Business Context and Reporting Period
Company: Franklin Covey Co.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 24, 2001 (Second Quarter of Fiscal 2001)
Business Overview: The Company provides integrated training and performance solutions in productivity, leadership, and sales performance. Key products include the Franklin Planner and "The 7 Habits of Highly Effective People." Operations are segmented into Retail Stores, Catalog/eCommerce, Organizational Sales Group (OSG), Educational, International, and Other channels.
Key Financial Metrics
| Metric | Q2 2001 | Q2 2000 | 6 Months 2001 | 6 Months 2000 |
|---|---|---|---|---|
| Sales | $133.4M | $149.4M | $262.5M | $298.2M |
| Gross Margin | $74.4M (55.8%) | $83.1M (55.6%) | $152.0M (57.9%) | $168.2M (56.4%) |
| Operating Income (Loss) | $(1.1M) | $6.9M | $2.4M | $21.2M |
| Net Income (Loss) | $(0.8M) | $2.8M | $0.5M | $10.0M |
| Net Income (Loss) to Common | $(2.8M) | $0.8M | $(3.5M) | $6.1M |
| Diluted EPS | $(0.14) | $0.04 | $(0.17) | $0.30 |
| Cash from Operations (6mo) | $48.0M (vs $65.6M prior year) | |||
| Cash & Equivalents | $19.0M (as of Feb 24, 2001) | |||
| Total Debt (Current + Long-term) | $65.1M (Lines of credit: $55.0M; Long-term: $10.1M) |
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 11% in Q2 and 12% for the six-month period. The "Other" segment saw a 50% drop due to the sale of the commercial printing division and the formation of a joint venture for personal coaching services.
- Profitability Reversal: The Company reported a net loss of $2.8 million available to common shareholders in Q2, compared to a profit of $0.8 million in the prior year. Operating expenses (SG&A) increased as a percentage of sales to 48.7% from 42.9%.
- Segment Performance:
- Retail: Sales increased slightly due to 24 new stores, but comparable store sales fell 10% due to reduced traffic and strong prior-year handheld device sales.
- OSG: Sales declined 10% due to reduced demand for leadership training.
- International: Sales were negatively impacted by unfavorable foreign exchange rates ($0.9M reduction).
- Restructuring: The Company continues to execute a restructuring plan initiated in fiscal 1999. As of Feb 24, 2001, $3.8 million in restructuring accruals remained (severance and office exit costs).
Outlook, Risks, and Unusual Items
- Management Commentary: Management attributes the earnings decline to lower retail traffic, inclement weather, decreased wholesale demand, and unfavorable exchange rates. Initiatives for the remainder of the fiscal year include new product solutions, alliances, and operational improvements.
- Stock Repurchase Covenant Breach: The Company was not in compliance with its line of credit agreement regarding the purchase of common stock for treasury. A waiver was obtained from lenders (Bank One and Zions First National Bank) on April 1, 2001, for a fee of $25,000 per lender. The Company is currently not pursuing additional share purchases.
- Debt Covenants: The Credit Agreement was amended to extend the facility termination date to March 1, 2002. The Fixed Charge Coverage Ratio requirement was adjusted to 1.05 for the current quarter and 1.75 for subsequent quarters.
- Joint Venture: Franklin Covey Coaching, LLC (50% owned) began operations in September 2000. The Company recognizes its share of earnings rather than full sales, impacting gross margin reporting.
- Risks: Key risks include dependence on specific products, competition, foreign currency volatility, and the integration of acquired businesses. The Company notes that forward-looking statements are subject to uncertainties.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the Fixed Charge Coverage Ratio and the terms of the waiver obtained for the stock repurchase breach.
- Retail Store Economics: Assess the profitability of the 24 new retail stores opened in the last year, given that incremental sales did not offset increased SG&A costs.
- Joint Venture Impact: Review the financial contribution of Franklin Covey Coaching, LLC and the long-term strategy for the personal coaching business.
- Inventory Levels: Monitor inventory levels ($49.6M) relative to sales trends, particularly for electronic handheld devices which have lower margins.
- Foreign Exchange Exposure: Evaluate the impact of currency fluctuations on international sales and the effectiveness of the $6.5M forward contract for Japanese Yen.