10-Q 1 d010210q.txt FORM 10Q- THE DRESS BARN INC. I - 9 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended January 26, 2002 Commission file number 0-11736 THE DRESS BARN, INC. (Exact name of registrant as specified in its charter) Connecticut 06-0812960 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 Dunnigan Drive, Suffern, New York 10901 (Address of principal executive offices) (Zip Code) (845) 369-4500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock $.05 par value Indicate whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. .05 par value 18,151,244 shares on March 3, 2002 Page 1 of 14 THE DRESS BARN, INC. FORM 10-Q QUARTER ENDED JANUARY 26, 2002 TABLE OF CONTENTS Page Number Part I. FINANCIAL INFORMATION (Unaudited): Item 1. Financial Statements: Consolidated Balance Sheets January 26, 2002 (unaudited) and July 28, 2001 I-3 Consolidated Statements of Earnings (unaudited) for the Thirteen weeks ended January 26, 2002 and January 27, 2001 I-4 Consolidated Statements of Earnings (unaudited) for the Twenty-Six weeks ended January 26, 2002 and January 27, 2001 I-5 Consolidated Statements of Cash Flows (unaudited) for the Twenty-Six weeks ended January 26, 2002 and January 27, 2001 I-6 Notes to Consolidated Financial Statements (unaudited) I-7 and I-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I-9 through I-12 Part II. OTHER INFORMATION: Item 1. Legal Proceedings * Item 2. Changes in Securities * Item 3. Defaults Upon Senior Securities * Item 4. Submissions of Matters to a Vote of Security Holders I-13 Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K I-13 Signature Page I-14 * Not applicable in this filing. The Dress Barn, Inc. and Subsidiaries Consolidated Balance Sheets Dollars in thousands except share data
January 26, July 28, 2002 2001 ------------------ ----------------- ASSETS Current Assets: (unaudited) Cash & cash equivalents $19,810 $16,834 Marketable securities and investments 196,603 177,474 Merchandise inventories 86,435 104,487 Prepaid expenses and other 4,874 4,147 ------------------ ----------------- Total Current Assets 307,722 302,942 ------------------ ----------------- Property and Equipment: Leasehold improvements 62,501 59,019 Fixtures and equipment 154,528 144,468 Computer software 15,250 14,277 Automotive equipment 531 547 ------------------ ----------------- 232,810 218,311 Less accumulated depreciation and amortization 143,013 129,712 ------------------ ----------------- 89,797 88,599 ------------------ ----------------- Deferred Taxes 6,312 7,278 ------------------ ----------------- Other Assets 5,146 3,463 ------------------ ----------------- $408,977 $402,282 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable- trade $46,896 $53,681 Accrued expenses 43,301 45,006 Customer credits 7,895 5,811 Income taxes payable 3,775 1,187 ------------------ ----------------- Total Current Liabilities 101,867 105,685 ------------------ ----------------- Commitments Shareholders' Equity: Preferred stock, par value $.05 per share: Authorized- 100,000 shares Issued and outstanding- none -- -- Common stock, par value $.05 per share: Authorized- 30,000,000 shares Issued- 25,921,219 and 25,656,232 shares, respectively Outstanding- 18,173,719 and 18,237,032 shares, respectively 1,299 1,283 Additional paid-in capital 48,339 45,339 Retained earnings 379,489 364,491 Treasury stock, at cost (122,238) (114,577) Accumulated other comprehensive income 221 61 ------------------ ----------------- 307,110 296,597 ------------------ ----------------- $408,977 $402,282 ================== ================= See notes to unaudited condensed financial statements
The Dress Barn, Inc. and Subsidiaries Consolidated Statements of Earnings - Second Quarter (unaudited) Amounts in thousands except per share amounts
Thirteen Weeks Ended --------------------------------------- January 26, January 27, 2002 2001 ------------------ ----------------- Net sales $171,241 $164,234 Cost of sales, including occupancy and buying costs 109,488 104,457 ------------------ ----------------- Gross profit 61,753 59,777 Selling, general and administrative expenses 46,068 44,150 Depreciation and amortization 6,060 5,495 ------------------ ----------------- Operating income 9,625 10,132 Interest income- net 1,483 2,672 ------------------ ----------------- Earnings before income taxes 11,108 12,804 Income taxes 3,999 4,674 ------------------ ----------------- Net earnings $7,109 $8,130 ================== ================= Earnings per share Basic $0.39 $0.44 ================== ================= Diluted $0.38 $0.43 ================== ================= Weighted average shares outstanding: Basic 18,262 18,309 ------------------ ----------------- Diluted 18,720 18,921 ------------------ ----------------- See notes to unaudited condensed financial statements
The Dress Barn, Inc. and Subsidiaries Consolidated Statements of Earnings - Six Months (unaudited) Amounts in thousands except per share amounts
Twenty-Six Weeks Ended --------------------------------------- January 26, January 27, 2002 2001 ------------------ ----------------- Net sales $353,320 $352,562 Cost of sales, including occupancy and buying costs 229,193 225,476 ------------------ ----------------- Gross profit 124,127 127,086 Selling, general and administrative expenses 91,927 87,766 Depreciation and amortization 11,820 11,265 ------------------ ----------------- Operating income 20,380 28,055 Interest income- net 3,053 4,884 ------------------ ----------------- Earnings before income taxes 23,433 32,939 Income taxes 8,436 12,023 ------------------ ----------------- Net earnings $14,997 $20,916 ================== ================= Earnings per share: Basic $0.82 $1.15 ================== ================= Diluted $0.80 $1.12 ================== ================= Weighted average shares outstanding: Basic 18,295 18,170 ------------------ ----------------- Diluted 18,710 18,714 ------------------ ----------------- See notes to unaudited condensed financial statements
The Dress Barn, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Dollars in thousands
Twenty-Six Weeks Ended ------------------------------------- January 26, January 27, 2002 2001 ------------------ ---------------- Operating Activities: Net earnings $14,997 $20,916 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization of property and equipment 11,820 11,265 Change in deferred income taxes 966 566 Changes in assets and liabilities: Decrease in merchandise inventories 18,052 23,125 Increase in prepaid expenses (727) (984) Increase in other assets (1,683) (853) Decrease in accounts payable- trade (6,785) (15,860) (Decrease) increase in accrued expenses (1,705) 3,011 Increase in customer credits 2,084 1,796 Increase (decrease) in income taxes payable 2,588 (5,007) ------------------ ---------------- Total adjustments 24,610 17,059 ------------------ ---------------- Net cash provided by operating activities 39,607 37,975 ------------------ ---------------- Investing Activities: Purchases of property and equipment - net (13,018) (11,666) Sales and maturities of marketable securities and investments 45,038 21,415 Purchases of marketable securities and investments (64,007) (39,665) ------------------ ---------------- Net cash used in investing activities (31,987) (29,916) ------------------ ---------------- Financing Activities: Proceeds from Employee Stock Purchase Plan 46 52 Purchase of treasury stock (7,661) --- Proceeds from stock options exercised 2,971 4,974 ------------------ ---------------- Net cash (used in) provided by financing activities (4,644) 5,026 ------------------ ---------------- Net increase in cash and cash equivalents 2,976 13,085 Cash and cash equivalents- beginning of period 16,834 2,978 ------------------ ---------------- Cash and cash equivalents- end of period $19,810 $16,063 ================== ================ Supplemental Disclosure of Cash Flow Information: Cash paid for income taxes $4,827 $18,374 ================== ================ See notes to unaudited condensed financial statements
THE DRESS BARN, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 1. Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) which management considers necessary to present fairly the consolidated financial position of The Dress Barn Inc., and its wholly owned subsidiaries (the "Company") as of January 26, 2002 and July 28, 2001, the consolidated results of its operations for the thirteen and twenty-six weeks ended January 26, 2002 and January 27, 2001, and cash flows for the twenty-six weeks ended January 26, 2002 and January 27, 2001. The results of operations for thirteen and twenty-six week periods may not be indicative of the results for the entire year. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's July 28, 2001 Annual Report to Shareholders. Accordingly, significant accounting policies and other disclosures necessary for complete financial statements in conformity with generally accepted accounting principles have been omitted since such items are reflected in the Company's audited financial statements and related notes thereto. 2. Stock Repurchase Program In October 1998, the Board of Directors authorized the Company to repurchase its outstanding common stock for up to an aggregate amount of $75 million. The $75 million stock repurchase program was completed in March 2000, with a total of approximately 4.8 million shares repurchased at an average price of $15.47 per share. On March 30, 2000, The Board of Directors authorized an additional $50 million stock repurchase program, which was increased to $75 million on April 5, 2001. As of the date of this filing, the Company had repurchased 1,161,500 shares under the second $75 million stock repurchase program at an aggregate purchase price of approximately $24.8 million. During the 26 weeks ended January 26, 2002 (the "six months"), 330,300 shares were repurchased at an average price of $23.20 totaling approximately $7.7 million. Subsequent to January 26, 2002, the Company has repurchased 50,500 shares at an aggregate purchase price of approximately $1.3 million. 3. Earnings Per Share There were no options excluded from the earnings per share calculation as the average market price exceeded the option price of all options outstanding. THE DRESS BARN, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 4. Comprehensive Income The Company's short-term investments are classified as available for sale securities, and therefore, are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive income. Total comprehensive income for the six months ended January 26, 2002 was $15.2 million versus comprehensive income of $21.8 million for the six months ended January 27, 2001. Total comprehensive income for the quarter ended January 26, 2002 was $7.2 million versus $8.2 million in the prior period. Total comprehensive income is composed of net earnings and net unrealized gains or losses on available for sale securities. 5. Recent Accounting Pronouncements Effective July 30, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The adoption of SFAS 133 did not have an impact on the consolidated financial position, results of operations, or cash flows of the Company. In July 2001, Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142) were released. The related statements address financial accounting and reporting for business combinations and acquired goodwill and other intangible assets. SFAS 141 is effective for all business combinations initiated after June 30, 2001. SFAS 142 is effective for all fiscal years beginning after December 15, 2001. The Company is required to adopt SFAS 142 in fiscal 2003. The adoption of SFAS 142 will not have an impact on the consolidated financial position, results of operations, or cash flows of the Company. In August 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS 144") was released. This Statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. In October 2001, SFAS No. 144, " Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144") was released. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company is required to adopt SFAS 143 and SFAS 144 in fiscal 2003. The Company has not yet assessed what impact, if any, the adoption of SFAS 143 and SFAS 144 will have on its financial position and results of operations. THE DRESS BARN, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth the percentage change in dollars from last year for the thirteen and twenty-six week periods ended January 26, 2002, and the percentage of net sales for each component of the Consolidated Statements of Earnings for each of the periods presented:
Second Quarter Six Months -------------- ---------- % Change % of Sales % Change % of Sales ---------- ---------- from L/Y T/Y L/Y from L/Y T/Y L/Y -------- --- --- -------- --- --- Net Sales 4.3% 0.2% Cost of Sales, including Occupancy & Buying 4.8% 63.9% 63.6% 1.6% 64.9% 64.0% Gross Profit 3.3% 36.1% 36.4% -2.3% 35.1% 36.0% Selling, General and Admin. Expenses 4.3% 26.9% 26.9% 4.7% 26.0% 24.9% Depreciation and Amortization 10.3% 3.6% 3.3% 4.9% 3.3% 3.2% Operating Income -5.0% 5.6% 6.2% -27.4% 5.8% 7.9% Interest Income - Net -44.5% 0.9% 1.6% -37.5% 0.8% 1.4% Earnings Before Income Taxes -13.2% 6.5% 7.8% -28.9% 6.6% 9.3% Net Earnings -12.6% 4.2% 5.0% -28.3% 4.2% 5.9%
Net sales for the thirteen weeks ended January 26, 2002 (the "second quarter") increased by 4.3% to $171.2 million from $164.2 million for the thirteen weeks ended January 27, 2001 (the "prior period"). The sales increase was due to an approximate 8% increase in average total selling square footage versus the prior period, offset by a 1% decrease in comparable store sales. Net sales for the twenty-six weeks ended January 26, 2002 (the "six months") increased 0.2% to $353.3 million from $352.6 million for the twenty-six weeks ended January 27, 2001 (the "prior six-month period"). The sales increase was due to an approximate 8% increase in average total selling square footage versus the prior six-month period, offset by a 5% decrease in comparable store sales. Revenues from retail sales, net of returns, are recognized upon delivery of the merchandise to the customer and exclude sales taxes. The tragic events of September 11th, 2001 initially added to the already existing weakness in the Company's sales that had started in spring 2001 and continued into the beginning of the six months. However, by the beginning of October, sales trends had returned to pre-September 11th levels. Sales trends improved in the second quarter, especially during the holiday season with December 2001 comparable store sales increasing 2%. Comparable store sales decreased 1% for January 2002. The Company remains guarded in its outlook for the spring season and continues to exercise caution by maintaining inventory levels in line with sales trends. THE DRESS BARN, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The 8% increase in square footage was due to the opening of 44 new stores and the conversion of 5 single-format stores into combo stores during the six months. These store openings offset the square footage reduction from the closing of 23 underperforming stores during the six months (19 of which were closed during the second quarter). During the second quarter, which includes the holiday season, the Company opened 6 new stores. As of January 26, 2002, the Company had 741 stores in operation, (213 Dress Barn stores, 58 Dress Barn Woman stores and 470 combo stores), versus 701 stores in operation at January 27, 2001, (226 Dress Barn stores, 57 Dress Barn Woman stores and 418 combo stores). The Company's strategy for the remainder of fiscal 2002 is to continue opening primarily combo stores and converting its existing single-format stores into combo stores, while closing its underperforming locations. The Company anticipates opening approximately 25 stores and closing approximately 15 stores during the remainder of the fiscal year. The Company significantly reduced the number of catalogs mailed during the second quarter compared to the prior period and does not plan to mail any additional catalogs for the remainder of fiscal 2002. The Company's earnings per share - diluted for the second quarter and six months were negatively impacted by approximately $.07 and $.19, respectively versus last year's $.09 and $.16, respectively, due to operating losses of its catalog and e-commerce operations. Gross profit (net sales less cost of goods sold, including occupancy and buying costs) for the second quarter increased by 3.3% to $61.8 million, or 36.1% of net sales, from $59.8 million, or 36.4% of net sales, for the prior period. For the six months, gross profit decreased 2.3%, to $124.1 million, or 35.1% of net sales, from $127.1 million, or 36.0% of net sales, for the prior six-month period. The decrease in gross profit as a percentage of sales for both periods was primarily due to negative leverage from the decrease in comparable store sales on occupancy and buying costs. Merchandise margins as a percent of sales increased slightly from last year for both periods due primarily to higher initial margins and tight inventory controls, which helped to increase inventory turns and minimize markdowns. Merchandise inventories are valued at the lower of cost or market as determined by the retail method. Selling, general and administrative (SG&A) expenses increased by 4.3% to $46.1 million, or 26.9% of net sales, in the second quarter as compared to $44.2 million, or 26.9% of net sales, in the prior period. For the six months, SG&A expenses increased by 4.7% to $91.9 million, or 26.0% of net sales, versus $87.8 million, or 24.9% of net sales, in the prior six-month period. These increases in SG&A expenses were primarily due to increases in store operating costs, primarily selling and benefit costs resulting from the increase in the Company's store base, and higher advertising and marketing costs. Advertising costs are expensed in the period in which they are incurred. In addition, SG&A expenses included ongoing costs for the Dress Barn Catalog and e-commerce operations. The increase in SG&A as a percentage of net sales for the six months was primarily due to negative comparable store sales leverage on SG&A expenses. In the second quarter, continuing cost controls and productivity enhancements offset the negative comparable store sales leverage, resulting in SG&A remaining flat as a percentage of net sales compared to the prior period. THE DRESS BARN, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Depreciation increased to $6.0 million in the second quarter from $5.5 million in the prior period. Increases in fixed asset purchases during the prior twelve months were accompanied by additional writeoffs of obsolete computer equipment and software in the second quarter. For the six months period depreciation increased to $11.8 million from $11.3 million in the prior six-month period. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years. Interest income decreased 44.5% to $1.5 million in the second quarter this year and decreased 37.5% to $3.1 million in the six months versus last year's $2.7 million and $4.9 million, respectively. These decreases were due to the steep reduction in investment rates versus last year notwithstanding that funds available for investment were higher than last year for both periods. The effective tax rates for both the second quarter and six months were 36.0%, a slight reduction from the 36.5% effective tax rate for the fiscal year ended July 28, 2001. This reduction was due to a reduction in the effective state tax rate. Principally as a result of the above factors, net income for the second quarter was $7.1 million, or 4.2% of net sales, a decrease of 12.6% from $8.1 million, or 5.0% of net sales, in the prior period. Net income for the six months decreased 28.3% to $15.0 million, or 4.2% of net sales, versus $20.9 million, or 5.9% of net sales, for the prior six-month period. A primary factor in determining the Company's net income during any period is the level of merchandise sales at acceptable profit margins. A critical accounting policy for the Company is the valuation of its merchandise inventories. Merchandise inventories are valued at the lower of cost or market as determined by the retail method. Liquidity and Capital Resources The Company has had a debt-free balance sheet for several years. The marketable securities and investments totaling over $196 million as of January 26, 2002 are invested primarily in tax free municipal bonds, short term investments and money market funds with the majority of such investments having scheduled maturities of one year or less. The Company holds no options or other derivative instruments. While the Company has substantial commitments under its store leases, the Company has the ability to cancel certain leases if specified sales levels are not achieved. Consistent with the other credit cards it accepts, the Company assumes no credit risk with respect to the Dress Barn credit card. The Company believes that its cash, cash equivalents and short-term investments, together with cash flow from operations, will be adequate to fund the Company's fiscal 2002 planned capital expenditures, other operating requirements and other proposed or contemplated expenditures. Inventories were current and in line with sales projections. THE DRESS BARN, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Seasonality The Company has historically experienced substantially lower earnings in its second fiscal quarter ending in January than during its other three fiscal quarters, reflecting the intense promotional atmosphere that has characterized the Christmas shopping season in recent years. This trend continued for this year's second quarter, however, the unusually large 8.2% decrease in comparable store sales for the first fiscal quarter ended October 27, 2001 resulted in sharply reduced earnings that reduced the apparent impact of fiscal 2002's second quarter's seasonality. In addition, the Company's quarterly results of operations may fluctuate materially depending on, among other things, increases or decreases in comparable store sales, adverse weather conditions, shifts in timing of certain holidays, the timing of new store openings, net sales contributed by new stores and changes in the Company's merchandise mix. Forward-Looking Statements and Factors Affecting Future Performance This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect the Company's current views with respect to future events and financial performance. The Company's actual results of operations and future financial condition may differ materially from those expressed or implied in any such forward looking statements as a result of certain factors set forth in the Company's Annual Report on Form 10-K for its fiscal year ended July 28, 2001. Part II - OTHER INFORMATION Item 4 -- Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of the Company's Shareholders was held on December 10, 2001. (b) The Company's shareholders voted for: 1. The reelection of Elliot S. Jaffe and Burt Steinberg, as Directors of the Company for 3-year terms (15,085,425 and 15,408,453 shares, respectively, voted for reelection and 1,580,713 and 1,257,685 shares, respectively, withheld authority with respect for such nominees), 2. The election of David R. Jaffe as Director of the Company for a 2-year term (15,083,053 shares voted for election and 1,583,085 shares withheld authority with respect for such nominee), 3. The election of Vivian Behrens as Director of the Company for a 1-year term (16,426,632 shares voted for election and 239,506 shares withheld authority with respect for such nominee), 4. The increase in the authorized shares of the Company's common stock from 30 million to 50 million (15,041,336 shares voted for the increase, 1,619,901 shares voted against the increase and 4,901 shares abstained), and 5. Approval of the 2001 Dress Barn Stock Option Plan (8,750,399 shares voted for approval, 6,504,244 shares voted against approval, 10,620 shares abstained and there were 1,400,857 shares represented by broker non-votes). Item 6 -- Exhibits and Reports on Form 8-K (a) No exhibits are required to be filed herewith. (b) No reports on Form 8-K have been filed during the quarter for which this report is filed. SIGNATURE 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. BY: /s/ ARMAND CORREIA Armand Correia Senior Vice President (Principal Financial and Accounting Officer)