Cole National Reports Strong Operating and Financial Results for
Second Quarter of Fiscal Year 2004 CLEVELAND, Sept. 8
/PRNewswire-FirstCall/ -- Cole National Corporation (NYSE:CNJ), a
leading retailer of optical services and personalized gifts with
over 2,900 locations throughout North America and the Caribbean and
one of the nation's largest providers of managed vision care
benefits, today announced results for the second quarter ended July
31, 2004. The Company filed its Form 10-Q for the quarter on
September 7, 2004. Financial and Operating Highlights for the
Second Quarter of Fiscal 2004 * Revenue rose in the second quarter
of fiscal 2004 to $312.8 million from $307.7 million in the second
quarter of fiscal 2003. The Company reported net income of $1.0
million, or $.05 per diluted share, compared to a net loss of $5.5
million, or $.34 per diluted share, for the same period in 2003. *
The second quarter's pre-tax results include $5.5 million in
unusual items - including expenses related to the Company's
evaluation of strategic alternatives and compliance costs
associated with the Federal Trade Commission's request for
information - compared to $11.4 million of unusual expenses in last
year's second quarter. * The Company's consolidated same store
sales decreased 0.5% in the second quarter of 2004. Same store
sales in the Company's gift segment increased 1.9%. Same store
sales in the Company's vision segment decreased 1.3%. * On July 22,
2004 the Company's stockholders approved the merger agreement
between Luxottica Group and Cole National for a cash purchase price
of $27.50, plus 4% interest per annum from the approval date
through the closing. Larry Pollock, President and CEO, commented,
"Cole National posted strong operating and financial results for
the second quarter of fiscal 2004. Even after accounting for the
fact that unusual expenses decreased by $5.9 million, operating
earnings rose significantly over last year's same period. This
improvement was achieved despite the slowdown in the economy that
affected many retailers. "Overall, same store sales at Cole
Licensed Brands decreased 2.0% in the second quarter of fiscal
2004. At Sears Optical, same store sales fell 4.0%, as our
promotional offers were not as impactful as in previous quarters
and we did not repeat last year's contact lens offer. In the second
half of fiscal 2004, we have repositioned Sears Optical's
merchandise assortment and plan to drive transactions more
aggressively by offering the customer greater value on a wider
array of frames and lenses. "Same store sales at Target Optical
rose 4.7% in the second quarter of fiscal 2004, reflecting our
success in providing Target guests with the fashionable merchandise
they seek at reasonable prices. The average revenue per spectacle
transaction increased by 2.4%. "BJ's Optical's same store sales
rose 11.0% in this year's second quarter. This positive trend is a
result of our improved in-store presentation, which emphasizes
fashion and value to the customer, and the continued popularity of
our 'Two for $98.00' promotional offer. "At Pearle Vision,
consolidated same store sales in the U.S. company-owned and
franchise stores decreased 1.7% in the second quarter of fiscal
2004, falling 2.0% at Company-owned stores and 1.4% at franchise
stores. However, average spectacle transaction rose as a result of
the increased sale of premium products and lens treatments such as
non-glare lens coating. The Pearle Vision Preferred Credit Card,
which enables us to provide extended payment terms to our customers
for up to six months at no cost, continued to grow as a percent of
sales, accounting for almost 14% of all sales at Company- owned
stores during the quarter. "Cole Managed Vision turned in another
strong performance in the second quarter of fiscal 2004. Revenue
growth was driven by an increase in the number of capitated plans
sold to employers, health plans and associations, higher
participation in existing voluntary plans, higher revenue from
fee-for- service programs, and increased laser procedure volume.
Lower benefit utilization of funded programs contributed to Cole
Managed Vision's improved margin performance compared to last
year's second quarter." Mr. Pollock continued, "Things Remembered
performed well during the second quarter of fiscal 2004, increasing
same store sales 1.9% while the average revenue per transaction
rose 8.2%. In addition, the gross margin rate improved due to
higher levels of personalization. Our direct channel business,
which includes catalogs and the Internet, generated substantial
growth in earnings and revenue that contributed to Things
Remembered's improved operating earnings. Membership in our Rewards
Club continued to rise during the period, reaching 1.2 million
members at the end of the second quarter. Our collection of
products designed exclusively for Things Remembered continued to be
very well received." Mr. Pollock added, "I am very pleased with the
hard work, dedication and focus our field and home office
associates have shown during the period that the merger has been
pending. They have continued to put the customer first and
foremost, thus delivering products, service and performance of
which we can all be proud." Pending Merger with Luxottica As
described in the Company's press release dated July 22, 2004, Cole
National's stockholders voted to approve the merger agreement, as
amended, with Luxottica Group S.p.A. Pursuant to the terms of an
amendment to the Luxottica merger agreement dated July 14, 2004,
Cole National stockholders will receive $27.50 per share in cash,
plus an additional amount equal to 4% per annum from July 22
through the closing date of the merger, upon completion of the
transaction. The Luxottica merger is subject to receipt of
regulatory approvals and other customary conditions. As previously
announced, Cole National and Luxottica have committed to the
Federal Trade Commission not to close the transaction before
September 30, 2004 without its consent. Financial Results Revenues
for the second quarter of fiscal 2004 rose 1.7% to $312.8 million
from $307.7 million during the second quarter of fiscal 2003. This
increase was primarily attributable to revenue increases in managed
vision care and Things Remembered, partially offset by a 1.3%
decrease in same store sales in the Company's vision segment and a
reduction in the number of Pearle Vision corporate stores. The
gross margin rate for the second quarter of fiscal 2004 increased
to 62.9% from 62.5% in last year's same period. Cole Vision's gross
margin rate increased to 60.0% in the second quarter compared to
59.4% in the second quarter of fiscal 2003. The gross margin rate
for Cole Vision was impacted by many factors, including higher
contact lens gross margin rate, lower levels of inventory shrink
and obsolescence, higher manufacturing productivity, lower benefit
utilization by funded plan members at Cole Managed Vision and a
reduction in the reserve percentage used for managed vision
underwriting gains to reflect recent experience. Partially
offsetting the gains were a higher mix of sales to franchisees,
which carry a lower gross margin but offer other benefits,
including producing a more uniform merchandise assortment and
consistent brand look, and increased promotional activity at Pearle
Vision. Things Remembered's gross margin rate increased in the
second quarter of fiscal 2004 as a result of an increase in
personalization sales, which carry a high gross margin rate.
Operating expenses as a percent of sales improved to 58.7% for the
second quarter of fiscal 2004 compared to 62.8% in the same period
last year. The improvement was driven by a lower level of unusual
expenses, productivity gains in store expense and non-store expense
at Things Remembered and Pearle Vision, and leverage gains in
administrative expenses due to revenue increases at Cole Managed
Vision. These improvements were partially offset by a decrease in
operating leverage in Cole Licensed Brands due to negative same
store sales in Sears Optical. Net income for the second quarter of
fiscal 2004 was $.05 per diluted share compared to a net loss of
$.34 per diluted share last year. The improvement was driven by
improved operating income in both segments and a lower level of
unusual expenses. These trends were partially offset by lower
levels of foreign currency gains, lower interest income resulting
from the repayment in the fourth quarter of fiscal 2003 of certain
loans previously made by the Company and a higher estimated income
tax rate resulting from the non-deductibility of certain
transaction related expenses. Revenues for the first six months of
fiscal 2004 increased 4.1% to $620.4 million compared to $595.9
million in the first six months of fiscal 2003. The growth in
revenue was primarily a result of increases in managed vision care
and a 2.2% increase in the vision segment's same store sales and a
3.8% increase in Things Remembered's same store sales. The gross
margin rate for the first six months of fiscal 2004 was 63.0%, up
from 62.7% in the first six months of fiscal 2003. This improvement
was a result of the same factors that caused the increase in gross
margin rate in the second quarter of fiscal 2004. Operating
expenses as a percent to sales improved to 60.4% for the first six
months of fiscal 2004 compared to 63.3% in the same period last
year. The decrease was the primarily the result of a lower level of
unusual expenses and operating leverage gains in both business
segments. Net income for the first six months of fiscal 2004 was
$.03 per diluted share compared to a net loss of $.73 per diluted
share last year. Non-GAAP Financial Measure As a retailer, the
Company believes that a measure of same store sales performance is
important for understanding its operations. Same store sales growth
is a non-GAAP financial measure of performance at stores open at
least 12 months, which includes deferred warranty sales on a cash
basis and undelivered customer orders, and does not reflect
provisions for returns, remakes, and certain other items.
Adjustments to the cash basis sales information accumulated at the
store level are made for these items on an aggregate basis. This
measure is consistent with the measures previously used in the
Company's reports. A reconciliation of same store sales to revenue
is set forth in Schedule II. Certain Operating and Expense Trends
Consolidated same store sales in the Company's vision segment
declined in the second quarter of 2004, although there was
variability within the Company's brands, ranging from single-digit
increases at Target Optical and low double-digit increases at BJ's
Optical to low single-digit decreases at Sears Optical and Pearle
Vision. During August, the first month of the third quarter of
fiscal 2004, consolidated same store sales in the Company's vision
segment increased in the low double-digits. While there was growth
in all brands, sales performance in August was driven primarily by
a successful promotion at Sears Optical. Things Remembered
experienced a same store sales decline in August of less than 1%.
There can be no assurance that these same store sales trends will
continue for the remainder of the third quarter of fiscal 2004 or
the remainder of the fiscal year. Costs associated with the
California litigation, the merger agreement with Luxottica Group
and compliance with the FTC's request for additional information
and documentary material with respect to the Luxottica merger, and
the SEC investigation are expected to continue in fiscal 2004.
However, many of the unusual expenses, such as the cost related to
the settlement of the stockholder litigation and audit fees related
to the restatement, are not expected to recur. Although there can
be no assurances regarding the level of same store sales, the
Company believes its profit performance will improve in fiscal 2004
as a result of revenue growth, expense controls and the
non-recurrence of the aforementioned unusual expenses. Conference
Call Information Cole National's management will conduct a
conference call today at 10:00 a.m. Eastern Time to discuss the
second-quarter results. Investors and interested parties may listen
to the call via http://www.colenational.com/ and
http://www.streetevents.com/ . About Cole National Cole National
Corporation's vision business, together with Pearle franchisees,
has 2,179 locations in the U.S., Canada, Puerto Rico and the Virgin
Islands and includes Cole Managed Vision, one of the largest
managed vision care benefit providers with multiple provider panels
and nearly 20,000 practitioners. Cole's personalized gift business,
Things Remembered, serves customers through 722 locations
nationwide, catalogs, and the Internet at
http://www.thingsremembered.com/ . Cole also has a 21% interest in
Pearle Europe, which has 1,508 optical stores in Austria, Belgium,
Denmark, Estonia, Finland, Germany, Italy, Kuwait, Norway, the
Netherlands, Poland, Portugal and Sweden. Forward Looking Statement
The Company's expectations and beliefs concerning the future
contained in this document are forward looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements involve risks, uncertainties and other
factors that could cause actual results to differ materially from
those which are anticipated. Such risks and uncertainties include,
but are not limited to, risks that the Luxottica merger will not be
completed, legislative or regulatory developments that could have
the effect of delaying or preventing the Luxottica merger,
fluctuations in exchange rates, liquidity and financial condition
such as risks associated with potential adverse consequences of the
restatement of the Company's financial statements, including those
resulting from litigation or government investigations,
restrictions or curtailment of the Company's credit facility and
other credit situations, costs and other effects associated with
the California litigation, the timing and achievement of
improvements in the operations of the optical business, the results
of Things Remembered, which is highly dependent on the fourth
quarter holiday season, the nature and extent of disruptions of the
economy from terrorist activities or major health concerns and from
governmental and consumer responses to such situations, the actual
utilization of Cole Managed Vision funded eyewear programs, the
success of new store openings and the rate at which new stores
achieve profitability, the Company's ability to select, stock and
price merchandise attractive to customers, success of systems
development and integration, costs and other effects associated
with litigation, competition in the optical industry, integration
of acquired businesses, economic and weather factors affecting
consumer spending, operating factors affecting customer
satisfaction, including manufacturing quality of optical and
engraved goods, the Company's relationships with host stores,
franchisees, and managed care clients, the mix of goods and
services sold, pricing and other competitive factors, and the
seasonality of the Company's business. The Company does not assume
any obligation to update the forward-looking statements in this
press release. SCHEDULE I Second Quarter Results of Operations (in
thousands, except per share amounts) 13 Weeks Ended 26 Weeks Ended
July 31, August 2, July 31, August 2, 2004 2003 2004 2003 Unaudited
Unaudited Net revenues $312,767 $307,659 $620,419 $595,908 Cost of
revenues 115,930 115,515 229,796 222,107 Operating expenses 183,656
193,300 374,498 377,488 Total costs and expenses 299,586 308,815
604,294 599,595 Operating income (loss) 13,181 (1,156) 16,125
(3,687) Interest expense 6,382 6,327 12,709 12,715 Interest and
other (income) expense, net (580) (1,975) (578) (2,882) Income
(loss) before income taxes 7,379 (5,508) 3,994 (13,520) Income tax
provision (benefit) 6,425 (21) 3,515 (1,622) Net income (loss) $954
$(5,487) $479 $(11,898) Earnings (loss) per common share Basic
$0.06 $(0.34) $0.03 $(0.73) Diluted $0.05 $(0.34) $0.03 $(0.73)
Weighted average shares Basic 16,880 16,330 16,815 16,317 Diluted
17,517 16,330 17,133 16,317 Financial Position (in thousands) July
31, August 2, January 31, 2004 2003 2004 Unaudited Assets Current
assets: Cash and cash equivalents $63,975 $17,074 $59,184 Accounts
and notes receivable, net 70,726 63,637 57,313 Inventories 119,932
130,727 120,927 Prepaid expenses and other current assets 57,920
54,730 59,868 Total current assets 312,553 266,168 297,292 Property
and equipment, net 117,453 121,883 118,402 Intangible and other
non-current assets, net 214,197 251,365 228,806 Total assets
$644,203 $639,416 $644,500 Liabilities and Stockholders' Equity
Current liabilities: Current portion of long-term debt $1,614
$5,250 $5,608 Accounts payable 65,365 68,687 61,180 Accrued
liabilities and other 105,778 108,336 108,166 Deferred revenue
42,161 39,855 41,122 Total current liabilities 214,918 222,128
216,076 Long-term debt, net of current portion 282,214 280,992
284,229 Other long-term liabilities 39,690 40,675 37,979 Deferred
revenue, long-term 12,558 12,567 12,129 Stockholders' equity 94,823
83,054 94,087 Total liabilities and stockholders' equity $644,203
$639,416 $644,500 Certain prior year amounts in the statements
above have been reclassified to conform with the current year's
presentation. SCHEDULE II Same-Store Sales Reconciliation ($ in
thousands) 13 Weeks Ended 26 Weeks Ended July 31, July 31, 2004
2004 Current year same-store sales $267,917 $534,450 Prior year
same-store sales 269,137 520,832 Percent change -0.5% 2.6% Current
year same-store sales $267,917 $534,450 Adjustment for: Sales at
new and closed stores 2,184 4,822 Deferred revenue 211 (1,468)
Order vs. customer receipt (1,098) (2,886) Returns, remakes and
refunds 268 13 Other 285 60 Store sales 269,767 534,991 Nonstore
revenues 50,602 102,279 Intercompany eliminations (7,602) (16,851)
GAAP Basis Net Revenue $312,767 $620,419 DATASOURCE: Cole National
Corporation CONTACT: Joseph Gaglioti of Cole National Corporation,
+1-330-486-3100 Web site: http://www.colenational.com/
http://www.thingsremembered.com/ http://www.streetevents.com/
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