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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-Q

(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 2002

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: 1-12552

THE TALBOTS, INC.

(Exact name of registrant as specified in its charter)
     
Delaware   41-1111318
 
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)
One Talbots Drive, Hingham, Massachusetts   02043
 
(Address of principal executive offices)   (Zip Code)

(781) 749-7600

(Registrant’s telephone number, including area code)

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   [X]      No   [    ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     
Class   Outstanding as of
September 3, 2002
 
Common Stock, $0.01 par value   58,325,887

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1 — Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
CONSOLIDATED BALANCE SHEETS (UNAUDITED) AUGUST 3, 2002, FEBRUARY 2, 2002 AND AUGUST 4, 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II — OTHER INFORMATION
ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6 — EXHIBITS AND REPORTS ON FORM 8-K

Table of Contents

INDEX TO FORM 10-Q

               
          Page
         
PART I. FINANCIAL INFORMATION
        
   
Item 1: Financial Statements
        
     
Consolidated Statements of Earnings for the Thirteen and Twenty-Six Weeks Ended August 3, 2002 and August 4, 2001
     3  
     
Consolidated Balance Sheets as of August 3, 2002, February 2, 2002 and August 4, 2001
     4  
     
Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended August 3, 2002 and August 4, 2001
     5  
     
Notes to Consolidated Financial Statements
     6-9  
   
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
     10-14  
PART II. OTHER INFORMATION
        
   
Item 4: Submission of Matters to a Vote of Security Holders
     15  
   
Item 6: Exhibits and Reports on Form 8-K
     16  

2

Table of Contents

PART I. FINANCIAL INFORMATION

     Item 1 — Financial Statements

     THE TALBOTS, INC. AND SUBSIDIARIES

     CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
     FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
     (Amounts in thousands except per share data)

                                   
      Thirteen Weeks Ended   Twenty-Six Weeks Ended
     
 
      August 3,   August 4,   August 3,   August 4,
      2002   2001   2002   2001
     
 
 
 
NET SALES
   $ 370,407     $ 384,295     $ 761,735     $ 785,367  
COSTS AND EXPENSES:
                                
 
Cost of sales, buying and occupancy
     235,578       252,979       456,700       471,227  
 
Selling, general and administrative
     102,232       101,120       215,633       217,494  
 
    
     
     
     
 
OPERATING INCOME
     32,597       30,196       89,402       96,646  
INTEREST:
                                
 
Interest expense
     720       1,436       1,641       3,154  
 
Interest income
     178       210       266       702  
 
    
     
     
     
 
INTEREST EXPENSE — NET
     542       1,226       1,375       2,452  
 
    
     
     
     
 
INCOME BEFORE TAXES
     32,055       28,970       88,027       94,194  
INCOME TAXES
     12,021       11,154       33,010       36,265  
 
    
     
     
     
 
NET INCOME
   $ 20,034     $ 17,816     $ 55,017     $ 57,929  
 
    
     
     
     
 
NET INCOME PER SHARE:
                                
 
Basic
   $ 0.34     $ 0.29     $ 0.92     $ 0.93  
 
    
     
     
     
 
 
Assuming dilution
   $ 0.33     $ 0.28     $ 0.90     $ 0.90  
 
    
     
     
     
 
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in thousands):
                                
 
Basic
     59,468       62,009       59,712       62,383  
 
    
     
     
     
 
 
Assuming dilution
     61,047       64,112       61,328       64,556  
 
    
     
     
     
 
CASH DIVIDENDS PER SHARE
   $ 0.09     $ 0.08     $ 0.17     $ 0.15  
 
    
     
     
     
 

See notes to consolidated financial statements.

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Table of Contents

THE TALBOTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AUGUST 3, 2002, FEBRUARY 2, 2002 AND AUGUST 4, 2001
(Dollar amounts in thousands except share data)

                               
          August 3,   February 2,   August 4,
          2002   2002   2001
         
 
 
ASSETS
                        
CURRENT ASSETS:
                        
 
Cash and cash equivalents
   $ 51,714     $ 18,306     $ 16,765  
 
Customer accounts receivable — net
     160,192       172,183       150,710  
 
Merchandise inventories
     165,413       183,803       204,483  
 
Deferred catalog costs
     5,465       8,341       7,130  
 
Due from affiliates
     7,747       9,618       8,522  
 
Deferred income taxes
     11,351       11,429       12,739  
 
Prepaid and other current assets
     30,983       29,089       33,568  
 
 
    
     
     
 
     
TOTAL CURRENT ASSETS
     432,865       432,769       433,917  
PROPERTY AND EQUIPMENT — NET
     298,705       277,576       265,397  
GOODWILL — NET
     35,513       35,513       36,185  
TRADEMARKS — NET
     75,884       75,884       77,076  
DEFERRED INCOME TAXES
     147       388       5,902  
OTHER ASSETS
     9,616       8,934       8,739  
 
 
    
     
     
 
TOTAL ASSETS
   $ 852,730     $ 831,064     $ 827,216  
 
 
    
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                        
CURRENT LIABILITIES:
                        
 
Accounts payable
   $ 63,136     $ 49,645     $ 58,845  
 
Income taxes payable
     25,171       1,019       —  
 
Accrued liabilities
     84,312       79,628       75,234  
 
 
    
     
     
 
     
TOTAL CURRENT LIABILITIES
     172,619       130,292       134,079  
LONG-TERM DEBT
     100,000       100,000       100,000  
DEFERRED RENT UNDER LEASE COMMITMENTS
     20,436       19,542       19,983  
OTHER LIABILITIES
     18,672       13,354       17,483  
STOCKHOLDERS’ EQUITY:
                        
 
Common stock, $0.01 par value; 200,000,000 authorized;
                        
   
75,254,095 shares, 74,935,856 shares and 74,756,789 shares issued, respectively, and 58,325,887 shares, 60,382,406 shares and 62,130,737 shares outstanding, respectively
     753       749       748  
 
Additional paid-in capital
     386,768       378,955       375,246  
 
Retained earnings
     517,424       472,594       413,309  
 
Accumulated other comprehensive (loss) income
     (4,814 )     (5,508 )     (4,532 )
 
Restricted stock awards
     (382 )     (697 )     (1,047 )
 
Treasury stock, at cost; 16,928,208 shares, 14,553,450 shares and 12,626,052 shares, respectively
     (358,746 )     (278,217 )     (228,053 )
 
 
    
     
     
 
     
TOTAL STOCKHOLDERS’ EQUITY
     541,003       567,876       555,671  
 
 
    
     
     
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $ 852,730     $ 831,064     $ 827,216  
 
 
    
     
     
 

See notes to consolidated financial statements.

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Table of Contents

THE TALBOTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001
(Dollar amounts in thousands)

                       
          Twenty-Six Weeks Ended
         
          August 3,   August 4,
          2002   2001
         
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                
Net income
   $ 55,017     $ 57,929  
Adjustments to reconcile net income to net cash provided by operating activities:
                
   
Depreciation and amortization
     28,129       24,659  
   
Deferred rent
     894       209  
   
Net non-cash compensation activity
     330       355  
   
Loss on disposal of property and equipment
     1,751       2,038  
   
Tax benefit from options exercised
     2,393       4,214  
   
Deferred income taxes
     352       (2,639 )
   
Changes in other assets
     (682 )     (2,496 )
   
Changes in other liabilities
     5,318       4,149  
   
Changes in current assets and liabilities:
                
     
Customer accounts receivable
     12,018       (15,205 )
     
Merchandise inventories
     18,595       29,335  
     
Deferred catalog costs
     2,876       2,106  
     
Due from affiliates
     1,871       356  
     
Prepaid and other current assets
     (1,950 )     (4,988 )
     
Accounts payable
     13,526       (24,051 )
     
Income taxes payable
     24,149       —  
     
Accrued liabilities
     4,495       (16,728 )
 
    
     
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
     169,082       59,243  
 
    
     
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Additions to property and equipment, net of disposals
     (50,671 )     (55,579 )
 
    
     
 
 
NET CASH USED IN INVESTING ACTIVITIES
     (50,671 )     (55,579 )
 
    
     
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from options exercised
     5,410       4,716  
Cash dividends
     (10,187 )     (9,420 )
Purchase of treasury stock
     (80,529 )     (52,020 )
 
    
     
 
 
NET CASH USED IN FINANCING ACTIVITIES
     (85,306 )     (56,724 )
 
    
     
 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
     303       (161 )
 
    
     
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
     33,408       (53,221 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
     18,306       69,986  
 
    
     
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
   $ 51,714     $ 16,765  
 
    
     
 

See notes to consolidated financial statements.

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Table of Contents

THE TALBOTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In Thousands)

1. OPINION OF MANAGEMENT

         With respect to the unaudited consolidated financial statements set forth herein, it is the opinion of management of The Talbots, Inc. and its subsidiaries (the “Company”) that all adjustments, which consist only of normal recurring adjustments necessary to present a fair statement of the results for such interim periods, have been included. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended February 2, 2002, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated in consolidation.

         Certain prior year amounts have been reclassified to conform to current year classifications.

2. SEASONAL VARIATIONS IN BUSINESS

         Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year.

3. FEDERAL AND STATE INCOME TAXES

         The Company has provided for income taxes based on the estimated annual effective rate method. The Company’s effective tax rate was reduced in fiscal 2002 to 37.5% due to the impact of a reorganization of the Company’s Canadian operations completed in the fourth quarter of fiscal 2001, a decrease in the overall effective state tax rate and the discontinuation of amortization of non-deductible goodwill.

4. COMPREHENSIVE INCOME

         The following is the Company’s comprehensive income for the periods ended August 3, 2002 and August 4, 2001:

                                 
    Thirteen Weeks Ended   Twenty-Six Weeks Ended
   
 
    August 3, 2002   August 4, 2001   August 3, 2002   August 4, 2001
   
 
 
 
Net income
   $ 20,034     $ 17,816     $ 55,017     $ 57,929  
Other comprehensive income:
                                
Cumulative foreign currency translation adjustment
     474       (144 )     694       (874 )
 
    
     
     
     
 
Comprehensive income
   $ 20,508     $ 17,672     $ 55,711     $ 57,055  
 
    
     
     
     
 

6

Table of Contents

5. NET INCOME PER SHARE

         The weighted average shares used in computing basic and diluted net income per share are presented below. For the thirteen week periods ended August 3, 2002 and August 4, 2001, options to purchase 2,491 and 1,227 shares of common stock, respectively, were not included in the computation of diluted net income per share because the options’ exercise prices were greater than the average market price of the common shares. For the twenty-six week periods ended August 3, 2002 and August 4, 2001, 2,488 and 1,225 shares, respectively, were not included in the computation of diluted net income per share because the options’ exercise prices were greater than the average market price of the common shares.

                                 
    Thirteen Weeks Ended   Twenty-Six Weeks Ended
   
 
    August 3, 2002   August 4, 2001   August 3, 2002   August 4, 2001
   
 
 
 
Shares for computation of basic net income per share
     59,468       62,009       59,712       62,383  
Effect of stock compensation plans
     1,579       2,103       1,616