01—Abstract
Summary
Summary of the 10-K filed March 29, 1996. Cited figures are marked; the original filing is the authoritative source.
Important note: the document provided is Melville Corporation's Form 10-K for fiscal 1995, filed March 29, 1996, not a CVS Health Corp filing.
CVS was Melville's largest division, and the filing describes Melville's plan to split into three public companies: a chain drug holding company built around CVS, a footwear company (Meldisco, Footaction, Thom McAn), and a toy company (Kay-Bee). The analysis below covers Melville as filed. Fiscal 1995 was a severe loss year.
Melville reported a net loss of $657.1 milliona, or $6.41 per share, against net earnings of $307.5 million ($2.75 per share) in 1994. The loss was driven by $936.8 million in restructuring and asset impairment charges, the $41.96 million after-tax cumulative effect of an accounting change (expensing software costs and early adoption of SFAS 121), and operating losses at the Marshalls and Thom McAn businesses. Management says per-share earnings excluding these items would have been $1.26.
Net sales from continuing operations were $9.69 billionb, up from $9.45 billion, and same-store sales rose 2.2%. Total company sales including footwear were $11.5 billion. The balance sheet and dividend changed substantially.
Shareholders' equity fell to $1.55 billionc from $2.38 billion, and book value per share fell to $14.73 from $22.54. The board cut the quarterly dividend from $0.38 to $0.11 per share, effective with the restructuring. Liquidity remains manageable: operating cash flow was $345.5 million, capital expenditures were $395.0 million, and year-end short-term borrowings were just $52.0 million.
The company also sold Marshalls to TJX for about $600 milliond in November 1995 and agreed in March 1996 to sell Kay-Bee to Consolidated Stores for about $315 million. The separations are targeted for summer 1996, with the spin-off of the footwear company subject to a tax-free ruling and Kmart consent.
02—Key points
Key Highlights
- Net loss of $657.1 million ($6.41 per share) in 1995, versus net earnings of $307.5 million ($2.75 per share) in 1994, driven by $936.8 million in restructuring and asset impairment charges.
- CVS (prescription drugs, health and beauty care) is the core earnings engine: about 50.2% of continuing-operations net sales, 1,366 stores in 14 states and DC, and operating profit of $252.7 million, or roughly 104% of total continuing-operations operating profit before corporate expenses and special charges. Same-store sales rose 8.8%.
- Strategic restructuring into three public companies: Chain Drug Holding Company (CVS plus Linens 'n Things and Bob's), a footwear company (Meldisco, Footaction, Thom McAn), and a toy company (Kay-Bee). Completion is targeted for summer 1996.
- Dividend reduced from $0.38 to $0.11 per quarter, which management says aligns payout with the chain drug company's growth and capital needs.
- Asset sales: Marshalls sold to TJX for about $600 million (November 1995); Kay-Bee agreed to sell to Consolidated Stores for about $315 million (March 1996); Wilsons and This End Up being marketed for sale.
- Balance sheet weakened: shareholders' equity fell to $1.55 billion from $2.38 billion, long-term obligations to total capitalization rose to 17.8% from 12.8%, and the current ratio declined to 1.4 from 1.6. Total assets were $3.96 billion.
- Expected benefits: about $100 million in pre-tax profit improvement over two years across the three companies, plus a positive net cash flow impact. Store closures of roughly 330 stores, with about 270 closed as of January 31, 1996.
03—Questions
Frequently Asked Questions
Is this filing from CVS Health, and what is the relationship between Melville and CVS?
No. The filing is Melville Corporation's 10-K for fiscal 1995, filed March 29, 1996. CVS was Melville's prescription drug division, which operated 1,366 stores at year-end 1995 and accounted for about 50% of continuing-operations sales. Melville planned to spin CVS into a separate publicly traded chain drug holding company. The company that became CVS Health was later formed from this business, so the filing is relevant to CVS's history but is not a CVS Health filing.
Why did Melville report a large loss in 1995?
The loss came mainly from $936.8 million of restructuring and asset impairment charges tied to the October 1995 strategic program. Those charges included $434.3 million for the estimated loss on the sales of Marshalls, This End Up and Wilsons, $166.8 million for asset write-offs and severance, $90.6 million for early adoption of SFAS 121, and $61.4 million for store and warehouse closure costs. Operating losses at Marshalls and Thom McAn and a $42.0 million after-tax accounting change for internally developed software costs added to the loss.
What does the dividend cut mean for shareholders?
The quarterly dividend was reduced from $0.38 to $0.11 per share, about a 71% reduction. Management tied the new rate to the capital needs and payout norms of the chain drug company. Dividend policies for the footwear and toy companies had not been set when the filing was made. Total common dividends were $159.9 million in 1995, and shareholders should expect the post-spin-off payout to depend on each new company's performance.
Is the company financially stable after the restructuring?
The company remained solvent and generated $345.5 million in operating cash flow, which covered most of its $395.0 million capital spending. Year-end short-term borrowings were only $52.0 million, down from $200.0 million, and the company had $1.15 billion in lines of credit. However, leverage increased and equity was reduced by the charges. Long-term obligations to total capitalization rose to 17.8%. Investors also face contingent liabilities, including $590.6 million in present-value guarantees on 474 leases from dispositions and the outcome of the Chess King lease liability.
04—Continue