99 Cents Only Stores Reports Second Quarter Fiscal 2016 Results

Geoffrey Covert Named Permanent President and Chief Executive Officer, Effective Later Today

Second Quarter Fiscal 2016 Overview:

- Net sales increased by 6.6% to $488.5 million

- Opened three new stores

- Same-store sales decreased by 1.9%

- Adjusted EBITDA (1) was $6.9 million versus $36.3 million in prior year

- Net loss was $78.1 million versus net income of $2.0 million in prior year

Sep 11, 2015

CITY OF COMMERCE, Calif., Sept. 11, 2015 /PRNewswire/ -- 99 Cents Only Stores LLC (the "Company") announced its financial results for each of the second quarter and first half of fiscal 2016 ended July 31, 2015.  The Company also made a separate announcement that the Board of Directors has appointed Geoffrey Covert as its new permanent President and Chief Executive Officer, effective later today.

99 Cents Only Stores LLC.

Financial Results

For the second quarter of fiscal 2016, the Company's net sales increased $30.3 million, to $488.5 million, compared to $458.2 million in the second quarter of fiscal 2015. Same-store sales decreased 1.9% from lower customer traffic, partially offset by higher average ticket. Same store sales performance experienced continued strength in seasonal and general merchandise categories, offset by challenges in consumables.

Gross margin, as a percentage of net sales, was 27.8% in the second quarter of fiscal 2016, a decline of 440 basis points from the second quarter of fiscal 2015.  Gross margin was negatively impacted by greater levels of promotional activities through June 2015 and higher inbound freight and duty costs, higher inventory shrinkage and scrap, and increased transportation expenses.  Selling, general and administrative expenses as a percentage of net sales was 31.6% in the second quarter of fiscal 2016, an increase of 340 basis points from the second quarter of fiscal 2015. The increase in selling, general and administrative expenses as a percentage of net sales was primarily driven by store level payroll and occupancy expenses, outside professional fees, depreciation and amortization and executive-related expenses.  Selling, general and administrative expenses as a percentage of net sales was also negatively impacted by the recent opening of 39 net new stores since the same period of last year and an increase in the minimum wage in California. 

Net loss was $78.1 million in the second quarter of fiscal 2016 compared to net income of $2.0 million for the second quarter of fiscal 2015.  Net loss as a percentage of net sales was (16.0)% for the second quarter of fiscal 2016, compared to net income of 0.4% for the second quarter of fiscal 2015.  Adjusted EBITDA was $6.9 million in the second quarter of fiscal 2016, compared to $36.3 million in the second quarter of fiscal 2015.  Adjusted EBITDA margin was 1.4% compared to 7.9% over the same period. 

For the first half of fiscal 2016, the Company's net sales increased $58.6 million, to $994.7 million, compared to $936.1 million in the first half of fiscal 2015. Same-store sales decreased 1.8% from lower customer traffic, partially offset by higher average ticket.  Net loss was $76.9 million in the first half of fiscal 2016, compared to net income of $11.6 million for the first half of fiscal 2015.  Net loss as a percentage of total sales was (7.7)% for fiscal 2016, compared to a net income as a percentage of total sales of 1.2% for the first half of fiscal 2015.  Adjusted EBITDA was $31.9 million in the first half of fiscal 2016, compared to $82.0 million in the first half of fiscal 2015.  Adjusted EBITDA margin was 3.2%, compared to 8.8% over the same period.

Commenting on the results, Andrew Giancamilli, Interim President and CEO, stated, "Our results this quarter remain disappointing as the significant changes we made last year to our stores and our merchandising and replenishment systems have taken time to drive improvements in our competitive positioning. To more immediately address our performance, we are actively working to more effectively manage our inventory and improve product assortment, while continuing to enhance customer service. In time, we expect these short- and long-term measures will enable 99 Cents Only Stores to strengthen its competitive position as one of the top extreme value retailers and a customer favorite for everyday staples as well as bargain closeout merchandise."

Commenting on the appointment of Mr. Covert, Mr. Giancamilli stated, "We are excited to have attracted such an energetic and experienced executive as Geoff.  I am confident that his leadership and experience in the grocery business will be invaluable in helping the Company reach its long-term objectives."

Store Openings

During the second quarter of fiscal 2016, the Company opened three new stores.  As of the end of the second quarter of fiscal 2016, the Company operated 389 stores, an increase of 11.1% in store count over the same period last year.  

Q2 FY16 Accounting Items

The Company concluded during the second quarter of fiscal 2016 that it was more likely than not that it would not realize its net deferred tax assets and recorded a non-cash $31.8 million increase to its provision for income taxes in order to establish a valuation allowance against such net deferred tax assets.  The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or utilizing other deferred tax assets in the future.

CONFERENCE CALL DETAILS

The Company's conference call to discuss its second quarter of fiscal 2016 ended July 31, 2015 and the other matters described in this release is scheduled for Friday, September 11, 2015 at 8:00 a.m. Pacific time (11:00 a.m. Eastern time). 

The live Second Quarter Fiscal 2016 Earnings call can be accessed by dialing (888) 895-5479 from the U.S.A., or (847) 619-6250 from international locations, and entering confirmation code 40642806.  Please phone in approximately 9 minutes before the call is scheduled to begin and hold for an operator to assist you.  Please inform the operator that you are calling in for 99 Cents Only Stores' Second Quarter Fiscal 2016 Earnings conference call, and be prepared to provide the operator with your name, company name, and position, if requested.  A telephone replay will be available approximately two hours after the call concludes and will be available through Friday, September 25, 2015, by dialing (888) 843-7419 from the U.S.A., or (630) 652-3042 from international locations, and entering confirmation code 40642806#.

A copy of this earnings release and any other financial and statistical information about the period to be presented in the conference call will be available prior to the call at the section of the Company's website entitled "Investor Relations" at www.99only.com

Non-GAAP Financial Measures

The Company defines EBITDA as net income before interest expense (income) and other financial costs, income taxes, depreciation and amortization.  Adjusted EBITDA is defined as EBITDA for the relevant period as adjusted by the following amounts: non-cash adjustments to reserve balances, stock-based compensation, fees and expenses related to the Merger (as defined below), legal settlements, non-ordinary course store closures, and other non-cash or one-time items.  Adjusted EBITDA margin is Adjusted EBITDA divided by total sales.  Adjusted EBITDA and Adjusted EBITDA margin as presented herein, are supplemental measures of the Company's performance that are not required by, or presented in accordance with, generally accepted accounting principles in the United States of America ("GAAP").  The Company's management uses EBITDA, Adjusted EBITDA and Adjusted EBITDA margin to assess its performance and that of its competitors.  In addition, Adjusted EBITDA is used to determine the Company's compliance and ability to take certain actions under the covenants contained in the Company's debt instruments.  EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not measures of the Company's financial performance under GAAP and should not be considered in isolation or as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP, as measures of operating performance or operating cash flows or as measures of liquidity.

Merger and Conversion to LLC

On January 13, 2012, 99¢ Only Stores was acquired by affiliates of Ares Management LLC, Canada Pension Plan Investment Board and the Gold-Schiffer family.  The acquisition is referred to as the "Merger." Effective October 18, 2013, 99¢ Only Stores converted from a California corporation to a California limited liability company, 99 Cents Only Stores LLC.  The term the "Company" refers to 99¢ Only Stores and its consolidated subsidiaries prior to the conversion date and to 99 Cents Only Stores LLC and its consolidated subsidiaries on or after the conversion date.

Founded in 1982, the Company operates 389 extreme value retail stores with 281 in California, 49 in Texas, 38 in Arizona and 21 in Nevada as of September 11, 2015. The Company is an extreme value retailer of consumable and general merchandise and seasonal products.   For more information, visit www.99only.com.

For further information:
Michael Fung
Interim Chief Financial Officer and Treasurer
(323) 881-5792
michael.fung@99only.com

The following tables reconcile EBITDA and Adjusted EBITDA to net income for the periods indicated:


For the Second Quarter Ended


July 31,
2015


August 1,
2014


(In thousands)


(Unaudited)





Net (loss) income

$           (78,101)


$              2,039

Interest expense, net

16,481


15,467

Provision for income taxes

42,951


1,151

Depreciation and amortization

17,308


13,109

EBITDA

$            (1,361)


$            31,766

Stock-based compensation (a)

773


739

Purchase accounting effect on leases (b)

616


406

Impairment of long-lived assets (c)

478


Executive related expenses (d)

2,525


777

Real estate projects termination charges (e)

2,833


Other (f)

1,076


2,624

Adjusted EBITDA

$              6,940


$           36,312





(a) 

Represents stock-based compensation expense incurred in connection with various stock-based compensation plans in which certain Company employees have participated.

(b)  

Represents purchase accounting effect on rent revenue and rent expense.

(c) 

Represents charges related to impairment due to an underperforming store in Texas.

(d)

Represents expenses related to severance for former executives, signing and retention bonuses and other executive related expenses.

(e)

Represents charges relating to previously capitalized store and distribution center real-estate development costs expensed upon termination of related projects.

(f)

Represents the following non-cash or other charges and income: (i) for all periods, amortization of gain related to sale-leaseback arrangements; (ii) for all periods, net gain/loss on the sale of non-core assets; and (iii) for all periods, severance charges, signing bonuses, professional fees, legal reserve adjustments and other.

The following tables reconcile EBITDA and Adjusted EBITDA to net income for the periods indicated:


For the First Half Ended


July 31,
2015


August 1,
2014


(In thousands)


(Unaudited)





Net (loss) income

$           (76,930)


$            11,614

Interest expense, net

32,750


30,896

Provision for income taxes

31,962


7,491

Depreciation and amortization

33,555


25,740

EBITDA

$            21,337


$            75,741

Stock-based compensation (a)

1,407


1,402

Purchase accounting effect on leases (b)

1,267


870

Impairment of long-lived assets (c)

478


Executive related expenses (d)

3,191


860

Real estate projects termination charges (e)

2,833


Other (f)

1,433


3,104

Adjusted EBITDA

$           31,946


$           81,977





(a)

Represents stock-based compensation expense incurred in connection with various stock-based compensation plans in which certain Company employees have participated.

(b)

Represents purchase accounting effect on rent revenue and rent expense.

(c)

Represents charges related to impairment due to an underperforming store in Texas.

(d)

Represents expenses related to severance for former executives, signing and retention bonuses and other executive related expenses.

(e)

Represents charges relating to previously capitalized store and distribution center real estate development costs expensed upon termination of related projects.

(f)

Represents the following non-cash or other charges and income: (i) for all periods, amortization of gain related to sale-leaseback arrangements; (ii) for all periods, net gain/loss on the sale of non-core assets; and (iii) for all periods, severance charges, signing bonuses, professional fees, legal reserve adjustments and other.

 

99 CENTS ONLY STORES LLC

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



July 31,

2015


January 30,

2015


(Unaudited)



ASSETS




Current Assets:




Cash

$            2,305


$       12,463

Accounts receivable, net of allowance for doubtful accounts of $49 and
   $58 at July 31, 2015 and January 30, 2015, respectively

1,661


1,954

Income taxes receivable

10,938


10,911

Deferred income taxes

31,097


41,583

Inventories, net

275,150


296,040

Assets held for sale

8,138


3,094

Other

12,491


19,039





Total current assets

341,780


385,084

Property and equipment, net

570,266


581,020

Deferred financing costs, net

13,817


15,463

Intangible assets, net

457,314


460,311

Goodwill

479,745


479,745

Deposits and other assets

7,759


7,543





Total assets

$      1,870,681


$   1,929,166









LIABILITIES AND MEMBER'S EQUITY




Current Liabilities:




Accounts payable

$           85,675


$    139,287

Payroll and payroll-related

19,407


20,004

Sales tax

6,305


14,087

Other accrued expenses

40,924


40,168

Workers' compensation

69,366


70,491

Current portion of long-term debt

6,138


6,138

Current portion of capital and financing lease obligations

823


380





Total current liabilities

228,638


290,555

Long-term debt, net of current portion

948,585


901,395

Unfavorable lease commitments, net

6,980


8,220

Deferred rent

25,488


23,293

Deferred compensation liability

783


724

Capital and financing lease obligation, net of current portions

34,440


24,681

Long-term deferred income taxes

192,204


170,678

Other liabilities

1,438


1,868





Total liabilities

1,438,556


1,421,414





Commitments and contingencies




Member's Equity:




Member units – 100 units issued and outstanding at July 31, 2015 and January 30, 2015

550,096


549,135

Investment in Number Holdings, Inc. preferred stock

(19,200)


(19,200)

Accumulated deficit

(98,115)


(21,185)

Other comprehensive loss

(656)


(998)





Total equity

432,125


507,752





Total liabilities and equity

$      1,870,681


$ 1,929,166





 

99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)










For the Second Quarter Ended


For the First Half Ended


July 31,
2015


August 1,
2014


July 31,
2015


August 1,
2014









Net Sales:








99¢ Only Stores

$           477,327


$         447,420


$           972,135


$        912,689

Bargain Wholesale

11,195


10,787


22,556


23,415

Total sales

488,522


458,207


994,691


936,104

Cost of sales

352,647


310,453


702,193


631,224

Gross profit

135,875


147,754


292,498


304,880

Selling, general and administrative expenses

154,544


129,097


304,716


254,879

Operating (loss) income

(18,669)


18,657


(12,218)


50,001









Other (income) expense:








Interest income



(3)


Interest expense

16,481


15,467


32,753


30,896

  Total other expense, net

16,481


15,467


32,750


30,896

(Loss) income before provision for income taxes

(35,150)


3,190


(44,968)


19,105

Provision for income taxes

42,951


1,151


31,962


7,491

Net (loss) income

$           (78,101)


$            2,039


$        (76,930)


$          11,614









 

99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



For the First Half Ended


July 31,
2015


August 1, 2014





Cash flows from operating activities:




Net (loss) income

$           (76,930)


$            11,614

Adjustments to reconcile net income to net cash provided by operating activities:




Depreciation

32,667


24,846

Amortization of deferred financing costs and accretion of OID

2,305


2,178

Amortization of intangible assets

887


894

Amortization of favorable/unfavorable leases, net

880


329

Gain on disposal of fixed assets

(48)


(32)

Loss on interest rate hedge

743


683

Long-lived assets impairment

478


Deferred income taxes

31,785


Stock-based compensation

1,408


1,402

Changes in assets and liabilities associated with operating activities:




Accounts receivable

293


102

Inventories

20,890


(45,556)

Deposits and other assets

6,471


795

Accounts payable

(38,902)


33,663

Accrued expenses

(7,623)


(2,232)

Accrued workers' compensation

(1,125)


(2,417)

Income taxes

(27)


1,704

Deferred rent

2,195


2,812

Other long-term liabilities

1,046


(3,377)

 Net cash (used in) provided by operating activities

(22,607)


27,408





Cash flows from investing activities:




Purchases of property and equipment

(43,685)


(43,866)

Proceeds from sale of property and fixed assets

1,439


27





Net cash used in investing activities

(42,246)


(43,839)









Cash flows from financing activities:




Payments of long-term debt

(3,069)


(3,069)

Proceeds under revolving credit facility

275,450


Payments under revolving credit facility

(225,850)


Proceeds from financing lease obligations

8,666


Payments of capital and financing lease obligations

(55)


(44)

Payments to repurchase stock options of Number Holdings, Inc

(390)


(76)

Net settlement of stock options of Number Holdings, Inc. for tax withholdings

(57)


Bank overdraft


422





Net cash provided by (used in) financing activities

54,695


(2,767)





Net decrease in cash

(10,158)


(19,198)

Cash - beginning of period

12,463


34,842

Cash - end of period

$                2,305


$             15,644

 

Safe Harbor Statement

The Company has included statements in this release that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act, as amended, and Section 27A of the Securities Act of 1933, as amended. As a general matter, forward-looking statements are those focused on future or anticipated events or trends, expectations and beliefs including, among other things, (a) trends affecting the financial condition or results of operations of the Company and (b) the business and growth strategies of the Company (including the Company's store opening growth rate) that are not historical in nature.  Such statements are intended to be identified by using words such as "believe," "expect," "intend," "estimate," "anticipate," "will," "project," "plan" and similar expressions in connection with any discussion of future operating or financial performance. Any forward-looking statements are and will be based upon the Company's then-current expectations, estimates and assumptions regarding future events and are applicable only as of the dates of such statements. Readers are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in this release for the reasons, among others, discussed in the reports and other documents the Company files from time to time with the Securities and Exchange Commission, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 2015. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 

(1)   EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are financial measures that are considered "non-GAAP financial measures" under the Securities and Exchange Commission regulations.  The definitions of, an explanation of how and why the Company uses, and a reconciliation to the most directly comparable GAAP measure of, these non-GAAP measures are included in this press release.

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SOURCE 99 Cents Only Stores