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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
     
(Mark one)
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended January 29, 2005
 
OR
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from          to
Commission file number 000-21543
Wilsons The Leather Experts Inc.
(Exact name of registrant as specified in its charter)
     
Minnesota   41-1839933
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
7401 Boone Ave. N., Brooklyn Park, MN
(Address of principal executive offices)
  55428
(Zip Code)
Registrant’s telephone number, including area code: (763) 391-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 par value
(Title of Class)
     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 þ         No o
     Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
     Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)    Yes þ         No o
     The aggregate market value of the voting common equity held by non-affiliates of the registrant was $87,273,366 based on the closing sale price for the common stock on the last business day of the registrant’s most recently completed second fiscal quarter as reported by the Nasdaq National Market. For purposes of determining such aggregate market value, all executive officers and directors of the registrant are considered to be affiliates of the registrant. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.
     The number of shares outstanding of the registrant’s common stock, $.01 par value, was 38,895,464 at April 4, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the definitive Proxy Statement of Wilsons The Leather Experts Inc. for the Annual Meeting of Shareholders to be held on June 2, 2005 (the “Proxy Statement”), which will be filed within 120 days after the registrant’s fiscal year ended January 29, 2005, are incorporated by reference into Part III of this Annual Report on Form 10-K (“Form 10-K”). The Compensation Committee Report, the Audit Committee Report, and the stock performance graph contained in the registrant’s Proxy Statement are expressly not incorporated by reference in this Form 10-K.
 
 


WILSONS THE LEATHER EXPERTS INC.
FORM 10-K
For the fiscal year ended January 29, 2005
TABLE OF CONTENTS
               
    description   page
         
           
 
     Business     1  
 
     Properties     17  
 
     Legal Proceedings     17  
 
     Submission of Matters to a Vote of Security Holders     17  
 
     Executive Officers of the Registrant     18  
 
           
 
     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     19  
 
     Selected Financial Data     21  
 
     Management’s Discussion and Analysis of Financial Condition and Results of Operations     23  
 
     Quantitative and Qualitative Disclosure About Market Risk     41  
 
     Financial Statements and Supplementary Data     41  
 
     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     41  
 
     Controls and Procedures     41  
 
     Other Information     45  
 
           
 
     Directors and Executive Officers of the Registrant     45  
 
     Executive Compensation     45  
 
     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     45  
 
     Certain Relationships and Related Transactions     46  
 
     Principal Accountant Fees and Services     46  
 
           
 
     Exhibits and Financial Statement Schedules     47  
 2nd Amendment, dated February 21, 2005
 Wavier & Modification
 Limited Waiver
 Subsidiaries
 Consent of KPMG LLP
 Certification of CEO Pursuant to Section 302
 Certification of CFO Pursuant to Section 302
 Certification of CEO Pursuant to Section 906
 Certification of CFO Pursuant to Section 906


Table of Contents

PART I
      When we refer to “we,” “our,” “us” or “Wilsons Leather,” we mean Wilsons The Leather Experts Inc. and its subsidiaries, including its predecessor companies. Unless otherwise indicated, references to our fiscal year mean the year ended on the Saturday closest to January 31. The periods that will end or have ended on January 28, 2006, January 29, 2005, January 31, 2004, February 1, 2003, February 2, 2002, and February 3, 2001, are referred to herein as 2005, 2004, 2003, 2002, 2001, and 2000, respectively. The year ended February 3, 2001, consisted of 53 weeks as compared to 52 weeks for all other years presented in this Form 10-K.
Item 1. Business
Disclosure Regarding Forward-Looking Statements
      The information presented in this Form 10-K under the headings “Item 1. Business” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based on the beliefs of our management as well as on assumptions made by and information currently available to us at the time such statements were made and relate to, among other things, expected demand for our products, financing requirements, merchandising strategy, capital expenditures, store operations, new store internal rate of return and competition. Although we believe these statements are reasonable, readers of this Form 10-K should be aware that actual results could differ materially from those projected by such forward-looking statements as a result of a number of factors, many of which are outside of our control, including those set forth under “—Risk Factors,” beginning on page 11 of this Form 10-K. Readers of this Form 10-K should consider carefully the factors listed under “—Risk Factors,” as well as the other information and data contained in this Form 10-K. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth under “—Risk Factors” in this section. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “target,” “may,” “will,” “project,” “should,” “continue” and similar expressions or the negative thereof, as they relate to us, are intended to identify such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
      We are the leading specialty retailer of quality leather outerwear, accessories and apparel in the United States. Our multi-channel store locations are designed to target a broad customer base with a superior level of customer service. Through our worldwide leather sourcing network and in-house design capabilities, we are able to consistently provide our customers with quality, fashionable merchandise at attractive prices. Our business structure results in shorter lead times, allowing us to react quickly to popular and emerging fashion trends and customer preferences, rapidly replenish fast-selling merchandise and minimize fashion risk.
      As of January 29, 2005, we operated a total of 436 stores located in 45 states, including 311 mall stores, 109 outlet stores and 16 airport locations. Each year we supplement our permanent stores with temporary seasonal stores during our peak selling season, which totaled 102 in 2004. Our mall stores average approximately 2,600 total leased square feet and feature a large assortment of classic and contemporary leather outerwear, accessories and apparel. Our outlet stores operated primarily under the Wilsons Leather Outlettm name, average approximately 4,000 total leased square feet and offer a combination of clearance merchandise from our mall stores, special outlet-only merchandise and key in-season goods. Our airport stores average approximately 700 total leased square feet, feature travel-related products as well as leather accessories and provide us the opportunity to showcase our products and the Wilsons Leather brand to millions of potential customers each year in some of the busiest airports in the United States.

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Financial Strategy
      Our financial strategy for the next year is to increase sales and margins by enhancing the productivity of our existing store base, to continue to strengthen our overall capital position by reducing our costs and working capital needs and to maintain an appropriate financial structure, which was established in 2004. Key elements of implementing this strategy include:
      Increase Sales and Margins. We are employing aggressive marketing strategies and targeted advertising to build customer urgency, drive foot traffic into our stores, generate sales and establish Wilsons Leather as a shopping destination. We believe that reinvigorating our mall store business remains both our biggest near-term challenge and our best opportunity to maximize profitability. Additionally, we are implementing targeted promotional activities to ensure our pricing is competitive, while maintaining acceptable margin levels through obtaining lower initial product costs, increasing opportunistic purchases, and selectively increasing average unit retail prices where and when appropriate. Finally, we will continue to focus our efforts on increasing our growing accessories business and ensuring our men’s and women’s garments appeal to our targeted customer base.
      Improve Balance Sheet and Enhance Cash Position. We are focused on conserving cash through tight expense controls throughout the organization, maintaining a lean corporate headquarters organization, improving inventory management and limiting new store growth until we improve the profitability of our existing store base. Capital expenditures for 2005 are capped at $10.0 million, with the majority of the funds being allocated to certain lease-required store remodels and investments in fixtures to further drive our accessories business.
      Maintain Rational Store Count. We had a net reduction of 24 stores in 2004, following a net reduction of 158 stores in 2003, including the 111 liquidation stores discussed in “—Reorganization and Partial Store Liquidation” below. In 2005, we plan to open five stores (primarily outlets) where we have pre-existing commitments and close approximately 15 additional locations (primarily related to natural lease terminations) for a net reduction of 10 stores. In 2005 and beyond, we will continue to analyze our store profitability on a market-by-market basis and work to close underperforming stores to minimize our financial risk.
      During the last three years, in support of our overall financial strategy, the following three major actions were taken: 1) we discontinued operations for the Travel Subsidiaries, 2) we conducted a reorganization and partial store liquidation, and 3) we obtained additional financing.
Discontinued Operations
      In October 2000, we acquired the El Portal Group, Inc. (“El Portal”), a specialty retailer of premium travel products and accessories with 38 stores based in Las Vegas, Nevada. In April 2001, we acquired Bentley’s Luggage Corp., including its subsidiary, Florida Luggage Corp. (collectively “Bentley’s”), a specialty retailer of travel products with 106 stores based in Miami, Florida. We operated these two chains for 24 and 19 months, respectively, with unsatisfactory financial results and, as a result, on November 19, 2002, we announced the liquidation of all 135 stores operated by El Portal and Bentley’s (the “Travel Subsidiaries”). The Travel Subsidiaries business is classified as discontinued operations in our consolidated financial statements and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Fiscal years 2001 and 2000 were reclassified to present discontinued operations for the Travel Subsidiaries.
Reorganization and Partial Store Liquidation
      On January 22, 2004, we announced that we would liquidate up to 100 underperforming mall and outlet stores (subsequently revised to 111 stores— the “liquidation stores”) and eliminate approximately 950 store-related positions. We retained a third party liquidator and real estate firm to assist in this process. The liquidation stores were selected based on strategic criteria, including negative sales and earnings trends, projected real estate costs, location, and financial conditions within the market. In addition, we announced the

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elimination of approximately 70 positions at our corporate headquarters in Brooklyn Park, Minnesota and our distribution center in Las Vegas, Nevada and the closure of our distribution center in Las Vegas, Nevada.
      For these actions we incurred charges related to the restructuring and partial store liquidation of $27.4 million and $8.6 million, during 2004 and 2003, respectively. These charges were primarily related to the transfer of inventory to an independent liquidator in conjunction with the closing of the liquidation stores, lease termination costs, accelerated depreciation, asset write-offs related to store closings, severance, including payments under our agreements with David L. Rogers and Joel N. Waller, performance bonuses due former officers of the Company, retention bonuses, and other restructuring costs. In 2004, $17.4 million of these charges were recorded in selling, general and administrative expenses and $13.8 million of these charges were recorded in depreciation and amortization, and were partially offset by $3.8 million of gross margin earned on the liquidation sales. In 2003, $2.8 million of these charges were recorded in selling, general and administrative expenses and $2.3 million of these charges were recorded in depreciation and amortization, in addition to the $3.5 million gross margin loss realized on the liquidation sales. The liquidation sales were completed in April 2004, and as of May 1, 2004, all the liquidation stores had been closed. As of October 30, 2004, we had successfully negotiated all of the lease terminations. The overall net cash outlay for the restructuring costs was slightly negative.
Additional Financing
      On April 25, 2004, we entered into an agreement to issue 17,948,718 shares of our common stock (the “Equity Financing”) to three institutional investors at a price of $1.95 per share. The transaction closed on July 2, 2004, with gross proceeds before offering expenses of $35.0 million. As additional consideration for the investors’ commitment, on April 25, 2004, we issued two million warrants exercisable for five years to the investors upon signing the Equity Financing agreement, and at closing issued an additional two million warrants exercisable for five years, all at an exercise price of $3.00 per share of common stock. On July 9, 2004, we repurchased $22.0 million of the 111/4% Senior Notes due August 15, 2004 (the “111/4% Senior Notes”) with proceeds from the Equity Financing and used $8.6 million of the proceeds from the Equity Financing to repay the balance of the 111/4% Senior Notes at maturity. The balance of the proceeds has been used for general working capital purposes.
      General Electric Capital Corporation and a syndicate of banks have provided us with a senior credit facility, which was amended on November 1, 2002, January 31, 2003, April 11, 2003, January 21, 2004, April 15, 2004, April 27, 2004, March 2, 2005, and April 4, 2005, that provides for borrowings of up to $150.0 million in aggregate principal amount, including a $25.0 million Term B promissory note and a $75.0 million letter of credit subfacility. We prepaid $5.0 million of the Term B promissory note with no pre-payment penalty on March 3, 2005. With the completion of the Equity Financing described above, and the subsequent repayment of the 111/4% Senior Notes in full at maturity, the senior credit facility expiration date was extended to June 28, 2008, at which time all borrowings, including the Term B promissory note, will become due and payable.
Merchandise Strategy
      The elements of our merchandise strategy combine to create an assortment of products that appeal to consumers from a broad range of socio-economic, demographic and cultural profiles. We perform internal market research at least annually, and we will continue to survey our current and potential customers each year to update our customer demographics. We believe that our strategy will continue to position us as the leading specialty retailer of quality leather outerwear, accessories and apparel and strengthen our brand position. The principal elements of our merchandise strategy include:
      Increase the Merchandising of Accessories. We are focused on continuing to increase the penetration of our accessories business within our retail concepts with an added emphasis on handbags. To support our objective of generating demand and sales throughout the year, we have expanded the accessories assortment in our stores. Through the development of new product styles and other merchandising activities, we plan to utilize accessories as an additional way of attracting more female customers into our stores. These products

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complement our outerwear and apparel selection and lead to higher “add-on” sales. Our accessories business has proven to be less seasonal and has grown into the largest segment of our business. We believe that further increasing our accessories business will offer us an opportunity to limit the risk inherent in our business and reduce our seasonality.
      Grow Brand Recognition. Our goal is to promote the Wilsons Leather brand through a variety of in-store visual presentations at our national network of stores, newspaper advertising, direct mail promotions and our e-commerce site. Reflecting our strength as a mass-market retailer, we are expanding the power of the Wilsons Leather brand by focusing our marketing and merchandising on both classic and colorful fashion-forward styles designed to reach a much broader market. We will continue to market to our customers’ ethnic backgrounds, ages, income levels and fashion requirements.
      Optimize Merchandise Assortment. We are currently evaluating our merchandise assortment to optimize our mix and price points. We continue to utilize our outlet channel to more effectively clear mall merchandise in order to keep our mall stores fresh and up to date. We will rebalance our focus on fashion versus basic. During 2004, we over-responded to trends in color and fashion during the fourth quarter holiday selling season. We have learned that we have different customers during different times of the year (with the holiday selling season tending to be more basic) and we will plan and execute accordingly.
      Target Core Customer Base. Our primary focus this past year was to tailor our price points and varieties of merchandise to grow with customers throughout their lives. We target customers ages 18 to 37, and we are working to ensure that our stores are assorted with the products they want. Our market research indicated that the median age of our high-potential, high-volume core customer is 28 years of age. We are intensifying our efforts to improve our customer focus and rebuild consumer loyalty by delivering fashion-right leather merchandise that fits the lifestyle needs of our customers at prices they find attractive.
      Capitalize on Worldwide Sourcing Network. We are able to leverage our worldwide sourcing network to benefit our stores. Our staff of in-house designers combines industry experience with the latest fashion trends to produce product lines that are both classic and fashion-forward. We have established strong relationships with suppliers globally and our design team works closely with our suppliers to ensure seamless development of leather styles, colors and finishes. We have a staff of 45 professionals in Asia and the sub-continent, South America, and Europe to ensure that our designs are manufactured quickly with consistent, quality standards. We believe that our control of design and sourcing results in shorter lead times than our competitors’, reducing inventory requirements and fashion risk and permitting in-season reorders.
      Pursue Multiple Store Formats. Our distribution network of multiple store formats allows us to specifically tailor our stores with a wide selection of merchandise at multiple price points and to optimize raw materials usage, inventory flow and sales across all channels. We operate our stores in malls, outlet centers, airports, and on an e-commerce site. We believe we are creating a new level of excitement throughout our mall stores, creatively using marketing and promotions, and making sure that we have the optimal leather merchandise assortment in our mall stores. Our outlet stores enable us to effectively manage inventories, drive year-round sales, extend our brand and build our customer base. We also operate temporary seasonal stores in malls during our peak selling season to complement our existing store base. These seasonal stores provide us with opportunities to drive incremental sales, test new markets and further strengthen the Wilsons Leather brand nationally. In the future, we plan to evaluate and test new growth vehicles, compatible new store concepts and new product offerings.
Product Design and Merchandising
      Our mission is to tailor our merchandising to a targeted customer base by offering a broad selection of quality merchandise at attractive prices. We offer approximately 3,400 styles of leather outerwear, accessories, and apparel throughout our stores. The accessories consist primarily of gloves, handbags, wallets, briefcases, computer cases, planners and belts. Our merchandising staff, including buyers and designers, continually monitors emerging trends and changing consumer preferences and utilizes information provided by our customers to ensure that we maintain a consistent and up-to-date selection of products. To further minimize our inventory risk and maximize our sales performance, our merchandising team utilizes our flexible

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merchandise management information system to test new merchandise in many of our stores before making large commitments and purchase orders with our suppliers.
      We believe that our integrated worldwide sourcing and in-house design capabilities enable us to gain numerous competitive advantages. As new market trends are identified, we make merchandise design decisions to ensure that key features of fashion merchandise are incorporated in future designs. Our in-house design staff will create and develop designs to ensure a consistent quality, theme and image. As part of the design process, we also consider the anticipated retail prices and profit margins of the merchandise, the availability of leather and raw materials and the capabilities of the factories that will manufacture the merchandise.
      Some key elements for merchandising our stores include:
  •  identifying customer lifestyle segments based on demographic factors such as age, fashion awareness, purchasing behavior, income, location and ethnicity;
 
  •  building strong brand recognition and utilizing our proprietary labels to target customer lifestyle segments;
 
  •  driving accessories growth through new styles designed to attract customers into our stores; and
 
  •  actively managing pricing to maintain value for the largest possible customer base.
      We believe that the name and reputation of the Wilsons Leather brand assures customers they are purchasing quality and fashionable merchandise. Approximately 90.0% of the merchandise in our stores is designed and sold under our proprietary labels: M. Julian®, Maxima®, Pelle Studio® and Wilsons Leathertm. We additionally offer a limited selection of other designer brands such as Kenneth Cole® and Andrew Marc® in our stores to highlight the value of our proprietary labels.
      The following table sets forth the percentages of net sales by major merchandise category from 2002 to 2004:
                         
    2004   2003   2002
Merchandise Category            
Accessories
    35.6 %     33.6 %     31.6 %
Women’s apparel
    32.1 %     33.1 %     35.0 %
Men’s apparel
    32.3 %     33.3 %     33.4 %
                   
Total
    100.0 %     100.0 %     100.0 %
                   
Sourcing and Quality Assurance
      We have developed strong and long-standing relationships with our manufacturers and tanneries. In 2004, approximately 84.0% of our leather garments and accessories were manufactured by over 70 independently owned manufacturing facilities throughout Asia and India. Our relationships, coupled with our significant purchasing power, enable us to achieve economies of scale and ensure that we can consistently maintain our quality and obtain sufficient manufacturing capacity when needed.
      We believe that our extensive knowledge of the world’s leather markets is critical in mitigating price fluctuations in the cost of raw leather during times of high volatility. While we do not normally obtain possession of a significant level of raw material, we assist tanneries and factories in sourcing raw material from all over the world, ensuring broad access to the marketplace. However, from time to time we purchase supplies of leather to take advantage of market opportunities to ensure reserves of quality materials at acceptable prices. Raw leather is primarily sourced in Italy and South Korea, with additional product sourced from South America, Australia, China and New Zealand. Our buying strategies, coupled with our expertise in leather development, enable us to purchase entire lots of raw leather and use varying grades of raw leather in different products, providing us with significant price advantages.

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      Our sourcing infrastructure and strong relationships with our suppliers allow us to effectively control merchandise production without owning manufacturing facilities. Our designers and buyers work closely with our sourcing team to identify and develop leather styles, colors and finishes. We have a staff of 45 professionals located in China, India, Hong Kong, South Korea, and South America who are primarily responsible for overseeing the production and quality assurance process in overseas factories and are supervised by the sourcing team at our corporate headquarters. Their responsibilities include inspecting leather at the tanneries, coordinating the production capacity, matching product samples to our technical specifications, and providing technical assistance and quality assurance through inspection in the factories.
      Our merchandising department works closely with our overseas personnel to coordinate order fulfillment. We have consistently maintained our merchandise production cycle at approximately 90 days. We believe this production cycle is shorter than that of our competitors and allows us to better control our production needs and reorder faster-selling merchandise during our peak selling season. We believe that this strategy results in more effective and efficient inventory management and gives us the ability to manage production as the business climate changes, thus reducing our need for markdowns on merchandise at the end of our peak selling season.
Store Formats and Locations
      As of January 29, 2005, we operated 436 retail stores located in 45 states, including 311 mall stores, 109 outlet stores and 16 airport locations. We regularly supplement our permanent mall stores with temporary seasonal stores during our peak selling season. Between October 2004 and January 2005, we operated 102 seasonal stores.
      Our e-commerce site at www.wilsonsleather.com offers leather outerwear, accessories and apparel, as well as company background and financial information.
      Store Locations as of January 29, 2005:
                                 
State   Mall   Outlets   Airport   Total
                 
Alabama
    2       2             4  
Arkansas
    1                   1  
Arizona
    2       1             3  
California
    25       13       1       39  
Colorado
    7       3             10  
Connecticut
    5       1             6  
Delaware
    3       1             4  
Florida
    8       7       1       16  
Georgia
    11       5       3       19  
Iowa
    5       1             6  
Idaho
    1                   1  
Illinois
    24       4       5       33  
Indiana
    8       2             10  
Kansas
    2                   2  
Kentucky
    4                   4  
Louisiana
    2       1             3  
Massachusetts
    10       2             12  
Maryland
    7       4             11  
Maine
    3       2             5  
Michigan
    17       3             20  
Minnesota
    14       3       1       18  
Missouri
    4       3             7  
Mississippi
          2             2  
North Carolina
    7       3             10  
North Dakota
    3                   3  
Nebraska
    2                   2  
New Hampshire
    4       2             6  
New Jersey
    9       3             12  
New Mexico
    2       1             3  
Nevada
    2       3             5  
New York
    20       5             25  
Ohio
    15       4             19  
Oklahoma
    3                   3  
Oregon
    5       1             6  
Pennsylvania
    17       4       2       23  
Rhode Island
    1       1             2  
South Carolina
          4             4  
South Dakota
    2                   2  
Tennessee
    7       4             11  
Texas
    16       5       1       22  
Utah
    1       1       1       3  
Virginia
    6       3       1       10  
Washington
    10       2             12  
Wisconsin
    13       3             16  
West Virginia
    1                   1  
                         
GRAND TOTAL
    311       109       16       436  
                         
      Site Selection for Store Openings and Closings. We use a detailed process to identify favorable store locations in existing or new markets. Within each targeted market, we identify potential sites for new and replacement stores by evaluating market dynamics. Our site selection criteria include:
  •  customer segment and demographic data derived from our point-of-sale network and outside sources;

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  •  information relating to population density in concentric circles surrounding the mall;
 
  •  the performance of past seasonal stores within the mall;
 
  •  the proposed location within the mall; and
 
  •  projected profitability, cost, return on investment and cash-flow objectives.
      Our cross-functional review committee approves proposed store projects, including new sites and lease renewals. We periodically evaluate our stores to assess the needs for remodeling or the timing of possible closure based on economic factors. We use our knowledge of market areas and rely upon the familiarity of our name and our national reputation with landlords to enhance our ability to obtain prime store locations and negotiate favorable lease terms. In 2005, we plan to open five stores (primarily outlets) and close approximately 15 stores (primarily related to natural lease terminations).
      We maintain a dedicated staff with extensive experience in opening and closing our temporary seasonal stores, which we leverage in our other concepts. Once a seasonal store site is selected and the lease is executed, we are usually able to open a store within three days.
      Our real estate, store planning and executive management teams analyze the performance and profitability of our stores and markets to assess the potential for new and replacement stores and to identify underperforming stores. We estimate that our average net investment in our permanent mall stores is approximately $378,000 and approximately $355,000 for our outlet stores, including inventory and capital investment and excluding any landlord compensation, which is recorded as deferred rent. In 2005, we expect new stores to generate a three-year internal rate of return of approximately 15% and have an average discounted cash payback period of two to three years. We cannot ensure that our future store openings will meet these expectations.
      The following chart highlights the number of stores, by format, opened or closed in each of the last three years:
                                   
    Mall   Outlet   Airport   Total
                 
Store count as of February 2, 2002
    492       94       33       619  
 
Fiscal year ended February 1, 2003
                               
 
Stores opened
    12       22             34  
 
Stores closed
    (21 )     (6 )     (8 )     (35 )
                         
 
End of year count
    483       110       25       618  
 
Fiscal year ended January 31, 2004
                               
 
Stores opened
    6       11             17  
 
Stores closed
    (50 )     (8 )     (6 )     (64 )
 
Stores in liquidation
    (105 )     (6 )           (111 )
                         
 
End of year count
    334       107       19       460  
 
Fiscal year ended January 29, 2005
                               
 
Stores opened
    3       2             5  
 
Stores closed
    (26 )           (3 )     (29 )
                         
 
End of year count
    311       109       16       436  
                         
      Mall Stores. We operated 311 permanent mall stores as of January 29, 2005, in 43 states. Our mall stores showcase a full range of leather outerwear, accessories and apparel primarily under our proprietary labels. These stores average approximately 2,600 total leased square feet and are located in all types of

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shopping malls, serving diverse demographics. A typical mall store will carry a selection of approximately 1,400 different styles of our merchandise.
      We further supplement our permanent mall stores with temporary seasonal stores to better capitalize on our peak selling season. In 2004, we operated 101 seasonal mall stores. We plan to operate approximately 125 seasonal mall stores in 2005. Our temporary seasonal stores provide us the opportunity to test prospective mall locations and are generally located in malls where there is not a permanent store. A typical seasonal store will carry approximately 1,800 styles of our merchandise.
      Outlet Stores. Our 109 outlet stores are located in 36 states and operate under the names Wilsons Leather Outlettm and The Wallet Workstm. To maintain brand image, we generally locate outlet stores in large outlet centers in areas away from our permanent mall stores. Our Wilsons Leather Outlet stores offer clearance items and special outlet-only merchandise as well as certain key in-season products. Wilsons Leather Outlet stores average approximately 4,000 total leased square feet and generally carry approximately 2,600 styles of merchandise. Our Wallet Works stores average 1,400 square feet and carry mainly accessories. We currently operate two Wallet Works stores. We operated one seasonal outlet store during 2004 and do not plan to operate any seasonal outlet stores in 2005.
      Airport Stores. We launched our airport stores in an effort to showcase our Wilsons Leather brand and accessories. Our 16 airport stores play an instrumental role in growing brand awareness and showcasing our products to millions of travelers who pass by our airport stores each year. These stores average approximately 700 total leased square feet and carry approximately 950 of our best-selling styles, primarily accessories.
      e-commerce. Our e-commerce site “www.wilsonsleather.com” offers an extension of our store experience and is intended to increase brand awareness, strengthen the relationship with our customers, make our merchandise more accessible to our customers and facilitate cross-marketing with our stores. We are also using e-mail as a means of reaching out to our customers. The e-commerce site features key in-season merchandise as well as promotional merchandise and has been revamped to decrease the cost structure and improve customer service. In 2004, we had 3.1 million visitors at our www.wilsonsleather.com e-commerce site, compared to 2.5 million in 2003, and we achieved $4.2 million in on-line sales, which equates to an essentially flat year-over-year comparison. We plan to continue to invest prudently in the development and maintenance of our on-line presence, with the Internet serving as an additional shopping format for our customers, as well as a vehicle for building brand awareness. During 2004, we out-sourced the administration and marketing of our e-commerce site to a third party vendor who performs similar services for other specialty retailers.
      Store Operations. Our store operations are organized by region. The mall, outlet and airport stores are divided into four regions, with each region subdivided into districts. Each district manager is responsible for anywhere from 8 to 17 stores. Individual stores are staffed by a manager, an assistant manager, and a complement of full- and part-time sales associates whose numbers fluctuate based upon expected and actual sales. A typical store manager has an average of four years experience with our company. Store managers are responsible for sales and other operations including hiring and associate training, visual display and inventory control. All other aspects of store operations are administered centrally by our corporate offices. Temporary seasonal stores have a dedicated staff with the same responsibilities as the staff of our permanent stores. Temporary seasonal stores also provide an opportunity to develop and assess the skills of associates being considered for future permanent store management positions.
      A core aspect of our corporate culture is to focus on employee training and customer service. We emphasize sales associate training to ensure each associate has knowledge of our merchandise and the customer segments that the various labels are designed to serve. Our associates receive ongoing training in the unique properties of leather, the appropriate methods of care for the various leather finishes and the product specifications and details of our merchandise. In addition, we train associates to perform minor repairs in the store for customers free of charge.
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