SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
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Commission file no. 1-10299
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VENATOR GROUP, INC.
--------------------
(Exact name of registrant as specified in its charter)
New York 13-3513936
- -------------------------------- ----------------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
233 Broadway, New York, New York 10279-0003
- --------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (212) 553-2000
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 x NO
--- ---
Number of shares of Common Stock outstanding at August 28, 1998: 135,524,566
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2
VENATOR GROUP, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets...................1
Condensed Consolidated Statements
of Operations......................................2
Condensed Consolidated Statements
of Comprehensive Loss..............................3
Condensed Consolidated Statements
of Retained Earnings...............................4
Condensed Consolidated Statements
of Cash Flows......................................5
Notes to Condensed Consolidated
Financial Statements.............................6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...8-14
Part II. Other Information
Item 1. Legal Proceedings......................................14
Item 4. Submission of Matters to Vote of Security Holders...14-15
Item 6. Exhibits and Reports on Form 8-K.......................15
Signature..............................................16
Index to Exhibits...................................17-18
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
- -----------------------------
VENATOR GROUP, INC.
------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(in millions)
August 1, July 26, January 31,
1998 1997 1998
-------- -------- ----------
(Unaudited) (Unaudited) (Audited)(1)
ASSETS
------
Current assets
Cash and cash equivalents..................$ 77 $ 69 $ 116
Merchandise inventories.....................1,406 1,216 1,159
Net assets of discontinued operations....... 10 209 7
Other current assets........................ 228 174 177
----- ------ ------
1,721 1,668 1,459
Property and equipment, net....................1,214 903 1,053
Deferred charges and other assets.............. 716 737 670
----- ------ ------
$3,651 $ 3,308 $ 3,182
===== ===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Short-term debt............................$ 451 $ 38 $ -
Accounts payable and accrued liabilities.... 747 646 662
Current portion of reserve for
discontinued operations................... 27 232 72
Current portion of long-term debt and
obligations under capital leases.......... 23 14 22
----- ------ ------
$1,248 930 756
Long-term debt and obligations
under capital leases........................ 536 568 535
Deferred taxes and other liabilities........... 586 654 602
Reserve for discontinued operations............ 18 67 18
Shareholders' Equity
Common stock and paid-in capital............ 327 311 317
Retained earnings...........................1,015 870 1,033
Accumulated other comprehensive loss........ (79) (92) (79)
----- ------ ------
Total shareholders' equity.....................1,263 1,089 1,271
Commitments....................................----- ------ ------
$3,651 $ 3,308 $ 3,182
===== ===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements.
(1) The Condensed Consolidated Balance Sheet as of January 31, 1998 has been
summarized from the Registrant's audited Consolidated Balance Sheet as of that
date.
1
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VENATOR GROUP, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
(in millions, except per share amounts)
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
------- ------- ------- -------
Sales $ 1,465 $ 1,500 $ 2,931 $ 3,039
Cost and expenses
Cost of sales ................. 1,052 1,037 2,098 2,111
Selling, general and
administrative expenses .... 380 370 771 758
Depreciation and amortization . 47 43 91 84
Interest expense, net ......... 9 11 21 22
Other income .................. (3) (2) (22) (6)
------- ------- ------- -------
1,485 1,459 2,959 2,969
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes (20) 41 (28) 70
Income tax expense (benefit) .... (7) 15 (10) 27
------- ------- ------- -------
Income (loss)
from continuing operations . (13) 26 (18) 43
Loss from discontinued operations,
net of income tax benefits
of $8 and $19 million,
respectively ............... -- (12) -- (28)
Loss on disposal of discontinued
operations, net of income tax
benefit of $115 million .... -- (195) -- (195)
------- ------- -------- -------
Net loss ........................$ (13) $ (181) $ (18) $ (180)
======= ======= ======= =======
Basic earnings per share:
Income (loss) from continuing
operations .................$ (0.09) $ 0.19 $ (0.13) $ 0.32
Loss from discontinued
operations ................. -- (1.54) -- (1.66)
------- ------- ------- -------
Net loss ...................$ (0.09) $ (1.35) $ (0.13) $ (1.34)
======= ======= ======= =======
Weighted-average common shares
outstanding ................ 135.4 134.5 135.3 134.3
Diluted earnings per share:
Income (loss) from continuing
operations ................$ (0.09) $ 0.19 $ (0.13) $ 0.32
Loss from discontinued
operations ................ -- (1.52) -- (1.64)
------- ------- ------- -------
Net loss ................... (0.09) $ (1.33) $ (0.13) $ (1.32)
======= ======= ======= =======
Weighted-average common
shares assuming dilution ... 135.4 136.0 135.3 135.6
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
-------------------------------------------------------
(Unaudited)
(in millions)
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
-------- ------- -------- --------
Net loss ........................ $ (13) $(181) $ (18) $ (180)
Other comprehensive loss, net of
tax: Foreign currency
translation adjustments
(pre-tax $(19), $(46), $0,
and $(124), respectively) .. (12) (30) -- (77)
----- ----- ----- ------
Comprehensive loss .............. $ (25) $(211) $ (18) $ (257)
===== ===== ===== =====
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
------------------------------------------------------
(Unaudited)
(in millions)
Twenty-six weeks ended
----------------------
August 1, July 26,
1998 1997
------- -------
Retained earnings at beginning of year.....$ 1,033 $ 1,050
Net loss ................................... (18) (180)
------ ------
Retained earnings at end of interim period.$ 1,015 $ 870
====== ======
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(in millions)
Twenty-six weeks ended
----------------------
August 1, July 26,
1998 1997
-------- -------
From Operating Activities:
Net loss ............................................$ (18) $ (180)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash charge for discontinued operations,
net of tax .................................... -- 195
Discontinued operations activity ................ (45) (11)
Depreciation and amortization ................... 91 84
Net gain on sales of real estate ................ (1) (4)
Net gain on sales of assets and investments ..... (19) --
Deferred income taxes ........................... (4) (23)
Change in assets and liabilities, net of acquisition:
Merchandise inventories ......................... (243) (153)
Accounts payable and other liabilities .......... 91 63
Net assets of discontinued operations ........... (3) 27
Other, net ...................................... (123) (111)
----- -----
Net cash used in operating activities ............. (274) (113)
----- -----
From Investing Activities:
Proceeds from sales of real estate .................. 7 19
Capital expenditures ................................ (233) (56)
Payments for businesses acquired, net of cash acquired (29) (140)
Proceeds from sales of assets and investments ....... 22 --
----- -----
Net cash used in investing activities ............. (233) (177)
----- -----
From Financing Activities:
Increase in short-term debt ......................... 451 38
Reduction in long-term debt and capital lease
obligations ....................................... (3) (1)
Issuance of common stock ............................ 10 11
----- -----
Net cash provided by financing activities ......... 458 48
----- -----
Effect of exchange rate fluctuations
on Cash and Cash Equivalents ........................ 10 (17)
----- -----
Net change in Cash and Cash Equivalents ................ (39) (259)
Cash and Cash Equivalents at beginning of year ......... 116 328
----- -----
Cash and Cash Equivalents at end of interim period .....$ 77 $ 69
===== =====
Cash paid during the period:
Interest.............................................$ 25 $ 22
Income taxes.........................................$ 10 $ 46
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VENATOR GROUP, INC.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Notes to Consolidated Financial
Statements contained in the Registrant's Form 10-K for the year ended January
31, 1998, as filed with the Securities and Exchange Commission (the "SEC") on
April 21, 1998. The Condensed Consolidated Statement of Comprehensive Loss was
prepared in conformity with the accounting principles and was not required for
the year ended January 31, 1998. Certain items included in these statements are
based on management's estimates. In the opinion of management, all material
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the results for the interim period have been included. The
results for the twenty-six weeks ended August 1, 1998 are not necessarily
indicative of the results expected for the year.
Name Change
- -----------
The Registrant (formerly Woolworth Corporation) changed its name to
Venator Group, Inc. effective June 11, 1998.
Discontinued Operations
- -----------------------
On July 17, 1997, the Registrant announced that it was exiting its 400
store domestic Woolworth general merchandise business and recorded a charge to
earnings of $310 million before-tax or $195 million after-tax, for the loss on
disposal of discontinued operations. The loss from discontinued operations
recorded through July 17, 1997 was $47 million before-tax or $28 million
after-tax. The remaining domestic Woolworth general merchandise stores as well
as the division's distribution center in Denver, Pennsylvania were closed in
November 1997. The Registrant is in the process of converting approximately 150
of the prime locations to Foot Locker, Champs Sports, and other athletic or
specialty formats. The Registrant has successfully converted and opened 88
stores through August 1, 1998.
The results of operations for all periods presented for the domestic
Woolworth general merchandise business have been classified as discontinued
operations in the Condensed Consolidated Statements of Operations. Sales from
discontinued operations for the 1997 second quarter and year-to-date periods
were $198 million and $427 million, respectively.
The following is a summary of the net assets of discontinued
operations:
August 1, July 26, Jan. 31,
1998 1997 1998
------ ------- -------
Assets............................... $ 17 $ 358 $ 28
Liabilities.......................... 7 149 21
---- ---- ----
Net assets of discontinued operations $ 10 $ 209 $ 7
==== ==== ====
The net assets of discontinued operations as of August 1, 1998 and
January 31, 1998 consisted primarily of fixed assets. As of July 26, 1997, the
net assets consisted primarily of inventory and fixed assets. Liabilities for
all periods presented consisted primarily of amounts due to vendors.
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9
Disposition activity related to the discontinued operations reserve for
the quarter and year-to-date periods ended August 1, 1998 was approximately $25
million and $45 million, respectively. The remaining reserve balance at August
1, 1998 was $45 million.
Earnings Per Share
- ------------------
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires the presentation of basic earnings per share and diluted
earnings per share. Basic earnings per share is computed as net earnings divided
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur from
common shares issuable through stock-based compensation including stock options,
restricted stock awards and other convertible securities.
A reconciliation of weighted-average common shares outstanding to
weighted-average common shares assuming dilution follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
August 1, July 26, August 1, July 26,
(in millions) 1998 1997 1998 1997
-------- ------- -------- -------
Weighted-average common shares
outstanding.................... 135.4 134.5 135.3 134.3
Incremental common shares issuable -- 1.5 -- 1.3
Weighted-average common shares ----- ----- ----- -----
assuming dilution.............. 135.4 136.0 135.3 135.6
===== ===== ===== =====
Incremental common shares were not included in the computation for the
quarter and year-to-date periods ended August 1, 1998 since their inclusion in
periods when the Registrant reported a net loss would be antidilutive. For the
thirteen and the twenty-six weeks ended July 26, 1997, options with an exercise
price greater than the average market price are not included in the computation
of diluted earnings per share and would not have a material impact on diluted
earnings per share.
Comprehensive Income
- --------------------
The Registrant adopted SFAS No. 130, "Reporting Comprehensive Income,"
in the first quarter of 1998. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. Comprehensive income is a more inclusive financial reporting
methodology that includes the disclosure of certain financial information that
has not been recognized in the calculation of net income or loss, such as
foreign currency translations and changes in minimum pension liability which are
recorded directly to shareholders' equity. Accumulated other comprehensive loss
was comprised of foreign currency translation adjustments of $34 million and
minimum pension liability adjustments of $45 million at August 1, 1998 and
January 31, 1998.
Reclassifications
- -----------------
Certain balances in prior periods have been reclassified to conform
with the presentation adopted in the current period.
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Legal Proceedings
- -----------------
During 1994, the staff of the SEC initiated an inquiry relating to the
matters that were reviewed by the Special Committee established by the Board of
Directors in 1994 as well as in connection with trading in the Registrant's
securities by certain directors and officers of the Registrant.
On June 29, 1998, the SEC announced that it had accepted the
Registrant's Offer of Settlement in resolution of an administrative proceeding
arising from the inquiry. In the Offer of Settlement, the Registrant admitted
that during its 1993 fiscal year it violated Sections 13(a) and 13(b) (2) (A)
and (B) of the Securities Exchange Act of 1934, 15 U.S.C. Sections 78m(a) and
78m(b) (2) (A) - (B), and SEC rules 13a-13 and 12b-20 promulgated thereunder,
and the SEC found that the Registrant had committed those violations and ordered
that the Registrant cease and desist from any violation of those provisions.
Apart from this direction to cease and desist, no monetary or other relief
against the Registrant was awarded.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
financial statements issued for fiscal years beginning after December 15, 1997
and therefore, effective for the Registrant in 1998. The Registrant will adopt
the provisions of this standard in the fourth quarter of 1998. SFAS No. 131
supersedes previously established standards for reporting operating segments in
the financial statements and requires disclosures regarding selected information
about operating segments in interim and annual financial reports.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which is effective for fiscal
years beginning after December 15, 1997. This statement revises employers'
disclosures about pensions and other postretirement benefit plans. It does not
change the measurement or recognition of those plans.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal quarters of
fiscal years beginning after June 15, 1999 and therefore, effective for the
Registrant in 2000. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Registrant is in the
process of evaluating SFAS No. 133 to determine its impact on the consolidated
financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
Total sales for the 1998 second quarter decreased 2.3 percent to $1,465
million as compared with $1,500 million for the second quarter of 1997,
reflecting foreign currency fluctuations and a comparable-store sales decrease
of 6.0 percent. Excluding the effect of foreign currency fluctuations and sales
from disposed operations, sales for the 1998 second quarter were essentially
flat as compared with the corresponding prior-year period. Total Specialty
segment sales for the 1998 second quarter remained unchanged while
comparable-store sales decreased 6.1 percent, as compared with the corresponding
prior-year period. International General Merchandise segment sales for the 1998
second quarter decreased 8.8 percent and comparable-store sales decreased 5.8
percent, as compared with the corresponding prior-year period.
8
11
Sales for the 1998 twenty-six weeks ended August 1, 1998 decreased 3.6
percent to $2,931 million as compared with $3,039 million for the same period a
year earlier. Excluding the effect of foreign currency fluctuations and sales
from disposed operations, sales decreased 1.1 percent as compared with 1997.
Comparable-store sales decreased 6.4 percent as compared with the corresponding
prior-year period.
Selling, general and administrative expenses ("SG&A") increased $10
million and $13 million for the thirteen and twenty-six weeks ended August 1,
1998 as compared with the corresponding prior-year periods. The increases
primarily reflect costs of $7 million associated with the shutdown of the
Registrant's 83-store Canadian Kinney Shoe and 11-store U.S. Randy River
specialty footwear operations in the first quarter of 1998, and a $9 million
charge primarily related to the shutdown of the Registrant's Eagle Rock footwear
operations, consisting of four manufacturing facilities and an administrative
office in the second quarter of 1998. These increases were partially offset by
decreases in net pension and net postretirement benefit expense of $9 million.
The decrease primarily reflects the amortization of the plans' unrecognized
gains and losses over the average remaining life expectancy of inactive
participants, who now comprise the majority of the plans' participants.
Previously, the unrecognized gains and losses were amortized over the average
remaining service period of active participants.
Second quarter operating results from continuing operations (before
corporate expense, interest expense and income taxes) include a $3 million loss
for 1998 as compared with a profit of $74 million in the second quarter of 1997.
For the twenty-six weeks ended August 1, 1998, operating profit declined to $25
million from $131 million in the corresponding prior-year period. Gross margin,
as a percentage of sales, decreased approximately 270 basis points to 28.2
percent for the 1998 second quarter and decreased approximately 210 basis points
to 28.4 percent for the 1998 year-to date period, as compared with the
corresponding periods a year earlier. These declines primarily reflect a
continuing decline in sales and an increase in markdowns as a result of the
aggressive promotional selling environment currently prevailing in the athletic
footwear and apparel industry.
Interest expense, net of interest income, decreased $2 million for the
1998 second quarter and $1 million for the year-to-date period as compared with
the corresponding prior-year periods. Interest income of approximately $7
million related to a franchise tax settlement in the second quarter of 1998 more
than offset higher interest expense as a result of increased short-term
borrowing levels.
The Registrant reported a net loss for the thirteen weeks ended August
1, 1998 of $13 million, or $0.09 per share, as compared with a net loss of $181
million or $1.33 per share for the corresponding prior-year period, which
included an after-tax loss of $207 million or $1.52 per share for discontinued
operations. For the twenty-six weeks ended August 1, 1998 the Registrant
reported a net loss of $18 million, or $0.13 per share, as compared with a net
loss of $180 million or $1.32 per share for the corresponding prior-year period,
which included an after-tax loss of $223 million or $1.64 per share for
discontinued operations.
The Registrant ended the second quarter with 7,262 stores consisting of
6,749 specialty stores and 513 international general merchandise stores. This
compares with 6,929 stores, adjusted for dispositions, at the end of the
corresponding prior-year period. During the twenty-six weeks ended August 1,
1998, the Registrant opened 347 stores, closed or disposed of 322 stores and
remodeled or relocated 194 stores. Of the 347 stores opened, 90 stores
represented the first quarter acquisition of Athletic Fitters stores.
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SALES
The following table summarizes sales for continuing operations by segment and
geographic area:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
(in millions) August 1, July 26, August 1, July 26,
By Segment: 1998 1997 1998 1997
-------- ------- -------- --------
Specialty:
Athletic Group...............$ 871 $ 858 $ 1,773 $ 1,763
Northern Group................ 85 86 159 160
Specialty Footwear............ 107 119 214 232
Other Specialty............... 83 83 158 155
------ ------ ------ ------
Specialty total.................. 1,146 1,146 2,304 2,310
------ ------ ------ ------
International General Merchandise 311 341 608 700
------ ------ ------ ------
Disposed operations.............. 8 13 19 29
------ ------ ------ ------
$ 1,465 $ 1,500 $ 2,931 $ 3,039
====== ====== ====== ======
By geographic area:
Domestic.....................$ 935 $ 937 $ 1,919 $ 1,923
International................. 522 550 993 1,087
Disposed operations........... 8 13 19 29
------ ------ ------ ------
$ 1,465 $ 1,500 $ 2,931 $ 3,039
====== ====== ====== ======
Specialty
- ---------
Athletic Group sales increased by 1.5 percent and by 0.6 percent for
the 1998 second quarter and year-to-date periods, as compared with the
corresponding periods a year earlier. These increases were primarily due to 343
additional stores and the positive impact from store remodelings. On a
comparable-store basis sales declined by 7.7 percent for both the 1998 second
quarter and the year-to-date periods primarily due to over-supplied athletic
footwear in the marketplace, as well as decreased sales in the licensed product
categories.
Excluding the impact of foreign currency fluctuations, Northern Group
sales increased by 0.9 percent and by 1.8 percent for the second quarter and
year-to-date periods, respectively. The increase reflects new store openings,
particularly in the United States, offset by comparable-store sales decreases of
4.7 percent and 5.4 percent for the second quarter and year-to-date periods,
respectively.
Specialty Footwear 1998 second quarter and year-to-date sales decreased
10.1 percent and 7.8 percent as compared with the corresponding prior-year
periods. Excluding the impact of foreign currency fluctuations in the Australian
operations, sales declined by 4.9 percent and by 2.3 percent for the 1998 second
quarter and year-to-date periods, respectively. On a comparable-store basis,
sales decreased by 3.6 percent for the second quarter and by 2.4 percent for the
year-to-date period. These decreases were primarily due to the closure of 43
under-performing stores in the U.S. Kinney Shoe format since the second quarter
1997, offset in part by comparable-store increases in the Australian operations
of 1.8 percent for the second quarter and 3.2 percent for the year-to-date
period.
Other Specialty 1998 second quarter and year-to-date comparable-store
sales increased by 7.2 percent and by 6.3 percent, as compared with the
corresponding prior-year periods. The increase primarily relates to the
Afterthoughts format, reflecting positive customer responses to increased
private-label product and the success of the format's larger-store design.
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International General Merchandise
- ---------------------------------
International General Merchandise sales decreased by 8.8 percent and by
13.1 percent for the second quarter and year-to-date periods, respectively.
Excluding the impact of foreign currency fluctuations, sales decreased by 4.0
percent and by 8.5 percent for the second quarter and year-to-date periods,
respectively. Comparable-store sales decreased by 5.8 percent for the second
quarter and by 7.2 percent for the year-to-date period. These decreases reflect
the overall difficulties of the German retail industry in the current recession
and the negative impact of the increase in VAT rates in Germany as of April
1998.
OPERATING RESULTS
- -----------------
Operating results from continuing operations (before corporate expense, interest
expense, and income taxes) are as follows:
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
(in millions) August 1, July 26, August 1, July 26,
By Segment: 1998 1997 1998 1997
-------- ------- -------- --------
Specialty.....................$ 18 $ 85 $ 40 $ 148
International General
Merchandise.................. (13) (9) (14) (12)
Net gain on sales of
real estate.................. 1 -- 1 4
Disposed operations............ (9) (2) (2) (9)
----- ----- ----- -----
$ (3) $ 74 $ 25 $ 131
===== ===== ===== =====
By geographic area:
Domestic......................$ 14 $ 74 $ 45 $ 142
International.................. (9) 2 (19) (6)
Net gain on sales of real estate 1 -- 1 4
Disposed operations............ (9) (2) (2) (9)
----- ----- ----- -----
$ (3) $ 74 $ 25 $ 131
===== ===== ===== =====
Specialty
- ---------
The Specialty segment's operating profit decreased by 78.8 percent and
by 73.0 percent for the thirteen and twenty-six weeks ended August 1, 1998 as
compared with the corresponding prior-year periods. The declines in Athletic
Group sales contributed to higher than anticipated inventory levels and
increased promotional markdowns to keep the product assortment current.
Operating results for Specialty Footwear and the Northern Group for the 1998
second quarter and year-to-date periods also decreased due to sales declines and
increased markdowns. Other Specialty operating results improved by 40.0 percent
and by 33.3 percent for the 1998 second quarter and year-to-date periods,
respectively, as compared with the corresponding prior-year periods
predominantly related to the Afterthoughts format.
Included in disposed operations for the twenty-six weeks ended August
1, 1998 is a $19 million gain from the sale of the Registrant's six-store
nursery chain. This gain is offset by a $21 million loss for the shutdown of the
Canadian Kinney Shoe, U.S. Randy River and Eagle Rock specialty footwear
operations, including $8 million in operating losses. This is part of the
Registrant's continuing program to reduce its investment in non-strategic
businesses. The prior-year amount represents the operating results of these
operations.
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14
International General Merchandise
- ---------------------------------
The International General Merchandise segment's operating loss
increased by $4 million and by $2 million for the 1998 second quarter and
year-to-date periods, respectively, as compared with the corresponding
prior-year periods. The increased operating loss is primarily attributable to
severance costs in Germany in connection with the ongoing improvement of its
personnel structure.
SEASONALITY
- -----------
The Registrant's businesses are seasonal in nature. Historically, the
greatest proportion of sales and net income is generated in the fourth quarter
and the lowest proportion of sales and net income is generated in the first
quarter, reflecting seasonal buying patterns. As a result of these seasonal
sales patterns, inventory increases in the third quarter in anticipation of the
strong fourth quarter sales.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used in operating activities was $274 million for the
twenty-six weeks ended August 1, 1998, as compared with $113 million in the
corresponding prior-year period, which principally reflects an additional $90
million used to purchase inventories. These additional inventory purchases
contributed to a $28 million increase in accounts payable and other liabilities.
Increased inventory reflects lower than anticipated sales and seasonal increases
associated with the back to school season. Additionally, under the Registrant's
new store and remodeling program, inventory was received for approximately 375
new and remodeled stores which are scheduled for completion in August and
September.
Net cash used in investing activities totaled $233 million for the
twenty-six weeks ended August 1, 1998, as compared with $177 million used during
the corresponding prior-year period. Cash used in investing activities for the
twenty-six weeks ended July 26, 1997 was predominantly due to the first quarter
cash acquisition of Eastbay, Inc. for $140 million, in a transaction accounted
for as a purchase. Capital expenditures increased by $177 million of which $25
million relates to the Woolworth conversion stores, as compared with the
corresponding prior-year period; approximately $545 million of capital
expenditures are planned for the year as compared with $284 million in 1997.
Increased inventory levels contributed to the increase in accounts
payable at August 1, 1998 by $114 million as compared with July 26, 1997 and by
$139 million as compared with January 31, 1998.
Short-term debt at August 1, 1998 increased by $451 million and by $413
million as compared with January 31, 1998 and July 26, 1997. The increases in
short-term debt were principally due to the significant capital expenditures
required for the Registrant's aggressive new store and remodeling program and
the acquisition of the Athletic Fitters stores for $29 million in February 1998.
Lower than expected sales and higher than anticipated inventory levels also
contributed to the increases in short-term borrowing levels.
On June 22, 1998, the Registrant entered into an agreement to sell its
Corporate Headquarters building in New York, the Woolworth Building. The
transaction is expected to be completed in October 1998.
As previously announced, the Registrant and The Sports Authority, Inc.
have signed a definitive merger agreement pursuant to which The Sports Authority
would become a wholly-owned subsidiary of the Registrant through a pooling of
interests. There is a provision in the merger agreement that provides that for
the transaction to be put to a vote of the shareholders of The Sports Authority,
the Registrant's average stock price is at least $20.50 per share during one or
more specified measuring periods prior to December 31, 1998. The transaction is
subject to approval by The Sports Authority shareholders.
12
15
IMPACT OF YEAR 2000
- -------------------
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits, rather than four, to define the applicable year.
Mistaking "00" for the year 1900 could result in miscalculations and errors and
cause significant business interruptions for the Registrant, as well as for the
government and most other companies. The Registrant has instituted a plan to
assess its state of readiness for Y2K, to remediate those systems that are non-
compliant and to assure that material third parties will be Y2K compliant.
State of Readiness
- ------------------
The Registrant has assessed all mainframe, operating and application
systems (including point of sale) for Y2K readiness, giving the highest priority
to those information technology applications (IT) systems that are considered
critical to its business operations. At present, approximately 60 percent of the
IT systems have been remediated. The Registrant anticipates the completion of
all remediation of the IT systems by the end of 1998. Extensive testing of the
remediated systems will be performed throughout 1999 for implementation during
that year.
Apart from the Y2K issue, the Registrant had developed and installed
throughout its business units beginning in 1997 a comprehensive information
computer system ("ECLIPSE"), encompassing merchandising, logistics, finance and
human resources. The ECLIPSE project was undertaken for business reasons
unrelated to Y2K. However, the installation of ECLIPSE eliminates the need to
reprogram or replace certain existing software for Y2K compliance.
The Registrant is presently compiling an inventory of its non-IT
systems, which include those systems containing embedded chip technology
commonly found in buildings and equipment connected with a buildings'
infrastructure. Once the inventory is complete, the systems will be prioritized
and assessed for compliance. Preliminary investigations of the embedded chip
systems indicate that Y2K will not affect systems such as heating, ventilation
and security in most store locations. Ongoing testing and implementation of any
remediation required for the non- IT systems will be performed throughout 1999.
Material Third Parties
- ----------------------
Key vendors and service providers have been identified, and management
intends to meet with these third parties to discuss the status of their
compliance and to distribute a comprehensive compliance questionnaire.
Approximately 20 vendors are considered key vendors of the Registrant.
Y2K Costs
- ---------
The Registrant is utilizing both internal and external resources to
address the Y2K issue. Internal resources reflect the reallocation of IT
personnel to the Y2K project from other IT projects. In the opinion of
management, the deferral of such other projects will not have a significant
adverse affect continuing operations. The total estimated direct cost, excluding
ECLIPSE, to remediate the Y2K issue is not expected to be material to the
Registrant's results of operations or financial condition. All costs, excluding
ECLIPSE, are being expensed as incurred.
Contingency Plan/Risks
- ----------------------
The Registrant is in the process of developing contingency plans for
those areas which might be affected by Y2K. Although the full consequences are
unknown, the failure of either the Registrant's critical systems or those of its
material third parties to be Y2K compliant would result in the interruption of
its business, which could have a material adverse affect on the results of
operations or financial condition of the Registrant.
13
16
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- -----------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of the
federal securities laws. All statements, other than statements of historical
facts, which address activities, events or developments that the Registrant
expects or anticipates will or may occur in the future, including such things as
future capital expenditures, expansion, strategic plans, growth of the
Registrant's business and operations, Y2K related actions, and other such
matters are forward-looking statements. These forward-looking statements are
based on many assumptions and factors including effects of currency
fluctuations, consumer preferences and economic conditions worldwide, and the
ability of the Registrant to implement, in a timely manner, the programs and
actions related to the Y2K issue. Any changes in such assumptions or factors
could produce significantly different results.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- -------------------------
This information is incorporated by reference to the Legal Proceedings
section of the Notes to Condensed Consolidated Financial Statements on page 8 of
Part I, Item 1.
Item 4. Submission of Matters to Vote of Security Holders
- ---------------------------------------------------------
(a) The Registrant's annual meeting of shareholders was held on June 11,
1998, in Watertown, Massachusetts. Proxies were solicited by management
of the Registrant pursuant to Regulation 14A under the Securities
Exchange Act of 1934; there was no solicitation in opposition to
management's nominees as listed in the Notice of 1998 Annual Meeting
and Proxy Statement, both dated April 28, 1998.
(b) Allan Z. Loren was elected as a director in Class III for a two-year
term ending at the annual meeting of shareholders of the Registrant in
2000. Each of Roger N. Farah, James E. Preston and Christopher A.
Sinclair was elected as a director in Class I for a three-year term
ending at the annual meeting in 2001. All of such individuals
previously served as directors of the Registrant. J. Carter Bacot,
Purdy Crawford, Philip H. Geier Jr., Jarobin Gilbert Jr., Dale W.
Hilpert, Margaret P. MacKimm and John J. Mackowski, having previously
been elected directors of the Registrant for terms continuing beyond
the 1998 annual meeting of shareholders, continue in office as
directors.
(c) The matters voted upon and the results of the voting were as follows:
(1) Election of Directors:
Abstentions and
Name Votes For Votes Withheld Broker Non-Votes
----------------------- ----------- ----------- ----------------
Roger N. Farah 114,158,903 5,841,327 --
Allan Z. Loren 114,229,354 5,770,876 --
James E. Preston 114,184,187 5,816,043 --
Christopher A. Sinclair 101,191,554 18,808,676 --
(2) Amendment of the Certificate of Incorporation to change the name
the Registrant's name:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ---------------
94,158,905 24,356,846 1,484,479 --
14
17
(3) Ratification of the appointment of KPMG Peat Marwick LLP as
independent accountants for the fiscal year beginning February 1,
1998:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
118,472,061 207,227 1,320,942 --
(4) Approval of the 1998 Stock Option and Award Plan:
Votes For Votes Against Abstentions Broker Non-Votes
-------- ------------- ----------- ----------------
100,453,155 17,881,428 1,665,647 --
(5) Shareholder Proposal on German Operations:
Votes For Votes Against Abstentions Broker Non-Votes
-------- ------------ ----------- ----------------
35,647,893 78,432,131 1,062,983 4,857,223
(6) Shareholder Proposal on Rights Plan:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------ ----------- ----------------
90,785,519 21,700,412 2,657,076 4,857,223
At the close of business on the record date of April 23, 1998, there
were issued and outstanding 135,251,929 shares of the Registrant's Common Stock,
par value $.01 per share ("Common Stock"). There were represented at the
meeting, in person or by proxy, 120,000,230 shares of Common Stock. Such shares
represented 88.72 percent of the total number of shares of such class of stock
issued and outstanding on the record date.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
--------
An index of the exhibits that are required by this item, and which are
furnished in accordance with Item 601 of Regulation S-K, appears on
pages 17 through 18. The exhibits which are in this report immediately
follow the index.
(b) Reports on Form 8-K
-------------------
The Registrant filed a report on Form 8-K dated May 7, 1998 (date of
earliest event reported) reporting that it had signed a definitive
merger agreement with The Sports Authority, Inc., whereby the
Registrant will acquire The Sports Authority in a tax-free exchange of
shares. The transaction is subject to approval by the shareholders of
The Sports Authority, Inc. and to customary regulatory approvals.
Additionally, the Registrant filed a report on Form 8-K dated June 11,
1998 (date of earliest event reported) reporting that the Board of
Directors and the shareholders approved the proposal to change the name
of the Registrant from Woolworth Corporation to Venator Group, Inc.
effective as of June 11, 1998.
15
18
SIGNATURE
---------
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.
VENATOR GROUP, INC.
--------------------
(Registrant)
Date: September 4, 1998 /s/ Reid Johnson
----------------
REID JOHNSON
Senior Vice President
and Chief Financial Officer
16
19
VENATOR GROUP, INC.
-------------------
INDEX OF EXHIBITS REQUIRED BY ITEM 6(a) OF FORM 10-Q
AND FURNISHED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
-------------------------------------------------------------
Exhibit No. in Item 601
of Regulation S-K Description
- ------------------------ -----------
1 *
2 *
3(i)(a) Certificate of Incorporation of the
Registrant, as filed by the
Department of State of the State of
New York on April 7, 1989
(incorporated herein by reference to
Exhibit 3(i)(a) to the Quarterly
Report on Form 10-Q for the
quarterly period ended July 26,
1997, filed by the Registrant with
the SEC on September 4, 1997
(the "July 26, 1997 Form 10-Q")).
3(i)(b) Certificates of Amendment of the
Certificate of Incorporation of the
Registrant, as filed by the
Department of State of the State of
New York on (a) July 20, 1989 (b)
July 24, 1990 (c) July 9, 1997
(incorporated herein by reference to
Exhibit 3(i)(b) to the July 26, 1997
Form 10-Q) and (d) June 11, 1998
(incorporated herein by reference to
Exhibit 4.2(a) of the Registration
Statement on Form S-8 (Registration
No.333-62425) previously filed with
the SEC).
3(ii) By-laws of the Registrant, as amended
(incorporated herein by reference to
Exhibit 4.2 of the Registration
Statement on Form S-8 (Registration
No. 333-62425) previously filed with
the SEC).
4.1 The rights of holders of the
Registrant's equity securities are
defined in the Registrant's
Certificate of Incorporation, as
amended (incorporated herein by
reference to Exhibits 3(i)(a) and
3(i)(b) to the July 26, 1997 Form
10-Q and Exhibit 4.2(a) to the
Registration Statement on Form S-8
(Registration No. 333-62425)
previously filed with the SEC).
4.2 Rights Agreement dated as of March 11,
1998, between Venator Group, Inc. and
First Chicago Trust Company of
New York, as Rights Agent
(incorporated herein by reference to
Exhibit 4 to the Form 8-K dated March
11, 1998).
4.3 Indenture dated as of October 10,
1991 (incorporated herein by
reference to Exhibit 4.1 to the
Registration Statement on Form S-3
(Registration No.33-43334) previously
filed with the SEC).
4.4 Forms of Medium-Term Notes (Fixed
Rate and Floating Rate) (incorporated
herein by reference to Exhibits 4.4
and 4.5 to the Registration Statement
on Form S-3 (Registration No.33-43334)
previously filed with the SEC).
17
20
4.5 Form of 81/2% Debentures due 2022
(incorporated herein by reference to
Exhibit 4 to the Registrant's Form
8-K dated January 16, 1992).
4.6 Purchase Agreement dated June 1, 1995
and Form of 7% Notes due 2000
(incorporated herein by reference to
Exhibits 1 and 4,respectively, to the
Registrant's Form 8-K dated June 7,
1995).
4.7 Distribution Agreement dated July 13,
1995 and Forms of Fixed Rate and
Floating Rate Notes (incorporated
herein by reference to Exhibits 1, 4.1
and 4.2, respectively, to the
Registrant's Form 8-K dated July 13,
1995).
5 *
8 *
9 *
10 *
11 *
12 Computation of Ratio of Earnings to
Fixed Charges.
13 *
15 Letter re: Unaudited Interim
Financial Statements.
16 *
17 *
18 *
19 *
20 *
21 *
22 *
23 *
24 *
25 *
26 *
27.1 Financial Data Schedule, August 1,
1998 (which is submitted
electronically to the SEC for
information only and not filed).
27.2 Restated Financial Data Schedule -
July 26, 1997 (which is submitted
electronically to the SEC for
information only and not filed).
99 Independent Accountants' Review
Report.
______________
* Not applicable
18
21
Exhibits filed with this Form 10-Q:
Exhibit No. Description
- ---------- -----------
12 Computation of Ratio of Earnings to Fixed Charges.
15 Letter re: Unaudited Interim Financial Statements.
27.1 Financial Data Schedule - August 1, 1998.
27.2 Restated Financial Data Schedule - July 26, 1997.
99 Independent Accountants' Review Report.
1
EXHIBIT 12
VENATOR GROUP, INC.
-------------------
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
(Unaudited)
(dollars in millions)
26-weeks ended Fiscal Years Ended
-------------- ---------------------------------------
Aug 1, Jul 26, Jan 31, Jan 25, Jan 27, Jan 28, Jan 29,
1998 1997 1998 1997 1996 1995 1994
----- ----- ----- ----- ----- ----- -----
NET EARNINGS
Net income (loss) from
continuing operations..$ (18) 43 213 193 (98) 38 (226)
Income tax expense
(benefit)............... (10) 27 125 127 (35) 42 (118)
Interest expense,
excluding capitalized
interest............... 30 25 48 63 108 93 71
Portion of rents deemed
representative of the
interest factor (1/3).. 102 106 204 211 207 194 192
----- ----- ----- ----- ----- ----- -----
$ 104 201 590 594 182 367 (81)
===== ===== ===== ===== ===== ===== =====
FIXED CHARGES
Gross interest expense...$ 32 25 48 63 108 93 71
Portion of rents deemed
representative of the
interest factor (1/3).. 102 106 204 211 207 194 192
----- ----- ----- ----- ----- ----- -----
$ 134 131 252 274 315 287 263
===== ===== ===== ===== ===== ===== =====
RATIO OF EARNINGS TO
FIXED CHARGES 0.8 1.5 2.3 2.2 0.6 1.3 --
===== ===== ===== ===== ===== ===== =====
Earnings were not adequate to cover fixed charges by $30 million for the
twenty-six weeks ended August 1, 1998 and by $133 million and $344 million for
the fiscal years ended January 27, 1996 and January 29, 1994, respectively.
1
EXHIBIT 15
Accountants' Acknowledgment
---------------------------
Venator Group, Inc.
New York, New York
Board of Directors:
Re: Registration Statements Numbers 33-10783, 33-91888, 33-91886, 33-97832,
333-07215, 333-21131 and 333-62425 on Form S-8 and Numbers 33-43334 and
33-86300 on Form S-3
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report August 20, 1998 related to our review
of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of Sections 7 and 11 of the Act.
/s/ KPMG Peat Marwick LLP
New York, New York
September 4, 1998
5
1,000,000
6-MOS
JAN-30-1999
FEB-1-1998
AUG-1-1998
77
0
0
0
1,406
1,721
0
0
3,651
1,248
536
0
0
0
1,263
3,651
2,931
2,931
2,098
2,098
69
0
21
(28)
(10)
(18)
0
0
0
(18)
(0.13)
(0.13)
5
1,000,000
6-MOS
JAN-31-1998
JAN-26-1997
JUL-26-1997
69
0
0
0
1,216
1,668
0
0
3,308
930
568
0
0
0
1,089
3,308
3,039
3,039
2,111
2,111
78
0
22
70
27
43
(223)
0
0
(180)
(1.34)
(1.32)
1
EXHIBIT 99
Independent Accountants' Review Report
The Board of Directors and Shareholders
Venator Group, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of
Venator Group, Inc. and subsidiaries as of August 1, 1998 and July 26, 1997, and
the related condensed consolidated statements of operations, comprehensive loss,
retained earnings, and cash flows for the thirteen and twenty-six week periods
ended August 1, 1998 and July 26, 1997. These condensed consolidated financial
statements are the responsibility of Venator Group Inc.'s management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Venator Group, Inc. (formerly
Woolworth Corporation) and subsidiaries as of January 31, 1998, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
March 11, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of January 31, 1998, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG Peat Marwick LLP
New York, New York
August 20, 1998
