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| DOVR > SEC Filings for DOVR > Form 10-K on 31-Mar-2009 | All Recent SEC Filings |
31-Mar-2009
Annual Report
This Annual Report on Form 10-K, including the following discussion, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, the words "projected", "anticipated", "planned", "expected", and similar expressions are intended to identify forward-looking statements. In particular, statements regarding a rebounding economy, retail store expansion and business growth are forward-looking statements. Forward-looking statements are not guarantees of our future financial performance, and undue reliance should not be placed on them. Our actual results, performance or achievements may differ significantly from the results, performance and achievements discussed in or implied by the forward-looking statements. Factors that could cause such a difference include material changes to Dover Saddlery, Inc.'s business or prospects, in consumer spending, fashion trends or consumer preferences, or in general political, economic, business or capital market conditions and other risks and uncertainties, including but not limited to the other factors that are detailed in "Item 1A. Risk Factors." We disclaim any intent or obligation to update any forward-looking statements.
Overview
We are the leading specialty retailer and the largest direct marketer of equestrian products in the U.S. For over 30 years, Dover Saddlery has been a premier upscale marketing brand in the English-style riding industry. We sell our products through a multi-channel strategy. This multi-channel strategy has allowed us to use catalogs and our proprietary database of nearly two million names of equestrian enthusiasts as a primary marketing tool to increase catalog sales and to drive additional business to our e-commerce websites and retail stores.
In November of 2005, we took Dover Saddlery public using the Open IPO® process. The proceeds of that offering were used to retire debt and launch our retail rollout.
Our strategy for growth has been to open additional retail stores using our proprietary mathematical store optimization model to select the sites. Our initial target of 50 retail locations is now 25% complete, with 13 locations up and operating.
2008 was a difficult operating environment for our industry as a result of numerous external factors that led to all time historical lows in consumer confidence which resulted in a contraction in specialty retail consumer spending.
As a result, the Company has developed several short-term strategies to maintain or expand market share, reduce operating costs and reduce capital expenditures. In order to manage our way through these uncertain times, our retail expansion has been slowed and we will be extremely opportunistic in negotiating leases for the balance of 2009 and 2010. Management believes retail space lease costs will decline by 20% to 30% over the last quarter of 2009 and the first half of 2010. On a 10,000 square foot location, this is likely to lower the lease cost by approximately $5.00 per square foot or $50,000 annually resulting in enhanced store profitability for new stores opened with the lower lease cost.
Aggressive cost control has been employed to counter act the contraction in specialty retail consumer spending, which led to a 4.2% decrease in Dover's total revenues, and a reduction in gross profits of $2.2 million. The result has been that we have been able to preserve a non-GAAP net income of $418,000, or $0.08 per diluted share, for the year ended December 31, 2008. The full year 2008 performance also generated an estimated federal taxable income of $775,000.
On a GAAP basis, the prior year 2007's net income was $825,000 or $0.16 per diluted share and for 2008 a net loss of ($13.8) million or ($2.68) per diluted share The net loss in 2008 was due
entirely to the non-cash, non-deductible goodwill impairment charge of $14.3 million in the fourth quarter. This is a non-cash charge which does not, by itself, impact the Company's cash flow, future earning power, or ability to service our customers.
Below is a table for clarification showing the non-GAAP net income and earnings per share reconciliation. We believe that these non-GAAP measures supplement our GAAP financial information and provide useful measures for evaluating operating results and trends.
Reconciliation of Non-GAAP to GAAP Measures
Year Ended December 31, 2008
Non-GAAP Impairment GAAP
Pro-forma Total Charges As Reported
(Unaudited)
Revenues, net - total $ 77,981 - $ 77,981
Cost of revenues 49,319 - 49,319
Gross profit 28,662 - 28,662
Selling, general and administrative
expenses 26,299 - 26,299
Litigation settlement expense - - -
Goodwill impairment charge - 14,267 14,267
Income (loss) from operations 2,363 (14,267 ) (11,904 )
Interest expense, financing and
other related costs, net 1,287 - 1,287
Other investment loss 96 - 96
Income (loss) before income tax
provision 980 (14,267 ) (13,287 )
Provision for income taxes 562 - 562
Net income (loss) $ 418 $ (14,267 ) $ (13,849 )
Net income (loss) per share Basic $ 0.08 $ - $ (2.68 )
Diluted $ 0.08 $ - $ (2.68 )
Number of shares used in per share
calculation Basic 5,164,000 - 5,164,000
Diluted 5,266,000 - 5,164,000
Estimated Federal
Taxable Income
(Unaudited)
Income (loss) before taxes (GAAP) $ (13,287 )
Permanent differences 14,446
State taxes (tax) (143 )
Timing differences $ (241 )
Estimated Federal taxable income $ 775
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The Company believes that the following strategic actions, which will be taken in 2009, will allow it to successfully weather the present negative macroeconomic conditions and return to positive
growth in sales and earnings as consumer confidence is restored and the economy turns around. These are:
• Aggressive cost control particularly in the area of targeted marketing, direct labor in the warehouse call center and retail stores, and management salaries.
• Reduction in capital expenditures by scaling back store expansion and being extremely opportunistic in present and future lease negotiations.
• Careful monitoring of same store sales growth and direct marketing response rates in order to determine when the Company's customers have returned to normal spending behavior, which will allow Dover to increase its marketing activities.
In this time of economic uncertainty, it is very difficult to accurately predict economic trends; however, as changing market conditions become clear, we will adapt our strategies to address these new conditions.
Consolidated Performance and Trends
The Company reported a net loss for the year ended December 31, 2008 of $(13.8) million or $(2.68) per diluted share, which included a non-cash, non-tax deductible goodwill impairment charge of $14.3 million triggered by declines in the Company's market capitalization. This is compared to a net income of $825,000 or $0.16 per diluted share for the corresponding period in 2007.
The 2008 results reflect our continuing efforts to execute our growth strategy in the retail market channel, where revenues increased 11.4% to $22.1 million for the year ended 2008. This trend of increased revenue may be slowed or eroded by delays in the execution of our new store expansion strategy, constraints in available capital, and interim declines in consumer demand at our retail stores implicated by the current global financial and credit crisis. We respond to fluctuations in revenues primarily by delaying the opening of new stores, adjusting marketing efforts and operations to support our retail stores and manage costs, as well as continuing to focus on our proprietary store optimization modeling to determine the rate and location of new store openings. Our direct market channel revenues decreased 9.2%, to $55.8 million for the year ended December 31, 2008, due to a combination of factors, including lower unit volumes attributable to the significant consumer spending slowdown in the overall economy. We respond to fluctuations in our direct customers' response by adjusting the quantities of catalogs mailed and other marketing and customer-related strategies and tactics in order to maximize revenues and manage costs. The reversal of these trends of decreased direct revenue, delays in our new store growth plan, and reduced borrowing capacity in our credit facility is dependent upon the response of our customers to these market conditions.
GAAP requires that the carrying value of goodwill on the Company's balance sheet be reviewed for impairment at least annually, and that a non-cash charge against earnings be taken if it is determined that an impairment in the value of goodwill has occurred. Given the declines in market capitalizations generally in the current global financial and economic recession, impairment charges are no longer uncommon. The Company performed its annual test of impairment of goodwill as of December 31, 2008, in connection with the preparation of its annual financial statements that are presented in this Annual Report. Based on the results of the goodwill impairment test, the Company determined impairment had occurred, which resulted in the write-off of the entire balance of goodwill at December 31, 2008 as required by GAAP. This was a non-cash, non-tax deductible charge of approximately $14,267,000, which we do not believe impacts the Company's cash flow, future earning power or ability to serve its customers.
In this time of economic uncertainty, we are unable to predict economic trends, but we continue to monitor the situation as it relates to our operations, including new store openings and capital spending.
Single Reporting Segment
The Company operates and manages its business as one operating segment utilizing a multi-channel distribution strategy.
Revenues
We market and sell the most comprehensive selection of products in the equestrian industry. We currently derive our revenues from product sales from two integrated market channels: direct and retail. Our direct market channel generates product sales from both catalog mailings and Internet marketing, and our retail store sales consist of product sales generated by our retail market channel. We sell to the English-style riding market through our Dover Saddlery brand and to the Western-style riding market through our Smith Brothers brand.
In 2008, approximately 71.6% of our revenues generated by our direct market channel, and 28.4% generated by our twelve retail stores, which increased from the 24.4% of retail sales in 2007, due primarily to the success of our retail rollout plan. All revenues are recorded net of product returns.
The Company defines our same store sales to include sales from all stores open for a full fifteen months following a grand opening, or conversion to a Dover branded store.
Revenues from our product sales are seasonal. In addition, our revenues can be affected by the timing of our catalog mailings. In 2008, 27.4% of our revenues were generated in the fourth quarter.
Cost of Revenues
The most significant components of our cost of revenues are product costs, purchasing, handling and transportation costs to obtain the products and ship them to our customers. We manage our integrated merchandising efforts by forming positive relationships with over 600 suppliers to ensure competitive costs and the most up-to-date and complete product offering for our customers. We have implemented procedures to promote labor efficiencies in the handling of our products. In addition, we work closely with transportation companies in negotiating competitive rate structures to manage our freight costs.
Gross Profit
Our gross profit as a percentage of revenues varies according to the season of the year and the mix of products sold. Our gross profit may not be comparable to other specialty retailers, as some companies include all of the costs related to distribution in cost of revenues while others, like us, exclude all or a portion of the costs related to distribution from cost of revenues and include them in selling, general and administrative expenses.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of:
• advertising, marketing and other brand-building costs, primarily associated with developing, printing and distributing our catalogs and internet advertising;
• labor and related costs for order processing, and salaries and related costs for marketing, creative and executive personnel;
• labor and occupancy costs to operate our retail stores;
• infrastructure costs and information system costs;
• credit card processing fees;
• occupancy and other overhead costs;
• store pre-opening costs;
• public company, professional fees and other legal, accounting and related costs; and
• non-cash, stock-based compensation.
Fiscal Periods
Our fiscal year ends on December 31 and our fiscal quarters end on March 31, June 30, September 30 and December 31.
Results of Operations
The following table sets forth results of operations for the periods shown (dollars in thousands):
Year Ended December 31
2008 2007 2006
Revenues, net - direct $ 55,843 $ 61,519 $ 60,249
Revenues, net - retail stores 22,138 19,873 12,797
Revenues, net - total 77,981 81,392 73,046
Cost of revenues 49,319 50,474 45,771
Gross profit 28,662 30,918 27,275
Selling, general and administrative expenses 26,299 27,263 24,021
Litigation settlement expense - 700 -
Goodwill impairment charge(1) 14,267 - -
Income (loss) from operations (11,904 ) 2,955 3,254
Interest expense, financing and other related costs, net 1,287 1,612 948
Other investment loss 96 - -
Income (loss) before income tax provision (13,287 ) 1,343 2,306
Provision for income taxes 562 518 914
Net income (loss) $ (13,849 ) $ 825 $ 1,392
Other Operating Data:
Number of retail stores(2) 12 10 6
Capital expenditures 1,123 862 1,674
Cash flows (used in) provided by operating activities (386 ) 515 (1,483 )
Cash flows (used in) investing activities (1,212 ) (876 ) (3,420 )
Cash flows provided by financing activities 1,737 569 2,117
Gross profit margin 36.8 % 38.0 % 37.3 %
Adjusted EBITDA(3) 3,323 3,856 3,963
Adjusted EBITDA margin(3) 4.3 % 4.7 % 5.4 %
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(1) Includes a non-cash, non-tax deductible goodwill impairment charge of approximately $14,267, triggered by declines in the Company's market capitalization.
(2) Includes eleven Dover branded stores and one Smith Brothers branded store; the December 31, 2008 store count includes the Branchburg, NJ Dover branded store opened in Q2 2008 and the Alpharetta, GA Dover branded store opened in Q4 2008.
(3) When we use the term "Adjusted EBITDA", we are referring to net income minus interest income and other income plus interest expense, income taxes, non-cash stock-based compensation, non-cash goodwill impairment charge, depreciation, amortization and other investment loss. We present Adjusted EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
The following table sets forth our results of operations as a percentage of revenues for the periods shown:
Year Ended December 31 (1)
2008 2007 2006
Revenues, net - direct 71.6 % 75.6 % 82.5 %
Revenues, net - retail stores 28.4 24.4 17.5
Revenues, net - total 100.0 100.0 100.0
Cost of revenues 63.2 62.0 62.7
Gross profit 36.8 38.0 37.3
Selling, general and administrative expenses 33.7 33.5 32.9
Litigation settlement expense - 0.9 -
Goodwill impairment charge 18.3 - -
Income (loss) from operations (15.3 ) 3.6 4.5
Interest expense, financing and other related costs, net 1.7 2.0 1.3
Other investment loss (0.1 ) - -
Income (loss) before income tax provision (17.0 ) 1.7 3.2
Provision for income taxes 0.7 0.6 1.3
Net income (loss) (17.8 )% 1.0 % 1.9 %
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(1) Certain of these amounts may not sum properly due to rounding.
Reconciliation of GAAP to Non-GAAP Net Income and Earnings Per Share
Year Ended Dec. 31, 2008
GAAP Impairment Non-GAAP
As Reported Charges Pro-forma Total
Revenues, net - total $ 77,981 - $ 77,981
Cost of revenues 49,319 - 49,319
Gross profit 28,662 - 28,662
Selling, general and administrative
expenses 26,299 - 26,299
Litigation settlement expense - - -
Goodwill impairment charge 14,267 (14,267 ) -
Income (loss) from operations (11,904 ) 14,267 2,363
Interest expense, financing and other
related costs, net 1,287 - 1,287
Other investment loss 96 - 96
Income (loss) before income tax provision (13,287 ) 14,267 980
Provision for income taxes 562 - 562
Net income (loss) $ (13,849 ) $ 14,267 $ 418
Net income (loss) per share
Basic $ (2.68 ) $ - $ 0.08
Diluted $ (2.68 ) $ - $ 0.08
Number of shares used in per share
calculation
Basic 5,164,000 - 5,164,000
Diluted 5,164,000 - 5,266,000
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Reconciliation of GAAP Income Before Taxes to Estimated Federal Taxable Income
(In thousands) (Unaudited)
Year Ended
Dec. 31, 2008
Income (loss) before taxes (GAAP) $ (13,287 )
Permanent differences 14,446
State taxes (tax) (143 )
Timing differences (241 )
Estimated federal taxable income $ 775
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Non-GAAP Financial Measures and Information
From time to time, in addition to financial results determined in accordance with generally accepted accounting principles in the United States ("GAAP"), the Company provides financial information determined by methods other than in accordance with GAAP. The Company's management uses these non-GAAP measures in its analysis of the Company's performance and ongoing operations. These non-GAAP measures are referred to as "Non-GAAP Net Income" and "Non-GAAP Earnings Per Share", both of which reflect adjustments for the goodwill impairment charge. Estimated federal taxable income is the amount we report on our federal income tax return as income on which we pay federal taxes. The Company believes that these non-GAAP operating measures supplement our GAAP financial information and provide useful information to investors for evaluating the Company's operating results, and trends that may be affecting the Company's business, as they allow investors to more readily compare our operations to prior financial results, and our future performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies
For clarification purposes, the Company notes that the data provided in the two tables immediately above reconcile GAAP measures to non-GAAP measures; whereas the data presented in the two tables in the section captioned "Overview" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" (in Part II, Item 7 earlier in this Annual Report) reconcile the same non-GAAP measures to GAAP measures.
Comparison of Years Ended December 31, 2008 and 2007
Revenues
Our total revenues decreased to $78.0 million for the year ended December 31, 2008, from $81.4 million for the corresponding period in 2007, a decrease of $3.4 million or 4.2%. Revenues in our direct market channel decreased $5.7 million, or 9.2% to $55.8 million. Revenues in our retail market channel were $22.1 million, an increase of $2.3 million, or 11.4%. The decrease in our direct market channel was due to lower unit volumes attributable to continuing consumer slowdown in the overall economy. The increase in revenues from our retail market channel was due primarily to the opening of new stores in 2007 and 2008 and resulting increases in retail revenues. Same store sales decreased 4.7% over prior year, attributable to consumer reaction to the global economic crisis and uncertainty.
Gross Profit
Gross profit for the year ended December 31, 2008 decreased 7.3% to $28.7 million, from $30.9 million for the corresponding period in 2007. Gross profit, as a percentage of revenues, for the year ended December 31, 2008 was 36.8% compared to 38.0% for the corresponding period in 2007. The decrease in gross profit of $2.2 million was due to lower revenues in our direct market channel
and variations in overall product mix. The decrease in gross profit as a percentage of revenues was attributable to variations in our overall product mix, a higher proportion of consumer spending on sale merchandise, and product cost increases.
Selling, General and Administrative
Selling, general and administrative expenses decreased 3.5% for the year ended December 31, 2008 to $26.3 million, compared to $27.3 million for the corresponding period in 2007. As a percentage of revenues, SG&A expenses increased to 33.7% of revenues, from 33.5% of revenues for the corresponding period in 2007. The $1.0 million decrease included tactical reductions in marketing costs of $0.6 million, primarily catalog costs, and professional fees of $0.4 million due to decreased litigation costs. Facility costs increased $0.5 million in support of retail market channel revenue growth, and overall labor costs were flat when compared to prior year.
Litigation Settlement Expense
There was no litigation settlement expense in 2008. In 2007, the litigation settlement expense was $0.7 million for the final settlement of the GAH litigation, which we incurred in the first quarter of 2007 to avoid additional costs of preparation and trial, the burden on management, and the risk of a large adverse award.
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