10-Q 1 b39731tbe10-q.txt THE TALBOTS, INC. 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 5, 2001 OR [ ] 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 (I.R.S. Employer incorporation or organization) Identification No.) 1 Talbots Drive, Hingham, Massachusetts 02043 ------------------------------------------ ------------------- (Address of principal executive offices) (Zip Code) (781) 749-7600 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding as of Class June 11, 2001 ----------------------------- ----------------- Common Stock, $0.01 par value 62,523,064 1 2 INDEX TO FORM 10-Q PAGE ---- PART I. FINANCIAL INFORMATION Item 1: Financial Statements Consolidated Statements of Earnings for the Thirteen Weeks Ended May 5, 2001 and April 29, 2000 ...................3 Consolidated Balance Sheets as of May 5, 2001, February 3, 2001 and April 29, 2000 ...................................4 Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 5, 2001 and April 29, 2000 ...................5 Notes to Consolidated Financial Statements ...................6-9 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations ......................10-13 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K ..............................14 2 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE TALBOTS, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE THIRTEEN WEEKS ENDED MAY 5, 2001 AND APRIL 29, 2000 (Amounts in thousands except per share data) -------------------------------------------------------------------------------- THIRTEEN WEEKS ENDED ----------------------- MAY 5, APRIL 29, 2001 2000 -------- -------- NET SALES $401,072 $363,498 COSTS AND EXPENSES Cost of sales, buying and occupancy 218,248 202,038 Selling, general and administrative 116,374 106,801 -------- -------- OPERATING INCOME 66,450 54,659 INTEREST Interest expense 1,718 1,977 Interest income 492 413 -------- -------- INTEREST EXPENSE - NET 1,226 1,564 -------- -------- INCOME BEFORE TAXES 65,224 53,095 INCOME TAXES 25,111 20,442 -------- -------- NET INCOME $ 40,113 $ 32,653 ======== ======== NET INCOME PER SHARE - BASIC $ 0.64 $ 0.53 ======== ======== ASSUMING DILUTION $ 0.62 $ 0.52 ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (in thousands) - BASIC 62,756 61,134 ======== ======== ASSUMING DILUTION 64,993 62,824 ======== ======== CASH DIVIDENDS PER SHARE $ 0.07 $ 0.06 ======== ======== See notes to consolidated financial statements. 3 4 THE TALBOTS, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (unaudited) MAY 5, 2001, FEBRUARY 3, 2001 AND APRIL 29, 2000 (Dollar amounts in thousands except share data) --------------------------------------------------------------------------------
MAY 5, FEBRUARY 3, APRIL 29, 2001 2001 2000 --------- ----------- --------- ASSETS ------ CURRENT ASSETS: --------------- Cash and cash equivalents $ 42,581 $ 69,986 $ 48,299 Customer accounts receivable - net 162,711 135,528 123,746 Merchandise inventories 218,298 233,948 189,879 Deferred catalog costs 6,297 9,236 5,158 Due from affiliates 8,668 8,878 8,023 Deferred income taxes 14,188 13,749 9,789 Prepaid and other current assets 31,845 35,080 19,369 --------- --------- --------- TOTAL CURRENT ASSETS 484,588 506,405 404,263 PROPERTY AND EQUIPMENT - NET 246,667 234,802 205,647 GOODWILL - NET 36,521 36,857 37,864 TRADEMARKS - NET 77,672 78,268 80,056 DEFERRED INCOME TAXES 2,468 2,264 2,296 --------- --------- --------- TOTAL ASSETS $ 847,916 $ 858,596 $ 730,126 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: -------------------- Accounts payable $ 38,405 $ 82,676 $ 44,377 Accrued liabilities 127,217 105,364 107,220 --------- --------- --------- TOTAL CURRENT LIABILITIES 165,622 188,040 151,597 LONG-TERM DEBT 100,000 100,000 100,000 DEFERRED RENT UNDER LEASE COMMITMENTS 19,877 19,785 19,000 STOCKHOLDERS' EQUITY: --------------------- Common stock, $0.01 par value; 100,000,000 authorized; 74,473,475 shares, 74,396,884 shares and 72,521,792 shares issued, respectively, and 62,538,064 shares, 63,106,806 shares and 61,773,128 shares outstanding, respectively 745 744 726 Additional paid-in capital 368,118 366,290 323,975 Retained earnings 400,497 364,800 295,366 Accumulated other comprehensive income (loss) (4,388) (3,658) (2,712) Restricted stock awards (1,210) (1,372) (1,968) Treasury stock, at cost; 11,935,411 shares, 11,290,078 shares and 10,748,664 shares, respectively (201,345) (176,033) (155,858) --------- --------- --------- TOTAL STOCKHOLDERS' EQUITY 562,417 550,771 459,529 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 847,916 $ 858,596 $ 730,126 ========= ========= =========
See notes to consolidated financial statements. 4 5 THE TALBOTS, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THIRTEEN WEEKS ENDED MAY 5, 2001 AND APRIL 29, 2000 (Dollar amounts inthousands) --------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED ------------------------ MAY 5, APRIL 29, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------- Net income $ 40,113 $ 32,653 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,879 10,579 Deferred rent 104 376 Net non-cash compensation activity 162 259 Loss on disposal of property and equipment 933 868 Deferred income taxes (652) (532) Changes in current assets and liabilities: Customer accounts receivable (27,205) (7,037) Merchandise inventories 15,518 (6,440) Deferred catalog costs 2,939 3,202 Due from affiliates 210 422 Tax benefit from options exercised 1,026 2,633 Prepaid and other current assets 2,926 1,628 Accounts payable (44,373) (12,270) Accrued liabilities 21,916 20,034 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 25,496 46,375 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: ------------------------------------- Additions to property and equipment, net of disposals (23,875) (13,222) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (23,875) (13,222) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: ------------------------------------- Proceeds from options exercised 803 6,883 Cash dividends (4,417) (3,677) Purchase of treasury stock (25,312) (9,879) -------- -------- NET CASH USED IN FINANCING ACTIVITIES (28,926) (6,673) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (100) (182) -------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (27,405) 26,298 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,986 22,001 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,581 $ 48,299 ======== ========
See notes to consolidated financial statements. 5 6 THE TALBOTS, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- 1. OPINION OF MANAGEMENT With respect to the unaudited consolidated financial statements set forth herein, it is the opinion of management of The Talbots, Inc. and its subsidiaries (the "Company") that all adjustments, which consist only of normal recurring adjustments necessary to present a fair statement of the results for such interim periods, have been included. These financial statements should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended February 3, 2001, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated in consolidation. The February 3, 2001 consolidated balance sheet has been derived from the Company's audited consolidated balance sheet. Certain prior year amounts have been reclassified to conform to current year classifications. 2. SEASONAL VARIATIONS IN BUSINESS Due to seasonal variations in the retail industry, the results of operations for any interim period are not necessarily indicative of the results expected for the full fiscal year. 3. FEDERAL AND STATE INCOME TAXES The Company has provided for income taxes based on the estimated annual effective rate method. 6 7 4. COMPREHENSIVE INCOME The following is the Company's comprehensive income for the periods ended May 5, 2001 and April 29, 2000:
Thirteen Weeks Ended ---------------------------- May 5, 2001 April 29, 2000 ----------- -------------- Net income $ 40,113 $ 32,653 Other comprehensive income: Cumulative foreign currency translation adjustment (730) (675) -------- -------- Comprehensive income $ 39,383 $ 31,978 ======== ========
5. NET INCOME PER SHARE The weighted average shares used in computing basic and diluted net income per share are presented below. Options to purchase 1,225,000 and 21,000 shares of common stock were outstanding during the thirteen-week periods ending May 5, 2001 and April 29, 2000, respectively, but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market prices of the common shares.
Thirteen Weeks Ended --------------------------- May 5, 2001 April 29, 2000 ----------- -------------- Shares for computation of basic net income per share 62,756 61,134 Effect of stock compensation plans 2,237 1,690 ------ ------ Shares for computation of diluted net income per share 64,993 62,824 ====== ======
6. SEGMENT INFORMATION The Company has segmented its operations in a manner that reflects how its chief operating decision-maker reviews the results of the operating segments that make up the consolidated entity. The Company has two reportable segments, its retail stores (the "Stores Segment"), which include the Company's United States, Canada and United Kingdom retail store operations, and its catalog operations (the "Catalog Segment"), which includes both catalog and internet operations. The Company's reportable segments offer similar products; however, each segment requires different marketing and management strategies. The Stores Segment derives its revenues from the sale of women's and children's classic apparel, accessories and shoes, 7 8 through its retail stores, while the Catalog Segment derives its revenues through its approximately 30 distinct catalog mailings per year and through its e-commerce site at www.talbots.com. The Company evaluates the operating performance of its identified segments based on a direct profit measure. The accounting policies of the segments are generally the same as those described in the summary of significant accounting policies, except as follows: direct profit is calculated as net sales less cost of goods sold and direct expenses, such as payroll, occupancy and other direct costs. Indirect expenses are not allocated on a segment basis; therefore, no measure of segment net income or loss is available. Assets are not allocated between segments; therefore, no measure of segment assets is available. The following is the Stores Segment and Catalog Segment information for the thirteen weeks ended May 5, 2001 and April 29, 2000: May 5, 2001 ------------------------------------ Stores Catalog Total -------- -------- -------- Sales to external customers $323,079 $ 77,993 $401,072 Direct Profit 79,224 18,323 97,547 April 29, 2000 ------------------------------------ Stores Catalog Total -------- -------- -------- Sales to external customers $295,443 $ 68,055 $363,498 Direct Profit 66,050 15,597 81,647 The following reconciles direct profit to consolidated net income before taxes for the thirteen weeks ending May 5, 2001 and April 29, 2000: May 5, 2001 April 29, 2000 ----------- -------------- Total direct profit for reportable segments $97,547 $81,647 Less: indirect expenses 32,323 28,552 ------- ------- Consolidated net income before taxes $65,224 $53,095 ======= ======= 7. NEW ACCOUNTING PRONOUNCEMENTS Effective October 29, 2000, the Company adopted the Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs." The EITF stated that a seller of goods should classify amounts billed to the customer for shipping and handling as revenue and the costs incurred by the seller for performing such services as an element of expense. To comply with the consensus, shipping and handling fees and costs, which were previously reported net in selling, general and administrative expenses, were 8 9 reclassified to net sales and cost of sales, buying and occupancy expense. All prior periods were restated to comply with the consensus. Such restatements had no impact on previously reported operating earnings, net earnings, stockholders' equity or cash flows. 9 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere in this document. RESULTS OF OPERATIONS The following table sets forth the percentage relationship to net sales of certain items in the Company's consolidated statements of earnings for the fiscal periods shown below: Thirteen Weeks Ended --------------------------- MAY 5, 2001 APRIL 29, 2000 (unaudited) (unaudited) ----------- -------------- Net sales 100.0% 100.0% ----------------------------------------------------------------------------- Cost of sales, buying and occupancy expenses 54.4% 55.6% ----------------------------------------------------------------------------- Selling, general and administrative expenses 29.0% 29.4% ----------------------------------------------------------------------------- Operating income 16.6% 15.0% ----------------------------------------------------------------------------- Interest expense, net 0.3% 0.4% ----------------------------------------------------------------------------- Income before income taxes 16.3% 14.6% ----------------------------------------------------------------------------- Income taxes 6.3% 5.6% ----------------------------------------------------------------------------- Net income 10.0% 9.0% ----------------------------------------------------------------------------- THE THIRTEEN WEEKS ENDED MAY 5, 2001 (FIRST QUARTER) COMPARED TO THE THIRTEEN WEEKS ENDED APRIL 29, 2000 (FIRST QUARTER) Net sales in the first quarter of 2001 increased by $37.6 million to $401.1 million, or 10.3% over the first quarter of 2000. Operating income was $66.5 million in the first quarter of 2001 compared to $54.7 million in the first quarter of 2000, an increase of 21.6%. Retail store sales in the first quarter of 2001 increased by $27.7 million to $323.1 million, or 9.4%, over the first quarter of 2000. The percentage of the Company's net sales derived from its retail stores decreased to 80.6% in the first quarter of 2001 compared to 81.3% in the first quarter of 2000. This decrease, as a percentage of total sales, was due to a 14.5% increase in catalog sales during the first quarter of 2001 compared to the same period in 2000. The increase in retail store sales, in total dollars, was attributable to the 20 net new stores opened in the first quarter of 2001, the 46 net non-comparable stores that opened in the last three quarters of 2000 and an increase of $6.2 million in comparable stores sales, or 2.4%, from the same period for the 10 11 previous year. Comparable stores are those which were open for at least one full fiscal year. When a new Talbots Petites store, Talbots Woman store or Talbots Accessories & Shoes store is opened adjacent to or in close proximity to an existing Misses store which would qualify as a comparable store, such Misses store is excluded from the computation of comparable store sales for a period of 13 months so that the performance of the full Misses assortment may be properly compared. Catalog sales in the first quarter of 2001 increased by $9.9 million, to $78.0 million, an increase of 14.5% from the first quarter of 2000. The percentage of the Company's net sales derived from its catalogs increased to 19.4% in the first quarter of 2001 compared to 18.7% in the first quarter of 2000. The increase in catalog sales was attributable to an increase in internet sales through the Company's website, www.talbots.com, and strong sales from its major books. Because the Company sells a wide range of products which by their nature are subject to constantly changing business strategies and competitive positioning, it is not possible to attribute changes in retail sales or catalog sales to specific changes in prices, changes in volume or changes in product mix. Cost of sales, buying and occupancy expenses decreased as a percentage of net sales to 54.4% in the first quarter of 2001 from 55.6% in the first quarter of 2000 due to healthy sales and continued improvements in merchandise margins through added mark-on and effective inventory management. Also contributing to this decrease were lower store occupancy costs as a percentage of sales. Selling, general and administrative expenses as a percentage of net sales decreased in the first quarter of 2001 to 29.0% compared to 29.4% in the first quarter of 2000. Contributing to this improvement was the Company's national rollout of its Classic Awards customer loyalty program which encouraged use of the Talbots charge card and resulted in reduced bank card fees and increased finance charge revenue. Interest expense, net, decreased to $1.2 million in the first quarter of 2001 from $1.6 million in the first quarter of 2000. Total interest expense decreased to $1.7 million in the first quarter of 2001 compared to $2.0 million in the first quarter of 2000 primarily due to lower average debt levels and lower interest rates. The average level of debt, including short-term and long-term bank borrowings, was $103.2 million in the first quarter of 2001 compared to $113.2 million in the first quarter of 2000. The average interest rate, including interest on short-term and long-term bank borrowings, was 6.7% in the first quarter of 2001 compared to 7.0% in the first quarter of 2000. The effective tax rate for the Company remained at 38.5% in the first quarter of 2001. 11 12 LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of working capital are cash flows from operating activities and a line-of-credit facility from five banks, with maximum available short-term borrowings of $125.0 million. At May 5, 2001 and April 29, 2000, the Company had no amounts outstanding under this line-of-credit. Additionally, the Company has a revolving credit facility with four banks. At May 5, 2001 and April 29, 2000, the Company's borrowings under this revolving credit facility were $100.0 million. The Company's working capital needs are typically at their lowest in the spring and peak during the fall selling season. In the first quarter of 2001, cash and cash equivalents decreased by $27.4 million compared to an increase of $26.3 million in the first quarter of 2000. Primarily contributing to the decrease in cash and cash equivalents was a decrease of $20.9 million in net cash provided by operating activities coupled with increased spending on investing and financing activities. The decline in cash from operating activities was mainly due to higher balances in accounts receivable as well as lower balances in accounts payable. This was partially offset by a decrease in merchandise inventories and increased net income. Capital expenditures, net of disposals, for the first quarter of fiscal 2001 were $23.9 million compared to $13.2 million in the first quarter of fiscal 2000. The Company used approximately $17.8 million and $6.1 million in the first quarter of fiscal 2001 and 2000, respectively, for opening new stores and expanding and renovating existing stores. The increase in spending was due to the timing of new store openings. During the first quarter of fiscal 2001 the Company opened 20 new stores compared to three in the first quarter of fiscal 2000. For the remainder of the fiscal year, the Company currently anticipates approximately $60.3 million in additional capital expenditures for the opening of new stores and expanding and renovating existing stores, to enhance the Company's computer information systems and to continue renovations of the Company's Hingham and Lakeville, Massachusetts facilities.* The actual amount of such capital expenditures will depend on the number and type of stores and facilities being opened, expanded and renovated, and the schedule of its capital expenditure activity during the remainder of fiscal 2001. During the quarter ending May 5, 2001, the Company repurchased $23.3 million, or 603,337 shares, of its common stock under its stock repurchase program. This was authorized under a sixth extension of the repurchase program that was approved by the Company's Board of Directors on March 14, 2001 allowing the Company to purchase up to an additional $100.0 million in stock, from time to time, over the next two years. The Company's primary ongoing cash requirements through the end of fiscal 2001 are expected to be for the financing of working capital buildups during peak selling seasons, capital expenditures for new stores and the expansion and renovation of existing stores and facilities, the purchase of treasury shares and for the payment of any dividends that may be declared from time 12 13 to time. The Company anticipates that cash from operating activities and from its borrowing facilities will be sufficient to meet its currently expected cash requirements for the foreseeable future.* The payment of dividends and the amount of any dividends, if any, will be determined by the Board of Directors and will depend on many factors, including earnings, operations, financial condition, capital requirements and general business outlook. On May 23, 2001, the Company's Board of Directors approved an increase in the quarterly dividend to $0.08 per share payable on June 18, 2001 to shareholders of record as of June 4, 2001. -------------------------------------------------------------------------------- The foregoing contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. The statements were made a number of times and may be identified by an "asterisk" ("*") or such forward-looking terminology as "expect," "look," "believe," "may," "will," "intend," "plan," "target," "goal" and similar statements or variations of such terms. Such forward-looking statements are based on our current expectations, assumptions, estimates and projections about our Company and involve certain significant risks and uncertainties including levels of sales, effectiveness of the Company's brand awareness and marketing programs, effectiveness and profitability of new concepts, effectiveness of its e-commerce site, store traffic, acceptance of Talbots new seasonal fashions, appropriate balance of merchandise offerings, and timing and levels of markdowns. These and other important factors that may cause actual results to differ materially from such forward-looking statements are included in the Company's Current Report on Form 8-K dated October 30, 1996 filed with the Securities and Exchange Commission (a copy of which may also be obtained from the Company at 781-741-4500) as well as other periodic reports filed by the Company with the Securities and Exchange Commission. You are urged to consider all such factors. In light of the uncertainty inherent in such forward-looking statements, you should not consider their inclusion to be a representation that such forward-looking matters will be achieved. The Company assumes no obligation for updating any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. 13 14 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 11.1 The computation of weighted average number of shares outstanding used in determining basic and diluted earnings per share is incorporated by reference to footnote 5 "Net Income Per Share" on page 7 of this Form 10-Q. (b) REPORTS ON FORM 8-K The Company filed Current Reports on Form 8-K on February 28, 2001, April 12, 2001 and May 25, 2001, respectively, pursuant to which various agreements and documents were filed by the Company, as identified therein. 14 15 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. THE TALBOTS, INC. Dated: June 18, 2001 By: /s/ Edward L. Larsen ------------------------------ Edward L. Larsen Senior Vice President Finance, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) 15