UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 2003
Commission file number: 1-12552
THE TALBOTS, INC.
| Delaware | 41-1111318 | |
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| One Talbots Drive, Hingham, Massachusetts | 02043 | |
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| (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 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 | December 5, 2003 | |
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| Common Stock, $0.01 par value | 56,614,942 |
INDEX TO FORM 10-Q
| Page | ||||||
PART I. FINANCIAL INFORMATION |
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Item 1: Financial Statements (Unaudited) |
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Consolidated Statements of Earnings for the
Thirteen and Thirty-Nine Weeks Ended
November 1, 2003 and November 2, 2002 |
3 | |||||
Consolidated Balance Sheets as of November 1,
2003, February 1, 2003 and
November 2, 2002 |
4 | |||||
Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended November 1, 2003 and November 2, 2002 |
5 | |||||
Notes to Consolidated
Financial Statements |
6-9 | |||||
Item 2: Management’s Discussion and Analysis
of Financial Condition and Results of
Operations |
10-15 | |||||
Item 3: Quantitative and Qualitative Disclosures About Market Risk |
16 | |||||
Item 4: Controls and Procedures |
16 | |||||
PART II. OTHER INFORMATION |
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Item 6: Exhibits and Reports on Form 8-K |
17 | |||||
Signatures |
18 | |||||
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE TALBOTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED NOVEMBER 1, 2003 AND NOVEMBER 2, 2002
(Amounts in thousands except per share data)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||
| November 1, | November 2, | November 1, | November 2, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
NET SALES |
$ | 408,148 | $ | 401,789 | $ | 1,192,764 | $ | 1,163,524 | |||||||||
COSTS AND EXPENSES: |
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Cost of sales, buying and occupancy |
233,974 | 224,896 | 717,344 | 681,596 | |||||||||||||
Selling, general and administrative |
118,055 | 116,333 | 341,360 | 331,966 | |||||||||||||
OPERATING INCOME |
56,119 | 60,560 | 134,060 | 149,962 | |||||||||||||
INTEREST: |
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Interest expense |
525 | 783 | 1,907 | 2,424 | |||||||||||||
Interest income |
76 | 75 | 188 | 341 | |||||||||||||
INTEREST EXPENSE - NET |
449 | 708 | 1,719 | 2,083 | |||||||||||||
INCOME BEFORE TAXES |
55,670 | 59,852 | 132,341 | 147,879 | |||||||||||||
INCOME TAXES |
20,876 | 22,445 | 49,628 | 55,455 | |||||||||||||
NET INCOME |
$ | 34,794 | $ | 37,407 | $ | 82,713 | $ | 92,424 | |||||||||
NET INCOME PER SHARE: |
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Basic |
$ | 0.62 | $ | 0.64 | $ | 1.46 | $ | 1.56 | |||||||||
Assuming Dilution |
$ | 0.60 | $ | 0.63 | $ | 1.43 | $ | 1.52 | |||||||||
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (in thousands): |
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Basic |
56,363 | 58,100 | 56,583 | 59,175 | |||||||||||||
Assuming dilution |
57,966 | 59,433 | 57,947 | 60,705 | |||||||||||||
CASH DIVIDENDS DECLARED PER SHARE |
$ | 0.20 | $ | 0.18 | $ | 0.39 | $ | 0.35 | |||||||||
See notes to consolidated financial statements.
3
THE TALBOTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
NOVEMBER 1, 2003, FEBRUARY 1, 2003 AND NOVEMBER 2, 2002
(Dollar amounts in thousands except share data)
| November 1, | February 1, | November 2, | ||||||||||||
| 2003 | 2003 | 2002 | ||||||||||||
ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ | 26,593 | $ | 25,566 | $ | 23,714 | ||||||||
Customer accounts receivable - net |
198,236 | 181,189 | 190,402 | |||||||||||
Merchandise inventories |
215,910 | 175,289 | 216,394 | |||||||||||
Deferred catalog costs |
6,020 | 5,877 | 7,229 | |||||||||||
Due from affiliates |
10,653 | 8,793 | 7,541 | |||||||||||
Deferred income taxes |
12,285 | 10,255 | 13,259 | |||||||||||
Prepaid and other current assets |
34,690 | 28,929 | 30,361 | |||||||||||
TOTAL CURRENT ASSETS |
504,387 | 435,898 | 488,900 | |||||||||||
PROPERTY AND EQUIPMENT - NET |
329,869 | 315,227 | 308,415 | |||||||||||
GOODWILL - NET |
35,513 | 35,513 | 35,513 | |||||||||||
TRADEMARKS - NET |
75,884 | 75,884 | 75,884 | |||||||||||
OTHER ASSETS |
12,295 | 9,403 | 8,726 | |||||||||||
TOTAL ASSETS |
$ | 957,948 | $ | 871,925 | $ | 917,438 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Notes payable to banks |
$ | 9,000 | $ | — | $ | 50,000 | ||||||||
Accounts payable |
49,360 | 48,365 | 54,207 | |||||||||||
Accrued income taxes |
32,115 | 11,590 | 27,307 | |||||||||||
Accrued liabilities |
103,257 | 87,986 | 95,319 | |||||||||||
TOTAL CURRENT LIABILITIES |
193,732 | 147,941 | 226,833 | |||||||||||
LONG-TERM DEBT |
100,000 | 100,000 | 100,000 | |||||||||||
DEFERRED RENT UNDER LEASE COMMITMENTS |
23,239 | 20,688 | 20,652 | |||||||||||
DEFERRED INCOME TAXES |
5,116 | 2,921 | 2,875 | |||||||||||
OTHER LIABILITIES |
36,658 | 32,699 | 19,574 | |||||||||||
STOCKHOLDERS’ EQUITY: |
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Common stock, $0.01 par value; 200,000,000 authorized;
75,836,855 shares, 75,270,013 shares and 75,268,013 shares
issued, respectively, and 56,678,124 shares, 57,505,802 shares
and 57,507,177 shares outstanding, respectively |
758 | 753 | 753 | |||||||||||
Additional paid-in capital |
402,541 | 389,402 | 386,992 | |||||||||||
Retained earnings |
633,311 | 572,741 | 544,406 | |||||||||||
Accumulated other comprehensive loss |
(13,047 | ) | (15,437 | ) | (4,818 | ) | ||||||||
Restricted stock awards |
(6,509 | ) | (78 | ) | (225 | ) | ||||||||
Treasury stock, at cost; 19,158,731 shares, 17,764,211 shares
and 17,760,836 shares, respectively |
(417,851 | ) | (379,705 | ) | (379,604 | ) | ||||||||
TOTAL STOCKHOLDERS’ EQUITY |
599,203 | 567,676 | 547,504 | |||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 957,948 | $ | 871,925 | $ | 917,438 | ||||||||
See notes to consolidated financial statements.
4
THE TALBOTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THIRTY-NINE WEEKS ENDED NOVEMBER 1, 2003 AND NOVEMBER 2, 2002
(Dollar amounts in thousands)
| Thirty-Nine Weeks Ended | |||||||||||
| November 1, | November 2, | ||||||||||
| 2003 | 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 82,713 | $ | 92,424 | |||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
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Depreciation and amortization |
48,815 | 42,647 | |||||||||
Deferred rent |
2,509 | 1,104 | |||||||||
Net non-cash compensation activity |
1,249 | 487 | |||||||||
Loss on disposal of property and equipment |
2,040 | 2,621 | |||||||||
Tax benefit from options exercised |
1,795 | 2,473 | |||||||||
Deferred income taxes |
273 | 1,479 | |||||||||
Changes in other assets |
(2,892 | ) | 208 | ||||||||
Changes in other liabilities |
3,959 | 6,220 | |||||||||
Changes in current assets and liabilities: |
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Customer accounts receivable |
(16,931 | ) | (18,178 | ) | |||||||
Merchandise inventories |
(39,998 | ) | (32,305 | ) | |||||||
Deferred catalog costs |
(143 | ) | 1,112 | ||||||||
Due from affiliates |
(1,860 | ) | 2,077 | ||||||||
Prepaid and other current assets |
(5,509 | ) | (2,199 | ) | |||||||
Accounts payable |
947 | 5,277 | |||||||||
Income taxes payable |
20,527 | 26,284 | |||||||||
Accrued liabilities |
9,367 | 10,392 | |||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
106,861 | 142,123 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
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Additions to property and equipment |
(65,466 | ) | (75,754 | ) | |||||||
Proceeds from disposals of property of equipment |
807 | 2 | |||||||||
NET CASH USED IN INVESTING ACTIVITIES |
(64,659 | ) | (75,752 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings under notes payable to banks |
9,000 | 50,000 | |||||||||
Proceeds from options exercised |
3,670 | 5,552 | |||||||||
Cash dividends paid |
(16,474 | ) | (15,436 | ) | |||||||
Purchase of treasury stock |
(38,146 | ) | (101,387 | ) | |||||||
NET CASH USED IN FINANCING ACTIVITIES |
(41,950 | ) | (61,271 | ) | |||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
775 | 308 | |||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
1,027 | 5,408 | |||||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
25,566 | 18,306 | |||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 26,593 | $ | 23,714 | |||||||
See notes to consolidated financial statements.
5
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. 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 November 1, 2003 and November 2, 2002: |
| Thirteen | Thirty-Nine | |||||||||||||||
| Weeks Ended | Weeks Ended | |||||||||||||||
| November 1, | November 2, | November 1, | November 2, | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net income |
$ | 34,794 | $ | 37,407 | $ | 82,713 | $ | 92,424 | ||||||||
Other comprehensive income: |
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Cumulative foreign currency
translation adjustment |
1,662 | (4 | ) | 2,390 | 690 | |||||||||||
Comprehensive income |
$ | 36,456 | $ | 37,403 | $ | 85,103 | $ | 93,114 | ||||||||
6
| 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.” 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 | Thirty-Nine | ||||||||||||||||
| Weeks Ended | Weeks Ended | ||||||||||||||||
| November 1, | November 2, | November 1, | November 2, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income, as reported |
$ | 34,794 | $ | 37,407 | $ | 82,713 | $ | 92,424 | |||||||||
Add: stock-based
compensation included
in reported net
income, net of related
tax effects |
248 | 98 | 658 | 295 | |||||||||||||
Deduct: total
stock-based
compensation
expense determined
under fair value
based method,
net of related tax
effects |
(4,159 | ) | (4,897 | ) | (12,137 | ) | (14,162 | ) | |||||||||
Proforma net income |
$ | 30,883 | $ | 32,608 | $ | 71,234 | $ | 78,557 | |||||||||
Earnings per share: |
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