UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 2004
Commission file number: 1-12552
THE TALBOTS, INC.
| 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
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)
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 6, 2004 |
|||
Common Stock, $0.01 par value |
54,126,667 | |||
INDEX TO FORM 10-Q
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| 19 | ||||||||
| 20 | ||||||||
| 21 | ||||||||
| Ex-31.1 Section 302 Certification of CEO | ||||||||
| Ex-31.2 Section 302 Certification of CFO | ||||||||
| Ex-32 Section 906 Certification of CEO/CFO | ||||||||
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 OCTOBER 30, 2004 AND NOVEMBER 1, 2003
(Amounts in thousands except per share data)
| Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
|||||||||||||||
| October 30, | November 1, | October 30, | November 1, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
NET SALES |
$ | 421,170 | $ | 408,148 | $ | 1,249,539 | $ | 1,192,764 | ||||||||
COSTS AND EXPENSES: |
||||||||||||||||
Cost of sales, buying and occupancy |
261,119 | 233,974 | 771,009 | 717,344 | ||||||||||||
Selling, general and administrative |
122,443 | 118,055 | 361,181 | 341,360 | ||||||||||||
OPERATING INCOME |
37,608 | 56,119 | 117,349 | 134,060 | ||||||||||||
INTEREST: |
||||||||||||||||
Interest expense |
728 | 525 | 1,705 | 1,907 | ||||||||||||
Interest income |
116 | 76 | 402 | 188 | ||||||||||||
INTEREST
EXPENSE - NET |
612 | 449 | 1,303 | 1,719 | ||||||||||||
INCOME BEFORE TAXES |
36,996 | 55,670 | 116,046 | 132,341 | ||||||||||||
INCOME TAXES |
9,390 | 20,876 | 35,683 | 49,628 | ||||||||||||
NET INCOME |
$ | 27,606 | $ | 34,794 | $ | 80,363 | $ | 82,713 | ||||||||
NET INCOME PER SHARE: |
||||||||||||||||
Basic |
$ | 0.51 | $ | 0.62 | $ | 1.45 | $ | 1.46 | ||||||||
Diluted |
$ | 0.50 | $ | 0.60 | $ | 1.42 | $ | 1.43 | ||||||||
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (in thousands): |
||||||||||||||||
Basic |
54,376 | 56,363 | 55,444 | 56,583 | ||||||||||||
Diluted |
55,364 | 57,966 | 56,780 | 57,947 | ||||||||||||
CASH DIVIDENDS DECLARED PER SHARE |
$ | 0.11 | $ | 0.20 | $ | 0.32 | $ | 0.39 | ||||||||
See accompanying notes to consolidated financial statements.
3
THE TALBOTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 30, 2004, JANUARY 31, 2004 AND NOVEMBER 1, 2003
(Amounts in thousands except share and per share data)
| October 30, | January 31, | November 1, | ||||||||||
| 2004 |
2004 |
2003 |
||||||||||
| (unaudited) | (audited) | (unaudited) | ||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 7,065 | $ | 85,655 | $ | 26,593 | ||||||
Customer
accounts receivable - net |
207,250 | 182,686 | 198,236 | |||||||||
Merchandise inventories |
263,351 | 170,447 | 215,910 | |||||||||
Deferred catalog costs |
6,661 | 4,449 | 6,020 | |||||||||
Due from affiliates |
9,589 | 10,046 | 10,653 | |||||||||
Deferred income taxes |
15,698 | 13,664 | 12,285 | |||||||||
Prepaid and other current assets |
50,895 | 29,207 | 34,690 | |||||||||
TOTAL CURRENT ASSETS |
560,509 | 496,154 | 504,387 | |||||||||
PROPERTY
AND EQUIPMENT - NET |
338,864 | 337,417 | 329,869 | |||||||||
GOODWILL - NET |
35,513 | 35,513 | 35,513 | |||||||||
TRADEMARKS - NET |
75,884 | 75,884 | 75,884 | |||||||||
OTHER ASSETS |
15,324 | 13,424 | 12,295 | |||||||||
TOTAL ASSETS |
$ | 1,026,094 | $ | 958,392 | $ | 957,948 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Notes payable to banks |
$ | 35,000 | $ | — | $ | 9,000 | ||||||
Accounts payable |
61,774 | 50,058 | 49,360 | |||||||||
Income taxes payable |
35,876 | 15,043 | 32,115 | |||||||||
Accrued liabilities |
108,695 | 101,041 | 103,257 | |||||||||
TOTAL CURRENT LIABILITIES |
241,345 | 166,142 | 193,732 | |||||||||
LONG-TERM DEBT |
100,000 | 100,000 | 100,000 | |||||||||
DEFERRED RENT UNDER LEASE COMMITMENTS |
25,652 | 23,897 | 23,239 | |||||||||
DEFERRED INCOME TAXES |
15,380 | 10,540 | 5,116 | |||||||||
OTHER LIABILITIES |
46,752 | 41,687 | 36,658 | |||||||||
STOCKHOLDERS’ EQUITY: |
||||||||||||
Common stock, $0.01 par value; 200,000,000 authorized;
76,934,499 shares, 76,245,075 shares and 75,836,855 shares
issued, respectively, and 54,121,032 shares, 56,675,506 shares
and 56,678,124 shares outstanding, respectively |
769 | 762 | 758 | |||||||||
Additional paid-in capital |
432,796 | 411,874 | 402,541 | |||||||||
Retained earnings |
717,746 | 655,288 | 633,311 | |||||||||
Accumulated other comprehensive loss |
(9,271 | ) | (14,601 | ) | (13,047 | ) | ||||||
Deferred compensation |
(13,453 | ) | (6,154 | ) | (6,509 | ) | ||||||
Treasury stock, at cost; 22,813,467 shares, 19,569,569 shares
and 19,158,731 shares, respectively |
(531,622 | ) | (431,043 | ) | (417,851 | ) | ||||||
TOTAL STOCKHOLDERS’ EQUITY |
596,965 | 616,126 | 599,203 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 1,026,094 | $ | 958,392 | $ | 957,948 | ||||||
See accompanying notes to consolidated financial statements.
4
THE TALBOTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 2004 AND NOVEMBER 1, 2003
(Amounts in thousands)
| Thirty-Nine Weeks Ended |
||||||||
| October 30, | November 1, | |||||||
| 2004 |
2003 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 80,363 | $ | 82,713 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
53,564 | 48,815 | ||||||
Deferred rent |
1,722 | 2,509 | ||||||
Amortization of deferred compensation |
3,324 | 1,249 | ||||||
Loss on disposal of property and equipment |
1,275 | 2,040 | ||||||
Tax benefit from options exercised |
2,459 | 1,795 | ||||||
Deferred income taxes |
2,873 | 273 | ||||||
Changes in other assets |
(1,900 | ) | (2,892 | ) | ||||
Changes in other liabilities |
5,065 | 3,959 | ||||||
Changes in current assets and liabilities: |
||||||||
Customer accounts receivable |
(24,487 | ) | (16,931 | ) | ||||
Merchandise inventories |
(91,018 | ) | (39,998 | ) | ||||
Deferred catalog costs |
(2,212 | ) | (143 | ) | ||||
Due from affiliates |
457 | (1,860 | ) | |||||
Prepaid and other current assets |
(19,539 | ) | (5,509 | ) | ||||
Accounts payable |
11,690 | 947 | ||||||
Income taxes payable |
20,848 | 20,527 | ||||||
Accrued liabilities |
7,508 | 9,367 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
51,992 | 106,861 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Additions to property and equipment |
(55,379 | ) | (65,466 | ) | ||||
Proceeds from disposal of property and equipment |
— | 807 | ||||||
NET CASH USED IN INVESTING ACTIVITIES |
(55,379 | ) | (64,659 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Borrowings under notes payable to banks |
35,000 | 9,000 | ||||||
Proceeds from options exercised |
7,252 | 3,670 | ||||||
Cash dividends |
(17,905 | ) | (16,474 | ) | ||||
Purchase of treasury stock |
(99,986 | ) | (38,146 | ) | ||||
NET CASH USED IN FINANCING ACTIVITIES |
(75,639 | ) | (41,950 | ) | ||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
436 | 775 | ||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(78,590 | ) | 1,027 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
85,655 | 25,566 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 7,065 | $ | 26,593 | ||||
See accompanying notes to consolidated financial statements.
5
THE TALBOTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Amounts in thousands except share and per 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 weeks ended October 30, 2004 was impacted by an income tax benefit of $4.4 million from a favorable resolution with the Joint Committee on Taxation of certain income tax issues relating to fiscal years 1995 through 1997. The effective tax rate during the thirty-nine weeks ended October 30, 2004 was impacted by an income tax benefit of $7.8 million from favorable resolutions with the Joint Committee on Taxation of certain income tax issues relating to fiscal years 1993 through 1997. In November 2004, the Company received all refunds from the Internal Revenue Service related to these matters. Additionally, the fiscal 1998 through 2000 federal tax years have been closed without adjustment.
3. COMPREHENSIVE INCOME
The following is the Company’s comprehensive income for the periods ended October 30, 2004 and November 1, 2003:
| Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
|||||||||||||||
| October 30, | November 1, | October 30, | November 1, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income |
$ | 27,606 | $ | 34,794 | $ | 80,363 | $ | 82,713 | ||||||||
Other comprehensive income: |
||||||||||||||||
Cumulative foreign currency
translation adjustment |
5,029 | 1,662 | 5,330 | 2,390 | ||||||||||||
Comprehensive income |
$ | 32,635 | $ | 36,456 | $ | 85,693 | $ | 85,103 | ||||||||
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 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 |
Thirty-Nine Weeks Ended |
|||||||||||||||
| October 30, | November 1, | October 30, | November 1, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income, as reported |
$ | 27,606 | $ | 34,794 | $ | 80,363 | $ | 82,713 | ||||||||
Add: stock-based compensation
included in reported net income, net of
related
tax effects |
773 | 248 | 2,078 | 658 | ||||||||||||
Deduct: total stock-based compensation
expense determined under fair value based
method, net of related tax effects |
(3,002 | ) | (3,862 | ) | (8,003 | ) | (10,720 | ) | ||||||||
Pro forma net income |
$ | 25,377 | $ | 31,180 | $ | 74,438 | $ | 72,651 | ||||||||
Earnings per share: |
||||||||||||||||
Basic-as reported |
$ | 0.51 | $ | 0.62 | $ | 1.45 | $ | 1.46 | ||||||||
Basic-pro forma |
$ | 0.47 | $ | 0.55 | $ | 1.34 | $ | 1.28 | ||||||||
Diluted-as reported |
$ | 0.50 | $ | 0.60 | $ | 1.42 | $ | 1.43 | ||||||||
Diluted-pro forma |
$ | 0.46 | $ | 0.54 | $ | 1.31 | $ | 1.25 | ||||||||
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. The fair values of the shares have been recorded as deferred compensation and are being amortized as compensation expense over the estimated vesting period, which is three to five years.
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. RSUs do not have voting rights.
7
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 October 30, 2004 and November 1, 2003, options to purchase 3,314,498 and 2,335,680 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 thirty-nine weeks ended October 30, 2004 and November 1, 2003, options to purchase 3,213,898 and 2,407,680 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 |
Thirty-Nine Weeks Ended |
|||||||||||||||
| October 30, | November 1, | October 30, | November 1, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Shares for computation of
basic net income per share |
54,376 | 56,363 | 55,444 | 56,583 | ||||||||||||
Effect of stock compensation plans |
988 | 1,603 | 1,336 | 1,364 | ||||||||||||
Shares for computation of
diluted net income per share |
55,364 | 57,966 | 56,780 | 57,947 | ||||||||||||
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
8
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 thirty-nine weeks ended October 30, 2004 and November 1, 2003:
| Thirteen Weeks Ended |
||||||||||||||||||||||||
| October 30, 2004 |
November 1, 2003 |
|||||||||||||||||||||||
| Stores |
Catalog |
Total |
Stores |
Catalog |
Total |
|||||||||||||||||||
Net sales |
$ | 361,514 | $ | 59,656 | $ | 421,170 | $ | 344,961 | $ | 63,187 | $ | 408,148 | ||||||||||||
Direct profit |
53,512 | 13,605 | 67,117 | 68,239 | 17,072 | 85,311 | ||||||||||||||||||
| Thirty-Nine Weeks Ended |
||||||||||||||||||||||||
| October 30, 2004 |
November 1, 2003 |
|||||||||||||||||||||||
| Stores |
Catalog |
Total |
Stores |
Catalog |
Total |
|||||||||||||||||||
Net sales |
$ | 1,069,748 | $ | 179,791 | $ | 1,249,539 | $ | 1,013,519 | $ | 179,245 | $ | 1,192,764 | ||||||||||||
Direct profit |
168,718 | 39,321 | 208,039 | 187,108 | 40,056 | 227,164 | ||||||||||||||||||
The following reconciles direct profit to consolidated net income for the thirteen and thirty-nine weeks ended October 30, 2004 and November 1, 2003:
| Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
|||||||||||||||
| October 30, | November 1, | October 30, | November 1, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Total direct profit
for reportable segments |
$ | 67,117 | $ | 85,311 | $ | 208,039 | $ | 227,164 | ||||||||
Less: indirect expenses |
29,509 | 29,192 | 90,690 | 93,104 | ||||||||||||
Operating income |
37,608 | 56,119 | 117,349 | 134,060 | ||||||||||||
Interest expense, net |
612 | 449 | 1,303 | 1,719 | ||||||||||||
Income before taxes |
36,996 | 55,670 | 116,046 | 132,341 | ||||||||||||
Income taxes |
9,390 | 20,876 | 35,683 | 49,628 | ||||||||||||
Consolidated net income |
$ | 27,606 | $ | 34,794 | $ | 80,363 | $ | 82,713 | ||||||||
9
7. EMPLOYEE BENEFIT PLANS
Net periodic benefit cost is comprised of the following components for the thirteen and thirty-nine weeks ended October 30, 2004 and November 1, 2003:
The components of the Company’s Pension Plan expense are as follows:
| Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
|||||||||||||||
| October 30, | November 1, | October 30, | November 1, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Service cost |
$ | 2,010 | $ | 1,652 | $ | 6,030 | $ | 4,956 | ||||||||
Interest cost |
1,495 | 1,235 | 4,405 | 3,705 | ||||||||||||
Expected return on plan assets |
(1,490 | ) | (1,287 | ) | (4,469 | ) | (3,861 | ) | ||||||||
Net amortization and deferral |
812 | 501 | 2,356 | 1,503 | ||||||||||||
Net periodic benefit cost |
$ | 2,827 | $ | 2,101 | $ | 8,322 | $ | 6,303 | ||||||||
During the thirteen weeks ended October 30, 2004 and November 1, 2003, the Company voluntarily contributed $8.0 million and $7.0 million, respectively, to its Pension Plan.
The components of the Company’s SERP expense are as follows:
| Thirteen Weeks Ended |
Thirty-Nine Weeks Ended |
|||||||||||||||
| October 30, | November 1, | October 30, | November 1, | |||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Service cost |
$ | 170 | $ | 157 | $ | 550 | ||||||||||