99 Cents Only Stores Reports Strong Third Quarter Fiscal 2018 Results

Dec 7, 2017

CITY OF COMMERCE, Calif., Dec. 7, 2017 /PRNewswire/ --

 99 Cents Only Stores LLC.

Third Quarter Fiscal 2018 Highlights:

  • Net sales increased to $553.6 million, up 10.7% compared to the prior year
  • Same-store sales increased by 11.3% compared to the prior year
  • Gross margin, as a percentage of net sales, increased to 29.4%, up from 29.0% in the prior year
  • Net loss was $27.1 million compared to net loss of $37.0 million in the prior year
  • Adjusted EBITDA1 increased 91.6% to $16.5 million compared to the prior year
  • Subsequent to the third quarter, the Company completed transactions to refinance its existing term loan facility

99 Cents Only Stores LLC (the "Company") announced its financial results for the third quarter ended October 27, 2017.

Geoffrey Covert, President and Chief Executive Officer, stated, "Our results in the third quarter highlight our ongoing success in executing our turnaround plan and the strong operating momentum that continues to build at 99 Cents Only Stores. I am proud of our top line performance, which drove improved profitability.  Net sales for the third quarter were $553.6 million, up 10.7% over the same period last year. On a same-store basis, sales increased 11.3%, resulting from a 5.1% increase in transaction count and a 5.8% increase in basket. Similar to recent periods, the sales growth in the quarter was driven by our ongoing emphasis on providing higher-quality merchandise, including our above $1 items and fresh offerings, as well as a better in-stock position and overall improvements in the customer shopping experience."

Mr. Covert continued, "At the bottom line, our third quarter net loss was $27.1 million, an improvement of $9.9 million or 26.9% compared to the third quarter last year. I am pleased to report that third quarter Adjusted EBITDA was $16.5 million, up 91.6% compared to the same period last year. On a year-to-date basis, Adjusted EBITDA of $42.9 million increased 57.9% compared to the same period last year.  We continue to expect to deliver strong Adjusted EBITDA growth in fiscal 2018."

Mr. Covert concluded, "In addition to our solid operational execution, during the quarter, our team dedicated significant time and energy working with our lenders to refinance the Company's debt obligations. Subsequent to the end of the quarter, we announced the amendment of the Company's existing term loan facility, which, among other things, extended the maturity date of certain first lien term loans by three years from January 2019 to January 2022, with a springing feature to June 1, 2019 if a certain percentage of the Company's existing senior notes due in 2019 remain outstanding at that time. This transaction reflects significant support from our stakeholders, and significantly improves our liquidity and debt maturity profile, providing additional runway to execute our turnaround plan and ultimately achieve our objectives of profitable long-term growth."

Third Quarter Financial Results

For the third quarter of fiscal 2018, the Company's net sales increased 10.7% to $553.6 million, compared to $500.1 million in the third quarter of fiscal 2017. Same-store sales increased 11.3% compared to the third quarter of fiscal 2017, with higher customer traffic of 5.1% in addition to higher average ticket of 5.8%. The increase in same-store sales was primarily driven by continued growth in all major categories including seasonal, general merchandise, consumables, fresh and grocery.  Also contributing to the sales increase were higher sales of above $1 products, refresh market sales performance, improved product assortment, store execution and in-stock levels.

Gross margin, as a percentage of net sales, was 29.4% in the third quarter of fiscal 2018, an increase of 40 basis points from the third quarter of fiscal 2017. Gross margin increased primarily due to lower inventory shrinkage and higher product margin. Selling, general and administrative expenses were $172.4 million, or 31.1%, as a percentage of net sales, representing a decrease of 190 basis points from the third quarter of fiscal 2017. This improvement was primarily due to an 80 basis point reduction from leveraging occupancy, depreciation and other fixed store-level expenses on higher same-store sales, a 50 basis point improvement from workers' compensation costs, as well as favorable comparison of 50 basis points relating to prior year sales tax audit liability charges. The remaining variance was primarily due to lower store operating costs in areas such as store supplies and outside services, partially offset by higher performance compensation expenses and losses on disposal of assets.

Net loss was $27.1 million in the third quarter of fiscal 2018 compared to net loss of $37.0 million in the third quarter of fiscal 2017. Net loss as a percentage of net sales was (4.9)% for the third quarter of fiscal 2018, compared to net loss as a percentage of net sales of (7.4)% for the third quarter of fiscal 2017. Adjusted EBITDA was $16.5 million in the third quarter of fiscal 2018, compared to $8.6 million in the third quarter of fiscal 2017. Adjusted EBITDA margin was 3.0% compared to 1.7% in the third quarter of fiscal 2017.

Year-to-Date Financial Results

For the first nine months fiscal 2018, the Company's net sales increased 8.7% to $1,641.6 million, compared to $1,509.5 million in the first nine months of fiscal 2017. Same-store sales increased 9.0% driven by higher customer traffic and higher average ticket. Net loss was $69.4 million in the first nine months of fiscal 2018, compared to net loss of $97.3 million for the first nine months of fiscal 2017. Net loss as a percentage of total sales was (4.2)% for the first nine months of fiscal 2018, compared to net loss as a percentage of total sales of (6.4)% for the first nine months of fiscal 2017. Adjusted EBITDA was $42.9 million in the first nine months of fiscal 2018, compared to $27.1 million for the first nine months of fiscal 2017. Adjusted EBITDA margin was 2.6% for the first nine months of fiscal 2018, compared to 1.8% for the first nine months of fiscal 2017.

Store Openings

The Company opened one new store during the third quarter of fiscal 2018. As of the end of the third quarter of fiscal 2018, the Company operated 391 stores.

Debt Recapitalization Transactions

On September 6, 2017, the Company completed an amendment of its asset-based revolving credit facility (the "ABL Facility"), to provide a last-out term loan facility in an aggregate principal amount of $25.0 million (the "FILO Facility"), which the Company has drawn in its entirety.

On November 7, 2017, the Company completed the amendment of its term loan facility, which, among other things, extended the maturity date of certain first lien term loans by three years from January 2019 to January 2022, with a springing feature to June 1, 2019 if a certain percentage of the Company's existing senior notes due in 2019 remain outstanding at that time.  In connection with the amendment, approximately $130 million of the existing first lien term loans held by the Company's equity sponsors were converted to a new pay in-kind second lien term loan facility.  In addition, the Company effected corresponding amendments to its ABL Facility to permit the transactions contemplated by the amendment, including an extension of the maturity of the ABL Facility (including the FILO Facility) to 91 days prior to the first lien term loan maturity date.

The Company also announced the launch of an exchange offer and consent solicitation to exchange its existing 11% senior notes due 2019, of which there are currently $250 million aggregate principal amount outstanding, for new senior secured notes due 2022 in respect of existing notes held by non-affiliated eligible holders. Existing notes held by affiliates of the Company's equity sponsors are proposed to be exchanged for shares of new paid in-kind preferred stock of Number Holdings, Inc., the direct parent of the Company. The Company has entered into a transaction support agreement with certain holders of existing notes pursuant to which the Company and the other parties thereto, including the equity sponsor affiliates, agreed to support the exchange offer, as amended. As amended, the exchange offer includes a minimum tender condition that at least 95% in aggregate principal amount of Existing Notes be validly tendered and not withdrawn in the exchange offer and the simultaneous Sponsor Affiliate exchange prior to the expiration date. The Company has announced that as of December 4, 2017, the Company had received tenders from holders of at least $242,228,000 in aggregate principal amount of Existing Notes, representing approximately 96.89% of the total outstanding principal amount of Existing Notes. The right to withdraw tenders of Existing Notes and related consents and the right to receive an early tender premium have expired. The exchange offer will expire later today, unless extended, and the settlement date is expected to be on or about December 14, 2017.

Fiscal 2018 Outlook

The Company is reiterating the following previously issued outlook for fiscal 2018:

  • Positive same-store sales growth
  • Year-over-year decrease in net loss and an increase in Adjusted EBITDA over the same period

The Company is revising the following previously issued outlook for fiscal 2018 to reflect changes in timing of select new store openings previously scheduled for the fourth quarter of fiscal 2018 and changes in its full year capital expenditure outlook, primarily due to changes in store construction and capital project timing:

  • Two new store openings
  • Capital expenditures of approximately $48-$53 million

The Company expects to open two new stores in the first quarter of fiscal 2019. The Company expects to close four stores by the end of fiscal 2018.

CONFERENCE CALL DETAILS

The Company's conference call to discuss its fiscal 2018 third quarter and the other matters described in this release is scheduled for Thursday, December 7, 2017 at 11:00 a.m. Pacific Time (2:00 p.m. Eastern Time).

The live call can be accessed by dialing 1-877-407-3982 (domestic) or 1-201-493-6780 (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' Fiscal 2018 Third Quarter Earnings Conference Call, and be prepared to provide the operator with your name, company name and the conference ID: 13674043. The call will also be broadcast live over the Internet, accessible through the Investor Relations section of the Company's website at www.99only.com/investor-relations.

A telephonic replay of the call will be available beginning Thursday, December 7, 2017, at 5:00 p.m. Eastern Time, through Thursday, December 21, 2017, at 11:59 p.m. Eastern Time. To access the replay, dial 1-844-512-2921 (domestic) or 1-412-317-6671 (international) and enter the replay pin number: 13674043. A replay of the webcast will also be available for 60 days upon completion of the conference call, accessible through the Investor Relations section of the Company's website at www.99only.com/investor-relations.

A copy of this earnings release and supplemental slides will be available prior to the call, accessible through the Investor Relations section of the Company's website at www.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 various items set forth in the reconciliation tables below, including stock-based compensation, impairment of goodwill and other assets, expenses, charges and reserves related to strategic initiatives and executive recruitment and severance, amortization of gain on sale-leaseback transactions, and other non-cash or one-time or other items as permitted by the terms of the Company's debt instruments.  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 core operating 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, 99 Cents Only Stores LLC is the leading operator of extreme value stores in California and the Southwestern United States. The Company currently operates 391 stores located in California, Texas, Arizona and Nevada. 99 Cents Only Stores LLC offers a broad assortment of name brand and other attractively priced merchandise and compelling seasonal product offerings. For more information, visit www.99only.com

Investor Contact:
Addo Investor Relations
Lasse Glassen
(424) 238-6249
lglassen@addoir.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.

### Tables to Follow ###


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


For the Third Quarter Ended


October 27,

2017


October 28,

2016


(In thousands)


(Unaudited)

Net loss

$         (27,058)


$        (36,991)

Interest expense, net

17,479


16,913

Provision for income taxes


21

Depreciation and amortization

17,670


18,292

EBITDA

$             8,091


$          (1,765)

Stock-based compensation (a)

114


155

Purchase accounting effect on leases (b)

858


721

Impairment of long-lived assets (c)


491

Cost of sales adjustments (d)


824

Inventory adjustments (e)


241

Employee related expenses (f)

3,634


3,742

Professional and consultant fees (g)

1,256


990

Loss (gain) on sales of assets (h)

1,360


(189)

Hurricane Harvey expenses (i)

1,384


Other (j)

(201)


3,401

Adjusted EBITDA

$            16,496


$           8,611







(a)  

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

(b)   

Represents purchase accounting effect on rent revenue and rent expense.

(c)   

Represents impairment charges primarily related to an asset held for sale, stores to be closed and fixtures to be disposed in fiscal 2017.

(d)   

Represents adjustment related to lower of cost or market.

(e)   

Represents charges related to excess and obsolescence reserve and other.

(f)    

Represents expenses related primarily to severance, signing and retention bonuses.

(g)   

Represents professional and consulting fees primarily related to profitability improvement and other strategic initiatives.

(h)   

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

(i)    

Represents charges related to non-recurring expenses and business disruption impact due to Hurricane Harvey.

(j)    

Represents non-cash or other charges and income: for fiscal 2018, insurance reimbursements, legal reserve adjustments, non-recurring professional fees and other; for fiscal 2017, non-recurring professional fees, legal reserve adjustments, prior year property and sales tax assessments, insurance reimbursements and other.

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


For the First Three Quarters Ended


October 27,

2017


October 28,

2016


(In thousands)


(Unaudited)

Net loss

$         (69,435)


$        (97,270)

Interest expense, net

51,975


50,185

Provision for income taxes

87


146

Depreciation and amortization

52,293


52,687

EBITDA

$           34,920


$             5,748

Stock-based compensation (a)

368


543

Purchase accounting effect on leases (b)

2,387


2,147

Impairment of long-lived assets (c)

1,515


491

Cost of sales adjustments (d)

180


824

Inventory adjustments (e)


1,827

Employee related expenses (f)

9,995


6,938

Real estate projects termination charges (g)


11

Professional and consultant fees (h)

3,156


2,735

Gain on sales of assets (i)

(16,632)


(112)

Hurricane Harvey expenses (j)

1,384


Loss on extinguishment of debt (k)


335

Other (l)

5,598


5,661

Adjusted EBITDA

$            42,871


$           27,148







(a) 

Represents stock-based compensation expense incurred in connection with 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 for stores to be closed in the early calendar year 2018 and impairment of asset held for sale, stores to be closed and fixtures to be disposed in fiscal 2017.

(d)   

Represents adjustment related to lower of cost or market.

(e)   

Represents charges related to excess and obsolescence reserve and other.

(f)    

Represents expenses related to severance, signing and retention bonuses.

(g)   

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

(h)   

Represents professional and consultant fees primarily related to profitability improvement and other strategic initiatives.

(i)    

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

(j)    

Represents charges related to non-recurring expenses and business disruption impact due to Hurricane Harvey.

(k)   

Represents loss on extinguishment of debt from amendment of the asset based lending facility in the first quarter of fiscal 2017.

(l)     

Represents non-cash or other charges and income: for fiscal 2018, legal reserve adjustments, non-recurring professional fees, insurance reimbursements and other; for fiscal 2017, non-recurring professional fees, legal reserve adjustments, property tax and sales tax assessment for prior year, insurance reimbursements and other.

 

99 CENTS ONLY STORES LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)




October 27,

2017


January 27,

2017


(Unaudited)



ASSETS




Current Assets:




Cash

$            2,391


$         2,448

Accounts receivable, net of allowance for doubtful accounts of $7 and $122 at October 27, 2017 and January 27, 2017, respectively

 

2,331


 

3,510

Income taxes receivable

2,739


3,876

Inventories, net

212,838


175,892

Assets held for sale

4,903


4,903

Other

10,935


10,307

Total current assets

236,137


200,936

Property and equipment, net

461,688


507,620

Deferred financing costs, net

1,976


3,488

Intangible assets, net

442,711


447,027

Goodwill

380,643


380,643

Deposits and other assets

13,491


8,592

Total assets

$      1,536,646


$   1,548,306









LIABILITIES AND MEMBER'S EQUITY




Current Liabilities:




Accounts payable

$           97,240


$      86,588

Payroll and payroll-related

35,736


24,110

Sales tax

16,712


19,389

Other accrued expenses

67,710


46,082

Workers' compensation

69,218


69,169

Current portion of long-term debt

6,138


6,138

Current portion of capital and financing lease obligations

1,228


31,330

Total current liabilities

293,982


282,806

Long-term debt, net of current portion

902,417


865,375

Unfavorable lease commitments, net

3,079


3,988

Deferred rent

30,636


30,360

Deferred compensation liability

959


816

Capital and financing lease obligation, net of current portions

52,584


47,195

Deferred income taxes

161,450


161,450

Other liabilities

16,587


12,297

Total liabilities

1,461,694


1,404,287





Commitments and contingencies




Member's Equity:




Member units – 100 units issued and outstanding at October 27, 2017 and January 27, 2017

551,286


550,918

Investment in Number Holdings, Inc. preferred stock

(19,200)


(19,200)

Accumulated deficit

(457,134)


(387,699)

Total equity

74,952


144,019

Total liabilities and equity

$      1,536,646


$  1,548,306





 

99 CENTS ONLY STORES LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)





For the Third Quarter Ended


For the First Three Quarters Ended


October 27,
2017


October 28,
2016


October 27,
2017


October 28,
2016

Net Sales:








99¢ Only Stores

$           543,856


$           489,900


$        1,613,136


$     1,479,126

Bargain Wholesale

9,775


10,244


28,457


30,405

Total sales

553,631


500,144


1,641,593


1,509,531

Cost of sales

390,776


354,982


1,160,522


1,074,202

Gross profit

162,855


145,162


481,071


435,329

Selling, general and administrative expenses

172,434


165,219


498,444


481,933

Operating loss

(9,579)


(20,057)


(17,373)


(46,604)









Other (income) expense:








Interest income

(1)


(7)


(8)


(45)

Interest expense

17,480


16,920


51,983


50,230

Loss on extinguishment




335

  Total other expense, net

17,479


16,913


51,975


50,520

Loss before provision for income taxes

(27,058)


(36,970)


(69,348)


(97,124)

Provision for income taxes


21


87


146

Net loss

$          (27,058)


$       (36,991)


$          (69,435)


$         (97,270)









 

99 CENTS ONLY STORES LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)



For the First Three Quarters Ended


October 27,
2017


October 28,

2016





Cash flows from operating activities:




Net loss

$           (69,435)


$         (97,270)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:




Depreciation

50,980


51,375

Amortization of deferred financing costs and accretion of OID

5,179


4,457

Amortization of intangible assets

1,313


1,312

Amortization of favorable/unfavorable leases, net

2,117


1,802

Loss on extinguishment of debt


335

Gain on disposal of fixed assets

(16,402)


(564)

Long-lived assets impairment

1,515


491

Loss on interest rate hedge


514

Stock-based compensation

368


543

Changes in assets and liabilities associated with operating activities:




Accounts receivable

1,179


(1,468)

Inventories

(36,946)


8,271

Deposits and other assets

(5,577)


5,202

Accounts payable

9,470


8,190

Accrued expenses

30,236


19,781

Accrued workers' compensation

49


(847)

Income taxes

1,137


1,322

Deferred rent

276


1,339

Other long-term liabilities

(1,485)


3,146

 Net cash (used in) provided by operating activities

(26,026)


7,931









Cash flows from investing activities:




Purchases of property and equipment

(32,051)


(35,273)

Proceeds from sale of property and fixed assets

9,399


617

Insurance recoveries for replacement assets

475


937

Net cash used in investing activities

(22,177)


(33,719)









Cash flows from financing activities:




Proceeds from long-term debt

25,000


Payment of long-term debt

(4,604)


(4,604)

Proceeds under revolving credit facility

211,400


168,500

Payments under revolving credit facility

(197,200)


(174,500)

Payments of debt issuance costs

(880)


(4,725)

Proceeds from financing lease obligations

15,317


41,993

Payments of capital and financing lease obligations

(887)


(762)

Net cash provided by financing activities

48,146


25,902





Net (decrease) increase in cash

(57)


114

Cash - beginning of period

2,448


2,312

Cash - end of period

$               2,391


$                2,426









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 27, 2017. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

SOURCE 99 Cents Only Stores