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 JULY 31, 2004

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 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.


Class		Outstanding as of September 3, 2004

Common Stock, $0.01 par value		55,164,099

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 JULY 31, 2004 AND AUGUST 2, 2003
(Amounts in thousands except per share data)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31,		August 2,		July 31,		August 2,
	2004		2003		2004		2003
NET SALES	$	409,385	$	389,624	$	828,369	$	784,615

COSTS AND EXPENSES:
Cost of sales, buying and occupancy		270,619		253,179		509,890		483,370
Selling, general and administrative		112,733		106,250		238,738		223,304

OPERATING INCOME		26,033		30,195		79,741		77,941

INTEREST:
Interest expense		493		636		977		1,383
Interest income		164		71		286		112

INTEREST EXPENSE — NET		329		565		691		1,271

INCOME BEFORE TAXES		25,704		29,630		79,050		76,670

INCOME TAXES		6,288		11,111		26,293		28,751

NET INCOME	$	19,416	$	18,519	$	52,757	$	47,919

NET INCOME PER SHARE:

Basic	$	0.35	$	0.33	$	0.94	$	0.85

Diluted	$	0.34	$	0.32	$	0.92	$	0.83

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in thousands):

Basic		55,581		56,390		55,977		56,693

Diluted		57,034		57,746		57,463		57,916

CASH DIVIDENDS PER SHARE	$	0.11	$	0.10	$	0.21	$	0.19

See accompanying notes to consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JULY 31, 2004, JANUARY 31, 2004 AND AUGUST 2, 2003
(Dollar amounts in thousands except share data)


	July 31,			January 31,			August 2,
	2004			2004			2003
	(unaudited)			(audited)			(unaudited)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	90,160		$	85,655		$	50,708
Customer accounts receivable — net		173,398			182,686			169,460
Merchandise inventories		203,223			170,447			166,865
Deferred catalog costs		4,824			4,449			4,716
Due from affiliates		8,943			10,046			9,657
Deferred income taxes		13,418			13,664			11,750
Prepaid and other current assets		45,612			29,207			35,495

TOTAL CURRENT ASSETS		539,578			496,154			448,651

PROPERTY AND EQUIPMENT — NET		337,057			337,417			324,071
GOODWILL — NET		35,513			35,513			35,513
TRADEMARKS — NET		75,884			75,884			75,884
OTHER ASSETS		15,319			13,424			11,655

TOTAL ASSETS	$	1,003,351		$	958,392		$	895,774

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	59,820		$	50,058		$	46,103
Income taxes payable		35,059			15,043			27,596
Accrued liabilities		93,903			101,041			83,889

TOTAL CURRENT LIABILITIES		188,782			166,142			157,588

LONG-TERM DEBT		100,000			100,000			100,000
DEFERRED RENT UNDER LEASE COMMITMENTS		25,085			23,897			22,161
DEFERRED INCOME TAXES		16,929			10,540			3,446
OTHER LIABILITIES		51,081			41,687			40,141

STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value; 200,000,000 authorized; 76,917,833 shares, 76,245,075 shares and 75,788,244 shares issued, respectively, and 55,975,835 shares, 56,675,506 shares and 56,633,870 shares outstanding, respectively		769			762			758
Additional paid-in capital		432,424			411,874			401,250
Retained earnings		696,208			655,288			609,852
Accumulated other comprehensive loss		(14,300	)		(14,601	)		(14,709	)
Deferred compensation		(15,042	)		(6,154	)		(6,984	)
Treasury stock, at cost; 20,941,998 shares, 19,569,569 shares and 19,154,374 shares, respectively		(478,585	)		(431,043	)		(417,729	)

TOTAL STOCKHOLDERS’ EQUITY		621,474			616,126			572,438

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,003,351		$	958,392		$	895,774

See accompanying notes to consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED JULY 31, 2004 AND AUGUST 2, 2003
(Dollar amounts in thousands)


	Twenty-Six Weeks Ended
	July 31,			August 2,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income	$	52,757		$	47,919
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		34,624			31,603
Deferred rent		1,187			1,452
Amortization of deferred compensation		2,089			774
Loss on disposal of property and equipment		781			1,403
Tax benefit from options exercised		2,397			1,540
Deferred income taxes		6,641			(935	)
Changes in other assets		(1,895	)		(2,252	)
Changes in other liabilities		9,394			7,442
Changes in current assets and liabilities:
Customer accounts receivable		9,293			11,776
Merchandise inventories		(32,753	)		8,627
Deferred catalog costs		(375	)		1,161
Due from affiliates		1,103			(864	)
Prepaid and other current assets		(16,276	)		(6,538	)
Accounts payable		9,754			(2,266	)
Income taxes payable		20,018			16,004
Accrued liabilities		(7,147	)		(4,170	)

NET CASH PROVIDED BY OPERATING ACTIVITIES		91,592			112,676

CASH FLOWS FROM INVESTING ACTIVITIES:

Additions to property and equipment		(34,862	)		(42,300	)
Proceeds from disposal of property and equipment		—			707

NET CASH USED IN INVESTING ACTIVITIES		(34,862	)		(41,593	)

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from options exercised		6,942			2,633
Cash dividends		(11,837	)		(10,807	)
Purchase of treasury stock		(47,303	)		(38,024	)

NET CASH USED IN FINANCING ACTIVITIES		(52,198	)		(46,198	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(27	)		257

NET INCREASE IN CASH AND CASH EQUIVALENTS		4,505			25,142
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		85,655			25,566

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	90,160		$	50,708

See accompanying notes to consolidated financial statements.

THE TALBOTS, INC. AND SUBSIDIARIES

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

1. BASIS OF PRESENTATION

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 the interim periods, have been included. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the fiscal year ended January 31, 2004, 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.

2. FEDERAL AND STATE INCOME TAXES

The Company has provided for income taxes based on the estimated annual effective rate method. The effective tax rate during the thirteen and twenty-six weeks ended July 31, 2004 was impacted by an income tax benefit of $3.4 million from a favorable resolution with the Joint Committee on Taxation during the month of July of certain income tax issues relating to fiscal years 1993 and 1994. In August of 2004 the Company received notice from the Joint Committee on Taxation that similar issues related to fiscal years 1995, 1996 and 1997 had also been favorably resolved. The Company currently expects to record a benefit of $0.02 per diluted share during the third quarter of fiscal 2004 relating to fiscal years 1995 through 1997.

3. COMPREHENSIVE INCOME

The following is the Company’s comprehensive income for the periods ended July 31, 2004 and August 2, 2003:


	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	July 31,		August 2,			July 31,		August 2,
	2004		2003			2004		2003
Net income	$	19,416	$	18,519		$	52,757	$	47,919
Other comprehensive income:
Cumulative foreign currency translation adjustment		1,209		(7	)		301		728

Comprehensive income	$	20,625	$	18,512		$	53,058	$	48,647

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 Statement of Financial Accounting Standards 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						Twenty-Six Weeks Ended
	July 31,			August 2,			July 31,			August 2,
	2004			2003			2004			2003
Net income, as reported	$	19,416		$	18,519		$	52,757		$	47,919
Add: stock-based compensation included in reported net income, net of related tax effects		773			242			1,305			410
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects		(2,376	)		(3,861	)		(5,017	)		(6,858	)

Pro forma net income	$	17,813		$	14,900		$	49,045		$	41,471

Earnings per share:
Basic-as reported	$	0.35		$	0.33		$	0.94		$	0.85

Basic-pro forma	$	0.32		$	0.26		$	0.88		$	0.73

Diluted-as reported	$	0.34		$	0.32		$	0.92		$	0.83

Diluted-pro forma	$	0.31		$	0.26		$	0.85		$	0.72

During the first quarter of fiscal 2004 and 2003, the Company issued 298,075 shares and 307,125 shares, respectively, of performance accelerated restricted stock, with a total market value at grant date of approximately $10.1 million and $7.7 million, respectively, to key employees of the Company under the Company’s shareholder-approved 2003 Executive Stock Based Incentive Plan.

During the second quarter of fiscal 2004, the Company issued 32,000 restricted stock units (“RSUs”) with an aggregate fair value at grant date of $1.1 million to the non-management directors on the Company’s Board of Directors under the Company’s shareholder-approved Restated Directors Stock Plan. The fair value of the RSUs has been recorded as deferred compensation and is being amortized as compensation expense over the vesting period, which is one year. The RSUs may be mandatorily or electively deferred, in which case the RSUs will be issued as common stock to the holder upon retirement from the Board, but not before vesting. If the RSUs are not deferred, then the RSUs will be issued as common stock upon vesting. Holders of RSUs are entitled to dividends equivalent to common stock dividends. Holders of RSUs do not have voting rights.

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 weeks ended July 31, 2004 and August 2, 2003, options to purchase 2,280,081 and 2,417,349 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 and their effect would be anti-dilutive. For the twenty-six weeks ended July 31, 2004 and August 2, 2003, options to purchase 2,280,081 and 2,536,049 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 and their effect would be anti-dilutive.


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31,		August 2,		July 31,		August 2,
	2004		2003		2004		2003
Shares for computation of basic net income per share		55,581		56,390		55,977		56,693
Effect of stock compensation plans		1,453		1,356		1,486		1,223

Shares for computation of diluted net income per share		57,034		57,746		57,463		57,916

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 online 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 & shoes, through its retail stores, while the Catalog Segment derives its revenues through its approximately 24 distinct catalog mailings per year and online 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 and twenty-six weeks ended July 31, 2004 and August 2, 2003:


	Thirteen Weeks Ended
	July 31, 2004						August 2, 2003
	Stores		Catalog		Total		Stores		Catalog		Total
Net sales	$	354,886	$	54,499	$	409,385	$	339,389	$	50,235	$	389,624
Direct profit		45,368		8,029		53,397		53,196		7,182		60,378


	Twenty-Six Weeks Ended
	July 31, 2004						August 2, 2003
	Stores		Catalog		Total		Stores		Catalog		Total
Net sales	$	708,234	$	120,135	$	828,369	$	668,557	$	116,058	$	784,615
Direct profit		115,206		25,716		140,922		118,869		22,984		141,853

The following reconciles direct profit to consolidated net income for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003:


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31,		August 2,		July 31,		August 2,
	2004		2003		2004		2003
Total direct profit for reportable segments	$	53,397	$	60,378	$	140,922	$	141,853
Less: indirect expenses		27,364		30,183		61,181		63,912

Operating income		26,033		30,195		79,741		77,941
Interest expense, net		329		565		691		1,271

Income before taxes		25,704		29,630		79,050		76,670
Income taxes		6,288		11,111		26,293		28,751

Consolidated net income	$	19,416	$	18,519	$	52,757	$	47,919

7. EMPLOYEE BENEFIT PLANS

Net periodic benefit cost is comprised of the following components for the thirteen and twenty-six weeks ended July 31, 2004 and August 2, 2003:

The components of the Company’s Pension Plan expense are as follows:


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 31,			August 2,			July 31,			August 2,
	2004			2003			2004			2003
Service cost	$	2,010		$	1,652		$	4,020		$	3,305
Interest cost		1,455			1,235			2,910			2,470
Expected return on plan assets		(1,490	)		(1,287	)		(2,980	)		(2,575	)
Net amortization and deferral		772			501			1,544			1,002

Net periodic benefit cost	$	2,747		$	2,101		$	5,494		$	4,202

The components of the Company’s SERP expense are as follows:


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31,		August 2,		July 31,		August 2,
	2004		2003		2004		2003
Service cost	$	190	$	157	$	380	$	315
Interest cost		191		160		382		320
Expected return on plan assets		—		7		—		14
Net amortization and deferral		85		61		170		122

Net periodic benefit cost	$	466	$	385	$	932	$	771

The components of the Company’s Postretirement Medical Plan expense are as follows:


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 31,		August 2,		July 31,		August 2,
	2004		2003		2004		2003
Service cost	$	151	$	113	$	302	$	226
Interest cost		75		63		150		126
Expected return on plan assets		—		—		—		—
Net amortization and deferral		5		—		10		—

Net periodic benefit cost</


EX-10.30 Directors Deferred Compensation Plan
EX-31.1 Section 302 Certification of C.E.O.
EX-31.2 Section 302 Certification of C.F.O.
EX-32 Section 906 Certification

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