled “Barter Transactions” for further
discussion).
We
recorded net income of $18.2 million for the three month period ended November
29, 2008 compared with net income of $23.2 million for the three month period
ended December 1, 2007. The decrease in our operating results of
$5.0 million during the three months ended November 29, 2008 compared with
the three months ended December 1, 2007 is primarily attributable to increased
markdowns and increased selling and administrative expenses. These
increases are partially offset by decreased interest expense, decreased
impairment charges and positive contributions from new stores opened in Fiscal
2009.
We
experienced an increase in net sales for the six months ended November 29, 2008
compared with the six months ended December 1, 2007. Net sales were
$1,709.4 million for the six months ended November 29, 2008 and $1,625.3 million
for the six months ended December 1, 2007, a 5.2% increase. The
increase is primarily the result of 33 new stores, net of closures, opened
between December 2, 2007 and November 29, 2008 and a net increase in barter
sales of $5.5 million for the six months ended November 29, 2008 compared with
the six months ended December 1, 2007. These increases are partially
offset by a 1.1% comparative store sales decrease from the comparative period of
a year ago.
Our gross
margin as a percentage of sales increased to 39.0% from 38.4% during the six
month period ended November 29, 2008 compared with the six month period
ended December 1, 2007. The improvement in gross margin as a
percentage of sales is primarily due to fewer markdowns during the six months
ended November 29, 2008 compared with the six months ended December 1, 2007 and
improved initial markups which are the result of lower costs associated with
better negotiating and buying efforts. The decrease in markdowns for the
six months ended November 29, 2008 compared with the six months ended December
1, 2007 is the result of a shift in the timing of markdowns of $16.9 million
which were accelerated into the fourth quarter of Fiscal 2008, partially offset
by $11.5 million of incremental markdowns for Fall seasonal
product.
The
improvement in markdowns is primarily related to our taking $16.9 million of
markdowns during the fourth quarter of Fiscal 2008. Those markdowns
were historically
taken
during the first quarter of our fiscal year. However, based on the
needs of the business at the end of Fiscal 2008, we took the markdowns sooner
than we historically had taken them. Therefore, there were fewer
markdowns during the six months ended November 29, 2008 compared with the six
months ended December 1, 2007.
We
recorded a net loss of $14.3 million for the six month period ended November 29,
2008 compared with a net loss of $27.2 million for the six month period ended
December 1, 2007. The improvement in our operating results during the
six months ended November 29, 2008 compared with the six months ended
December 1, 2007 is primarily attributable to less interest expense and lower
impairment charges during the six months ended November 29, 2008 compared with
the six months ended December 1, 2007. The improvements noted above
in our operating results are partially offset by increased selling and
administrative expenses.
Current
Conditions
Store Openings, Closings, and
Relocations. During the six months ended November 29, 2008, we opened 33
new Burlington Coat Factory Warehouse Stores (“BCF” stores) and closed
three BCF stores, two of which were in locations within the same trading market
as two of the new stores that we opened. As of November 29, 2008, we
operated 427 stores under the names "Burlington Coat Factory Warehouse" (409
stores), "Cohoes Fashions" (two stores), "MJM Designer Shoes" (fifteen stores)
and "Super Baby Depot" (one store). We have reduced our planned new
store openings for the remainder of Fiscal 2009 and have committed to only six
new lease agreements for stores to be opened during the remainder of Fiscal
2009. In addition to the planned new store openings, during the
second half of Fiscal 2009, we are planning to remodel three of our existing
stores, which were damaged by hurricanes this past fall.
Ongoing
Initiatives. We continue to focus on a number of ongoing
initiatives aimed at improving our comparative store sales, and ultimately, our
operating results. These initiatives include, but are not limited
to:
·
|
Developing
and enhancing our strategies related to improving our merchandise flow and
improving our inventory allocation process to place trend right
merchandise in the right stores at the right
time;
|
·
|
Implementing
several logistics initiatives including a new warehouse management system,
enhancements to our distribution centers and improvements in
productivity. We believe that the implementation of these
initiatives will enable us to reduce costs and improve service levels in
both the short term as well as over the long
term;
|
·
|
Working
to derive insights into our customers' purchasing behavior from our
recently implemented customer relationship database;
and
|
·
|
Implementing
various process improvements and standard operating procedures to improve
the efficiencies of our stores.
|
Subsequent Events. In an effort to better align our resources with our
business objectives, we have reviewed all areas of the business to identify
efficiency opportunities to enhance our organization’s performance. We have been
progressing on a number of initiatives to provide improved tools and business
processes to the organization. In light of the challenging economic
and retail sales environments, we have accelerated the implementation of several
initiatives, including some that have resulted in the elimination of certain
positions and the restructuring of certain other jobs and
functions. This has resulted in the planned reduction of our
workforce in our corporate office and our stores of approximately 2,300
positions, or slightly less than 9% of our total workforce. This reduction in
our workforce will result in a severance charge during the third quarter of
Fiscal 2009 of less than $2.0 million.
As a
result of these various initiatives, we plan to reduce our cost structure in
excess of $45 million during the last two quarters of Fiscal 2009. The majority
of these savings are anticipated to result from a more effective
management structure and payroll management in the stores and a reduction of
payroll costs of our corporate functions. We believe this will
allow us to run the business more efficiently without sacrificing our ability to
serve our customers.
We will
continue to pursue our growth plans and invest in capital projects that meet our
required financial hurdles. However, given the uncertainty of the economy,
prudent management of inventory and expenses will remain a strategic
initiative.
General Economic
Conditions. Consumer
spending habits, including spending for the merchandise that we sell, are
affected by, among other things, prevailing economic conditions, inflation,
levels of employment, salaries and wage rates, prevailing interest rates,
housing costs, energy costs, income tax rates and policies, consumer confidence
and consumer perception of economic conditions. In addition, consumer
purchasing patterns may be influenced by consumers’ disposable income, credit
availability and debt levels. A continued or incremental slowdown in the U.S.
economy, an uncertain economic outlook or an expanded credit crisis could
continue to adversely affect consumer spending habits resulting in lower net
sales and profits than expected on a quarterly or annual
basis. During the second quarter of Fiscal 2009, there was
significant deterioration in the global financial markets and economic
environment, which we believe negatively impacted consumer spending at many
retailers, including us. In response to this, we have taken steps to increase
opportunities to profitably drive sales and to curtail capital spending and
operating expenses where prudent. If these adverse economic trends worsen, or if
our efforts to counteract the impacts of these trends are not sufficiently
effective, there could be a negative impact on our financial performance and
position in future fiscal periods. For further discussion of the risks to us
regarding general economic conditions, please refer to Part II, Item 1A of this
report entitled “Risk Factors.”
Key
Performance Measures
Management
considers numerous factors in assessing our performance. Key performance
measures used by management include comparative store sales, earnings before
interest, taxes, depreciation, amortization and impairment (which we define as
“EBITDA”), gross margin, inventory levels, inventory turnover, liquidity and
comparative store payroll.
Comparative Store Sales.
Comparative store sales measures performance of a store during the current
reporting period against the performance of the same store in the corresponding
period of the previous year. The method of calculating comparative
store sales varies across the retail industry. We define comparative
store sales as sales of those stores (net of sales discounts) that are beginning
their four hundred and twenty-fifth day of operation (approximately one year and
two months). Existing stores whose square footage has been changed by
more than 20% and relocated stores (except those relocated within the same
shopping center) are classified as new stores for comparative store sales
purposes. We experienced a decrease in comparative store sales of
1.1% and 2.1% during the six and three month periods ended November 29, 2008,
respectively, compared with the six and three month periods ended December 1,
2007.
Various
factors affect comparative store sales, including, but not limited to, current
economic conditions, weather conditions, the timing of our releases of new
merchandise and promotional events, the general retail sales environment,
consumer preferences and buying trends, changes in sales mix among distribution
channels, competition, and the success of marketing programs. While
any and all of these factors can impact comparative store sales, we believe that
the decrease in comparative store sales in the six and three month periods ended
November 29, 2008 as compared with the six and three months ended December 1,
2007 is primarily attributable to weakened consumer demand as a result of the
contraction of credit available to consumers and the downturn in the
economy.
EBITDA. EBITDA is
a non-GAAP financial measure of our performance. EBITDA provides
management with helpful information with respect to our
operations. It provides additional information with respect to our
ability to meet our future debt service, fund our capital expenditures and
working capital requirements and to comply with various covenants in each
indenture governing our outstanding notes, as well as various covenants related
to our senior secured credit facilities.
EBITDA
for the six months ended November 29, 2008 decreased slightly compared with
EBITDA for the six months ended December 1, 2007. For the six months
ended November 29, 2008, EBITDA was $112.5 million compared with $113.5 million
for the six months ended December 1, 2007. Refer to the Company’s
discussion below under the title “Results of Operations” for further information
related to our sales, cost of sales and selling and administrative expenses,
which are the primary drivers of EBITDA.
EBITDA
for the three months ended November 29, 2008 compared with the three months
ended December 1, 2007 decreased $20.5 million. EBITDA contribution
from new store gross margin was offset by the effect of negative comparative
store sales and higher markdown expense. Selling and administrative
costs increased as a result of new stores that were opened in Fiscal 2009 and as
a result of increased occupancy expenses and increased benefits, offset in part
by decreased comparative store payroll for stores opened prior to Fiscal
2009. Other income and other revenue decreased primarily as a result
of a loss on our investment in a money market fund.
The
following table shows our calculation of EBITDA for the six and three months
ended November 29, 2008 and December 1, 2007:
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
November
29, 2008
|
|
|
December
1, 2007
|
|
|
November
29, 2008
|
|
|
December
1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income
|
|
$ |
(14,291 |
) |
|
$ |
(27,222 |
) |
|
$ |
18,177 |
|
|
$ |
23,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
54,138 |
|
|
|
66,910 |
|
|
|
27,764 |
|
|
|
33,685 |
|
Income
Tax (Benefit)/ Provision
|
|
|
(10,850 |
) |
|
|
(16,576 |
) |
|
|
13,089 |
|
|
|
16,778 |
|
Depreciation
|
|
|
61,713 |
|
|
|
61,602 |
|
|
|
31,334 |
|
|
|
30,845 |
|
Impairment
Charges
|
|
|
-- |
|
|
|
7,379 |
|
|
|
-- |
|
|
|
6,826 |
|
Amortization
|
|
|
21,765 |
|
|
|
21,380 |
|
|
|
11,083 |
|
|
|
10,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
112,475 |
|
|
$ |
113,473 |
|
|
$ |
101,447 |
|
|
$ |
121,936 |
|
Gross Margin. Gross
margin is a measure used by management to indicate whether we are selling
merchandise at an appropriate gross profit. Gross margin is the difference
between net sales and the cost of sales. For the six month period ended November
29, 2008 compared with the six month period ended December 1, 2007, we
experienced an increase in gross margin as a percentage of sales from
38.4% to 39.0%. The improvement in gross margin as a
percentage of sales is primarily due to fewer markdowns during the six
months ended November 29, 2008 compared with the six months ended December 1,
2007 and improved initial markups which are the result of lower costs associated
with better negotiating and buying efforts.
The
improvement in markdowns is primarily related to our taking $16.9 million of
markdowns during the fourth quarter of Fiscal 2008. Those markdowns
were historically taken during the first quarter of our fiscal
year. However, based on the needs of the business at the end of
Fiscal 2008, we took the markdowns sooner than we historically had taken
them. Therefore, there are fewer markdowns during the six months
ended November 29, 2008 compared with the six months ended December 1,
2007.
For the
three month periods ended November 29, 2008 and December 1, 2007, the gross
margin as a percentage of sales decreased to 39.8% from 41.1%. This
decrease is due primarily to increased markdowns during the three months ended
November 29, 2008 compared with the three months ended December 1, 2008 and the
barter transaction which contributed $10.7 million of sales at no gross
margin. Refer to the discussion below under “Results of
Operations” regarding cost of sales for further information related to our gross
margin.
Inventory
Levels. Inventory levels are monitored by management to assure
that our stores are properly stocked to service customer needs while at the same
time assuring that stores are not over-stocked which would necessitate increased
markdowns to move slow-selling merchandise. At November 29, 2008, inventory was
$928.4 million versus $870.9 million at December 1, 2007. This increase in
inventory is primarily due to the opening of 33 new stores, net of store
closures, during the period of December 2, 2007 through November 29,
2008. Average store inventory at November 29, 2008 decreased
approximately 1.6% to $2.2 million.
Inventory Turnover. Inventory
turnover is a measure that indicates how efficiently inventory is bought and
sold. It measures the length of time we own our inventory. This is significant
because usually the longer the inventory is owned, the more likely
markdowns would be necessary to sell the inventory. Inventory turnover is
calculated by dividing the net sales before sales discounts by the average
retail inventory for the period being measured. The annualized inventory
turnover rate during the first six months of Fiscal 2009 is consistent with the
annualized inventory turnover rate during the first six months of Fiscal 2008 at
2.3 turns per year.
Liquidity. Liquidity
measures our ability to generate cash. Management measures liquidity through
cash flow and working capital position. Cash flow is the measure of cash
generated from operating, financing, and investing activities. We experienced a
decrease in cash flow of $8.7 million during the six month period ended November
29, 2008 compared with the six month period ended December 1, 2007 primarily due
to increased capital expenditures largely driven by new store growth, and the
redesignation of cash and
cash
equivalents to investments in money market funds, offset in part by lower
net borrowings on our ABL Line of Credit and improved operating
results. Cash and cash equivalents increased $0.3 million to $40.4
million during the six months ended November 29, 2008 (discussed in more detail
under the caption below entitled “Liquidity and Capital
Resources”).
Changes
in working capital also impact our cash flows. Working capital equals current
assets (exclusive of restricted cash and cash equivalents) minus current
liabilities. Working capital at November 29, 2008 was $252.3 million compared
with $198.4 million at December 1, 2007. This increase in working
capital is primarily attributable to increased inventory levels as a result of
the opening of 33 new stores, net of store closures, from December 2, 2007
through November 29, 2008.
Comparative Store
Payroll. Comparative store payroll measures a store’s payroll
during the current reporting period against the payroll of the same store in the
corresponding period of the previous year. We define our comparative store
payroll as stores which were opened for an entire week both in the previous year
and the current year. Comparative store payroll decreased 5.1% and
5.2 % for the six and three months ended November 29, 2008, respectively,
compared with the six and three months ended December 1, 2007 as a result of
various process improvements and standard operating procedures that have been
implemented to improve the efficiencies of our stores, including, but not
limited to, the cash office, baby depot and receiving areas within our
stores.
Critical
Accounting Policies and Estimates
Our
Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of these financial statements requires management to
make estimates and assumptions that affect (i) the reported amounts of assets
and liabilities; (ii) the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements; and (iii) the reported amounts of
revenues and expenses during the reporting period. On an on-going basis,
management evaluates its estimates and judgments, including those related to
inventories, long lived assets, intangible assets, goodwill impairment,
insurance, sales returns, allowances for doubtful accounts and income taxes.
Historical experience and various other factors, that are believed to be
reasonable under the circumstances, form the basis for making estimates and
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Our
critical accounting policies and estimates are consistent with those disclosed
in our 2008 10-K.
Results
of Operations
The
following table sets forth certain items in the Condensed Consolidated
Statements of Operations as a percentage of net sales for the six and three
month periods ended November 29, 2008 and December 1, 2007.
|
|
Percentage
of Net Sales
|
|
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
November
29,
|
|
|
December
1,
|
|
|
November
29,
|
|
|
December
1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
& Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income
before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax (Benefit) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended
November 29, 2008 compared with Three Month Period Ended December 1,
2007
Net
Sales
Consolidated
net sales increased $55.8 million (5.9%) to $1,002.4 million for the three
month period ended November 29, 2008 compared with the three month period ended
December 1, 2007. The primary driver resulting in the increase in
net sales is due to an increase in non-comparative store sales for the three
months ended November 29, 2008 compared with the three months ended December 1,
2007. From December 2, 2007 through November 29, 2008, we opened 33
new stores, net of store closures. New stores opened in Fiscal 2009
contributed additional sales of $67.4 million while stores opened in Fiscal 2008
contributed incremental non-comparative sales of $5.0 million.
Additionally,
during the three months ended November 29, 2008, we entered into a barter
agreement which contributed net sales of $10.7 million (as more fully described
in Note 9 to our Condensed Consolidated Financial Statements entitled “Barter
Transactions”). There were no net sales from barter transactions
during the three months ended December 1, 2007.
These
increases were partially offset by a comparative stores sales decrease of 2.1%
for the three month period ended November 29, 2008 due primarily to weakened
consumer demand as a result of the contraction of credit available to consumers
and the downturn in the economy.
Other
Revenue
Other
revenue (consisting of rental income from leased departments, sublease rental
income, layaway, alteration, dormancy, and other service charges and
miscellaneous revenue items) decreased to $7.9 million for the three month
period ended November 29, 2008 compared with $9.1 million for the three month
period ended December 1, 2007. This decrease is primarily related to our
decision during the third quarter of Fiscal 2008 to cease charging dormancy
service fees on outstanding store value cards, which were recorded in the line
item “Other Revenue” in our Condensed Consolidated Statements of Operations, and
begin recording store value card breakage income in the line item “Other Income”
in our Condensed Consolidated Statements of Operations. These
dormancy service fees contributed an additional $1.2 million to the line item
“Other Revenue” in our Condensed Consolidated Statements of Operations for the
three months ended November 29, 2008 compared with the three months ended
December 1, 2007. We now recognize breakage income related to
outstanding store value cards in the line item “Other Income, Net” in our
Condensed Consolidated Statements of Operations (refer to Note 14 to
our Condensed Consolidated Financial Statements entitled “Store Value
Cards” for further discussion).
Cost
of Sales
Cost of
sales increased $45.8 million (8.2%) for the three month period ended
November 29, 2008 compared with the three month period ended December 1, 2007.
Cost of sales as a percentage of net sales increased to 60.2% during the three
months ended November 29, 2008 from 58.9% during the three months ended December
1, 2007. The increase in cost of sales as a percentage of net sales
for the three months ended November 29, 2008 compared with the three months
ended December 1, 2007 was primarily related to increased markdowns during the
three months ended November 29, 2008 compared with the three months ended
December 1, 2007 and the impact of the barter transaction that we entered into
in November of 2008. This transaction resulted in $10.7 million of
net sales at no gross margin. The increased markdowns are inclusive of
$11.5 million of incremental markdowns for Fall seasonal product, which
negatively impacted our gross margin rate by 1.2%.
Our
cost of sales and gross margin may not be comparable to those of other entities,
since some entities include all of the costs related to their buying and
distribution functions in cost of sales. We include certain of these costs in
the “Selling and Administrative Expenses” and “Depreciation” line items in our
Condensed Consolidated Statements of Operations. We include in our “Cost of
Sales” line item all costs of merchandise (net of purchase discounts and certain
vendor allowances), inbound freight, warehouse outbound freight and certain
merchandise acquisition costs, primarily commissions and import
fees.
Selling
and Administrative Expenses
Selling
and administrative expenses increased $27.8 million (10.0%) during the three
months ended November 29, 2008 compared with the three months ended December 1,
2007. The increase is primarily driven by an increase in occupancy related
costs
(rent, utilities, repairs and maintenance, and real estate taxes) of $15.6
million, an increase in benefit costs of $6.5 million and an increase in payroll
and payroll taxes of $5.3 million.
The
increase in occupancy related costs of $15.6 million is primarily related to new
store openings. New stores opened in Fiscal 2009 accounted for $8.8
million of the total increase. Stores opened in Fiscal 2008 that were
not operating for a full quarter incurred incremental occupancy costs during the
three months ended November 29, 2008 of $1.1 million. Excluding the
impact of new store openings, electric expense increased $1.9 million and
janitorial services increased $2.4 million during the three months ended
November 29, 2008 compared with the three months ended December 1,
2007. The increase in electric expense is related to rate
increases. The increase in janitorial service is related to our
initiative to replace janitorial payroll with a third party
provider. The increase in janitorial service expense is offset by
decreases in our comparative store payroll as noted below.
The
increase in benefit costs is primarily driven by an accrual reduction related to
employee incentives during the three months ended December 1, 2007 which
resulted in a credit to our selling and administrative expenses during that
period. During the three months ended November 29, 2008, we did not
record a comparable credit.
The
increase in payroll and payroll related costs of $5.3 million is primarily
related to new store openings, partially offset by a decrease in comparative
store payroll. New stores opened in Fiscal 2009 contributed $9.2
million of payroll and payroll related costs during the three months ended
November 29, 2008. Stores opened in Fiscal 2008 that were not
operating for a full year incurred incremental payroll and payroll related costs
during the three months ended November 29, 2008 of $0.6
million. These increases were offset by various process improvements
and standard operating procedures that have been implemented to improve the
efficiencies of our stores, including, but not limited to, the cash office, baby
depot and receiving areas within our stores and the reduction of janitorial
payroll in conjunction with our initiative to replace janitorial payroll with a
third party provider. These initiatives resulted in a decrease in
comparative store payroll of $5.1 million during the three months ended November
29, 2008.
Depreciation
Depreciation
expense related to the depreciation of fixed assets remained relatively
consistent with the comparative period. Depreciation expense amounted to $31.3
million in the three month period ended November 29, 2008 compared with $30.8
million in the three month period ended December 1, 2007.
Amortization
Amortization
expense related to the amortization of favorable and unfavorable leases and
deferred debt charges remained relatively consistent with the prior
period. Amortization expense was $11.1 million for the three month
period ended November 29, 2008 compared with $10.6 million for the three month
period ended December 1, 2007.
Impairment
Charges
There
were no impairment charges for the three months ended November 29,
2008. Impairment charges of $6.8 million during the three months
ended December 1, 2007 pertained to certain long-lived assets related to ten of
the Company’s stores.
Interest
Expense
Interest
Expense was $27.8 million and $33.7 million for the three month periods ended
November 29, 2008 and December 1, 2007, respectively. The decrease in interest
expense is primarily related to lower interest rates on our ABL Senior Secured
Revolving Facility (“ABL Line of Credit”) and our Senior Secured Term Loan
Facility (“Term Loan”) during the three months ended November 29, 2008 compared
with the three months ended December 1, 2007 and to decreases in the fair market
value of our interest rate cap agreements. These decreases were
partially offset by interest incurred on increased borrowings under our ABL Line
of Credit during the three months ended November 29, 2008 compared with the
three months ended December 1, 2007. The average balance on our ABL
Line of Credit was $290.1 million during the three months ended November 29,
2008 compared with an average balance of $200.6 million for the three months
ended December 1, 2007.
The
average interest rates on our ABL Line of Credit for the three months ended
November 29, 2008 and for the three months ended December 1, 2007 were 4.7% and
7.2%, respectively. The average interest rates on our Term Loan for
the three months ended November 29, 2008 and December 1, 2007 were 5.1 % and
7.8%, respectively. Adjustments of the interest rate cap contracts to fair value
amounted to losses of $0.2 million for both the three month periods ended
November 29, 2008 and December 1, 2007, which are recorded as “Interest Expense”
in our Condensed Consolidated Statement of Operations.
Other
Income, Net
Other
income, net (consisting of investment income, gains and losses on disposition of
assets, breakage income and other miscellaneous items) decreased $1.6 million to
$0.3 million for the three month period ended November 29, 2008 compared with
the three
month period ended December 1, 2007. This decrease is primarily
related the loss on the investment in a money market fund of $1.7 million (refer
to Note 5 to our Condensed Consolidated Financial Statements entitled “Fair
Value Measurements” for further discussion) and lower insurance recoveries in
the amount of $0.4 million during the three months ended November 29, 2008
compared with the three months ended December 1, 2007. Partially
offsetting these decreases is the recording of breakage income of $0.8 million
(Refer to Note 14 to our Condensed Consolidated Financial Statements
entitled “Store Value Cards” for further discussion) during the three months
ended November 29, 2008 and $0.3 million less of losses on the disposal of fixed
assets during the three months ended November 29, 2008 compared with the three
months ended December 1, 2007.
Income
Tax Expense
Income
tax expense was $13.1 million for the three month period ended November 29, 2008
and $16.8 million for the three months ended December 1, 2007. The effective tax
rate for the three month period ended November 29, 2008 was
41.9%. See discussion below on six months income tax benefit and Note
8 to our Condensed Consolidated Financial Statements entitled "Income
Taxes." The effective tax rate for the three month period
ended December 1, 2007 was 42.0%.. The effective tax rates for both
periods differ from their annual effective tax rates due to adjustments for the
effects of the change in the estimated annual effective tax rates used in the
first fiscal quarter of each fiscal year and discrete items recorded during the
quarter.
Net Income
Net
Income amounted to $18.2 million for the three months ended November 29, 2008
compared with net income of $23.2 million for the three months ended December 1,
2007. The $5.0 million decline in net income for the three months ended November
29, 2008 compared with the three months ended December 1, 2007 is related to the
negative impact of decreased comparative store sales, increased markdown expense
and increased selling and administrative costs. These decreases in
our net income were partially offset by positive contributions from new
stores.
Six Month Period Ended
November 29, 2008 compared with Six Month Period Ended December 1,
2007
Net
Sales
Consolidated
net sales increased $84.1 million (5.2%) to $1,709.4 million for the six
month period ended November 29, 2008 compared with the six month period ended
December 1, 2007. The increase in sales was primarily driven by
an increase in non-comparative store sales for the six months ended November 29,
2008 compared with the six months ended December 1, 2007. From
December 2, 2007 through November 29, 2008, we opened 33 new stores, net of
store closures. Stores opened during Fiscal 2009 contributed $70.6
million to sales while stores opened during Fiscal 2008 contributed incremental
non-comparative net sales of $41.9 million.
Additionally,
we experienced a net increase in barter sales during the six months ended
November 29, 2008 compared with the six months ended December 1,
2007. During the six months ended November 29, 2008, we entered into
our second barter agreement which contributed net sales of $10.7 million (as
more fully described in Note 9 to our Condensed Consolidated Financial
Statements entitled “Barter Transactions”). During the six months
ended December 1, 2007, we had entered into our first barter agreement which
contributed $5.2 million to net sales during the period.
These
increases in net sales were partially offset by a decrease in comparative store
sales of 1.1% for the six month period ended November 29, 2008 due primarily to
weakened consumer demand as a result of the contraction of credit available to
consumers and the downturn in the economy throughout the six months ended
November 29, 2008.
Other
Revenue
Other
revenue (consisting of rental income from leased departments, sublease rental
income, layaway, alterations, dormancy and other service charges and
miscellaneous revenue items) decreased to $14.3 million for the six month period
ended November 29, 2008 compared with $15.9 million for the six month period
ended December 1, 2007. This decrease is primarily related to our decision
during the third quarter of Fiscal 2008 to cease charging dormancy service fees
on outstanding store value cards, which was recorded in the line item “Other
Revenue” in our Condensed Consolidated Statements of Operations, and begin
recording store value card breakage income in the line item “Other Income” in
our Condensed Consolidated Statements of Operations. These
dormancy service fees contributed an additional $1.8 million to the line item
“Other Revenue” in our Condensed Consolidated
Statements of Operations for the six months ended December 1, 2007 compared with
the six months ended November 29, 2008. We now recognize breakage
income related to outstanding store value cards in the line item “Other Income,
Net” in our Condensed Consolidated Statements of Operations (Refer to Note 14 to
our Condensed Consolidated Financial Statements entitled “Store Value
Cards” for further discussion).
Cost
of Sales
Cost of
sales increased $41.2 million (4.1%) for the six month period ended
November 29, 2008 compared with the six month period ended December 1,
2007. Cost of sales as a percentage of net sales decreased to 61.0%
during the six months ended November 29, 2008 from 61.6% during the six months
ended December 1, 2007. The increase in cost of sales in dollars is
related to the sales of 33 new stores, net of store closures, which were
opened from December 2, 2007 through November 29, 2008. The decrease in cost of
sales, as a percent of net sales is primarily related to fewer markdowns
during the six months ended November 29, 2008 compared with the six months ended
December 1, 2007 and improved initial markups which are the result of lower
costs associated with better negotiating and buying efforts. The decrease
in markdowns for the six months ended November 29, 2008 compared with the six
months ended December 1, 2007 is the result of a shift in the timing of
markdowns of $16.9 million which were accelerated into the fourth quarter of
Fiscal 2008, partially offset by $11.5 million of incremental markdowns for Fall
seasonal product.
The
improvement in markdowns is primarily related to our taking $16.9 million of
markdowns during the fourth quarter of Fiscal 2008. Those markdowns
were historically taken during the first quarter of our fiscal
year. However, based on the needs of the business at the end of the
fiscal year, we took the markdowns sooner than we historically had taken
them. Therefore, there are less markdowns during the six months ended
November 29, 2008 compared with the six months ended December 1,
2007.
Selling
and Administrative Expenses
Selling
and administrative expenses increased $42.6 million (8.1%) from $529.3 million
for the six months ended December 1, 2007 to $571.9 million for the six months
ended November 29, 2008. The increase is primarily driven by an increase in
occupancy related costs (rent, utilities, repairs and maintenance, and real
estate taxes) of $25.4 million, an increase in payroll and payroll related costs
of $7.4 million, an increase in advertising costs of $5.7 million, and an
increase in benefit costs of $4.4 million.
The
increase in occupancy related costs of $25.4 million is primarily related to new
store openings. New stores opened in Fiscal 2009 accounted for $14.3
million of the total increase. Stores opened in Fiscal 2008 that were
not operating for a full six months in Fiscal 2008 incurred incremental
occupancy costs during the six months ended November 29, 2008 of $3.5
million. After taking into account the impact of new stores, electric
expense increased $3.1 million during the six months ended November 29, 2008
compared with the six months ended December 1, 2007 due to an increase in
rates. Finally, janitorial service increased $3.0 million, exclusive
of new store impact, during the six months ended November 29, 2008 compared with
the six months ended December 1, 2007 due to our initiative to replace
janitorial payroll with a third party provider. The increase in
janitorial service expense is offset by decreases in our comparative store
payroll as noted below.
The
increase in payroll and payroll related costs of $7.4 million is primarily
related to $12.3 million of payroll and payroll related costs of new store
openings during the six months ended November 29, 2008. Stores opened
in Fiscal 2008 that were not operating for a full year incurred incremental
payroll and payroll related costs during the six months ended November 29, 2008
of $4.7 million. These increases were offset by a decrease in our
comparative store payroll related to various process improvements and standard
operating procedures that have been implemented to improve the efficiencies of
our stores, including, but not limited to, the cash office, baby depot and
receiving areas within our stores and the reduction of janitorial payroll in
conjunction with our initiative to replace janitorial payroll with a third party
provider. These initiatives resulted in a decrease in comparative
store payroll of $9.8 million during the six months ended November 29,
2008.
The
increase in advertising costs of $5.7 million for the six months ended November
29, 2008 compared with the six months ended December 1, 2007 is related to
planned increases in advertising as well as 33 net new stores opened from
December 2, 2007 through November 29, 2008.
The
increase in benefit costs is primarily driven by a reduction of accruals for
certain employee incentives during the six months ended December 1, 2007 which
resulted in a credit to our selling and administrative expenses during that
period. During the six months ended November 29, 2008, we did not
record a comparable credit.
Depreciation
Depreciation
expense related to the depreciation of fixed assets remained relatively
consistent with the comparative period. Depreciation expense amounted to $61.7
million for the six month period ended November 29, 2008 compared with $61.6
million for the six month period ended December 1, 2007.
Amortization
Amortization
expense related to the amortization of favorable and unfavorable leases and
deferred debt charges remained relatively consistent with the prior
period. Amortization expense was $21.8 million for the six month
period ended November 29, 2008 compared with $21.4 million for the six month
period ended December 1, 2007.
Impairment
Charges
There
were no impairment charges recorded during the six months ended November 29,
2008. Impairment charges for the six months ended December 1, 2007
amounted to $7.4 million. For the six months ended December 1, 2007,
these charges pertained to certain long-lived assets related to ten of our
stores and certain warehouse equipment.
Interest
Expense
Interest
expense was $54.1 million and $66.9 million for the six month periods ended
November 29, 2008 and December 1, 2007, respectively. The decrease in interest
expense is primarily related to lower average interest rates on our ABL Line of
Credit and our Term Loan during the six months ended November 29, 2008 compared
with the six months ended December 1, 2007 and to decreases in the fair market
value of our interest rate cap agreements. These decreases were
partially offset by interest incurred on increased borrowings during the six
months ended November 29, 2008 compared with the six months ended December 1,
2007 under the ABL Line of Credit. The average balance on our ABL
Line of Credit was $260.4 million during the six months ended November 29, 2008
compared with an average balance of $204.5 million for the six months ended
December 1, 2007.
The
average interest rates on our ABL Line of Credit for the six months ended
November 29, 2008 and for the six months ended December 1, 2007 were 4.4% and
7.2%, respectively. The average interest rates on our Term Loan for
the six months ended November 29, 2008 and December 1, 2007 were 5.0% and 7.7%,
respectively. Adjustments of the interest rate cap contracts to fair
value amounted to losses of $0.3 million and $0.1 million for the six month
periods ended November 29, 2008 and December 1, 2007, respectively, which are
recorded as “Interest Expense” in the our Condensed Consolidated Statements of
Operations.
Other
Income, Net
Other
income, net (consisting of investment income, gains and losses on disposition of
assets, breakage income and other miscellaneous items) increased $0.3 million to
$2.8 million for the six month period ended November 29, 2008 compared with the
six month period ended December 1, 2007. This increase is primarily
related to the recording of breakage income of $1.6 million (refer to Note 14 to
our Condensed Consolidated Financial Statements entitled “Store Value Cards” for
further discussion), $0.5 million less in losses on disposal of fixed assets,
and an increase of insurance recoveries of $0.6 million related to various store
insurance claims that were received, net of our deductible, during the six
months ended November 29, 2008 compared with the six months ended December 1,
2007. These increases are partially offset by a $1.7 million loss on
our investment in a money market fund (refer to Note 5 to our Condensed
Consolidated Financial Statements entitled “Fair Value Measurements” for further
discussion) and $0.5 million less in interest income principally due to less
funds being invested during the period.
Income
Tax Benefit
Income
tax benefit was $10.9 million for the six month period ended November 29, 2008
and $16.6 million for the six month period ended December 1, 2007. The effective
tax rates for the six month periods ended November 29, 2008 and December 1,
2007 were 43.2% and 37.8% respectively. The effective tax rate for
the six month period ended November 29, 2008 differs from the projected annual
effective tax rate of 44.1% due to adjustments for the effects of the change in
the estimated annual effective tax rate used in the second quarter of each
fiscal year and discrete items recorded during the quarter. Please refer
to Footnote 8 to our Condensed Consolidated Financial Statements entitled
"Income Taxes" for further discussion around our effective tax
rate. The effective tax rate of 37.8% for the six month period ended
December 1, 2007 is based primarily upon our forecasted annualized effective tax
rates, adjusted for discrete items. The effective tax rate for
the six months ended November 29, 2008 was impacted by three discrete
adjustments: a decrease to tax expense of $0.9 million to adjust deferred tax
asset and liabilities for a change in state tax law and rates, a decrease to tax
expense of $0.7 million due to a change in our effective state tax rate
used to calculate deferred taxes, and an increase to tax expense of $1.2 million
for the accrual of interest related to unrecognized tax benefits established in
prior years in accordance with FASB Interpretation No 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 (“FIN
48”). The effective tax rate for the six months ended December
1, 2007 was impacted by two discrete adjustments: an increase to tax
expense of $1.5 million for the accrual of interest related to unrecognized tax
benefits in accordance with FIN 48, and a decrease to tax expense of $0.7
million to adjust deferred tax asset and liabilities for a change in state tax
law and rates.
Net
Loss
Net loss
amounted to $14.3 million for the six months ended November 29, 2008 compared
with a net loss of $27.2 million for the six months ended December 1,
2007. The improvement in the our net loss position of $12.9 million
is primarily attributable to lower interest expense and impairment charges
during the six months ended November 29, 2008 compared with the six months ended
December 1, 2007. Additionally, new stores opened in Fiscal 2009
contributed positively to our results. The improvements noted above
in our operating results are partially offset by increased selling and
administrative expenses.
Seasonality &
Inflation
Our
business, like that of most retailers, is subject to seasonal influences, with
the major portion of sales and income typically realized during the second and
third quarters of each fiscal year, which includes the back-to-school and
holiday seasons. Approximately 50% of our annual net sales historically occur
during the period from September through January. Because of the
seasonality of our business, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year. In
addition, quarterly results of operations depend significantly upon the timing
and amount of sales and costs associated with the opening of new stores, as well
as weather. Weather continues to be an important contributing factor
to the sale of clothing in the Fall, Winter and Spring seasons. Generally, our
sales are higher if the weather is cold during the Fall and warm during the
early Spring.
Although
we expect that our operations will be influenced by general economic conditions,
including fluctuations in food, fuel and energy prices, we do not believe that
inflation has had a material effect on our results of operations. However, there
can be no assurance that our business will not be affected by such factors in
the future.
Liquidity
and Capital Resources
Overview
We fund
inventory expenditures during normal and peak periods through cash flows from
operating activities, available cash, and our ABL Line of Credit. Our working
capital needs follow a seasonal pattern, peaking in the second quarter of our
fiscal year when inventory is received for the Fall selling season. Our largest
source of operating cash flows is cash collections from our customers. In
general, our primary uses of cash are the opening of new stores and remodeling
of existing stores, debt servicing, payment of operating expenses and providing
for working capital, which principally represents the purchase of
inventory.
Our
ability to satisfy our interest payment obligations on our outstanding debt will
depend largely on our future performance, which in turn, is subject to
prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service interest
payment obligations on our outstanding indebtedness and if we can not
borrow or obtain equity financing to satisfy those obligations, our business and
results of operations will be materially adversely affected. We cannot be
assured that any replacement borrowing or equity financing could be successfully
completed.
We
believe that cash generated from operations, along with our existing cash and
revolving credit facilities, will be sufficient to fund our expected cash flow
requirements and planned capital expenditures for at least the next twelve
months as well as the foreseeable future.
The
Company’s Term Loan agreement contains financial, affirmative and negative
covenants and requires the Company to, among other things, maintain on the last
day of each fiscal quarter a consolidated leverage ratio not to exceed a maximum
amount. Specifically, the Company’s total debt to Adjusted EBITDA for the four
fiscal quarters most recently ended on or prior to such date, both measures as
defined in the Term Loan agreement, may not exceed 6.2 to 1 at February 28,
2009; 5.75 to 1 at May 30, 2009, August 29, 2009, and November 28, 2009;
5.5 to 1 at February 27, 2010; and 5.25 to 1 at May 29, 2010. Adjusted
EBITDA reflects certain adjustments to calculate the consolidated leverage
ratio. Adjusted EBITDA starts with consolidated net income for the
period and adds back (i) depreciation, amortization, and other non cash charges
that were deducted in arriving at consolidated net income, (ii) the provision
for taxes, (iii) interest expense, (iv) advisory fees, and (v) unusual,
non-recurring or extraordinary expenses, losses or charges as reasonably
approved by the administrative agent for such period.
In
September 2008, as part of the Company's overnight cash management
strategy, we made investments into The Reserve Primary Fund (“Fund”), a money
market fund registered with the SEC under the Investment Company Act of 1940, of
$56.3 million. On September 22, 2008, the Fund announced that redemptions
of shares of the Fund were suspended pursuant to an SEC order so that an orderly
liquidation may be effected for the protection of the Fund’s
investors. On October 30, 2008, the Fund announced an initial
distribution to Fund shareholders pursuant to which we received $28.5 million.
Based on the decline in the value of the Fund, we recorded a loss of $1.7
million in November 2008 related to our investment in the Fund.
On
December 3, 2008, the Fund announced a second distribution to Fund shareholders
pursuant to which we received $15.8 million. Under the Fund’s plan
of liquidation (also announced on December 3, 2008), subsequent periodic
distributions will be made to Fund shareholders as cash accumulates in the Fund
until the Fund’s net assets (other than (i) a special reserve established to
satisfy certain costs and expenses of the Fund, including pending or threatened
claims against the Fund, and (ii) net income generated from Fund holdings since
September 15, 2008) have been distributed. Based upon the maturities of the
underlying investments in the Fund, we expect to receive the remaining
amount of our investment during the next twelve months. In the event that
we do not receive the majority of the remaining amount of our investment during
calendar 2009, we may have to borrow additional cash through our ABL Line of
Credit. The investment in the Fund is classified in the line item entitled
“Investment in Money Market Fund” in our Condensed Consolidated Balance Sheets
as of November 29, 2008.
Cash
Flow for the Six Months Ended November 29, 2008 Compared with the Six Months
Ended December 1, 2007
We
generated $0.3 million of cash flow for the six months ended November 29, 2008
compared with $8.9 million of cash flow for
the six months ended December 1, 2007. Net cash provided by operating
activities was $134.1 million for the six months ended November 29, 2008
compared with $124.5 million for the six months ended December 1,
2007. The improvement in net cash provided by operating
activities is primarily the result of several factors, as
follows:
·
|
Operating
results for the six months ended November 29, 2008 improved by $12.9
million compared with the operating results for the six months ended
December 1, 2007.
|
·
|
Cash
flow from the change in accounts payable for the six months ended November
29, 2008 increased $47.9 million compared with the six months ended
December 1, 2007. The increase in accounts payable for the six
months ended November 29, 2008 compared with the six months ended December
1, 2007 is primarily related to the increase in merchandise inventory
during the similar periods.
|
These
increases were partially offset by the following decrease in cash flow from
operating activities for the six months ended November 29, 2008 compared with
the six months ended December 1, 2007:
·
|
Merchandise
inventory had a larger increase during the six month period ended November
29, 2008 compared with the six month period ended December 1,
2007. This increase resulted in $48.5 million less cash flow
during the six month period ended November 29, 2008 compared with the six
month period ended December 1, 2007. The larger increase in our
merchandise inventories is primarily due to the opening of 33 new stores,
net of store closures, between December 2, 2007 and November 29,
2008.
|
The
improvements in net cash flows from operating activities were augmented by our
using less cash in financing activities. For the six months ended
November 29, 2008, we used $26.9 million in financing activities, the majority
of which represents the repayments, net of borrowings, on our ABL Line of Credit
of $25.6 million. Comparatively, during the six months ended December
1, 2007, we used $68.5 million in financing activities, with the majority of the
usage attributable to repayments, net of borrowings, of $55.3 million on our ABL
Line of Credit for the six months ended December 1, 2007. The
increased cash flow generated from operating and financing activities was offset
by higher levels of spending related to capital expenditures (discussed in more
detail under the caption below entitled “Operational Growth”) and the
redesignation of cash and cash equivalents to investments in money market funds,
partially offset by the partial redemption of the investment in money market
funds during the six months ended November 29, 2008 compared with the six
months ended December 1, 2007.
Cash flow
and working capital levels assist management in measuring our ability to
meet our cash requirements. Working capital measures our current
financial position. Working capital is defined as current assets
(exclusive of restricted cash and cash equivalents) less current
liabilities. Working capital at November 29, 2008 was $252.3 million
compared with $284.4 million at May 31, 2008. The decrease in working
capital is primarily the result of higher levels of accounts payable and other
current liabilities partially offset by increased merchandise inventories,
accounts receivable and investment in money market funds as of November 29, 2008
compared with May 31, 2008.
Accounts
payable increased $278.6 million from May 31, 2008 through November 29,
2008. The increase is primarily attributable to new store growth and
increased inventories on hand during the holiday selling
season. Other current liabilities increased $26.9 million from May
31, 2008 through November 29, 2008, due primarily to increased accruals of $16.0
million, primarily related to new store growth during the six months ended
November 29, 2008 compared with the six months ended December 1, 2007, and
increases in layaway deposits and sales return reserves of $5.2 million and $3.6
million, respectively.
Merchandise
inventories increased $208.8 million from May 31, 2008 through November 29,
2008. This increase is primarily attributable to increased stores and
higher inventory levels during the holiday selling season. Accounts
receivable increased approximately $39.2 million, due to increased credit card
receivables at the end of November compared with the end of May and increased
lease incentive receivables related to new
stores. Additionally, our investment in a money market fund
went from a zero balance
at May
31, 2008 to a balance of $26.1 million at November 29, 2008. This is
due to the Reserve Fund being frozen by order of the SEC in order to perform an
orderly liquidation (Please refer to Note 5 entitled “Fair Value Measurement”
for further details). As a result, we reclassified $26.1 million out
of the line item “Cash and Cash Equivalents” and into the line item “Investments
in Money Market Fund” as of November 29, 2008.
Operational
Growth
During
the six months ended November 29, 2008, we opened 33 new Burlington Coat Factory
Warehouse Stores (“BCF” stores) and closed three BCF stores, two
of which were in locations within the same trading market as two of the new
stores we opened. As of November 29, 2008, we operated 427 stores
under the names "Burlington Coat Factory Warehouse" (409 stores), "Cohoes
Fashions" (two stores), "MJM Designer Shoes" (fifteen stores) and "Super Baby
Depot" (one store). We are forecasting spending approximately
$85 million net of approximately $55 million of landlord allowances, in capital
expenditures during Fiscal 2009. Estimated capital expenditures include
approximately $26 million, net of the $55 million of landlord
allowances for store expenditures, $28 million for upgrades of warehouse
facilities and $31 million for computer and other equipment. This
forecast represents an approximate $15 million reduction in planned capital
expenditures for Fiscal 2009. For the six months ended November 29,
2008, capital expenditures, net of landlord allowances, amounted to
approximately $59 million.
We
monitor the availability of desirable locations for our stores from such sources
as dispositions by other retail chains and bankruptcy auctions, as well as
locations presented to us by real estate developers, brokers and existing
landlords. Most of our stores are located in malls, strip shopping
centers, regional powers centers or are freestanding. We also lease
existing space and are opening some built-to-suit locations. For most
of our new leases, we have revised our lease model to provide for at least a ten
year initial term with a number of five year options
thereafter. Typically, our new lease strategy includes landlord
allowances for leasehold improvements. We believe our new lease model
makes us more competitive with other retailers for desirable
locations. We may seek to acquire a number of such locations either
through transactions to acquire individual locations or transactions that
involve the acquisition of multiple locations simultaneously.
Additionally,
we may consider strategic acquisitions. If we undertake such
transactions, we may seek additional financing to fund acquisitions and carrying
charges (i.e., the cost of rental, maintenance, tax and other obligations
associated with such properties from the time of commitment to acquire to the
time that such locations can be readied for opening as our stores) related to
these stores. There can be no assurance, however, that any additional
locations will become available from other retailers or that, if available, we
will undertake to bid or be successful in bidding for such locations.
Furthermore, to the extent that we decide to purchase additional store
locations, it may be necessary to finance such acquisitions with additional
long-term borrowings.
Dividends
Payment
of dividends is prohibited under our credit agreements, except for limited
circumstances. Dividends equal to $0.6 million were paid during the
six month period ended December 1, 2007 to Holdings in order to repurchase
capital stock of the Parent from executives who left the Company.
Long-Term
Borrowings, Lines of Credit and Capital Lease Obligations
Holdings
and each of our current and future subsidiaries, except one subsidiary which is
considered minor, have jointly, severally and unconditionally guaranteed BCFWC’s
obligations pursuant to the $800 million ABL Line of Credit, $900 million Term
Loan and the $305 million Senior Notes due 2014. As of November 29, 2008, we
were in compliance with all of our debt covenants. Significant changes in
our debt structure consist of the following:
$800
Million ABL Senior Secured Revolving Facility
During
the six and three months ended November 29, 2008, we made repayments of
principal, net of borrowings, in the amount of $25.6 million and $129.0 million,
respectively. As of November 29, 2008, we had $156.0 million
outstanding under the ABL Senior Secured Revolving Facility and unused
availability of $488.5 million.
$900
Million Term Loan
On
September 4, 2007, we made a repayment of principal in the amount of $11.4
million based on 50% of the available free cash flow (as defined in the credit
agreement governing the Term Loan) as of June 2, 2007. This payment
offsets the $2.3 million quarterly payments that we are required to make under
the credit agreement through the third quarter of Fiscal 2009 and $0.2 million
of the quarterly payment to be made in the fourth quarter of Fiscal
2009. Based on the available free cash flow for the fiscal year ended
May 31, 2008, we were not required to make any mandatory
repayment. As of November 29, 2008, we had $872.8 million outstanding
under the Term Loan.
Senior
Discount Notes
On
October 15, 2008, we made our first interest payment of approximately $7.2
million to the Senior Discount Note Holders. On April 15, 2009,
we are required to make another interest payment of approximately $7.2
million. Semi-annual interest payments will continue to be made
through October 15, 2014.
Off-Balance
Sheet Arrangements
Other
than operating leases consummated in the normal course of business and letters
of credit, as more fully described below, we are not involved in any off-balance
sheet arrangements that have or are reasonably likely to have a material current
or future impact on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or
capital resources.
Contractual
Obligations
There
have been no significant changes to our contractual obligations and commercial
commitments table as disclosed in our 2008 10-K, except as noted
below:
We enter into lease agreements during
the ordinary course of business in order to secure favorable store
locations. As of November 29, 2008, we committed to six new
lease agreements for locations at which stores are expected to be opened in
Fiscal 2009. The six new stores are expected to have, in the
aggregate, minimum lease payments of $1.1 million, $4.3 million, $4.3 million,
$4.3 million, and $30.5 million for the remainder of Fiscal 2009, the
fiscal years ended May 29, 2010, May 28, 2011, and June 2, 2012, and each
subsequent year thereafter, respectively.
We had
letter of credit arrangements with various banks in the amount of $44.3 million
and $28.6 million guaranteeing performance under various lease agreements,
insurance contracts and utility agreements at November 29, 2008 and December 1,
2007, respectively.
Additionally,
we have an outstanding letter of credit in the amount of $2.4 million and
$3.4 million at November 29, 2008 and December 1, 2007, respectively,
guaranteeing our Industrial Revenue Bonds. We also have outstanding
letters of credit agreements in the amount of $11.4 million and $13.2 million at
November 29, 2008 and December 1, 2007, respectively, related to certain
merchandising agreements.
Safe Harbor
Statement
This
report contains forward-looking statements (including, without limitation, any
forward-looking statements contained in any financial statement forming part of
this report) that are based on current expectations, estimates, forecasts and
projections about us, the industry in which we operate and other matters, as
well as management’s beliefs and assumptions and other statements regarding
matters that are not historical facts. For example, when we use words such
as “projects,” “expects,” “anticipates,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” “should,” “would,” “could,” “will,” “opportunity,”
“potential” or “may,” variations of such words or other words that convey
uncertainty of future events or outcomes, we are making forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
(Securities Act) and Section 21E of the Securities Exchange Act of 1934
(Exchange Act). Our forward-looking statements are subject to risks and
uncertainties. Such statements include, but are not limited to,
proposed store openings and closings, proposed capital expenditures, projected
financing requirements, proposed developmental projects, projected sales and
earnings, our ability to maintain selling margins, and the effect of the
adoption of recent accounting pronouncements on our consolidated financial
position, results of operations and cash flows. Actual events or
results may differ materially from the results anticipated in these
forward-looking statements as a result of a variety of factors. While it is
impossible to identify all such factors, factors that could cause actual results
to differ materially from those estimated by us include: competition in the
retail industry, seasonality of our business, adverse weather conditions,
changes in consumer preferences and consumer spending patterns, import risks,
inflation, general economic conditions, our ability to implement our strategy,
our substantial level of indebtedness and related debt-service obligations,
restrictions imposed by covenants in our debt agreements, availability of
adequate financing, our dependence on vendors for our merchandise, events
affecting the delivery of merchandise to our stores, existence of adverse
litigation, availability of desirable locations on suitable terms, and
other risks discussed from time to time in our filings with the Securities and
Exchange Commission.
Many of
these factors are beyond our ability to predict or control. In addition, as a
result of these and other factors, our past financial performance should not be
relied on as an indication of future performance. The cautionary statements
referred to in this section also should be considered in connection with any
subsequent written or oral forward-looking statements that may be issued by us
or persons acting on our behalf. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law. In light of
these risks and uncertainties, the forward-looking events and circumstances
discussed in this report might not occur. Furthermore, we cannot guarantee
future results, events, levels of activity, performance or
achievements.
Recent
Accounting Pronouncements
Refer
to Note 19 to our Condensed Consolidated Financial Statements entitled
“Recent Accounting Pronouncements” for a discussion of recent accounting
pronouncements and their impact on our Condensed Consolidated Financial
Statements.
Item
3. Quantitative and Qualitative Market Risk
Disclosures
We are
exposed to certain market risks as part of our ongoing business operations.
Primary exposures include changes in interest rates, as borrowings under our ABL
Line of Credit and Term Loan will bear interest at floating rates based on
LIBOR or the base rate, in each case plus an applicable borrowing margin and
investing activities.
We will
manage our interest rate risk by balancing the amount of fixed-rate and
floating-rate debt and through the use of interest rate cap transactions. For
fixed-rate debt, interest rate changes do not affect earnings or cash flows.
Conversely, for floating-rate debt, interest rate changes generally impact our
earnings and cash flows, assuming other factors are held constant.
At
November 29, 2008, we had $428.5 million principal amount of fixed-rate debt and
$1,028.8 million of floating-rate debt. Based on $1,028.8 million outstanding as
floating rate debt, an immediate increase of one percentage point, excluding the
interest rate caps, would cause an increase to cash interest expense of
approximately $10.3 million per year.
If a one
point increase in interest rates were to occur over the next four quarters
excluding the interest rate cap, such an increase would result in the following
additional interest expenses (assuming current borrowing level remains
constant):
Floating
Rate Debt
|
|
Principal
Outstanding at November 29, 2008
|
|
|
Additional
Interest Expense
Q3
2009
|
|
|
Additional
Interest Expense
Q4
2009
|
|
|
Additional
Interest Expense
Q1
2010
|
|
|
Additional
Interest Expense
Q2
2010
|
|
ABL
Senior Secured Revolving Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
|
|
|
872,807
|
|
|
|
2,182
|
|
|
|
2,177
|
|
|
|
2,171
|
|
|
|
2,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have
two interest rate cap agreements for a maximum principal amount of $1.0 billion
which limit our interest rate exposure to 7% on our first billion dollars of
borrowings under our variable rate debt obligations. If interest
rates were to increase above the 7% cap rate, then our maximum interest rate
exposure would be $27.0 million assuming constant current borrowing levels of
$1.0 billion. Currently, we have unlimited interest rate risk related
to our variable rate debt in excess of $1.0 billion. For the six
months ended November 29, 2008, our borrowing rates related to our ABL Line of
Credit and our Term Loan averaged 4.4% and 5.0%, respectively.
Our
ability to satisfy our interest payment obligations on our outstanding debt will
depend largely on our future performance, which, in turn, is in part subject to
prevailing economic conditions and to financial, business and other factors
beyond our control. If we do not have sufficient cash flow to service our
interest payment obligations on our outstanding indebtedness and if we cannot
borrow or obtain equity financing to satisfy those obligations, our business and
results of operations will be materially adversely affected. We cannot be
assured that any replacement borrowing or equity financing could be successfully
completed.
We and
our subsidiaries, affiliates, and significant shareholders may from time to time
seek to retire or purchase our outstanding debt (including publicly issued debt)
through cash purchases and/or exchanges, in open market purchases, privately
negotiated transactions, by tender offer or otherwise. Such repurchases or
exchanges, if any, will depend on prevailing market conditions, liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.
A change
in interest rates generally does not have an impact upon our future earnings and
cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however,
and if additional debt is acquired to fund the debt repayment, future earnings
and cash flow may be affected by changes in interest rates. This effect would be
realized in the periods subsequent to the periods when the debt
matures.
In
September 2008, as part of the Company's overnight cash management
strategy, we made investments into The Reserve Primary Fund (“Fund”) of $56.3
million. On September 22, 2008, the Fund announced that redemptions of
shares of the Fund were suspended pursuant to an SEC order so that an orderly
liquidation may be effected for the protection of the Fund’s
investors. On October 30, 2008, the Fund announced an initial
distribution to Fund shareholders pursuant to which we received $28.5 million.
Based on the decline in the value of the Fund, we recorded a loss of $1.7
million in November 2008 related to our investment in the Fund.
On December 3, 2008, the Fund announced a second distribution to Fund
shareholders pursuant to which we received $15.8 million. Under the
Fund’s plan of liquidation (also announced on December 3, 2008), subsequent
periodic distributions will be made to Fund shareholders as cash accumulates in
the Fund until the Fund’s net assets (other than (i) a special reserve
established to satisfy certain costs and expenses of the Fund, including pending
or threatened claims against the Fund, and (ii) net income generated from Fund
holdings since September 15, 2008) have been distributed. Based upon the
maturities of the underlying investments in the Fund, we expect to receive
the remaining amount of our investment during the next twelve months. In
the event that we do not receive the majority of the remaining amount of our
investment during calendar 2009, we may have to borrow additional cash through
our ABL Line of Credit. The investment in the Fund is classified in the
line item entitled “Investment in Money Market Fund” in our Condensed
Consolidated Balance Sheets as of November 29, 2008.
.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management team, under the supervision and with the participation of our
principal executive officer and our principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last
day of the fiscal period covered by this report, November 29, 2008. The term
disclosure controls and procedures means our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit 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 us in
the reports that we file or submit under the Exchange Act is accumulated and
communicated to management, including our principal executive and principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure. Based on this evaluation,
our principal executive officer and our principal financial officer concluded
that our disclosure controls and procedures were effective as of November 29,
2008.
Changes
in Internal Control Over Financial Reporting
During
the fiscal quarter ended November 29, 2008, there were no changes in our
internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC.
AND
SUBSIDIARIES
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
No
material legal proceedings have commenced or been terminated during the period
covered by this report. We are party to various other litigation matters, in
most cases involving ordinary and routine claims incidental to our business. We
cannot estimate with certainty our ultimate legal and financial liability with
respect to such pending litigation matters. However, we believe, based on our
examination of such matters, that our ultimate liability will not have a
material adverse effect on our financial position, results of operations or cash
flows.
Item
1A. Risk Factors.
Our
Annual Report on Form 10-K for the fiscal year ended May 31, 2008 (“2008 10-K”)
contains a detailed discussion of certain risk factors that could materially
adversely affect our business, our operating results, or our financial
condition. Set forth below is an update to our risk factor related to the
risk regarding general economic conditions previously identified in our 2008
10-K. Except as set forth below, there have been no material changes to
the risk factors disclosed in the “Risk Factors” section of our 2008
10-K.
General
economic conditions affect our business.
During
the first half of Fiscal 2009, there was significant deterioration in the global
financial markets and economic environment, which we believe negatively impacted
consumer spending at many retailers, including us. Consumer
spending habits, including spending for the merchandise that we sell, are
affected by, among other things, prevailing economic conditions, inflation,
levels of employment, salaries and wage rates, prevailing interest rates,
housing costs, energy costs, income tax rates and policies, consumer confidence
and consumer perception of economic conditions. In addition, consumer
purchasing patterns may be influenced by consumers’ disposable income, credit
availability and debt levels. A continued or incremental slowdown in the U.S.
economy, an uncertain economic outlook or an expanded credit crisis could
continue to adversely affect consumer spending habits resulting in lower net
sales and profits than expected on a quarterly or annual
basis. Consumer confidence is also affected by the domestic and
international political situation. The outbreak or escalation of war, or the
occurrence of terrorist acts or other hostilities in or affecting the United
States, could lead to a decrease in spending by consumers.
The
financial crisis which began in the summer of 2008, combined with already
weakened economic conditions due to high energy costs, deterioration of the
mortgage lending market and rising costs of food, has led to a global recession
affecting all industries and businesses. The resultant loss of jobs
and decrease in consumer spending has caused businesses to reduce spending and
scale down their profit and performance projections. More
specifically, these conditions have led to unprecedented promotional activity
among retailers. In order to increase traffic and drive consumer
spending during the current economic crisis, competitors, including department
stores, mass merchants and specialty apparel stores, have been offering
brand-name merchandise at substantial markdowns. In the past, we have
been able to compete successfully by employing a hybrid business model, offering
the low prices of off-price retailers as well as the branded merchandise,
product breadth and product diversity traditionally associated with department
stores. If we are unable to continue to positively differentiate ourselves from
our competitors, our results of operations could be adversely
affected.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a
Vote of Security Holders.
None.
Item
5. Other Information.
None.
Item
6. Exhibits.
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a - 14(a) and Rule 15d -
14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a - 14(a) and Rule 15d -
14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
BURLINGTON
COAT FACTORY INVESTMENTS HOLDINGS, INC.
|
/s/
Mark A. Nesci
|
|
|
|
Mark
A. Nesci
|
|
|
|
Principal
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Todd Weyhrich
|
|
|
|
Todd
Weyhrich
|
|
|
|
Executive
Vice President & Chief Financial Officer (Principal Financial
Officer)
|
|
|
|
|
|
|
Date:
January 13, 2009