Attached files
file | filename |
---|---|
EX-32.1 - EX-32.1 - TALBOTS INC | b82585exv32w1.htm |
EX-31.2 - EX-31.2 - TALBOTS INC | b82585exv31w2.htm |
EX-31.1 - EX-31.1 - TALBOTS INC | b82585exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2010
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)
Registrants telephone number, including area code
781-749-7600
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
The number of shares outstanding of the registrants common stock as of September 1, 2010:
70,368,234 shares.
Table of Contents
THE TALBOTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Amounts in thousands except per share data
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 300,742 | $ | 304,641 | $ | 621,403 | $ | 610,816 | ||||||||
Costs and expenses |
||||||||||||||||
Cost of sales, buying and occupancy |
195,777 | 220,239 | 376,622 | 431,395 | ||||||||||||
Selling, general and administrative |
93,075 | 94,880 | 201,214 | 205,703 | ||||||||||||
Merger-related costs |
3,050 | | 26,863 | | ||||||||||||
Restructuring charges |
112 | 2,875 | 5,071 | 9,271 | ||||||||||||
Impairment of store assets |
| 12 | 6 | 31 | ||||||||||||
Operating income (loss) |
8,728 | (13,365 | ) | 11,627 | (35,584 | ) | ||||||||||
Interest |
||||||||||||||||
Interest expense |
6,370 | 7,245 | 14,805 | 14,600 | ||||||||||||
Interest income |
21 | 36 | 42 | 219 | ||||||||||||
Interest expense, net |
6,349 | 7,209 | 14,763 | 14,381 | ||||||||||||
Income (loss) before taxes |
2,379 | (20,574 | ) | (3,136 | ) | (49,965 | ) | |||||||||
Income tax expense (benefit) |
1,858 | (93 | ) | 3,439 | (10,666 | ) | ||||||||||
Income (loss) from continuing operations |
521 | (20,481 | ) | (6,575 | ) | (39,299 | ) | |||||||||
Income (loss) from discontinued operations, net of taxes |
420 | (4,004 | ) | 3,148 | (8,755 | ) | ||||||||||
Net income (loss) |
$ | 941 | $ | (24,485 | ) | $ | (3,427 | ) | $ | (48,054 | ) | |||||
Basic earnings (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 0.01 | $ | (0.38 | ) | $ | (0.10 | ) | $ | (0.73 | ) | |||||
Discontinued operations |
| (0.07 | ) | 0.05 | (0.16 | ) | ||||||||||
Net earnings (loss) |
$ | 0.01 | $ | (0.45 | ) | $ | (0.05 | ) | $ | (0.89 | ) | |||||
Diluted earnings (loss) per share: |
||||||||||||||||
Continuing operations |
$ | 0.01 | $ | (0.38 | ) | $ | (0.10 | ) | $ | (0.73 | ) | |||||
Discontinued operations |
| (0.07 | ) | 0.05 | (0.16 | ) | ||||||||||
Net earnings (loss) |
$ | 0.01 | $ | (0.45 | ) | $ | (0.05 | ) | $ | (0.89 | ) | |||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
68,338 | 53,827 | 63,105 | 53,724 | ||||||||||||
Diluted |
69,520 | 53,827 | 63,105 | 53,724 | ||||||||||||
See notes to condensed consolidated financial statements.
2
Table of Contents
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Amounts in thousands
July 31, | January 30, | August 1, | ||||||||||
2010 | 2010 | 2009 | ||||||||||
ASSETS |
||||||||||||
Current Assets: |
||||||||||||
Cash and cash equivalents |
$ | 4,650 | $ | 112,775 | $ | 113,471 | ||||||
Customer accounts receivable, net |
155,606 | 163,587 | 162,780 | |||||||||
Merchandise inventories |
130,344 | 142,696 | 145,494 | |||||||||
Deferred catalog costs |
3,352 | 6,685 | 2,977 | |||||||||
Prepaid and other current assets |
54,122 | 48,139 | 56,552 | |||||||||
Due from related party |
| 959 | 988 | |||||||||
Income tax refundable |
| 2,006 | | |||||||||
Total current assets |
348,074 | 476,847 | 482,262 | |||||||||
Property and equipment, net |
195,004 | 220,404 | 250,907 | |||||||||
Goodwill |
35,513 | 35,513 | 35,513 | |||||||||
Trademarks |
75,884 | 75,884 | 75,884 | |||||||||
Other assets |
19,527 | 17,170 | 11,378 | |||||||||
Total Assets |
$ | 674,002 | $ | 825,818 | $ | 855,944 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||
Current Liabilities: |
||||||||||||
Accounts payable |
$ | 80,153 | $ | 104,118 | $ | 105,658 | ||||||
Accrued liabilities |
147,487 | 148,177 | 166,078 | |||||||||
Revolving credit facility |
37,365 | | | |||||||||
Current portion of related party debt |
| 486,494 | 8,506 | |||||||||
Notes payable to banks |
| | 147,100 | |||||||||
Current portion of long-term debt |
| | 80,000 | |||||||||
Total current liabilities |
265,005 | 738,789 | 507,342 | |||||||||
Related party debt less current portion |
| | 241,494 | |||||||||
Long-term debt less current portion |
| | 20,000 | |||||||||
Deferred rent under lease commitments |
103,588 | 111,137 | 135,951 | |||||||||
Deferred income taxes |
28,456 | 28,456 | 28,456 | |||||||||
Other liabilities |
112,810 | 133,072 | 129,358 | |||||||||
Commitments and contingencies |
||||||||||||
Stockholders Equity (Deficit): |
||||||||||||
Common stock, $0.01 par value; 200,000,000 authorized; 97,056,412
shares, 81,473,215 shares, and 81,448,215 shares issued, respectively,
and 70,371,464 shares, 55,000,142 shares, and 55,101,526 shares
outstanding, respectively |
971 | 815 | 814 | |||||||||
Additional paid-in capital |
854,211 | 499,457 | 495,190 | |||||||||
Retained deficit |
(52,117 | ) | (48,690 | ) | (67,332 | ) | ||||||
Accumulated other comprehensive loss |
(51,083 | ) | (51,179 | ) | (49,483 | ) | ||||||
Treasury stock, at cost; 26,684,948 shares, 26,473,073 shares, and
26,346,689 shares, respectively |
(587,839 | ) | (586,039 | ) | (585,846 | ) | ||||||
Total stockholders equity (deficit) |
164,143 | (185,636 | ) | (206,657 | ) | |||||||
Total Liabilities and Stockholders Equity (Deficit) |
$ | 674,002 | $ | 825,818 | $ | 855,944 | ||||||
See notes to condensed consolidated financial statements.
3
Table of Contents
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Amounts in thousands
Twenty-Six Weeks Ended | ||||||||
July 31, | August 1, | |||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (3,427 | ) | $ | (48,054 | ) | ||
Income (loss) from discontinued operations, net of tax |
3,148 | (8,755 | ) | |||||
Loss from continuing operations |
(6,575 | ) | (39,299 | ) | ||||
Adjustments to reconcile loss from continuing operations
to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
31,490 | 37,958 | ||||||
Stock-based compensation |
7,755 | 2,156 | ||||||
Amortization of debt issuance costs |
1,996 | 1,585 | ||||||
Impairment of store assets |
6 | 31 | ||||||
Loss on disposal of property and equipment |
646 | 71 | ||||||
Deferred rent |
(3,844 | ) | (1,824 | ) | ||||
Deferred income taxes |
| (10,749 | ) | |||||
Changes in assets and liabilities: |
||||||||
Customer accounts receivable |
8,013 | 6,756 | ||||||
Merchandise inventories |
12,442 | 61,481 | ||||||
Deferred catalog costs |
3,333 | 1,818 | ||||||
Prepaid and other current assets |
(6,959 | ) | (14,024 | ) | ||||
Due from related party |
959 | (612 | ) | |||||
Income tax refundable |
2,006 | 26,646 | ||||||
Accounts payable |
(24,184 | ) | (16,189 | ) | ||||
Accrued liabilities |
4,075 | (9,851 | ) | |||||
Other assets |
(66 | ) | 3,593 | |||||
Other liabilities |
(20,528 | ) | (8,265 | ) | ||||
Net cash provided by operating activities |
10,565 | 41,282 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Additions to property and equipment |
(5,935 | ) | (13,243 | ) | ||||
Proceeds from disposal of property and equipment |
15 | | ||||||
Cash acquired in merger with BPW Acquisition Corp. |
332,999 | | ||||||
Net cash provided by (used in) investing activities |
327,079 | (13,243 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Borrowings on revolving credit facility |
684,338 | | ||||||
Payments on revolving credit facility |
(646,973 | ) | | |||||
Proceeds from related party borrowings |
| 230,000 | ||||||
Payments on related party borrowings |
(486,494 | ) | | |||||
Proceeds from working capital notes payable |
| 8,000 | ||||||
Payments on working capital notes payable |
| (9,400 | ) | |||||
Payments on long-term borrowings |
| (208,351 | ) | |||||
Payment of debt issuance costs |
(5,993 | ) | (1,720 | ) | ||||
Payment of equity issuance costs |
(3,594 | ) | | |||||
Proceeds from warrants exercised |
19,042 | | ||||||
Proceeds from options exercised |
414 | | ||||||
Purchase of treasury stock |
(1,800 | ) | (363 | ) | ||||
Net cash (used in) provided by financing activities |
(441,060 | ) | 18,166 | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
333 | 694 | ||||||
CASH FLOWS FROM DISCONTINUED OPERATIONS: |
||||||||
Operating activities |
(5,042 | ) | (15,224 | ) | ||||
Investing activities |
| 63,827 | ||||||
Effect of exchange rate changes on cash |
| 32 | ||||||
(5,042 | ) | 48,635 | ||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(108,125 | ) | 95,534 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
112,775 | 16,551 | ||||||
INCREASE IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS |
| 1,141 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 4,650 | $ | 113,226 | ||||
See notes to condensed consolidated financial statements.
4
Table of Contents
THE TALBOTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The condensed consolidated financial statements of The Talbots, Inc. and its subsidiaries
(Talbots or the Company) included herein have been prepared, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have been condensed or
omitted from this report, as is permitted by such rules and regulations. Accordingly, these
condensed consolidated financial statements should be read in conjunction with the financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the year
ended January 30, 2010.
The unaudited condensed consolidated financial statements include the accounts of Talbots and its
wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation. In the opinion of management, the information furnished reflects all adjustments,
all of which are of a normal and recurring nature, necessary for a fair presentation of the results
for the reported interim periods. The Company considers events or transactions that occur after the
balance sheet date but before the financial statements are issued to provide additional evidence
relative to certain estimates or to identify matters that require additional disclosure. The
results of operations for interim periods are not necessarily indicative of results to be expected
for the full year or any other interim period.
2. Summary of Significant Accounting Policies
There have been no material changes to the significant accounting policies previously disclosed in
the Companys Annual Report on Form 10-K for the fiscal year ended January 30, 2010.
3. Merger with BPW Acquisition Corp. and Related Transactions
On April 7, 2010, the Company completed a series of transactions (collectively, the BPW
Transactions) which, in the aggregate, substantially reduced its indebtedness and significantly
deleveraged its balance sheet, consisting of three related transactions: (i) an Agreement and Plan
of Merger between Talbots and BPW Acquisition Corp. (BPW) pursuant to which a wholly-owned
subsidiary of the Company merged with and into BPW in exchange for the Companys issuance of
Talbots common stock and warrants to BPW stockholders; (ii) the repurchase and retirement of all
Talbots common stock held by AEON (U.S.A.), Inc. (AEON (U.S.A.)), the Companys then majority
shareholder; the issuance of warrants to purchase one million shares of Talbots common stock and
the repayment of all of the Companys outstanding AEON Co., Ltd. (AEON) and AEON (U.S.A.) debt;
and (iii) the execution of a new senior secured revolving credit facility.
BPW was a special purpose acquisition company with approximately $350.0 million in cash held in a
trust account for the benefit of its shareholders to be used in connection with a business
combination. Accordingly, the Company concluded that BPW was a business and acquisition accounting
applied. The acquisition method of accounting requires the determination of the accounting
acquirer. The Company considered the following principal facts and circumstances to determine the
accounting acquirer:
| the purpose of the merger was to assist the Company with the refinancing of its business and Talbots initiated the transaction; |
| the Company is the larger of the two combining entities and is the remaining operating company; |
| Talbots continuing Board of Directors retained a majority of the seats on the combined companys Board of Directors; |
| BPW has no appointment rights after the initial consent to appoint three additional Board members; |
| the Companys existing senior management team has continued as senior management of the combined company; and |
| the terms of the exchange provided BPW shareholders with a premium over the market price of BPW shares of common stock prior to the announcement of the merger. |
5
Table of Contents
Based on the above facts and other considerations, the Company determined that Talbots was the
accounting acquirer.
BPW had no significant commercial operations and its only significant pre-combination assets were
cash and cash equivalents which were already recognized at fair value. The Company recorded the
shares of common stock and warrants issued in the merger at the fair value of BPWs net monetary
assets received on April 7, 2010. The net monetary assets received in the transaction, consisting
solely of cash and cash equivalents, was $333.0 million, after payment of all prior BPW
obligations. No goodwill or intangible assets were recorded in the transaction.
In connection with the merger, the Company issued 41.5 million shares of Talbots common stock and
warrants to purchase 17.2 million shares of Talbots common stock (the Talbots Warrants) for 100%
ownership of BPW. Approximately 3.5 million BPW warrants that did not participate in the warrant
exchange offer (the Non-Tendered Warrants) remained outstanding at the closing of the merger.
Pursuant to an agreement entered into during the merger process on December 8, 2009 (the Sponsors
Agreement) between Talbots and the sponsors of BPW, Perella Weinberg Partners Acquisition LP and
BPW BNYH Holdings LLC (together, the Sponsors), the Sponsors agreed not to transfer the shares of
Talbots common stock held by them for 180 days after the completion of the merger, subject to
certain exceptions and unless otherwise agreed to be waived by Talbots in whole or in part.
Additionally, in connection with the merger, the Company repurchased and retired the 29.9 million
shares held by AEON (U.S.A.), the former majority shareholder, in exchange for warrants to purchase
one million shares of Talbots common stock (the AEON Warrants).
The following summarizes the changes to stockholders (deficit) equity including the impact of the
BPW Transactions at July 31, 2010:
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury | Stockholders' | |||||||||||||||||||||||
(In thousands except share data) | Shares | $ Amount | Capital | Deficit | Loss | Stock | (Deficit) Equity | |||||||||||||||||||||
Balance at January 30, 2010 |
81,473,215 | $ | 815 | $ | 499,457 | $ | (48,690 | ) | $ | (51,179 | ) | $ | (586,039 | ) | $ | (185,636 | ) | |||||||||||
Merger and related BPW Transactions: |
||||||||||||||||||||||||||||
Issuance of common stock and
warrants in merger with BPW |
41,469,003 | 415 | 332,584 | | | | 332,999 | |||||||||||||||||||||
Issuance of warrants to repurchase
and retire common stock held by
AEON (U.S.A.) |
(29,921,829 | ) | (299 | ) | 299 | | | | | |||||||||||||||||||
Equity issuance costs |
| | (3,594 | ) | | | | (3,594 | ) | |||||||||||||||||||
Extinguishment of related party debt |
| | (1,706 | ) | | | | (1,706 | ) | |||||||||||||||||||
Total merger-related |
11,547,174 | 116 | 327,583 | | | | 327,699 | |||||||||||||||||||||
Exercise of Non-Tendered Warrants |
2,538,946 | 25 | 19,017 | | | 19,042 | ||||||||||||||||||||||
Exercise of stock options |
111,227 | 1 | 413 | | | | 414 | |||||||||||||||||||||
Stock-based compensation |
1,385,850 | 14 | 7,741 | | | | 7,755 | |||||||||||||||||||||
Purchase of 211,875 shares of vested
and nonvested common stock awards |
| | | | | (1,800 | ) | (1,800 | ) | |||||||||||||||||||
Net loss |
| | | (3,427 | ) | | | (3,427 | ) | |||||||||||||||||||
Translation adjustment |
| | | | 361 | 361 | ||||||||||||||||||||||
Change in pension and postretirement
liabilities, net of taxes |
| | | | (265 | ) | | (265 | ) | |||||||||||||||||||
Balance at July 31, 2010 |
97,056,412 | $ | 971 | $ | 854,211 | $ | (52,117 | ) | $ | (51,083 | ) | $ | (587,839 | ) | $ | 164,143 | ||||||||||||
The Talbots Warrants are immediately exercisable at $14.85 per warrant for one share of
Talbots common stock, have a stated term of five years from the date of issuance, April 9, 2010,
and beginning after April 9, 2011, are subject to accelerated expiration under certain conditions
including, at the Companys discretion, if the trading value of Talbots common stock
6
Table of Contents
exceeds $19.98
per share for 20 of 30 consecutive trading days in a period ending not more than 15 days prior to
notice of such acceleration. The warrants may be exercised on a cashless basis. These warrants
began trading on NYSE Amex in April 2010. Approximately 17.2 million Talbots Warrants were
outstanding at July 31, 2010.
The Non-Tendered Warrants have an exercise price of $7.50 per warrant for 0.9853 share of Talbots
common stock. Approximately 2.6 million Non-Tendered Warrants were exercised for total cash
proceeds of $19.0 million immediately
following the transaction. The 0.9 million Non-Tendered Warrants that remained outstanding at July
31, 2010 are not exercisable for one year from the April 7, 2010 effective date of the merger, do
not have anti-dilution rights, were de-listed from NYSE Amex concurrent with the merger and expire
February 26, 2015.
The AEON Warrants are immediately exercisable at $13.21 per share for one share of Talbots common
stock, have a stated term of five years from the date of issuance, April 7, 2010, and beginning
after April 7, 2011, are subject to accelerated expiration under certain conditions including, at
the Companys discretion, if the trading value of Talbots common stock exceeds $23.12 per share for
20 of 30 consecutive trading days in a period ending not more than 15 days prior to notice of such
acceleration. The warrants may be exercised on a cashless basis. One million AEON Warrants were
outstanding at July 31, 2010.
With the consummation and closing of the BPW merger, the Company repaid all outstanding AEON and
AEON (U.S.A.) indebtedness on April 7, 2010 at its principal value plus accrued interest and other
costs for total cash consideration of $488.2 million. As the AEON and AEON (U.S.A.) debt
extinguishment transaction was between related parties, the difference between the carrying value
and the repayment price was recorded as an equity transaction. Accordingly, the Company recorded no
gain or loss on the extinguishment and the difference between the repayment price and the net
carrying value, consisting of $1.7 million of unamortized deferred financing costs, was recorded to
additional paid-in capital.
Further in connection with the consummation and closing of the BPW merger, the Company executed a
new senior secured revolving credit agreement with a third-party lender which provides borrowing
capacity up to $200.0 million, subject to availability and satisfaction of all borrowing
conditions. See Note 11, Debt, for further information including key terms of this credit
agreement.
As a result of the BPW Transactions, the Company became subject to annual limitations on the use of
its existing net operating losses (NOL) and created an uncertain tax position that reduced a
substantial portion of the Companys NOL. Accordingly, the Company recorded an increase in
unrecognized tax benefits of approximately $20.0 million that will reduce net deferred tax assets
before consideration of any valuation allowance.
Merger-related costs are those expenses incurred in order to effect the merger, including advisory,
legal, accounting, valuation, and other professional or consulting fees as well as certain general
and administrative costs incurred by the Company as a direct result of the closing of the merger,
including an incentive award given to certain executives and members of management, contingent upon
the successful closing of the BPW merger. The incentive portion of merger-related costs was awarded
in restricted stock units and cash for efforts related to the closing of the BPW merger. The cash
bonus awarded was paid in the first quarter of 2010 in connection with the consummation of the BPW
merger. The restricted stock units awarded will cliff vest 12 months from the completion of the BPW
merger. Other costs primarily include printing and mailing expenses related to proxy solicitation
and incremental insurance expenses related to the transaction. The Company estimates total
merger-related costs of approximately $37.5 million, of which $8.2 million and $26.9 million were
expensed in fiscal 2009 and the twenty-six weeks ended July 31, 2010, respectively. Approximately
$2.4 million of merger-related costs are estimated to be incurred in future periods related to the
incentive award. In addition, the Company expects to continue to incur merger-related legal
expenses as a result of the legal proceedings discussed in Note 13, Legal Proceedings.
Approximately $7.6 million of costs incurred in connection with the new senior secured revolving
credit facility were recorded as deferred financing costs and included in other assets on the
condensed consolidated balance sheet. These costs are being amortized to interest expense over the
three and one-half year life of the facility. Approximately $3.6 million of costs incurred in
connection with the registration and issuance of the common stock and warrants were charged to
additional paid-in capital.
7
Table of Contents
Details of the merger-related costs recorded in the thirteen and twenty-six weeks ended July 31,
2010 are as follows:
Thirteen | Twenty-Six | |||||||
Weeks Ended | Weeks Ended | |||||||
July 31, 2010 | July 31, 2010 | |||||||
(In thousands) | ||||||||
Investment banking |
$ | | $ | 14,255 | ||||
Accounting and legal |
1,669 | 6,650 | ||||||
Financing incentive compensation |
1,210 | 4,428 | ||||||
Other costs |
171 | 1,530 | ||||||
Total |
$ | 3,050 | $ | 26,863 | ||||
The following pro forma summary financial information presents the operating results of the
combined company assuming the merger and related events, including the repurchase of common stock
held by AEON (U.S.A.) and repayment of all outstanding indebtedness owed to AEON and AEON (U.S.A.)
and the execution of the new senior secured revolving credit agreement, had been completed on
February 1, 2009, the beginning of Talbots fiscal year ended January 30, 2010. The $2.4 million of
estimated future merger-related costs are not reflected in the pro forma information in accordance
with the rules for preparation of pro forma statement of operations data.
Thirteen Weeks Ended | ||||||||||||||||
July 31, 2010 | August 1, 2009 | |||||||||||||||
Actual | Pro Forma | Actual | Pro Forma | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales |
$ | 300,742 | $ | 300,742 | $ | 304,641 | $ | 304,641 | ||||||||
Operating income (loss) |
8,728 | 8,728 | (13,365 | ) | (13,522 | ) | ||||||||||
Income (loss) from continuing operations |
521 | 521 | (20,481 | ) | (15,141 | ) | ||||||||||
Earnings (loss) from continuing operations per share: |
||||||||||||||||
Basic |
$ | 0.01 | $ | 0.01 | $ | (0.38 | ) | $ | (0.23 | ) | ||||||
Diluted |
$ | 0.01 | $ | 0.01 | $ | (0.38 | ) | $ | (0.23 | ) | ||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
68,338 | 68,338 | 53,827 | 65,374 | ||||||||||||
Diluted |
69,520 | 69,520 | 53,827 | 65,374 |
Twenty-Six Weeks Ended | ||||||||||||||||
July 31, 2010 | August 1, 2009 | |||||||||||||||
Actual | Pro Forma | Actual | Pro Forma | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales |
$ | 621,403 | $ | 621,403 | $ | 610,816 | $ | 610,816 | ||||||||
Operating income (loss) |
11,627 | 4,755 | (35,584 | ) | (35,958 | ) | ||||||||||
Loss from continuing operations |
(6,575 | ) | (8,187 | ) | (39,299 | ) | (29,905 | ) | ||||||||
Loss from continuing operations per share: |
||||||||||||||||
Basic |
$ | (0.10 | ) | $ | (0.12 | ) | $ | (0.73 | ) | $ | (0.46 | ) | ||||
Diluted |
$ | (0.10 | ) | $ | (0.12 | ) | $ | (0.73 | ) | $ | (0.46 | ) | ||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
63,105 | 67,293 | 53,724 | 65,271 | ||||||||||||
Diluted |
63,105 | 67,293 | 53,724 | 65,271 |
Based on the nature of the BPW entity, there was no revenue or earnings associated with BPW
included in the consolidated statements of operations for the thirteen or twenty-six weeks ended
July 31, 2010.
8
Table of Contents
4. Restructuring
In late 2007, management developed a strategic business plan focused on the following areas: brand
positioning, productivity, store growth and store productivity, non-core concepts, distribution
channels, the J. Jill business and other operating matters. In response to declines in the U.S. and
global economy in late 2008 and 2009, management prioritized its strategy on those areas which
would reduce costs and streamline the organization, while continuing to redefine the brand and make
product improvements. The actions taken during 2009 and 2010 included reducing headcount and
employee benefit costs, shuttering or disposing of non-core businesses, and reducing office and
retail space when determined to no longer coincide with the vision of the brand or the needs of the
business, among other steps. Specifically, in February 2009, the Company reduced its corporate
headcount by 17%. In June 2009, the Company reduced its corporate headcount by an additional 20%
including the elimination of open positions. In August 2009, the Company reorganized its global
sourcing activities and entered into a buying agency agreement with an affiliate of Li & Fung
Limited, a Hong Kong-based global consumer goods exporter (Li & Fung), whereby effective
September 2009, Li & Fung is acting as the exclusive global apparel sourcing agent for
substantially all Talbots apparel. In connection with this reorganization, the Company closed its
Hong Kong and India sourcing offices and reduced its corporate sourcing headcount. In March 2010,
the Company focused its restructuring efforts on programs designed to reduce retail space no longer
coinciding with the needs of the business and the purpose of certain flagship locations to the
business.
In the twenty-six weeks ended July 31, 2010, the Company recorded $5.1 million of restructuring
expense primarily related to the consolidation of the Companys Madison Avenue, New York flagship
location in which the Company reduced active leased floor space and wrote down certain assets and
leasehold improvements no longer used in the redesigned lay-out. In the thirteen weeks ended August
1, 2009, the Company recorded $2.9 million of restructuring expense primarily related to estimated
lease termination costs for the portion of the Companys Tampa, Florida data center that ceased to
be used in July 2009. In the first quarter of 2009, and included in restructuring charges for the
twenty-six weeks ended August 1, 2009, the Company recorded $6.4 million of primarily severance
expense due to corporate headcount reductions.
The following is a summary of the activity and liability balances related to restructuring for the
twenty-six weeks ended July 31, 2010 and August 1, 2009:
Corporate - Wide | ||||||||||||
Strategic Initiatives | ||||||||||||
Lease - | ||||||||||||
Severance | Related | Total | ||||||||||
(In thousands) | ||||||||||||
Balance at January 30, 2010 |
$ | 3,089 | $ | 784 | $ | 3,873 | ||||||
Charges |
1,041 | 4,030 | 5,071 | |||||||||
Cash payments |
(2,960 | ) | (579 | ) | (3,539 | ) | ||||||
Non-cash items |
| (48 | ) | (48 | ) | |||||||
Balance at July 31, 2010 |
$ | 1,170 | $ | 4,187 | $ | 5,357 | ||||||
Corporate - Wide | ||||||||||||
Strategic Initiatives | ||||||||||||
Lease - | ||||||||||||
Severance | Related | Total | ||||||||||
(In thousands) | ||||||||||||
Balance at January 31, 2009 |
$ | 10,882 | $ | | $ | 10,882 | ||||||
Charges (income) |
6,523 | 2,748 | 9,271 | |||||||||
Cash payments |
(10,939 | ) | (62 | ) | (11,001 | ) | ||||||
Non-cash items |
812 | | 812 | |||||||||
Balance at August 1, 2009 |
$ | 7,278 | $ | 2,686 | $ | 9,964 | ||||||
9
Table of Contents
The non-cash items primarily consist of the write-off of certain leasehold improvements, lease
adjustments and changes to stock-based compensation expense related to terminated employees. Of the
$5.4 million in restructuring liabilities at July 31, 2010, $2.6 million, expected to be paid
within the next twelve months, is included in accrued liabilities and the remaining $2.8 million,
expected to be paid thereafter through 2014, is included in deferred rent under lease commitments.
5. Stock-Based Compensation
Total stock-based compensation expense related to stock options, nonvested stock awards and
restricted stock units (RSUs) was $3.6 million and $1.4 million for the thirteen weeks ended July
31, 2010 and August 1, 2009, respectively, and $7.8 million and $2.2 million for the twenty-six
weeks ended July 31, 2010 and August 1, 2009, respectively.
The compensation expense was classified in the consolidated statements of operations as follows:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Cost of sales, buying and occupancy |
$ | 245 | $ | 259 | $ | 384 | $ | 418 | ||||||||
Selling, general and administrative |
2,148 | 1,277 | 5,283 | 2,550 | ||||||||||||
Merger-related costs |
1,210 | | 2,088 | | ||||||||||||
Restructuring charges |
| (143 | ) | | (812 | ) | ||||||||||
Total |
$ | 3,603 | $ | 1,393 | $ | 7,755 | $ | 2,156 | ||||||||
Stock Options
The weighted-average fair value of options granted during the twenty-six weeks ended July 31, 2010
and August 1, 2009, estimated as of the grant date using the Black-Scholes option pricing model,
was $10.40 and $1.57 per option, respectively. Key assumptions used to apply this pricing model
were as follows:
Twenty-Six Weeks Ended | ||||||||
July 31, | August 1, | |||||||
2010 | 2009 | |||||||
Risk-free interest rate |
3.1 | % | 2.0 | % | ||||
Expected life of options |
6.8 years | 4.8 years | ||||||
Expected volatility of underlying stock |
79.7 | % | 83.7 | % | ||||
Expected dividend yield |
0.0 | % | 0.0 | % |
10
Table of Contents
The following is a summary of stock option activity for the twenty-six weeks ended July 31, 2010:
Weighted | Weighted | |||||||||||||||
Average | Average Remaining | Aggregate | ||||||||||||||
Number of | Exercise Price | Contractual Term | Intrinsic | |||||||||||||
Shares | per Share | (In Years) | Value | |||||||||||||
(In thousands) | ||||||||||||||||
Outstanding at January 30, 2010 |
10,402,019 | $ | 24.06 | |||||||||||||
Granted |
92,385 | 14.26 | ||||||||||||||
Exercised |
(111,227 | ) | 3.72 | |||||||||||||
Forfeited or expired |
(2,176,685 | ) | 19.30 | |||||||||||||
Outstanding at July 31, 2010 |
8,206,492 | $ | 25.48 | 3.4 | $ | 13,645 | ||||||||||
Exercisable at July 31, 2010 |
6,760,780 | $ | 29.62 | 2.3 | $ | 4,180 | ||||||||||
As of July 31, 2010, there was $1.8 million of unrecognized compensation cost related to stock
options that are expected to vest.
Nonvested Stock Awards and RSUs
The following is a summary of nonvested stock awards and RSU activity for the twenty-six weeks
ended July 31, 2010:
Weighted | ||||||||
Average Grant | ||||||||
Number of | Date Fair Value | |||||||
Shares | per Share | |||||||
Nonvested at January 30, 2010 |
1,330,890 | $ | 12.62 | |||||
Granted |
1,727,551 | 11.68 | ||||||
Vested |
(508,922 | ) | 16.51 | |||||
Forfeited |
(69,379 | ) | 10.33 | |||||
Nonvested at July 31, 2010 |
2,480,140 | $ | 11.23 | |||||
As of July 31, 2010, there was $13.7 million of unrecognized compensation cost related to nonvested
stock awards and RSUs that are expected to vest, excluding merger-related awards.
6. Income Taxes
The Companys effective income tax rate, including discrete items, was (109.7%) and 21.3% for the
twenty-six weeks ended July 31, 2010 and August 1, 2009, respectively. The effective income tax
rate is based upon the estimated income or loss for the year, the estimated composition of the
income or loss in different jurisdictions and discrete adjustments in the applicable quarterly
periods for settlements of tax audits or assessments, the resolution or identification of tax
position uncertainties and non-deductible costs associated with the merger. In the twenty-six weeks
ended July 31, 2010, the Company recorded merger-related costs of $26.9 million, the majority of
which do not receive any associated tax benefit, and limited the utilization of its net operating
losses, contributing to a negative overall effective tax rate for the period. Income tax expense
for this period is impacted primarily by changes in estimates related to previously existing
uncertain tax positions based on new information.
Income taxes for the twenty-six weeks ended August 1, 2009 were primarily impacted by the
intraperiod tax allocation arising from other comprehensive income recognized from the
remeasurement of the Companys Pension Plan and Supplemental Executive Retirement Plan obligations
due to the Companys decision to freeze future benefits under the plans effective as of
May 1, 2009, which resulted in an allocated tax benefit of $10.6 million to continuing operations
and an off-setting tax expense included in other comprehensive income.
11
Table of Contents
The Company continues to provide a full valuation allowance against its net deferred tax
assets, excluding deferred tax liabilities for non-amortizing intangibles, due to insufficient
positive evidence that the deferred tax assets will be realized in the future.
The BPW Transactions, completed on April 7, 2010, subject the utilization of the Companys net
operating loss carryover to a limitation under U.S. tax laws. In addition, as a result of the
closing of the BPW Transactions in April 2010, the Companys gross unrecognized tax benefit
increased by $20.0 million. This increase results in a reduction to net deferred tax assets before
consideration of any valuation allowance.
7. Discontinued Operations
The Companys discontinued operations include the Talbots Kids, Mens and U.K. businesses, all of
which ceased operations in 2008, and the J. Jill business which was sold to Jill Acquisition LLC
(the Purchaser) for net proceeds of $64.3 million on July 2, 2009. The operating results of these
businesses have been classified as discontinued operations for all periods presented, and the cash
flows from discontinued operations, including the proceeds from the sale, have been separately
presented in the statements of cash flows.
The results of discontinued operations for the thirteen and twenty-six weeks ended July 31, 2010
and August 1, 2009 are as follows:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | (In thousands) | |||||||||||||||
Net sales |
$ | | $ | 74,809 | $ | | $ | 178,296 | ||||||||
(Loss) income from operations |
(21 | ) | 1,724 | (116 | ) | (3,027 | ) | |||||||||
Gain (loss) on disposal, net of taxes |
441 | (5,728 | ) | 3,264 | (5,728 | ) | ||||||||||
Income (loss) from discontinued
operations, net of taxes |
$ | 420 | $ | (4,004 | ) | $ | 3,148 | $ | (8,755 | ) | ||||||
The (loss) income from operations includes on-going liability adjustments related to the Talbots
Kids and Mens businesses and, for the thirteen and twenty-six weeks ended August 1, 2009, the
operating results of the J. Jill business prior to disposal. The gain on disposal for the thirteen
weeks ended July 31, 2010 includes approximately $0.7 million of favorable adjustments to estimated
lease liabilities, primarily due to the execution of an agreement to partially settle and terminate
the lease for a portion of the Companys unused Quincy, Massachusetts office space not assumed by
the Purchaser in the J. Jill sale. This event reduced the Companys recorded lease liability for
this space, the previously recorded amount of which had not assumed a settlement option. The gain
on disposal for the twenty-six weeks ended July 31, 2010 includes the Quincy lease settlement,
approximately $1.7 million of additional favorable adjustments to other estimated lease
liabilities, including the settlement of four J. Jill store leases not assumed by the Purchaser in
the J. Jill sale during the first quarter of 2010 and approximately $0.9 million of favorable
adjustments to other assets. The $5.7 million loss on disposal recorded in the thirteen and
twenty-six weeks ended August 1, 2009 reflects the loss on disposal recorded at the closing of the
J. Jill sale in the second quarter of 2009. The results for the thirteen and twenty six weeks ended
July 31, 2010 reflect income tax expense of $0.2 million and $0.0 million, respectively. The
results for the thirteen and twenty-six weeks ended August 1, 2009 reflect no income tax benefit as
the Company recorded a valuation allowance for substantially all of its deferred taxes due to
insufficient positive evidence that the deferred tax assets would be realized in the future.
Pursuant to the purchase and sale agreement, the Purchaser agreed to assume certain assets and
liabilities relating to the J. Jill business. The 75 J. Jill stores that were not sold were closed.
As of July 31, 2010, the Company had settled the lease liabilities of 73 of the 75 stores not
acquired by the Purchaser. Lease termination costs were initially estimated and recorded at the
time the stores were closed, or existing space vacated, and are adjusted subsequently, as
necessary, when new information suggests that actual costs may vary from initial estimates. Income
and loss recorded in the periods subsequent to disposal are due to working capital adjustments and
modifications to the estimated lease liabilities relating to the stores that were not sold and the
Quincy, Massachusetts office space that is not being subleased or used. Total cash expenditures to
settle the lease liabilities for the remaining two unsold stores will depend on the outcome of
negotiations with third parties. As a result, actual costs to terminate these leases may vary from
current estimates and managements assumptions and projections may change.
12
Table of Contents
At January 30, 2010, the Company had remaining recorded lease-related liabilities from discontinued
operations of $16.7 million. During the twenty-six weeks ended July 31, 2010, the Company made cash
payments of approximately $5.2 million and recorded other income due to favorable settlements of
estimated lease liabilities of $2.4 million, resulting in a total estimated recorded liability of
$9.1 million as of July 31, 2010. Of these liabilities, approximately $5.5 million is expected to
be paid out within the next 12 months and is included within accrued liabilities as of July 31,
2010.
8. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income (loss) available for common
stockholders by the weighted average number of common shares outstanding. During periods of income,
participating securities are allocated a proportional share of income determined by dividing total
weighted average participating securities by the sum of the total weighted average common shares
and participating securities (the two-class method). The Companys nonvested stock and director
RSUs participate in any dividends declared by the Company and are therefore considered
participating securities. Participating securities have the effect of diluting both basic and
diluted earnings per share during periods of income. During periods of loss, no loss is allocated
to participating securities since they have no contractual obligation to share in the losses of the
Company. Diluted earnings per share is computed after giving consideration to the dilutive effect
of warrants, stock options and management RSUs that are outstanding during the period, except where
such common stock equivalents would be antidilutive.
Basic and diluted earnings (loss) per share from continuing operations were computed as follows (in
thousands, except per share amounts):
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic earnings (loss) per share: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 521 | $ | (20,481 | ) | $ | (6,575 | ) | $ | (39,299 | ) | |||||
Less: income associated with participating securities |
15 | | | | ||||||||||||
Income (loss) associated with common stockholders |
$ | 506 | $ | (20,481 | ) | $ | (6,575 | ) | $ | (39,299 | ) | |||||
Weighted average shares outstanding |
68,338 | 53,827 | 63,105 | 53,724 | ||||||||||||
Basic earnings (loss) per share continuing
operations |
$ | 0.01 | $ | (0.38 | ) | $ | (0.10 | ) | $ | (0.73 | ) | |||||
13
Table of Contents
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Diluted earnings (loss) per share: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 521 | $ | (20,481 | ) | $ | (6,575 | ) | $ | (39,299 | ) | |||||
Less: income associated with participating securities |
15 | | | | ||||||||||||
Income (loss) associated with common stockholders |
$ | 506 | $ | (20,481 | ) | $ | (6,575 | ) | $ | (39,299 | ) | |||||
Weighted average shares outstanding |
68,338 | 53,827 | 63,105 | 53,724 | ||||||||||||
Effect of dilutive securities |
1,182 | | | | ||||||||||||
Diluted weighted average shares outstanding |
69,520 | 53,827 | 63,105 | 53,724 | ||||||||||||
Diluted earnings (loss) per share continuing
operations |
$ | 0.01 | $ | (0.38 | ) | $ | (0.10 | ) | $ | (0.73 | ) | |||||
The following common stock equivalents were excluded from the calculation of earnings (loss) per
share because their inclusion would have been anti-dilutive for the thirteen and twenty-six week
periods ended July 31, 2010 and August 1, 2009:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Nonvested stock |
2,012,818 | 1,350,514 | 2,012,818 | 1,350,514 | ||||||||||||
Nonvested director RSUs |
18,410 | 28,000 | 18,410 | 28,000 | ||||||||||||
Stock options |
6,435,171 | 10,566,370 | 8,206,492 | 10,566,370 | ||||||||||||
Warrants |
18,242,750 | | 19,152,354 | | ||||||||||||
Nonvested management RSUs |
| | 402,912 | | ||||||||||||
26,709,149 | 11,944,884 | 29,792,986 | 11,944,884 | |||||||||||||
9. Comprehensive Income (Loss)
The following illustrates the Companys total comprehensive income (loss) for the thirteen and
twenty-six weeks ended July 31, 2010 and August 1, 2009:
Thirteen Weeks Ended | ||||||||
July 31, | August 1, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net income (loss) |
$ | 941 | $ | (24,485 | ) | |||
Other comprehensive (loss) income: |
||||||||
Foreign currency translation adjustment |
(231 | ) | 1,323 | |||||
Change in pension and postretirement plan liabilities |
(97 | ) | (31 | ) | ||||
Total comprehensive income (loss) |
$ | 613 | $ | (23,193 | ) | |||
Twenty-Six Weeks Ended | ||||||||
July 31, | August 1, | |||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
Net loss |
$ | (3,427 | ) | $ | (48,054 | ) | ||
Other comprehensive income (loss): |
||||||||
Foreign currency translation adjustment |
361 | 1,473 | ||||||
Change in pension and postretirement plan liabilities |
(265 | ) | 16,124 | |||||
Total comprehensive loss |
$ | (3,331 | ) | $ | (30,457 | ) | ||
14
Table of Contents
The foreign currency translation adjustment for the thirteen and twenty-six weeks ended July 31,
2010 and August 1, 2009 and the change in pension and postretirement plan liabilities for the
thirteen and twenty-six weeks ended July 31, 2010 and thirteen weeks ended August 1, 2009 reflect
no income tax expense (benefit) as the Company continues to maintain a valuation allowance for
substantially all of its deferred taxes due to insufficient positive evidence that the deferred tax
assets would be realized in the future. The change in pension and postretirement plan liabilities
for the twenty-six weeks ended August 1, 2009 includes a recorded tax expense of $10.8 million
related to the curtailment of the Companys pension and postretirement plans in the first quarter
of 2009.
10. Fair Value Measurements
The Company classifies fair value based measurements on a three-level hierarchy that prioritizes
the inputs used to measure fair value. This hierarchy requires entities to maximize the use of
observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to
measure fair value are as follows: Level 1, quoted market prices in active markets for identical
assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level
1 such as quoted market prices for markets that are not active or other inputs that are observable
or can be corroborated by observable market data; and Level 3, unobservable inputs that are
supported by little or no market activity and that are significant to the fair value of the assets
or liabilities, including certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
The Companys financial instruments at July 31, 2010 consist primarily of cash and cash
equivalents, accounts receivable, investments in the Companys irrevocable grantors trust (Rabbi
Trust) that holds assets intended to fund benefit obligations under the Companys Supplemental
Retirement Savings Plan and Deferred Compensation Plan, accounts payable and debt. The Company
believes the carrying value of cash and cash equivalents, accounts receivable and accounts payable
approximates their fair values due to their short-term nature. The money market investments in the
Rabbi Trust are recorded at fair value based on quoted market prices in active markets for
identical assets (Level 1 measurements) and are not significant to the total value of the Rabbi
Trust. The investments in life insurance policies held in the Rabbi Trust are recorded at their
cash surrender values, which is consistent with settlement value and is not a fair value
measurement. The Company believes that the carrying value of debt approximates fair value at July
31, 2010 as the interest rates are market-based variable rates and were designated less than four
months prior to quarter-end when the debt agreement was executed.
The Company monitors the performance and productivity of its store portfolio and closes stores when
appropriate. When it is determined that a store is underperforming or is to be closed, the Company
reassesses the expected future cash flows of the store, which in some cases results in an
impairment charge. The value of non-financial assets measured at fair value on a non-recurring
basis in performing these analyses was not significant for the periods ended July 31, 2010 and
August 1, 2009.
11. Debt
A summary of outstanding debt at July 31, 2010 and January 30, 2010 is as follows:
July 31, | January 30, | |||||||
2010 | 2010 | |||||||
(In thousands) | ||||||||
Revolving credit facility |
$ | 37,365 | $ | | ||||
Related party debt |
| 486,494 | ||||||
Total |
$ | 37,365 | $ | 486,494 | ||||
15
Table of Contents
Revolving Credit Facility
On April 7, 2010, in connection with the consummation and closing of the merger with BPW, the
Company executed a senior secured revolving credit facility with a third-party lender (the Credit
Facility). The Credit Facility is an asset-based revolving credit facility, including a $25.0
million letter of credit sub-facility, that permits the Company to borrow up to the lesser of (a)
$200.0 million and (b) the borrowing base, calculated as a percentage of the value of eligible
credit card receivables and the net orderly liquidation value of eligible private label credit card
receivables, the net orderly liquidation value of eligible inventory in the United States and the
net orderly liquidation value of eligible in-transit inventory from international vendors (subject
to certain caps and limitations), as set forth in the agreement, minus the lesser of (x) $20.0
million and (y) 10% of the borrowing base. Through the end of the second quarter, loans made
pursuant to the immediately preceding sentence carry interest, at the Companys election, at either
(a) the three-month LIBOR plus 4.0% to 4.5% depending on availability thresholds or (b) the base
rate plus 3.0% to 3.5% depending on certain availability thresholds. Interest on borrowings is
payable monthly in arrears. The Company pays a fee on the unused portion of the commitment and
outstanding letters of credit, if any, monthly in arrears in accordance with the formulas set forth
in the agreement. As of July 31, 2010, the Companys effective interest rate under the Credit
Facility was 5.1%, and the Company had additional borrowing availability of up to $111.6 million.
Under the Credit Facility, amounts are borrowed and repaid on a daily basis through a control
account arrangement. Cash received from customers is swept on a daily basis into a control account
in the name of the agent for the lenders. The Company is permitted to maintain a certain amount of
cash in disbursement accounts, including such amounts necessary to satisfy current liabilities
incurred in the ordinary course of business. Amounts may be borrowed and re-borrowed from time to
time, subject to the satisfaction or waiver of all borrowing conditions, including without
limitation perfected liens on collateral, accuracy of all representations and warranties, the
absence of a default or an event of default, and other borrowing conditions, all subject to certain
exclusions as set forth in the agreement.
The agreement matures on October 7, 2013, subject to earlier termination as set forth in the
agreement. The entire principal amount of loans under the facility and any outstanding letters of
credit will be due on the maturity date. Loans may be voluntarily prepaid at any time at the
Companys option, in whole or in part, at par plus accrued and unpaid interest and any break
funding loss incurred. The Company is required to make mandatory repayments in the event of receipt
of net proceeds from asset dispositions, receipt of net proceeds from the issuance of securities
and to the extent that its outstanding indebtedness under the Credit Facility exceeds its maximum
borrowing availability at any time. Upon any voluntary or mandatory prepayment of borrowings
outstanding at the LIBOR rate on a day that is not the last day of the respective interest period,
the Company will reimburse the lenders for any resulting loss or expense that the lender may incur.
Amounts voluntarily repaid prior to the maturity date may be re-borrowed.
The Company and certain of its subsidiaries have executed a guaranty and security agreement
pursuant to which all obligations under the Credit Facility are fully and unconditionally
guaranteed on a joint and several basis. Additionally, pursuant to the security agreement, all
obligations are secured by (i) a first priority perfected lien and security interest in
substantially all assets of the Company and any guarantor from time to time and (ii) a first lien
mortgage on the Companys Hingham, Massachusetts headquarters facility and Lakeville, Massachusetts
distribution facility. In connection with the lenders security interest in the proprietary Talbots
charge card program, Talbots and certain of its subsidiaries have also executed an access and
monitoring agreement that requires the Company to comply with certain monitoring and reporting
obligations to the agent with respect to such program, subject to applicable law.
The Company may not create, assume or suffer to exist any lien securing indebtedness incurred after
the closing date of the Credit Facility subject to certain limited exceptions set forth in the
agreement. The Credit Facility contains negative covenants prohibiting the Company, with certain
exceptions, from among other things, incurring indebtedness and contingent obligations, making
investments, intercompany loans and capital contributions, declaring or making any dividend payment
except for dividend payments or distributions payable solely in stock or stock equivalents, and
disposing of property or assets. The Company has agreed to keep the mortgaged properties in good
repair, reasonable wear and tear excepted. The agreement also provides for events of default,
including failure to repay principal and interest when due and failure to perform or violation of
the provisions or covenants of the agreement. The agreement does not contain any financial covenant
tests.
The Credit Facility is the Companys only outstanding debt agreement at July 31, 2010. Of the
$125.0 million borrowed under the Credit Facility at its inception, approximately $37.4 million was
outstanding at July 31, 2010. Borrowings under this Credit Facility have been classified as a
current liability as the Credit Facility requires repayment of outstanding borrowings with
16
Table of Contents
substantially all cash collected by the Company and contains a subjective acceleration clause. Such
provisions do not affect the final maturity date of the Credit Facility.
The Company incurred approximately $7.6 million of costs in connection with the execution of the
Credit Facility which were recorded as deferred financing costs in other assets on the condensed
consolidated balance sheet. These costs are being amortized to interest expense over the three and
one-half year life of the facility.
Subsequent to the end of the quarter, on August 31, 2010, the Company entered into a First
Amendment to the Credit Agreement with the third-party lender (the First Amendment), which
modified the following terms under the Credit Facility: (i) reduced the interest rates by one
hundred basis points on loan amounts under the Credit Facility for loans provided by the lenders to
either (a) three-month LIBOR plus 3.0% to 3.5%, or (b) the base rate plus 2.0% to 2.5%, in each
case depending on certain availability thresholds; (ii) adjusted the fee structure on the unused
portion of the commitment and reduced by one-half the rates applicable to documentary letters of
credit; and (iii) extended the time period during which a prepayment premium will be assessed upon
the reduction or termination of the revolving loan commitments from April 7, 2011 to April 7, 2012.
Concurrent with the execution of the First Amendment, the Company and the third-party lender
entered into (a) a Master Agreement for Documentary Letters of Credit and (b) a Master Agreement
for Standby Letters of Credit (each a Master Agreement), pursuant to which the lender will
provide either documentary or standby letters of credit at the request of the Company to various
beneficiaries on the terms set forth in the applicable Master Agreement, subject to any applicable
limitations set forth in the Credit Facility.
Related Party Debt
The Companys related party debt as of January 30, 2010 was comprised of the following:
| $245.0 million outstanding on a $250.0 million secured revolving loan facility with AEON; |
| $191.5 million outstanding on a $200.0 million term loan facility with AEON; and |
| $50.0 million outstanding on a $50.0 million term loan with AEON (U.S.A.). |
In connection with the consummation and closing of the merger with BPW and the execution of the
Credit Facility, the Company repaid all outstanding related party indebtedness on April 7, 2010.
Since the debt extinguishment was between related parties, the Company recorded no gain or loss on
the extinguishment and the difference between the reacquisition price and the net carrying value of
the debt, consisting of $1.7 million of unamortized deferred financing costs, was recorded as a
capital transaction by a charge to additional paid-in capital.
Letters of Credit
At July 31, 2010, the Company had letter of credit availability of up to $25.0 million under a
letter of credit sub-facility to its Credit Facility, subject to borrowing capacity restrictions
described therein. The Company had no letters of credit outstanding at July 31, 2010 under the
sub-facility to its Credit Facility or at January 30, 2010 under the Companys prior credit
facilities.
12. Benefit Plans
In February 2009, the Company announced its decision to discontinue future benefits being earned
under its non-contributory defined benefit pension plan (Pension Plan) and Supplemental Executive
Retirement Plan (SERP) effective May 1, 2009. As a result of the decision, the assets and
liabilities under the plans were remeasured as of February 28, 2009. The remeasurement resulted in
a decrease to other liabilities of $25.4 million and $2.0 million for the Pension Plan and SERP,
respectively, and an increase to other comprehensive income of $15.2 million and $1.2 million, net
of tax, for the Pension Plan and SERP, respectively.
17
Table of Contents
The components of net pension expense for the Pension Plan for the thirteen and twenty-six weeks
ended July 31, 2010 and August 1, 2009 are as follows:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Interest expense on projected benefit obligation |
$ | 2,371 | $ | 2,206 | $ | 4,678 | $ | 4,412 | ||||||||
Expected return on plan assets |
(2,394 | ) | (1,914 | ) | (4,800 | ) | (3,828 | ) | ||||||||
Curtailment loss |
| | | 124 | ||||||||||||
Prior service cost net amortization |
| 1 | | 3 | ||||||||||||
Net amortization and deferral |
139 | 233 | 244 | 465 | ||||||||||||
Net pension expense |
$ | 116 | $ | 526 | $ | 122 | $ | 1,176 | ||||||||
The components of net SERP expense for the thirteen and twenty-six weeks ended July 31, 2010 and
August 1, 2009 are as follows:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Interest expense on projected benefit obligation |
$ | 288 | $ | 291 | $ | 554 | $ | 582 | ||||||||
Curtailment gain |
| (58 | ) | | (451 | ) | ||||||||||
Net amortization and deferral |
20 | | 27 | | ||||||||||||
Net SERP expense |
$ | 308 | $ | 233 | $ | 581 | $ | 131 | ||||||||
The components of net postretirement medical expense (credit) for the thirteen and twenty-six weeks
ended July 31, 2010 and August 1, 2009 are as follows:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Interest expense on accumulated
postretirement benefit obligation |
$ | 17 | $ | 2 | $ | 35 | $ | 4 | ||||||||
Curtailment gain |
| | | (442 | ) | |||||||||||
Prior service cost amortization |
(380 | ) | (375 | ) | (760 | ) | (750 | ) | ||||||||
Net amortization and deferral |
130 | 110 | 261 | 220 | ||||||||||||
Net postretirement medical credit |
$ | (233 | ) | $ | (263 | ) | $ | (464 | ) | $ | (968 | ) | ||||
The Company was required to make contributions to the Pension Plan of $1.0 million and $1.8
million during the thirteen weeks ended July 31, 2010 and August 1, 2009, respectively, and $2.0
million and $3.7 million during the twenty-six weeks ended July 31, 2010 and August 1, 2009,
respectively. The Company expects to make required contributions of $2.6 million to the Pension
Plan during the remainder of 2010. The Company did not make any voluntary contributions to the
Pension Plan during the thirteen or twenty-six weeks ended July 31, 2010 and August 1, 2009.
18
Table of Contents
13. Legal Proceedings
On January 12, 2010, a Talbots common shareholder filed a putative class and derivative action
captioned Campbell v. The Talbots, Inc., et al., C.A. No. 5199-VCS, in the Court of Chancery of the
State of Delaware (the Chancery Court) against Talbots; Talbots board of directors; AEON
(U.S.A.), Inc.; BPW Acquisition Corp. (BPW); Perella Weinberg Partners LP, a financial advisor to
the audit committee of the Board of Directors of the Company and an affiliate of Perella Weinberg
Partners Acquisition LP, one of the sponsors of BPW; and the Vice Chairman, Chief Executive
Officer, and Senior Vice President of BPW. Among other things, the complaint asserts claims for
breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, and violations of
certain sections of the Delaware General Corporation Law (DGCL) and Talbots by-laws in
connection with the negotiation and approval of the merger agreement between Talbots and BPW. The
complaint sought injunctive, declaratory and monetary relief, including an order to enjoin the
consummation of the merger and related transactions. On March 6, 2010, a Stipulation (the
Stipulation) entered into by the Company; the Companys board of directors; AEON (U.S.A.), Inc.;
BPW; Perella Weinberg Partners LP; the Vice Chairman, Chief Executive Officer and Senior Vice
President of BPW and John C. Campbell (Plaintiff) was filed in the Chancery Court with respect to
this action. Pursuant to the Stipulation, the Plaintiff withdrew its motion for a preliminary
injunction to enjoin consummation of the merger and related transactions between the Company and
BPW. In exchange, the Company agreed to implement and maintain certain corporate governance
measures, subject to the terms and conditions specified in the Stipulation. The Stipulation did not
constitute dismissal, settlement or withdrawal of Plaintiffs claims in the litigation, and there
is no assurance the parties will finally settle and discharge such claims. Defendants have moved to
dismiss the complaint and intend to continue to defend against the claims vigorously. The Company
cannot accurately predict the likelihood of a favorable or unfavorable outcome or quantify the
amount or range of potential financial impact, if any.
14. Segment Information
The Company has two separately managed and reported business segments Stores and Direct
Marketing.
The following is certain segment information for the thirteen and twenty-six weeks ended July 31,
2010 and August 1, 2009:
Thirteen Weeks Ended | ||||||||||||||||||||||||
July 31, 2010 | August 1, 2009 | |||||||||||||||||||||||
Direct | Direct | |||||||||||||||||||||||
Stores | Marketing | Total | Stores | Marketing | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Net sales |
$ | 250,870 | $ | 49,872 | $ | 300,742 | $ | 254,872 | $ | 49,769 | $ | 304,641 | ||||||||||||
Direct profit |
31,010 | 10,784 | $ | 41,794 | 10,178 | 6,913 | $ | 17,091 |
Twenty-Six Weeks Ended | ||||||||||||||||||||||||
July 31, 2010 | August 1, 2009 | |||||||||||||||||||||||
Direct | Direct | |||||||||||||||||||||||
Stores | Marketing | Total | Stores | Marketing | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Net sales |
$ | 508,443 | $ | 112,960 | $ | 621,403 | $ | 511,236 | $ | 99,580 | $ | 610,816 | ||||||||||||
Direct profit |
82,473 | 30,592 | $ | 113,065 | 26,195 | 11,080 | $ | 37,275 |
19
Table of Contents
The
following reconciles direct profit to income (loss) from continuing operations for the thirteen and
twenty-six weeks ended July 31, 2010 and August 1, 2009. Indirect expenses include unallocated
corporate overhead and related expenses.
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands) | ||||||||||||||||
Direct profit for reportable segments |
$ | 41,794 | $ | 17,091 | $ | 113,065 | $ | 37,275 | ||||||||
Less: Indirect expenses |
29,904 | 27,581 | 69,504 | 63,588 | ||||||||||||
Merger-related costs |
3,050 | | 26,863 | | ||||||||||||
Restructuring charges |
112 | 2,875 | 5,071 | 9,271 | ||||||||||||
Operating income (loss) |
8,728 | (13,365 | ) | 11,627 | (35,584 | ) | ||||||||||
Interest expense, net |
6,349 | 7,209 | 14,763 | 14,381 | ||||||||||||
Income (loss) before taxes |
2,379 | (20,574 | ) | (3,136 | ) | (49,965 | ) | |||||||||
Income tax expense (benefit) |
1,858 | (93 | ) | 3,439 | (10,666 | ) | ||||||||||
Income (loss) from continuing operations |
$ | 521 | $ | (20,481 | ) | $ | (6,575 | ) | $ | (39,299 | ) | |||||
20
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The Talbots, Inc. (we, us, our, Talbots or the Company) is a specialty retailer and
direct marketer of womens apparel, accessories and shoes sold almost exclusively under the Talbots
brand. The Talbots brand vision is Tradition Transformed and focuses on honoring the classic
heritage of our brand while emphasizing a relevant and innovative approach to style that is both
modern and timeless. We have two primary sales channels: Stores and Direct Marketing, which
consists of our Internet business, at www.talbots.com, and our catalog business. As of July 31,
2010, we operated 560 stores in the United States and 20 stores in Canada. We conform to the
National Retail Federations fiscal calendar. The thirteen weeks ended July 31, 2010 and August 1,
2009 are referred to as the second quarter of 2010 and 2009, respectively. Unless the context
indicates otherwise, all references herein to the Company, we, us and our, include the Company and
its wholly-owned subsidiaries.
Our managements discussion and analysis of our financial condition and results of operations are
based upon our unaudited condensed consolidated financial statements included in this Quarterly
Report on Form 10-Q, which have been prepared by us in accordance with accounting principles
generally accepted in the United States of America, or GAAP, for interim periods and with
Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. This discussion
and analysis should be read in conjunction with these unaudited condensed consolidated financial
statements as well as in conjunction with our Annual Report on Form 10-K for the fiscal year ended
January 30, 2010.
Recent Developments
On April 7, 2010, we completed a series of transactions (collectively, the BPW Transactions)
which, in the aggregate, substantially reduced our indebtedness and significantly deleveraged our
balance sheet, consisting of three related transactions: (i) an Agreement and Plan of Merger
between Talbots and BPW Acquisition Corp. (BPW) pursuant to which a wholly-owned subsidiary of
the Company merged with and into BPW in exchange for the Companys issuance of Talbots common stock
and warrants to BPW stockholders; (ii) the repurchase and retirement of all Talbots common stock
held by AEON (U.S.A.), Inc. (AEON (U.S.A.)), our then majority shareholder, totaling 29.9 million
shares; the issuance of warrants to purchase one million shares of Talbots common stock and the
repayment of all of our outstanding debt with AEON Co., Ltd. (AEON) and AEON (U.S.A.) at its
principal value plus accrued interest and other costs for total cash consideration of $488.2
million; and (iii) the execution of a third party senior secured revolving credit facility which
provides borrowing capacity up to $200.0 million, subject to availability and satisfaction of all
borrowing conditions.
As of April 7, 2010, as a result of these transactions, we reduced our outstanding debt by
approximately $361.5 million and increased stockholders equity by approximately $327.7 million.
Since the close of these transactions, we have sought to translate our operating results into
further improved financial position, reducing debt by an additional $87.6 million through July 31,
2010 and ending the quarter with a positive equity balance and positive net working capital.
Results of Continuing Operations
Highlights from the results of the thirteen and twenty-six weeks ended July 31, 2010 include:
| Achieved year-to-date operating income of $11.6 million, while recording $26.9 million in merger-related costs and reinstating and enhancing operational performance-based and certain other employee compensation programs with additional year-to-date expense of $16.6 million in cost of sales, buying and occupancy and selling, general and administrative expenses, compared to an operating loss of $35.6 million in the comparable period of the prior year; | ||
| Improved second quarter gross profit margins to 34.9% from 27.7% in the second quarter of 2009; and improved year-to-date gross profit margins to 39.4% from 29.4% in the comparable period of the prior year; and | ||
| Reduced total outstanding debt by $449.1 million, or 92.3%, year-to-date in 2010. |
21
Table of Contents
The following table sets forth the percentage relationship to net sales of certain items in our
consolidated statements of operations for the periods shown below:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales, buying and occupancy |
65.1 | % | 72.3 | % | 60.6 | % | 70.6 | % | ||||||||
Selling, general and administrative |
31.0 | % | 31.1 | % | 32.4 | % | 33.7 | % | ||||||||
Merger-related costs |
1.0 | % | 0.0 | % | 4.3 | % | 0.0 | % | ||||||||
Restructuring charges |
0.0 | % | 0.9 | % | 0.8 | % | 1.5 | % | ||||||||
Impairment of store assets |
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
Operating income (loss) |
2.9 | % | (4.4 | )% | 1.9 | % | (5.8 | )% | ||||||||
Interest expense, net |
2.1 | % | 2.4 | % | 2.4 | % | 2.4 | % | ||||||||
Income (loss) before taxes |
0.8 | % | (6.8 | )% | (0.5) | % | (8.2 | )% | ||||||||
Income tax expense (benefit) |
0.6 | % | 0.0 | % | 0.6 | % | (1.7 | )% | ||||||||
Income (loss) from continuing operations |
0.2 | % | (6.8 | )% | (1.1) | % | (6.5 | )% |
Net Sales
The following is a comparison of net sales for the thirteen and twenty-six weeks ended July 31,
2010 and August 1, 2009:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||
July 31, | August 1, | (Decrease) | July 31, | August 1, | (Decrease) | |||||||||||||||||||
2010 | 2009 | Increase | 2010 | 2009 | Increase | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Net store sales |
$ | 250.8 | $ | 254.9 | $ | (4.1 | ) | $ | 508.4 | $ | 511.2 | $ | (2.8 | ) | ||||||||||
Net direct marketing sales |
49.9 | 49.7 | 0.2 | 113.0 | 99.6 | 13.4 | ||||||||||||||||||
Total |
$ | 300.7 | $ | 304.6 | $ | (3.9 | ) | $ | 621.4 | $ | 610.8 | $ | 10.6 | |||||||||||
Store Sales
Reflected in net store sales for the second quarter of 2010 is a $3.1 million, or 1.4%, decrease in
comparable store sales compared to the second quarter of 2009. This decrease is largely correlated
to changes in our promotional cadence and approach which, in part, contributed to reduced customer
traffic and translated into a 19.7% decrease in store markdown sales relative to the comparable
prior year period. Further related to this promotional change, and partially offsetting the decline
in store markdown sales, store full-price sales increased 14.9% during the second quarter of 2010
over the comparable fiscal 2009 period. The shift from markdown selling to increased full-price
selling has contributed to a stronger gross profit margin over the comparable periods.
Sales metrics for comparable stores for the second quarter of 2010 were as follows: customer
traffic, while sequentially improved, decreased 6.2% year-over-year, yet the rate of converting
traffic increased 1.4%, contributing to a 4.8% decrease in the number of transactions per store.
Additionally, units per transaction were up 4.2% which, combined with a 0.7% decrease in average
unit retail, contributed to a 3.5% increase in dollars per transaction over the comparable fiscal
2009 period.
Net store sales for the twenty-six weeks ended July 31, 2010 reflect a $2.4 million, or 0.5%,
increase in comparable store sales compared to the twenty-six weeks ended August 1, 2009, primarily
attributable to a stronger mix of full-price to markdown merchandise.
22
Table of Contents
Sales metrics for comparable stores for the twenty-six weeks ended July 31, 2010 were as follows:
customer traffic decreased 8.7% year-over-year, yet the rate of converting traffic to transactions
increased 3.7%, contributing to a 5.3% decrease in the number of transactions per store.
Additionally, units per transaction were up 3.8% which, combined with a 2.3% increase in average
unit retail, contributed to a 6.2% increase in dollars per transaction over the comparable fiscal
2009 period.
Comparable stores are those that are open for at least 13 full months. When the square footage of
a store is increased or decreased by at least 15%, the store is excluded from the computation of
comparable store sales for a period of 13 full months. As of July 31, 2010, we operated a total of
580 stores with gross and selling square footage of approximately 4.2 million square feet and 3.2
million square feet, respectively, a decrease in gross and selling square footage of approximately
1.2% and 1.5%, respectively, from August 1, 2009 when we operated a total of 588 stores.
Direct Marketing Sales
Direct marketing sales in the second quarter of 2010 were flat compared to the second quarter of
2009 while the percentage of our net sales derived from direct marketing increased to 16.6% from
16.3% in the second quarter of 2009. Reflected in direct marketing sales for the second quarter of
2010 is a $3.2 million increase in red-line phone sales, which are sales resulting from direct
lines in our stores to our telemarketing center, emphasized as part of our store productivity
program. Additionally, year-over-year comparative direct marketing sales for the second quarter
reflect a timing shift in the dates of our Best Customer event and the release of our May
catalog. As a result of these timing adjustments, approximately $5.5 million in net sales were
recorded in the first quarter of 2010 which had comparable sales captured in the second quarter of
2009.
Year-to-date direct marketing sales have increased 13.5% compared to the same period of the prior
year with the percentage of our net sales derived from direct marketing increasing to 18.2% from
16.3% in the same period of the prior year. This increase can be primarily attributed to a $9.2
million increase in red-line phone sales. Overall, our year-to-date direct marketing sales reflect
a 10.3% increase in unit sales volume and have also benefited from the delivery of a stronger mix
of full-price merchandise.
Internet sales in the second quarter of 2010 were $38.7 million compared to $37.5 million in the
second quarter of 2009. Year-to-date, Internet sales were $80.7 million compared to $70.1 million
in the same period of the prior year. This increase is primarily due to a period-over-period
increase in the average order size on our new Internet platform, launched in August 2009, coupled
with changing trends in consumer purchasing behavior.
Cost of Sales, Buying and Occupancy
The following is a comparison of cost of sales, buying and occupancy expenses for the thirteen and
twenty-six weeks ended July 31, 2010 and August 1, 2009:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||||||||||
2010 | 2009 | Decrease | 2010 | 2009 | Decrease | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Cost of sales, buying and occupancy |
$ | 195.8 | $ | 220.2 | $ | (24.4 | ) | $ | 376.6 | $ | 431.4 | $ | (54.8 | ) | ||||||||||
Percentage of net sales |
65.1 | % | 72.3 | % | (7.2) | % | 60.6 | % | 70.6 | % | (10.0 | )% |
In the second quarter of 2010, net sales declines of $3.9 million were offset by cost of sales,
buying and occupancy declines of $24.4 million, resulting in a 720 basis point improvement in gross
profit margin to 34.9% from 27.7% in the second quarter of 2009. The improvement in gross profit
margin was primarily driven by gains in merchandise margin, which was up 620 basis points as a
result of changes to our internal sourcing practices and correlated to improvements in our initial
mark-up rate (IMU) compared to the second quarter of 2009, strong full-price selling and
disciplined inventory management. Occupancy
expenses as a percent of net sales also improved 80 basis points, due to comparatively lower
depreciation expense. Buying expenses as a percent of net sales improved 20 basis points.
23
Table of Contents
Year-to-date in 2010, while net sales increased $10.6 million, cost of sales, buying and occupancy
expenses decreased $54.8 million compared to the same period of the prior year. Improvements in
cost of sales, buying and occupancy, coupled with increases in net sales driven by improved
full-price selling, resulted in a 1,000 basis point improvement in gross profit margin to 39.4%
from 29.4% year-over-year. The improvement in gross profit margin was primarily driven by gains in
merchandise margin, which was up 860 basis points as a result of changes to our sourcing practices
and correlated to improvements in our initial mark-up rate (IMU) year-over-year, strong
full-price selling and disciplined inventory management. Occupancy expenses as a percent of net
sales also improved 120 basis points, due to comparatively lower depreciation expense. Buying
expenses as a percent of net sales improved 20 basis points.
Selling, General and Administrative
The following is a comparison of selling, general and administrative expenses for the thirteen and
twenty-six weeks ended July 31, 2010 and August 1, 2009:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||||||||||
2010 | 2009 | Decrease | 2010 | 2009 | Decrease | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Selling, general and administrative |
$ | 93.1 | $ | 94.9 | $ | (1.8 | ) | $ | 201.2 | $ | 205.7 | $ | (4.5 | ) | ||||||||||
Percentage of net sales |
31.0 | % | 31.1 | % | (0.1 | )% | 32.4 | % | 33.7 | % | (1.3 | )% |
In early 2009, we established a goal of reducing annual expenses by $150.0 million by the end of
fiscal 2010 by streamlining our organization and identifying cost savings in our day-to-day
operations. Approximately 80% of this reduction was expected to be within selling, general and
administrative expenses. By the end of fiscal 2009, we had reduced expenses by $119.9 million,
substantially achieving our two-year goal in one year. In the first quarter of 2010, we were able
to reinstate and enhance operational performance-based and certain other employee compensation
programs that were suspended in the prior year under the $150.0 million cost reduction initiative,
recording related incremental compensation expense of $3.4 million and $13.9 million in the
thirteen and twenty-six weeks ended July 31, 2010 as compared to the same periods of the prior
year. Further, in 2010, we were able to increase our investment in our marketing campaigns
including expanded e-commerce advertising and increased in-store visual, recording related
incremental marketing expense of $1.8 million and $2.8 million in the thirteen and twenty-six weeks
ended July 31, 2010, respectively. With these additional spending investments included in the
operating results of the thirteen and twenty-six weeks ended July 31, 2010, we were able to
continue to generate improvements in selling, general and administrative expenses as a percentage
of net sales year-over-year. If net sales and gross profit margin continue to show improvement, we
would expect to continue to re-invest in the business, particularly in the area of marketing, while
seeking to manage to a reduced selling, general and administrative expense as a percent of net
sales rate.
Merger-Related Costs
In the thirteen and twenty-six weeks ended July 31, 2010, we incurred $3.1 million and $26.9
million of merger-related costs, respectively, in connection with our acquisition of BPW. These
costs primarily consist of investment banking, professional services fees and an incentive award
given to certain executives and members of senior management as a result of the closing of this
transaction. Approximately $2.4 million of additional merger-related costs are expected to be
incurred in future periods related to the incentive award. In addition, we expect to continue to
incur merger-related legal expenses as a result of the legal proceedings discussed in Part II Item
1. Legal Proceedings.
24
Table of Contents
Restructuring Charges
The following is a comparison of restructuring charges for the thirteen and twenty-six weeks ended
July 31, 2010 and August 1, 2009:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||||||||||
2010 | 2009 | Decrease | 2010 | 2009 | Decrease | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Restructuring charges |
$ | 0.1 | $ | 2.9 | $ | (2.8 | ) | $ | 5.1 | $ | 9.3 | $ | (4.2 | ) | ||||||||||
Percentage of net sales |
0.0 | % | 0.9 | % | (0.9 | )% | 0.8 | % | 1.5 | % | (0.7 | ) |
The restructuring charges incurred year-to-date in 2010 primarily relate to the consolidation of
our Madison Avenue flagship location wherein we reduced active leased floor space and wrote down
certain assets and leasehold improvements no longer used in the redesigned lay-out. Restructuring
charges incurred in the thirteen weeks ended August 1, 2009 primarily relate to the recording of
lease termination liabilities for the portion of our Tampa, Florida data center which we ceased to
use in July 2009. Restructuring charges incurred in the twenty-six weeks ended August 1, 2009
include these estimated lease termination costs as well as severance costs recorded in the first
quarter of 2009 due to corporate headcount reductions.
Impairment of Store Assets
Impairment of store assets was insignificant in the thirteen and twenty-six weeks ended July 31,
2010 and August 1, 2009. We closely monitor the performance and productivity of our store
portfolio. When we determine that a store is underperforming or is to be closed, we reassess the
expected future cash flows of the store, which in some cases can result in an impairment charge.
Goodwill and Other Intangible Assets
Our policy is to evaluate goodwill and trademarks for impairment on an annual basis at the
reporting unit level on the first day of each fiscal year, and more frequently if events occur or
circumstances change which suggest that the goodwill or trademarks should be evaluated. We
performed our annual impairment tests for fiscal 2010 and fiscal 2009 as of January 31, 2010 and
February 1, 2009, respectively, using a combination of an income approach and market value
approach. These tests contemplate our operating results and financial position, forecasted
operating results, industry trends, market uncertainty and comparable industry multiples. As a
result of these analyses, we determined that no impairment of our goodwill or trademarks existed.
Interest Expense, net
The following is a comparison of net interest expense for the thirteen and twenty-six weeks ended
July 31, 2010 and August 1, 2009:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||
July 31, | August 1, | (Decrease) | July 31, | August 1, | Increase | |||||||||||||||||||
2010 | 2009 | Increase | 2010 | 2009 | (Decrease) | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Interest expense, net |
$ | 6.3 | $ | 7.2 | $ | (0.9 | ) | $ | 14.8 | $ | 14.4 | $ | 0.4 |
Net interest expense for the thirteen weeks ended July 31, 2010 decreased from the same period in
2009 primarily due to reductions in the weighted average debt outstanding in the respective
periods, from $501.8 million in the second quarter of 2009 to $80.8 million in the second quarter
of 2010. This reduction in debt-related interest expense has been partially offset by additional
tax-related interest expense recorded in connection with the discrete tax items in the quarter,
with tax-related interest expense contributing more than half of net interest expense in the
thirteen weeks ended July 31, 2010. Net interest expense for the twenty-six weeks ended July 31,
2010 increased from the same period in 2009 primarily due to the recording of this additional
tax-related interest expense as well as approximately $1.4 million in fees associated with our
related party debt,
25
Table of Contents
which was repaid in April 2010. We expect debt-related interest expense to decrease on a
year-over-year comparative basis for the remainder of the year as a result of a lower average debt
outstanding.
Income Tax Expense (Benefit)
The following is a comparison of income tax expense (benefit) for the thirteen and twenty-six weeks
ended July 1, 2010 and August 1, 2009:
Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||||||||
July 31, | August 1, | July 31, | August 1, | |||||||||||||||||||||
2010 | 2009 | Increase | 2010 | 2009 | Increase | |||||||||||||||||||
(In millions) | (In millions) | |||||||||||||||||||||||
Income tax expense (benefit)
|
$ | 1.9 | $ | (0.1 | ) | $ | 2.0 | $ | 3.4 | $ | (10.7 | ) | $ | 14.1 |
For the twenty-six weeks ended July 31, 2010 and August 1, 2009, our effective income tax rate,
including discrete items, was (109.7%) and 21.3%, respectively. The effective income tax rate is
based upon the estimated income or loss for the year, the estimated composition of the income or
loss in different jurisdictions and discrete adjustments in the applicable quarterly periods for
settlements of tax audits or assessments, the resolution or identification of tax position
uncertainties and non-deductible costs associated with the merger. In the twenty-six weeks ended
July 31, 2010, we recorded merger-related costs of $26.9 million, the majority of which do not
receive any associated tax benefit, and limited the utilization of our net operating losses,
contributing to a negative overall effective tax rate for the period. Income taxes for the
twenty-six weeks ended August 1, 2009 were primarily impacted by the intraperiod tax allocation
arising from other comprehensive income recognized from the remeasurement of our Pension Plan and
Supplemental Executive Retirement Plan obligations due to our decision to freeze future benefits
under the plans effective as of May 1, 2009, which resulted in an allocated tax benefit of $10.6
million to continuing operations and an off-setting tax expense included in other comprehensive
income.
Income tax expense for the thirteen weeks ended July 31, 2010 was impacted primarily by changes in
estimates related to previously existing uncertain tax positions based on new information. This
expense was partially offset by a decrease in our estimated annual effective tax rate and the
resultant quarterly adjustment necessary to adjust the current year-to-date expense to the revised
estimate of our annual effective rate. The change in the estimated
annual effective tax rate resulted in a tax benefit which
partially offset the tax expense associated with these discrete items and the net income earned
during this period. Income tax expense for the twenty-six weeks ended July 31, 2010 primarily
reflects the effect of the aforementioned discrete items. Increases in income tax expense recorded
in the thirteen and twenty-six weeks ended July 31, 2010 over the comparable prior year periods are
reflective of increases in income (loss) before taxes and the impact of discrete items
period-over-period.
We continue to provide a full valuation allowance against our net deferred tax assets, excluding
deferred tax liabilities for non-amortizing intangibles.
Discontinued Operations
Our discontinued operations include the Talbots Kids, Mens and U.K. businesses, all of which ceased
operations in 2008, and the J. Jill business, which was sold on July 2, 2009. The operating results
of these businesses have been classified as discontinued operations for all periods presented.
On July 2, 2009, we completed the sale of the J. Jill business for net proceeds of $64.3
million, pursuant to which Jill Acquisition LLC (the Purchaser) agreed to acquire and assume from
us certain assets and liabilities relating to the J. Jill business. The 75 J. Jill stores that were
not sold were closed. Gains and losses recorded in the periods subsequent to the closing are due to
working capital adjustments and modifications to the estimated lease liabilities relating to the
stores that were not sold and the Quincy, Massachusetts office space that is not being subleased or
used. As of July 31, 2010, we had settled the lease liabilities of 73 of the 75 stores not acquired
by the Purchaser. Lease termination costs were initially estimated and recorded at the time the
stores were closed, or existing space vacated, and are adjusted
subsequently, as necessary, when new information suggests that actual costs may vary from initial
estimates. Total cash expenditures to settle the lease liabilities for the remaining two unsold
stores cannot yet be finally determined and will depend on the outcome of negotiations with third
26
Table of Contents
parties. As a result, actual costs to terminate these leases may vary from current estimates
and managements assumptions and projections may change.
The $0.4 million income from discontinued operations recorded in the thirteen weeks ended July 31,
2010 includes adjustments to the estimated lease liabilities of the J. Jill, Talbots Kids and Mens
businesses, primarily related to the execution of an agreement to terminate and settle the lease
for a portion of the Companys vacant leased Quincy office space not assumed by the Purchaser in
the J. Jill sale, which reduced the Companys recorded lease liability for this space that had not
previously assumed a settlement option. The $3.1 million income from discontinued operations
recorded in the twenty-six weeks ended July 31, 2010 includes similar adjustments, primarily
relating to the Quincy office space as well as negotiated settlements on four of the leased J. Jill
retail locations which were finalized in the first quarter of 2010. The loss from discontinued
operations recorded in the thirteen and twenty-six weeks ended August 1, 2009 reflects the income
(losses) incurred by the J. Jill business prior to ceasing operations in July 2009, a $5.7 million
loss on the disposal of the J. Jill business recorded upon completion of the sale and adjustments
to estimated lease liabilities relating to the Talbots Kids and Mens businesses.
Liquidity and Capital Resources
We primarily finance our working capital needs, operating costs, capital expenditures, strategic
initiatives and restructurings, and debt and interest payment requirements through cash generated
by operations and existing credit facilities.
Merger with BPW and Related Financing Transactions
On April 7, 2010, we completed a series of transactions (collectively, the BPW Transactions)
which, in the aggregate, substantially reduced our indebtedness and significantly deleveraged our
balance sheet, consisting of three related transactions: (i) an Agreement and Plan of Merger
between Talbots and BPW Acquisition Corp. (BPW) pursuant to which a wholly-owned subsidiary of
the Company merged with and into BPW in exchange for the issuance of Talbots common stock and
warrants to BPW stockholders; (ii) the repurchase and retirement of all Talbots common stock held
by AEON (U.S.A.), Inc. (AEON (U.S.A.)), our then majority shareholder; the issuance of warrants
to purchase one million shares of Talbots common stock and the repayment of all of our outstanding
AEON Co., Ltd. (AEON) and AEON (U.S.A.) debt; and (iii) the execution of new senior secured
revolving credit facility.
In
connection with the merger, we issued 41.5 million shares of Talbots common stock and warrants
to purchase 17.2 million shares of Talbots common stock (the Talbots Warrants) for 100% ownership
of BPW. Approximately 3.5 million BPW warrants that did not participate in the warrant exchange
offer (the Non-Tendered Warrants) remained outstanding at the closing of the merger. Pursuant to
an agreement entered into during the merger process on December 8, 2009 (the Sponsors Agreement)
between Talbots and the sponsors of BPW, Perella Weinberg Partners Acquisition LP and BPW BNYH
Holdings LLC (together, the Sponsors), the Sponsors agreed not to transfer the shares of Talbots
common stock held by them for 180 days after the completion of the merger, subject to certain
exceptions and unless otherwise agreed to be waived by Talbots in whole or in part. Additionally,
in connection with the merger, we repurchased and retired the 29.9 million shares held by AEON
(U.S.A.), our former majority shareholder, in exchange for warrants to purchase one million shares
of Talbots common stock (the AEON Warrants).
The Talbots Warrants are immediately exercisable at $14.85 per warrant for one share of Talbots
common stock, have a stated term of five years from the date of issuance, April 9, 2010, and
beginning after April 9, 2011, are subject to accelerated expiration under certain conditions
including, at our discretion, if the trading value of Talbots common stock exceeds $19.98 per share
for 20 of 30 consecutive trading days in a period ending not more than 15 days prior to notice of
such acceleration. The warrants may be exercised on a cashless basis. These warrants began trading
on NYSE Amex in April 2010. Approximately 17.2 million Talbots Warrants were outstanding at July
31, 2010.
The Non-Tendered Warrants have an exercise price of $7.50 per warrant for 0.9853 share of Talbots
common stock. Approximately 2.6 million Non-Tendered Warrants were exercised for total cash
proceeds of $19.0 million immediately following the transaction. The 0.9 million Non-Tendered
Warrants that remained outstanding at July 31, 2010 are not exercisable for one year from the April
7, 2010 effective date of the merger, do not have anti-dilution rights, were de-listed from NYSE
Amex concurrent with the merger and expire February 26, 2015.
The AEON Warrants are immediately exercisable at $13.21 per share for one share of Talbots common
stock, have a stated term of five years from the date of issuance, April 7, 2010, and beginning
after April 7, 2011, are subject to accelerated
27
Table of Contents
expiration under certain conditions including, at our discretion, if the trading value of Talbots
common stock exceeds $23.12 per share for 20 of 30 consecutive trading days in a period ending not
more than 15 days prior to notice of such acceleration. The warrants may be exercised on a cashless
basis. One million AEON Warrants were outstanding at July 31, 2010.
Further in connection with the consummation and closing of the BPW merger, we executed a new senior
secured revolving credit agreement with a third-party lender (the Credit Facility). The Credit
Facility is an asset-based revolving credit facility (including a $25.0 million letter of credit
sub-facility) that permits us to borrow up to the lesser of (a) $200.0 million and (b) the
borrowing base, calculated as a percentage of the value of eligible credit card receivables and the
net orderly liquidation value of eligible private label credit card receivables, the net orderly
liquidation value of eligible inventory in the United States and the net orderly liquidation value
of eligible in-transit inventory from international vendors (subject to certain caps and
limitations), net of reserves as set forth in the agreement, minus the lesser of (x) $20.0 million
and (y) 10% of the borrowing base. Through the end of the second quarter, loans made pursuant to
the immediately preceding sentence carry interest, at our election, at either (a) the three-month
LIBOR plus 4.0% to 4.5% depending on availability thresholds or (b) the base rate plus 3.0% to
3.5%, depending on certain availability thresholds. Interest on borrowings is payable monthly in
arrears. We pay a fee on the unused portion of the commitment and outstanding letters of credit, if
any, monthly in arrears in accordance with formulas set forth in the agreement. As of July 31,
2010, our effective interest rate was 5.1% and we had additional borrowing availability of up to
$111.6 million.
Amounts are borrowed and repaid on a daily basis through a control account arrangement. Cash
received from customers is swept on a daily basis into a control account in the name of the agent
for the lenders. We are permitted to maintain a certain amount of cash in disbursement accounts,
including such amounts necessary to satisfy our current liabilities incurred in the ordinary course
of our business. Amounts may be borrowed and re-borrowed from time to time, subject to the
satisfaction or waiver of all borrowing conditions, including without limitation perfected liens on
collateral, accuracy of all representations and warranties, the absence of a default or an event of
default, and other borrowing conditions, all subject to certain exclusions as set forth in the
agreement.
The agreement matures on October 7, 2013, subject to earlier termination as set forth in the
agreement. The entire principal amount of loans under the facility and any outstanding letters of
credit will be due on the maturity date. Loans may be voluntarily prepaid at any time at our
option, in whole or in part, at par plus accrued and unpaid interest and any break funding loss
incurred. We are required to make mandatory repayments in the event of receipt of net proceeds from
asset dispositions, receipt of net proceeds from the issuance of securities and to the extent that
our outstanding indebtedness under the Credit Facility exceeds our maximum borrowing availability
at any time. Upon any voluntary or mandatory prepayment of borrowings outstanding at the LIBOR rate
on a day that is not the last day of the respective interest period, we will reimburse the lenders
for any resulting loss or expense that the lender may incur. Amounts voluntarily repaid prior to
the maturity date may be re-borrowed.
The Company and certain of our subsidiaries have executed a guaranty and security agreement
pursuant to which all obligations under the Credit Facility are fully and unconditionally
guaranteed on a joint and several basis. Additionally, pursuant to the security agreement, all
obligations are secured by (i) a first priority perfected lien and security interest in
substantially all assets of the Company and any guarantor from time to time and (ii) a first lien
mortgage on our Hingham, Massachusetts headquarters facility and Lakeville, Massachusetts
distribution facility. In connection with the lenders security interest in our proprietary Talbots
charge card program, Talbots and certain of our subsidiaries have also executed an access and
monitoring agreement that requires us to comply with certain monitoring and reporting obligations
to the agent with respect to such program, subject to applicable law.
We may not create, assume or suffer to exist any lien securing indebtedness incurred after the
closing date of the Credit Facility subject to certain limited exceptions set forth in the
agreement. The Credit Facility contains negative covenants prohibiting us, with certain exceptions,
from among other things, incurring indebtedness and contingent obligations, making investments,
intercompany loans and capital contributions, declaring or making any dividend payment except for
dividend payments or distributions payable solely in stock or stock equivalents, and disposing of
property or assets. We have agreed to keep the mortgaged properties in good repair, reasonable wear
and tear excepted. The agreement also provides for events of default, including failure to repay
principal and interest when due and failure to perform or violation of the provisions or covenants
of the agreement. The agreement does not contain any financial covenant tests.
28
Table of Contents
The Credit Facility is our only outstanding debt agreement at July 31, 2010. Of the $125.0 million
borrowed under the Credit Facility at its inception, approximately $37.4 million was outstanding at
July 31, 2010. We had no outstanding letters of credit under the associated sub-facility at July
31, 2010.
Subsequent to the end of the quarter, on August 31, 2010, we entered into a First Amendment to the
Credit Agreement with the third-party lender (the First Amendment), which modified the following
terms under the Credit Facility: (i) reduced the interest rates by one hundred basis points on loan
amounts under the Credit Facility for loans provided by the lenders to either (a) three-month LIBOR
plus 3.0% to 3.5%, or (b) the base rate plus 2.0% to 2.5%, in each case depending on certain
availability thresholds; (ii) adjusted the fee structure on the unused portion of the commitment
and reduced by one-half the rates applicable to documentary letters of credit; and (iii) extended
the time period during which a prepayment premium will be assessed upon the reduction or
termination of the revolving loan commitments from April 7, 2011 to April 7, 2012.
Concurrent with the execution of the First Amendment, we and the third-party lender entered into
(a) a Master Agreement for Documentary Letters of Credit and (b) a Master Agreement for Standby
Letters of Credit (each a Master Agreement), pursuant to which the lender will provide either
documentary or standby letters of credit at our request to various beneficiaries on the terms set
forth in the applicable Master Agreement, subject to any applicable limitations set forth in the
Credit Facility.
Fiscal 2010 Outlook
We expect that our primary uses of cash in the next twelve months will be concentrated in (i)
funding operations and working capital needs; (ii) investing in capital expenditures with
approximately $34.1 million in capital expenditures expected for the remainder of fiscal 2010,
primarily related to the store re-image initiative and investments in our operations, finance and
information technology systems; and (iii) seeking to continue to deleverage our consolidated
balance sheet by repaying our outstanding obligation under the Credit Facility.
Our cash and cash equivalents were $4.7 million as of July 31, 2010. Based on our assumptions, our
forecast and operating cash flow plan for 2010, our borrowing availability under the Credit
Facility and improvements to the Companys capital composition, we anticipate that the Company will
have sufficient liquidity to finance anticipated working capital and other expected cash needs for
at least the next twelve months. Our ability to meet our cash needs, obtain additional financing as
needed and satisfy our operating and other non-operating costs will depend upon, among other
factors, our future operating performance and creditworthiness as well as external economic
conditions and the general liquidity of the credit markets.
Cash Flows
The following is a summary of cash flows from continuing operations for the twenty-six weeks ended
July 31, 2010 and August 1, 2009:
Twenty-Six Weeks Ended | ||||||||
July 31, | August 1, | |||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Net cash provided by operating activities |
$ | 10.6 | $ | 41.3 | ||||
Net cash provided by (used in) investing activities |
327.1 | (13.2 | ) | |||||
Net cash (used in) provided by financing activities |
(441.1 | ) | 18.2 |
Cash provided by operating activities
Cash provided by operating activities was $10.6 million during the twenty-six weeks ended July 31,
2010 compared to net cash provided by operating activities of $41.3 million during the twenty-six
weeks ended August 1, 2009. Cash provided by operating activities in the twenty-six weeks ended
July 31, 2010 is the result of earnings excluding non-cash items in the period-to-date, offset by
increases in cash used in working capital changes, principally related to reductions in accounts
payable and other liabilities in the year-to-date period. The comparative decrease
period-over-period in cash provided of $30.7
29
Table of Contents
million is primarily due to the inclusion and payment
of merger-related costs in fiscal 2010 as well as changes in certain working capital items.
Reflected in these working capital changes are significant decreases in merchandise inventories in
both comparable periods, due to managements efforts to implement a disciplined inventory
management program over the past year; and significant decreases in accounts payable in both
comparable periods.
Cash provided by (used in) investing activities
Cash provided by investing activities was $327.1 million during the twenty-six weeks ended July 31,
2010 compared to cash used in investing activities of $13.2 million during the twenty-six weeks
ended August 1, 2009, an increase of $340.3 million. The cash flows provided by investing
activities in 2010 primarily reflect the $333.0 million of cash and cash equivalents acquired in
the merger with BPW on April 7, 2010. See Recent Developments for further information regarding
this transaction.
Cash flows used in investing activities relate solely to purchases of property and equipment in
both periods presented. Cash used for purchases of property and equipment during the twenty-six
weeks ended July 31, 2010 was $5.9 million compared to $13.2 million during the twenty-six weeks
ended August 1, 2009. This $7.3 million decline in capital expenditures reflects a continuation of
reduced capital spend initiated in fiscal 2009 as we finalize our strategy to determine the extent
of the roll-out of new fixtures and furnishings under our store re-image initiative in key retail
locations and investments in our operations, finance and information technology systems, including
implementing an enhanced planning and allocation system.
In the second quarter of 2010, we began store renovations of fourteen retail locations in three key
markets under our store re-image initiative. Renovations of these locations are expected to be
completed early in the third quarter of 2010 and include $6.2 million of related capital
expenditures. In connection with the renovations, $0.6 million of expenses related to accelerate
depreciation of property and equipment and costs associated with property disposals were recorded
in the second quarter of 2010, with primarily all of the expenses classified as cost of sales,
buying and occupancy in the consolidated statement of operations. Further in the second quarter of
2010, we began a complete rebuild of an additional location in a key market. Rebuild of this
location is expected to be completed in the third quarter of 2010 and include $2.9 million of
capital expenditures and $0.1 million of related expense.
These renovations mark the first roll-out of a multi-faceted store re-image initiative, a program
designed to translate our updated brand image of Tradition Transformed into a renovated
storefront and store lay-out. Implementation of this initiative is primarily comprised of two
programs first, a store renovation with new lay-out, fixtures, and exterior updates and signage
and second, a storefront refresh with new signage and exterior updates. We believe the store
re-image initiative is a key component in our plan to improve customer traffic and drive store
productivity and could be a significant portion of our future capital investment. Based on the
results of the renovations begun in the second quarter, we will evaluate the scope and execution of
the next phase of the initiative.
We expect to spend approximately $34.1 million in gross capital expenditures during the remainder
of fiscal 2010, primarily related to the store re-image initiative and systems
improvements.
Cash (used in) provided by financing activities
Cash used in financing activities was $441.1 million during the twenty-six weeks ended July 31,
2010 compared to cash provided by financing activities of $18.2 million during the twenty-six weeks
ended August 1, 2009. This change is primarily correlated to an outstanding debt reduction in the
twenty-six weeks ended July 31, 2010 compared to an outstanding debt increase in the twenty-six
weeks ended August 1, 2009 with outstanding debt totaling $37.4 million at July 31, 2010, $486.5
million at January 30, 2010, and $497.1 million at August 1, 2009. The net use of cash in financing
activities in the twenty-six weeks ended July 31, 2010 primarily reflects the repayment of $486.5
million in related party debt and payment of debt and equity issuance costs in connection with the
merger with BPW, partially offset by net borrowings on our new revolving credit facility of $37.4
million and proceeds from the exercise of Non-Tendered Warrants of $19.0 million. The net proceeds
of cash from financing activities in the twenty-six weeks ended August 1, 2009 primarily reflect a
net borrowing on credit facilities of $20.2 million, partially offset by payments of debt issuance
costs and the repurchase of shares surrendered by employee stock-award holders to satisfy
employees tax withholding obligations.
30
Table of Contents
Cash (used in) provided by discontinued operations
Net cash used in discontinued operations was $5.0 million for the twenty-six weeks ended July 31,
2010 compared to net cash provided by discontinued operations of $48.6 million for the twenty-six
weeks ended August 1, 2009. In the twenty-six weeks ended July 31, 2010, cash used in discontinued
operations was primarily related to the remaining lease liabilities of the Talbots Kids, Mens and
U.K. businesses and the J. Jill business. Cash provided by discontinued operations in the
comparable period of the prior year includes net cash proceeds from the sale of the J. Jill
business of $64.3 million.
Critical Accounting Policies
Our critical accounting policies are those policies which require the most significant judgments
and estimates in the preparation of our condensed consolidated financial statements. Management has
determined that our most critical accounting policies are those relating to the inventory markdown
reserve, sales return reserve, customer loyalty program, retirement plans, long-lived assets,
goodwill and other intangible assets, income taxes and stock-based compensation. We continue to
monitor our accounting policies to ensure proper application of current rules and regulations.
There have been no significant changes to our critical accounting policies discussed in our Annual
Report on Form 10-K for the fiscal year ended January 30, 2010.
Contractual Obligations
In the first quarter of 2010, we settled lease liabilities of four of the J. Jill retail locations
which were not assumed in the purchase of the J. Jill business or previously settled by us in
fiscal 2009. In the second quarter of 2010, we settled a portion of the lease liability of the
Quincy, Massachusetts office space which was not assumed in the purchase of the J. Jill business or
previously settled by us in fiscal 2009. Except for changes in our outstanding financing
arrangements, including the repayment of our outstanding related party debt and borrowing under the
Credit Facility in April 2010, discussed in the Liquidity and Capital Resources section above,
there were no other material changes to our contractual obligations during the twenty-six weeks
ended July 31, 2010. For a complete discussion of our contractual obligations, please refer to Item
7, Managements Discussion and Analysis of Financial Condition and Results of Operations in our
2009 Annual Report on Form 10-K.
Forward-looking Information
This Quarterly Report on Form 10-Q contains forward-looking information within the meaning of The
Private Securities Litigation Reform Act of 1995. These statements may be identified by such
forward-looking terminology as expect, achieve, plan, look, projected, believe,
anticipate, outlook, will, would, should, potential or similar statements or variations
of such terms. All of the information concerning our future liquidity, future financial performance
and results, future credit facilities and availability, future cash flows and cash needs, and other
future financial performance or financial position, as well as our assumptions underlying such
information, constitute forward-looking information. Our forward-looking statements are based on a
series of expectations, assumptions, estimates and projections about the Company, are not
guarantees of future results or performance, and involve substantial risks and uncertainty,
including assumptions and projections concerning our liquidity, internal plan, regular-price and
markdown selling, operating cash flows, and credit availability for all forward periods. Our
business and our forward-looking statements involve substantial known and unknown risks and
uncertainties, including the following risks and uncertainties:
| the continuing material impact of the volatility in the U.S. economic environment and global economic uncertainty on our business, continuing operations, liquidity, financing plans and financial results, including substantial negative impact on consumer discretionary spending and consumer confidence, substantial loss of household wealth and savings, the disruption and significant tightening in the U.S. credit and lending markets and potential long-term unemployment levels; | ||
| the satisfaction of all borrowing conditions under our credit facility including accuracy of all representations and warranties, no events of default, absence of material adverse effect or change and all other borrowing conditions; | ||
| any lack of sufficiency of available cash flows and other internal cash resources to satisfy all future operating needs and other cash requirements; | ||
| the ability to access on satisfactory terms, or at all, adequate financing and sources of liquidity necessary to fund our continuing operations and strategic initiatives and to obtain further increases in our credit facilities as may be needed from time to time; |
31
Table of Contents
| the impact of the current regulatory environment and financial systems reforms on our business, including new consumer credit rules; | ||
| the success and customer acceptance of our merchandise offerings; | ||
| the risks associated with our appointment of an exclusive global merchandise buying agent, including that the anticipated benefits and cost savings from this arrangement may not be realized or may take longer to realize than expected; and the risk that upon any cessation of the relationship, for any reason, we would be unable to successfully transition to an internal or other external sourcing function; | ||
| the ability to continue to purchase merchandise on open account purchase terms at existing or future expected levels and with acceptable payment terms and the risk that suppliers could require earlier or immediate payment or other security due to any payment concerns; | ||
| the risks and uncertainties in connection with any need to source merchandise from alternate vendors; | ||
| any impact to or disruption in our supply of merchandise including from any current and any future increased political or other unrest in various Asian countries which are our sources of merchandise supply or any other disruption in our ability to adequately obtain alternate merchandise supply as may be necessary; | ||
| the ability to successfully execute, fund and achieve the expected benefits of supply chain initiatives, anticipated lower inventory levels, cost reductions and all current and future strategic initiatives; | ||
| any significant interruption or disruption in the operation of our distribution facility or the domestic and international transportation infrastructure; | ||
| the risk that estimated or anticipated costs, charges and liabilities to settle and complete the transition and exit from and disposal of the J. Jill business, including both retained obligations and contingent risk for assigned obligations, may materially differ from or be materially greater than anticipated; | ||
| any future store closings and the success of and necessary funding for closing underperforming stores; | ||
| the ability to reduce spending as needed; | ||
| the ability to achieve our 2010 financial plan for operating results, working capital and cash flows; | ||
| any negative publicity concerning the specialty retail business in general or our business in particular; | ||
| the ability to accurately estimate and forecast future regular-price and markdown selling, operating cash flows and other future financial results and financial position; | ||
| the risk of impairment of goodwill and other intangible and long-lived assets; and | ||
| the risks and uncertainties associated with the outcome of litigation, claims, tax audits, and tax and other proceedings and the risk that actual liabilities, assessments and financial impact will exceed any estimated, accrued or expected amounts or outcomes. |
All of our forward-looking statements are as of the date of this Quarterly Report only. In each
case, actual results may differ materially from such forward-looking information. We can give no
assurance that such expectations or forward-looking statements will prove to be correct. An
occurrence of or any material adverse change in one or more of the risk factors or risks and
uncertainties referred to in this Report or included in our other periodic reports filed with the
SEC could materially and adversely affect our continuing operations and our future financial
results, cash flows, prospects and liquidity. Except as required by law, we do not undertake or
plan to update or revise any such forward-looking statements to reflect actual results, changes in
plans, assumptions, estimates or projections or other circumstances affecting such forward-looking
statements occurring after the date of this Report, even if such results, changes or circumstances
make it clear that any forward-looking information will not be realized. Any public statements or
disclosures by us following this Report which modify or impact any of the forward-looking
statements contained in this Report will be deemed to modify or supersede such statements in this
Report.
In addition to the information set forth in this Report, you should carefully consider the risk
factors and risks and uncertainties included in our 2009 Annual Report on Form 10-K and other
periodic reports filed with the SEC.
32
Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments and in our financial position represents the
potential loss arising from adverse changes in interest rates. We do not enter into financial
instruments for trading purposes.
At July 31, 2010, we had outstanding variable rate borrowings of $37.4 million under our Credit
Facility. The impact of a hypothetical 10% adverse change in interest rates for this variable rate
debt would have caused an additional pre-tax charge of $0.1 million for the quarter ended July 31,
2010.
We enter into certain purchase obligations outside the United States which are predominately
settled in U.S. dollars and, therefore, we have only minimal exposure to foreign currency exchange
risks. We do not hedge against foreign currency risks and believe that the foreign currency
exchange risk is not material. In addition, we operated 20 stores in Canada as of July 31, 2010. We
believe that our foreign currency translation risk is immaterial, as a hypothetical 10%
strengthening or weakening of the U.S. dollar relative to the applicable foreign currency would not
materially affect our results of operations or cash flow.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company has established disclosure controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and is accumulated and
communicated to management, including the principal executive officer (our Chief Executive Officer)
and principal financial officer (our Chief Financial Officer), to allow timely decisions regarding
required disclosure.
Our management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this Quarterly Report on Form 10-Q. Management recognizes that any disclosure controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level as of July 31,
2010.
Changes in Internal Control over Financial Reporting
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the period covered by this Quarterly Report
on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, on January 12, 2010, a Talbots common shareholder filed a putative class
and derivative action captioned Campbell v. The Talbots, Inc., et al., C.A. No. 5199-VCS, in the
Court of Chancery of the State of Delaware (the Chancery Court) against Talbots; Talbots board
of directors; AEON (U.S.A.), Inc.; BPW Acquisition Corp. (BPW); Perella Weinberg Partners LP, a
financial advisor to the audit committee of the Board of Directors of the Company and an affiliate
of Perella Weinberg Partners Acquisition LP, one of the sponsors of BPW; and the Vice Chairman,
Chief Executive Officer, and Senior Vice President of BPW. Among other things, the complaint
asserts claims for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties,
and violations of certain sections of the Delaware General Corporation Law (DGCL) and Talbots
by-laws in connection with the negotiation and approval of the merger agreement between Talbots and
BPW. We cannot accurately predict the likelihood of a favorable or unfavorable outcome or quantify
the amount or range of
33
Table of Contents
potential financial impact, if any.For additional information concerning this proceeding,
please see Item 3, Legal Proceedings of our 2009 Annual Report on Form 10-K.
Talbots is periodically named as a defendant in various lawsuits, claims and pending actions and is
exposed to tax risks. While Talbots believes the recorded amounts for pending claims, tax matters
and other proceedings or contingencies are adequate, there are inherent limitations in projecting
the outcome or final resolution of these matters and in the estimation process whereby future
actual amounts may exceed projected amounts, which could have a material adverse effect on Talbots
financial condition and results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, careful consideration
should be given to the risk factors discussed in Part I, Item 1A, Risk Factors, of our 2009 Annual
Report on Form 10-K, any of which could materially affect our business, operations, financial
position or future results. The risks described in our 2009 Annual Report on Form 10-K are not
intended to be exhaustive, are not the only risks facing the Company and are important to an
understanding of the statements made in this Quarterly Report, in our other filings with the SEC
and in any other discussion of our business. These risk factors, which contain forward-looking
information, should be read in conjunction with Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the condensed consolidated financial statements
and related notes included in this Quarterly Report. There have been no material changes from risk
factors previously disclosed in Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K
for the fiscal year ended January 30, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A summary of our repurchase activity under certain equity programs for the thirteen weeks ended
July 31, 2010 is set forth below:
Approximate Dollar | ||||||||||||
Value of Shares that | ||||||||||||
Total Number of | Average Price | may yet be Purchased | ||||||||||
Shares | Paid per | under the Equity | ||||||||||
Period | Purchased (1) | Share | Award Programs (2) | |||||||||
May 2, 2010 through May 29, 2010 |
11,541 | $ | 0.10 | $ | 20,145 | |||||||
May 30, 2010 through July 3, 2010 |
20,423 | 4.65 | 20,157 | |||||||||
July 4, 2010 through July 31, 2010 |
2,053 | 2.53 | 20,128 | |||||||||
Total |
34,017 | $ | 2.98 | $ | 20,128 | |||||||
(1) | We repurchased 25,575 shares in connection with stock forfeited by employees prior to vesting under our equity compensation plan, at an acquisition price of $0.01 per share. | |
Our equity program permits employees to tender shares in order to satisfy the employees tax withholding obligations from the vesting of their restricted stock. During the period, we repurchased 8,442 shares of common stock from certain employees to cover tax withholding obligations from the vesting of stock, at a weighted average acquisition price of $11.97 per share. | ||
(2) | As of July 31, 2010, there were 2,012,818 shares of nonvested stock that were subject to buyback at $0.01 per share, or $20,128.18 in the aggregate, that we have the option to repurchase if employment is terminated prior to vesting. |
34
Table of Contents
Item 6. Exhibits
10.1 | First Amendment to Credit Agreement, dated August 31, 2010, by and among, the Company, TCFC, TGLP, each as borrower, the subsidiaries of the Company from time to time party thereto, as guarantors, and General Electric Capital Corporation, as Agent, for the financial institutions from time to time party thereto, and as a lender. (1) | |
10.2 | Master Agreement for Documentary Letters of Credit, dated August 31, 2010, by General Electric Capital Corporation, the Company, TCFC, TGLP, Talbots Classics, Inc., Talbots Import, LLC, Birch Pond Realty Corporation, Talbots International Retailing Limited, Inc., Talbots (U.K.) Retailing Limited, and Talbots (Canada), Inc. (1) | |
10.3 | Master Agreement for Standby Letters of Credit, dated August 31, 2010, by General Electric Capital Corporation, the Company, TCFC, TGLP, Talbots Classics, Inc., Talbots Import, LLC, Birch Pond Realty Corporation, Talbots International Retailing Limited, Inc., Talbots (U.K.) Retailing Limited, and Talbots (Canada), Inc. (1) | |
31.1 | Certification of Trudy F. Sullivan, President and Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a). (2) | |
31.2 | Certification of Michael Scarpa, Chief Operating Officer, Chief Financial Officer and Treasurer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a). (2) | |
32.1 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, by Trudy F. Sullivan, President and Chief Executive Officer of the Company, and Michael Scarpa, Chief Operating Officer, Chief Financial Officer and Treasurer of the Company. (2) |
(1) | Incorporated by reference to the Current Report on Form 8-K filed on August 31, 2010. | |
(2) | Filed with this Form 10-Q. |
35
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 8, 2010 | THE TALBOTS, INC. |
|||
By: | /s/ Michael Scarpa | |||
Michael Scarpa | ||||
Chief Operating Officer, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
36