TALBOTS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 3, 2003

Commission file number: 1-12552

THE TALBOTS, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		41-1111318 (I.R.S. Employer Identification No.)


One Talbots Drive, Hingham, Massachusetts (Address of principal executive offices)		02043 (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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)


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.


		Outstanding as of
Class Common Stock, $0.01 par value		June 2, 2003 56,854,202

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONSOLIDATED STATEMENTS OF EARNINGS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX-99.1 SECTION 906 CERTIFICATION
EX-99.2 SECTION 906 CERTIFICATION

INDEX TO FORM 10-Q


			Page

PART I. FINANCIAL INFORMATION
	Item 1: Financial Statements
		Consolidated Statements of Earnings for the Thirteen Weeks Ended May 3, 2003 and May 4, 2002		3
		Consolidated Balance Sheets as of May 3, 2003, February 1, 2003 and May 4, 2002		4
		Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 3, 2003 and May 4, 2002		5
		Notes to Consolidated Financial Statements		6-9
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			10-13
	Item 3: Quantitative and Qualitative Disclosures About Market Risk			13
	Item 4: Controls and Procedures			14
PART II. OTHER INFORMATION
	Item 6:Exhibits and Reports on Form 8-K			15
	Signatures			16
	Certifications			17-18

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE TALBOTS, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
               FOR THE THIRTEEN WEEKS ENDED MAY 3, 2003 AND MAY 4, 2002
                (Dollar amounts in thousands except per share data)


		Thirteen Weeks Ended

		May 3,		May 4,
		2003		2002

NET SALES		$	394,991	$	391,328
COSTS AND EXPENSES
	Cost of sales, buying and occupancy		230,191		221,122
	Selling, general and administrative		117,054		113,401

OPERATING INCOME			47,746		56,805
INTEREST
	Interest expense		747		921
	Interest income		41		88

INTEREST EXPENSE - net			706		833

INCOME BEFORE TAXES			47,040		55,972
INCOME TAXES			17,640		20,989

NET INCOME		$	29,400	$	34,983

NET INCOME PER SHARE:
	BASIC	$	0.52	$	0.58

	ASSUMING DILUTION	$	0.51	$	0.57

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in thousands):
	BASIC		56,995		59,957

	ASSUMING DILUTION		58,074		61,609

CASH DIVIDENDS PER SHARE		$	0.09	$	0.08

See notes to consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)
MAY 3, 2003, FEBRUARY 1, 2003 AND MAY 4, 2002
(Dollar amounts in thousands except share data)


			May 3,			February 1,			May 4,
			2003			2003			2002

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	5,905		$	25,566		$	41,360
	Customer accounts receivable - net			191,445			181,189			182,465
	Merchandise inventories			204,480			175,289			175,301
	Deferred catalog costs			4,908			5,877			4,904
	Due from affiliates			9,150			8,793			8,618
	Deferred income taxes			11,163			10,255			8,269
	Prepaid and other current assets			30,621			28,929			27,719

		Total current assets		457,672			435,898			448,636
PROPERTY AND EQUIPMENT - net				320,932			315,227			290,955
GOODWILL - net				35,513			35,513			35,513
TRADEMARKS - net				75,884			75,884			75,884
DEFERRED INCOME TAXES				—			—			3,346
OTHER ASSETS				10,191			9,403			10,241

TOTAL ASSETS			$	900,192		$	871,925		$	864,575

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Notes payable to banks		$	9,000		$	—		$	7,500
	Accounts payable			43,377			48,365			32,539
	Accrued income taxes			25,015			11,590			19,240
	Accrued liabilities			95,077			87,986			84,216

		Total current liabilities		172,469			147,941			143,495
LONG-TERM DEBT				100,000			100,000			100,000
DEFERRED RENT UNDER LEASE COMMITMENTS				21,479			20,688			20,232
DEFERRED INCOME TAXES				3,435			2,921			—
OTHER LIABILITIES				35,787			32,699			16,988
COMMITMENTS
STOCKHOLDERS’ EQUITY:
	Common stock, $0.01 par value; 200,000,000 authorized; 75,580,138, 75,270,013 and 75,066,693 shares issued, respectively, and 56,838,788, 57,505,802 and 60,022,837 shares outstanding, respectively			756			753			751
	Additional paid-in capital			397,130			389,402			382,210
	Retained earnings			597,018			572,741			502,767
	Accumulated other comprehensive income (loss)			(14,702	)		(15,437	)		(5,288	)
	Restricted stock awards			(7,376	)		(78	)		(539	)
	Treasury stock, at cost: 18,741,350, 17,764,211 and 15,043,856 shares, respectively			(405,804	)		(379,705	)		(296,041	)

		Total stockholders’ equity		567,022			567,676			583,860

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$	900,192		$	871,925		$	864,575

See notes to consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THIRTEEN WEEKS ENDED MAY 3, 2003 AND MAY 4, 2002
(Dollar amounts in thousands)


			Thirteen Weeks Ended

			May 3,			May 4,
			2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income			$	29,400		$	34,983
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			16,103			14,016
	Deferred rent			771			686
	Net non-cash compensation activity			382			158
	Loss on disposal of property and equipment			632			950
	Deferred income taxes			(362	)		223
	Changes in other assets			(788	)		(1,307	)
	Change in other liabilities			3,088			3,634
	Tax benefit from options exercised			14			814
	Changes in current assets and liabilities:
		Customer accounts receivable		(10,214	)		(10,263	)
		Merchandise inventories		(28,973	)		8,653
		Deferred catalog costs		969			3,437
		Due from affiliates		(357	)		1,000
		Prepaid and other current assets		(1,519	)		1,195
		Accounts payable		(5,004	)		(17,134	)
		Accrued income taxes		13,423			18,218
		Accrued liabilities		7,024			4,531

	Net cash provided by operating activities			24,589			63,794

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net of disposals				(22,212	)		(28,189	)

	Net cash used in investing activities			(22,212	)		(28,189	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under notes payable to banks				9,000			7,500
Proceeds from options exercised				37			2,443
Cash dividends				(5,122	)		(4,809	)
Purchase of treasury stock				(26,099	)		(17,824	)

	Net cash used in financing activities			(22,184	)		(12,690	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH				146			139

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS				(19,661	)		23,054
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD				25,566			18,306

CASH AND CASH EQUIVALENTS, END OF PERIOD			$	5,905		$	41,360

See notes to consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Dollar amounts in thousands except share data)

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. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Because of the seasonality of the specialty retail business, operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended February 1, 2003, 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. FEDERAL AND STATE INCOME TAXES

The Company has provided for income taxes based on the estimated annual effective rate method.

3. COMPREHENSIVE INCOME

The following is the Company’s comprehensive income for the periods ended May 3, 2003 and May 4, 2002:


		Thirteen Weeks Ended

		May 3, 2003		May 4, 2002

Net income		$	29,400	$	34,983
Other comprehensive income:
	Cumulative foreign currency translation adjustment		735		220

Comprehensive income		$	30,135	$	35,203

4. STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which has not required the Company to record any

compensation expense. Had the Company used the fair value method to value compensation, as set forth in SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share would have been reported as follows:


	Thirteen Weeks Ended

	May 3, 2003		May 4, 2002

Reported net income	$	29,400	$	34,983
Less: Impact of stock options expense, net of tax		3,489		4,277

Adjusted net income	$	25,911	$	30,706

Reported earnings per share – basic	$	0.52	$	0.58
Less: Impact of stock options expense, net of tax		0.06		0.07

Adjusted earnings per share – basic	$	0.46	$	0.51

Reported diluted earnings per share	$	0.51	$	0.57
Add: Impact of stock options expense, net of tax		0.06		0.07

Adjusted diluted earnings per share	$	0.45	$	0.50

The fair value of options on their grant date is measured using the Black Scholes option pricing model. The estimated weighted average fair value of options granted during the thirteen weeks ended May 3, 2003 and May 4, 2002 were $11.44 and $20.05 per option, respectively. Key assumptions used to apply this pricing model are as follows:


	May 3, 2003			May 4, 2002

Weighted average risk free interest rate		3.7	%		5.2	%
Weighted average expected life of option grants	6.15 years			6.25 years
Weighted average expected volatility of underlying stock		50.4	%		58.5	%
Weighted average expected dividend payment rate, as a percentage of the stock price on the date of grant		1.6	%		1.0	%

The option pricing model used was designed to value readily tradable stock options with relatively short lives and no vesting restrictions. In addition, option valuation models require the input of highly subjective assumptions including the expected price volatility. Because the options granted to employees are not tradable and have contractual lives of ten years and changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the models do not necessarily provide a reliable measure of fair value of the options granted under the Company’s equity compensation plans.

During the first quarter of fiscal 2003, the Company issued 307,125 restricted shares with a total market value of $7.7 million to members of Company management under its 2003 Stock Based Incentive Plan.

5. NET INCOME PER SHARE

The weighted average shares used in computing basic and diluted net income per share are presented below. Options to purchase 2,555,698 and 2,454,666 shares of common stock were outstanding during the thirteen-week periods ended May 3, 2003 and May 4, 2002, respectively, but were not included in the computation of diluted net income per share because the options’ exercise prices were greater than the average market prices of the common shares.


	Thirteen Weeks Ended
	(in thousands)

	May 3, 2003		May 4, 2002

Shares for computation of basic net income per share		56,995		59,957
Effect of stock compensation plans		1,079		1,652

Shares for computation of diluted net income per share		58,074		61,609

6. SEGMENT INFORMATION

The Company has segmented its operations in a manner that reflects how its chief operating decision-maker reviews the results of the operating segments that make up the consolidated entity.

The Company has two reportable segments, its retail stores (the “Stores Segment”), which include the Company’s United States, Canada and United Kingdom retail store operations, and its catalog operations (the “Catalog Segment”), which includes both catalog and internet operations.

The Company’s reportable segments offer similar products; however, each segment requires different marketing and management strategies. The Stores Segment derives its revenues from the sale of women’s, children’s and men’s classic apparel, accessories and shoes, through its retail stores, while the Catalog Segment derives its revenues through its approximately 26 distinct catalog mailings and through its e-commerce site at www.talbots.com.

The Company evaluates the operating performance of its identified segments based on a direct profit measure. The accounting policies of the segments are generally the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K, except as follows: direct profit is calculated as net sales less cost of goods sold and direct expenses, such as payroll, occupancy and other direct costs. Indirect expenses are not allocated on a segment basis; therefore, no measure of segment net income or loss is available. Assets are not allocated between segments; therefore, no measure of segment assets is available.

The following is the Stores Segment and Catalog Segment information for the thirteen weeks ended May 3, 2003 and May 4, 2002:


	May 3, 2003

	Stores		Catalog		Total

Sales to external customers	$	329,168	$	65,823	$	394,991
Direct profit		65,673		15,802		81,475

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