99 Cents Only Stores Reports Third Quarter Fiscal 2016 Results

Dec 14, 2015

CITY OF COMMERCE, Calif., Dec. 14, 2015 /PRNewswire/ --  

Third Quarter Fiscal 2016 Overview:

  • Net sales increased 2.8% to $491.5 million in prior year
  • Same-store sales decreased by 3.9%
  • Adjusted EBITDA1 was $5.1 million compared to $27.1 million in prior year
  • Net loss was $152.6 million compared to $3.8 million in prior year
  • Felicia Thornton named permanent Chief Financial Officer & Treasurer

99 Cents Only Stores LLC (the "Company") announced its financial results for each of the quarter and nine months ended October 30, 2015. 

Geoffrey Covert, President and Chief Executive Officer, stated, "With a new senior executive team now in place, we are aggressively identifying the issues that have led to our disappointing results in recent quarters. I see great possibilities for 99 Cents Only Stores and look forward to building on the foundational strengths of our business while providing the direction and discipline to return the organization to profitable growth.  Our new leadership team is energized and working with a sense of urgency to address the challenges that we face and the opportunities that lie ahead.  To this end, we are focused on improving the customer experience, reducing shrink and scrap, enhancing inventory management practices and getting the right products to the right stores at the right time. These priorities are designed to focus the organization and drive improvement in our financial and operational performance."

Third Quarter Financial Results

For the third quarter of fiscal 2016, the Company's net sales increased 2.8% to $491.5 million, compared to $478.3 million in the third quarter of fiscal 2015. Same-store sales decreased 3.9% due to lower customer traffic of 5.1%, partially offset by higher average ticket of 1.2%. Same store sales decline was primarily driven by challenges in produce and consumables sales, cannibalization impact of recent new store openings as well as ongoing initiatives to clear excess seasonal inventory.

Gross margin, as a percentage of net sales, was 26.8% in the third quarter of fiscal 2016, a decline of 460 basis points from the third quarter of fiscal 2015.  Gross margin was negatively impacted by an increase in cost of goods sold, partially as a result of the Company's ongoing initiatives to clear excess seasonal inventory, higher shrink & scrap as well as higher distribution costs. Selling, general and administrative expenses were $147.1 million, or 29.9% as a percentage of net sales, an increase of 60 basis points from the third 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, offset by a one-time impact of a $5.5 million gain on sale of excess warehousing capacity, which benefitted SG&A by approximately 110 basis points. 

During the third quarter of fiscal 2016, the Company recorded a $120.0 million non-cash goodwill impairment charge relating to the retail reporting unit. The impairment determination was based primarily on significant declines in profitability in recent quarters and only a modest recovery to restore expected future operating results to historical levels, as well as a significant increase in the fair value of the Company's tangible assets since the Merger. This is a preliminary estimate of the non-cash impairment charge and adjustments to the estimate may be recorded in the fourth quarter of fiscal 2016 as the Company finalizes the impairment review.  The goodwill impairment charge did not adversely affect the Company's debt position, cash flow, liquidity or compliance with financial covenants.

Net loss was $152.6 million in the third quarter of fiscal 2016 compared to $3.8 million for the third quarter of fiscal 2015. Net loss as a percentage of net sales was (31.1)% for the third quarter of fiscal 2016, compared to (0.8)% for the third quarter of fiscal 2015.  Adjusted EBITDA was $5.1 million in the third quarter of fiscal 2016, compared to $27.1 million in the third quarter of fiscal 2015.  Adjusted EBITDA margin was 1.0% compared to 5.7% over the same period.

Year-to-Date Financial Results

For the first nine months of fiscal 2016, the Company's net sales increased 5.1% to $1,486.2 million, compared to $1,414.4 million in the first nine of fiscal 2015. Same-store sales decreased 2.5% due to lower customer traffic of 4.4%, partially offset by higher average ticket of 2.0%.  Net loss was $229.6 million in the first nine months of fiscal 2016, compared to net income of $7.8 million for the first nine months of fiscal 2015.  Net loss as a percentage of total sales was (15.4)% for the first nine months of fiscal 2016, compared to net income as a percentage of total sales of 0.6% for the first nine months of fiscal 2015.  Adjusted EBITDA was $37.1 million in the first nine months of fiscal 2016, compared to $109.1 million for the first nine months of fiscal 2015.  Adjusted EBITDA margin was 2.4% for the first nine months of fiscal 2016, compared to 7.7% over the same period in fiscal 2015.

Store Openings

During the third quarter of fiscal 2016, the Company did not open any new stores. As of the end of the third quarter of fiscal 2016, the Company operated 389 stores, an increase of 7.5% in store count over the end of the third quarter last year. Subsequent to the end of the quarter, two new stores were opened in California, bringing the total store count to 391.

Executive Appointment

Subsequent to the end of the third quarter, the Company appointed Felicia Thornton as Chief Financial Officer and Treasurer, responsible for overseeing finance, accounting, treasury, risk management, legal and IT functions. Ms. Thornton has extensive executive experience in retail, and particularly in the grocery store industry, having served in senior leadership positions at DSM, Inc., Albertsons, and The Kroger Company.

Conference Call Details

The Company's conference call to discuss its third quarter of fiscal 2016 and the other matters described in this release is scheduled for Monday, December 14, 2015 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern Time).

The live call can be accessed by dialing 1-877-407-3982 (domestic) or 1-858-384-5517 (international).  Please phone in approximately 10 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' Third Quarter Fiscal 2016 Earnings conference call, and be prepared to provide the operator with your name, company name, position and the conference ID: 13626145. The call will also be broadcast live over the Internet, accessible through the Investors section of the Company's website at 99only.com/investor-relations.

A telephonic replay of the call will be available beginning Monday, December 14, 2015, at 2:00 p.m. Eastern Time, through Monday, December 28, 2015, at 11:59 p.m. Eastern Time. To access the replay, dial 1-877-870-5176 (domestic) or 1-858-384-5517 (international) and enter the replay pin number: 13626145. A replay of the webcast will also be available for 60 days upon completion of the conference call, accessible through the Investors section of the Company's website at 99only.com/investor-relations.

A copy of this earnings release and supplemental slides will be available prior to the call, accessible through the Investors section of the Company's website at 99only.com/investor-relations.

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.

About 99 Cents Only Stores

Founded in 1982, the Company operates 391 extreme value retail stores with 283 in California, 49 in Texas, 38 in Arizona and 21 in Nevada as of December 14, 2015. The Company is an extreme value retailer of consumable and general merchandise and seasonal products.  For more information, visit www.99only.com.  

Investor Contact:

Addo Communications
Lasse Glassen
(424) 238-6249
lasseg@addocommunications.com  

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.

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

 



For the Third Quarter Ended


October 30,

2015

October 31,

2014


(In thousands)


(Unaudited)




Net loss

$         (152,636)

$           (3,814)

Interest expense, net

16,549

15,717

Provision (benefit) for income taxes

607

(2,141)

Depreciation and amortization

16,955

14,051

EBITDA

$        (118,525)

$            23,813

Stock-based compensation (a)

48

614

Purchase accounting effect on leases (b)

624

448

Goodwill impairment (c)

120,000

Impairment of long-lived assets (d)

32

Cost of sales adjustments (e)

905

Inventory adjustments (f)

597

Executive related expenses (g)

2,183

1,122

Real estate projects termination charges (h)

116

Sponsor expenses (i)

103

Gain on sales of assets (j)

(5,503)

(36)

Promotional adjustments (k)

3,660

Other (l)

899

1,176

Adjusted EBITDA

$              5,139

$           27,137




(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 goodwill impairment charge related to retail reporting unit.

(d)    

Represents charges related to impairment of equipment.

(e)    

Represents lower of cost or market adjustments, close-out inventory return fee and other.

(f)     

Represents charges related to excess and obsolescence reserve.

(g)    

Represents expenses related to signing and retention bonuses and other executive related expenses.

(h)    

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

(i)      

Represents reimbursement of Company related expense incurred by the Sponsor.

(j)      

Represents amortization of gain related to sale-leaseback arrangements and net gain/loss on the sale of non-core assets.

(k)    

Represents promotions aimed at profitability improvement.

(l)      

Represents the following non-cash or other charges and income: for all periods, non-executive severance charges, non-executive signing bonuses, professional fees and other.

 



For the First Three Quarters Ended


October 30,

2015

October 31,

2014


(In thousands)


(Unaudited)




Net (loss) income

$         (229,566)

$             7,800

Interest expense, net

49,299

46,613

Provision for income taxes

32,569

5,350

Depreciation and amortization

50,510

39,791

EBITDA

$          (97,188)

$           99,554

Stock-based compensation (a)

1,455

2,016

Purchase accounting effect on leases (b)

1,891

1,318

Goodwill impairment (c)

120,000

Impairment of long-lived assets (d)

510

Cost of sales adjustments (e)

905

Inventory adjustments (f)

597

Executive related expenses (g)

5,374

1,982

Real estate projects termination charges (h)

2,949

Sponsor expenses (i)

103

Gain on sales of assets (j)

(5,599)

(116)

Promotional adjustments (k)

3,660

Other (l)

2,428

4,360

Adjusted EBITDA

$            37,085

$           109,114




(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 goodwill impairment charge related to retail reporting unit.

(d)    

Represents charges related to impairment of an underperforming store and equipment.

(e)    

Represents lower of cost or market adjustments, close-out inventory return fee and other.

(f)     

Represents charges related to excess and obsolescence reserve.

(g)    

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

(h)    

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

(i)      

Represents reimbursement of Company related expense incurred by the Sponsor.

(j)      

Represents amortization of gain related to sale-leaseback arrangements and net gain/loss on the sale of non-core assets.

(k)    

Represents promotions aimed at profitability improvement.

(l)      

Represents the following non-cash or other charges and income: for all periods, non-executive severance charges, non-executive signing bonuses, professional fees, legal reserve adjustments and other.


99 CENTS ONLY STORES LLC

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)





October 30,

2015

January 30,

2015


(Unaudited)


ASSETS



Current Assets:



Cash

$            2,585

$       12,463

Accounts receivable, net of allowance for doubtful accounts of $80 and $58 at October 30, 2015 and January 30, 2015, respectively

 

1,813

 

1,954

Income taxes receivable

1,540

10,911

Deferred income taxes

31,115

41,583

Inventories, net

266,236

296,040

Assets held for sale

2,308

3,094

Other

15,697

19,039

Total current assets

321,294

385,084

Property and equipment, net

555,445

581,020

Deferred financing costs, net

13,402

15,463

Intangible assets, net

455,817

460,311

Goodwill

359,745

479,745

Deposits and other assets

7,518

7,543

Total assets

$      1,713,221

$   1,929,166







LIABILITIES AND MEMBER'S EQUITY



Current Liabilities:



Accounts payable

$           98,901

$    139,287

Payroll and payroll-related

20,115

20,004

Sales tax

6,668

14,087

Other accrued expenses

51,115

40,168

Workers' compensation

68,705

70,491

Current portion of long-term debt

6,138

6,138

Current portion of capital and financing lease obligations

979

380

Total current liabilities

252,621

290,555

Long-term debt, net of current portion

916,485

901,395

Unfavorable lease commitments, net

6,365

8,220

Deferred rent

26,559

23,293

Deferred compensation liability

762

724

Capital and financing lease obligation, net of current portions

34,474

24,681

Long-term deferred income taxes

191,914

170,678

Other liabilities

3,972

1,868

Total liabilities

1,433,152

1,421,414




Commitments and contingencies



Member's Equity:



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

550,144

549,135

Investment in Number Holdings, Inc. preferred stock

(19,200)

(19,200)

Accumulated deficit

(250,751)

(21,185)

Other comprehensive loss

(124)

(998)

Total equity

280,069

507,752

Total liabilities and equity

$      1,713,221

$ 1,929,166





99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

 (In thousands)

(Unaudited)





For the Third Quarter Ended

For the First Three Quarters Ended


October 30,

 2015

October 31,

2014

October 30,

 2015

October 31,

2014

Net Sales:





99¢ Only Stores

$           480,547

$           467,134

$        1,452,682

$     1,379,823

Bargain Wholesale

10,918

11,144

33,474

34,559

Total sales

491,465

478,278

1,486,156

1,414,382

Cost of sales

359,796

328,144

1,061,989

959,368

Gross profit

131,669

150,134

424,167

455,014

Selling, general and administrative expenses

147,149

140,372

451,865

395,251

Goodwill impairment

120,000

120,000

Operating (loss) income

(135,480)

9,762

(147,698)

59,763

Other (income) expense:





Interest income

(3)

Interest expense

16,549

15,717

49,302

46,613

  Total other expense, net

16,549

15,717

49,299

46,613

(Loss) income before provision for income taxes

(152,029)

(5,955)

(196,997)

13,150

Provision (benefit) for income taxes

607

(2,141)

32,569

5,350

Net (loss) income

$         (152,636)

$          (3,814)

$     (229,566)

$            7,800






99 CENTS ONLY STORES LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)




For the First Three Quarters Ended


October 30,

2015


October 31, 2014





Cash flows from operating activities:




Net (loss) income

$         (229,566)


$            7,800

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




Depreciation

49,179


38,451

Amortization of deferred financing costs and accretion of OID

3,542


3,292

Amortization of intangible assets

1,332


1,340

Amortization of favorable/unfavorable leases, net

1,322


529

Gain on disposal of fixed assets

(5,497)


(45)

Loss on interest rate hedge

1,119


1,105

Goodwill impairment

120,000


Long-lived assets impairment

509


Deferred income taxes

31,704


465

Stock-based compensation

1,456


2,016

Changes in assets and liabilities associated with operating activities:




Accounts receivable

141


132

Inventories

29,804


(69,030)

Deposits and other assets

3,487


(1,051)

Accounts payable

(22,433)


34,652

Accrued expenses

3,270


9,455

Accrued workers' compensation

(1,786)


(3,366)

Income taxes

9,371


(902)

Deferred rent

3,266


6,403

Other long-term liabilities

1,607


(4,221)

 Net cash provided by operating activities

1,827


27,025









Cash flows from investing activities:




Purchases of property and equipment

(55,710)


(76,914)

Proceeds from sale of property and fixed assets

22,320


29

Net cash used in investing activities

(33,390)


(76,885)









Cash flows from financing activities:




Payments of long-term debt

(4,604)


(4,604)

Proceeds under revolving credit facility

404,050


112,500

Payments under revolving credit facility

(385,350)


(76,500)

Payments of debt issuance costs

(487)


Proceeds from financing lease obligations

8,666


Payments of capital and financing lease obligations

(143)


(65)

Payments to repurchase stock options of Number Holdings, Inc

(390)


(76)

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

(57)


Net cash provided by financing activities

21,685


31,255

Net decrease in cash

(9,878)


(18,605)

Cash - beginning of period

12,463


34,842

Cash - end of period

$                2,585


$            16,237





 

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.

99 Cents Only Stores LLC

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