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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED February 1, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-12552
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THE TALBOTS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 41-1111318
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
175 Beal Street, Hingham, Massachusetts 02043
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617)749-7600
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock New York Stock Exchange
$0.01 Par Value
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO BE
FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR THE
PAST 90 DAYS. YES X NO
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE APPROXIMATE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES (FOR THIS PURPOSE, DEEMED TO REFER TO ALL PERSONS AND ENTITIES
OTHER THAN EXECUTIVE OFFICERS, DIRECTORS AND 10% OR MORE SHAREHOLDERS) BASED ON
THE CLOSING SALE PRICE ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE ON APRIL 3,
1997 WAS APPROXIMATELY $348 MILLION.
NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF APRIL 3,
1997: 32,917,757
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED FEBRUARY 1, 1997 ARE INCORPORATED BY REFERENCE INTO PART II, AND PORTIONS
OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III.
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PART I
ITEM 1. BUSINESS.
GENERAL
The Talbots, Inc., a Delaware corporation (together with its wholly owned
subsidiaries, "Talbots" or the "Company"), is a leading national specialty
retailer and cataloger of women's classic apparel, accessories and shoes. Over
the past eight years, the Company has implemented an aggressive store expansion
program, with the number of stores increasing from 137 at the end of 1988 to 535
at the end of 1996. During 1996, Talbots issued 26 separate catalogs with a
combined circulation of approximately 50 million. Total net sales were
approximately $1,018.8 million in 1996, of which retail store sales were
approximately $839.0 million and catalog sales were approximately $179.8
million.
To conform with other industry retailers, Talbots adopted the National
Retail Federation's fiscal calendar during 1995, which in fiscal 1995 had 53
weeks. Where a reference is made in this Part I to a particular year or years,
it is a reference to Talbots 52-week or 53-week fiscal year. For example, "1996"
refers to the 52-week fiscal year ended February 1, 1997, "1995" refers to the
53-week fiscal year ended February 3, 1996, and "1994" refers to the 52-week
fiscal year ended January 28, 1995. Since Talbots fiscal 1996 was a 52-week year
and fiscal 1995 was a 53-week year, comparable store sales are reported in this
Annual Report on a 52-week comparative basis.
Talbots stores and catalogs offer a distinctive collection of classic
sportswear, casual wear, dresses, coats, sweaters, accessories and shoes,
consisting primarily of Talbots own private label merchandise in misses and
petites sizes. Talbots Kids stores and catalogs offer an assortment of high
quality classic clothing and accessories for infants, toddlers, boys and girls.
Talbots merchandising strategy focuses on achieving a "classic look", which
emphasizes timeless styles. Talbots stores and catalogs offer a variety of key
basic and fashion items and a complementary assortment of accessories and shoes
which enable customers to assemble complete outfits. The consistency in color,
fabric and fit of Talbots merchandise allows a customer to create wardrobes
across seasons and years. The Company believes that a majority of its customers
are college-educated and employed, primarily in professional and managerial
occupations, and are attracted to Talbots by its focused merchandising strategy,
personalized customer service and continual flow of high quality, reasonably
priced classic merchandise.
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Talbots has established a market niche as a brand in women's classic
apparel, accessories and shoes. In 1996, approximately 98% of the Company's
merchandise consisted of styles that were sold exclusively under the Talbots
label. Most of this merchandise is manufactured to the specifications of the
Company's technical designers and product developers, enabling Talbots to offer
consistently high quality merchandise that the Company believes differentiates
Talbots from its competitors.
The Company operates its stores and catalogs as an integrated business and
provides the same personalized service to its customers regardless of whether
merchandise is purchased through its stores or catalogs. The Company believes
that the synergy between Talbots stores and catalogs offers an important
convenience to its customers and a competitive advantage to the Company in
identifying new store sites and testing new business concepts.
The first Talbots store was opened in 1947 in Hingham, Massachusetts by
Rudolph and Nancy Talbot. The first Talbots catalog was issued the following
year with a circulation of approximately 3,000. Additional stores were opened
beginning in 1955, and there was a total of five Talbots stores by 1973, at
which time the Company was acquired by General Mills, Inc. Talbots continued to
expand and grew to 126 stores by June 1988. In June 1988, JUSCO (U.S.A.), Inc.
("JUSCO USA"), a Delaware corporation, acquired Talbots (the "Acquisition").
JUSCO USA is a wholly owned subsidiary of JUSCO Co., Ltd. ("JUSCO"), a Japanese
corporation. On November 18, 1993, the Company effected an initial public
offering of its common stock (the "Offering"), issuing approximately 12.6
million shares of common stock. Subsequent to the Offering, JUSCO USA continues
to own approximately 63.4% of the outstanding common stock of the Company.
The Company grew significantly after the Acquisition by adding stores and
developing new complementary business concepts that capitalized on the strength
of the Talbots name and its loyal customer base. By February 1, 1997, the number
of stores increased to 535, in 44 states, the District of Columbia, Canada and
the United Kingdom. This number included 351 Talbots Misses stores (including 19
Misses stores in Canada and five Misses stores in the United Kingdom), 100
Talbots Petites stores (including one Petites store in Canada), 14 Talbots
Accessories & Shoes stores, 55 Talbots Kids stores, four Talbots Intimates
stores, and 11 Talbots Outlet stores. Of the Company's $839.0 million in total
retail store sales for fiscal 1996, Talbots Misses stores accounted for $633.2
million; Talbots Petites, $106.8 million; Talbots Accessories & Shoes, $7.9
million; and Talbots Kids, $43.5 million. The remaining $47.6 million was
generated from Talbots Outlet stores and test concepts.
Talbots catalog business also has undergone changes. The circulation of
catalogs has been reduced by 36.4% from 78.1 million catalogs in 1989 to 49.7
million catalogs in 1996. This circulation reduction has been an integral part
of a strategy to better focus the distribution of catalogs to proven customers
and, more recently, to offset increased paper costs in the production of the
catalogs. From 1989 to 1996, sales per catalog has increased from $1.88 to
$3.62.
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STRATEGY
Talbots has established a market niche as a brand in women's classic
apparel, accessories and shoes. The Company's strategy is to maintain its strong
competitive position in private label classic apparel and to capitalize on the
strength of the Talbots name and loyal customer base through geographic
expansion and development of new business concepts. The key elements of the
Company's strategy are to: (1) maintain its strong competitive position as a
full-price retailer of private label classic apparel offering personalized
customer service, (2) continue to capitalize on its complementary store and
catalog operations, (3) continue its store expansion program by opening new
stores, and (4) capitalize on the strength of its brand name through the
development of new business concepts, such as Talbots Kids, Talbots Babies and
Talbots Accessories & Shoes.
MARKET NICHE IN CLASSIC APPAREL. Talbots stores and catalogs offer a
distinctive collection of sportswear, casual wear, dresses, coats, sweaters,
accessories and shoes, consisting primarily of the Company's own private label
merchandise in misses and petites sizes. Talbots offers a variety of key basic
and fashion items and a complementary assortment of accessories and shoes to
enable customers to assemble complete outfits. An important aspect of the
Company's marketing strategy is dressing the customer from "head-to-toe" to
create Talbots signature "classic look". The Company believes that consistently
emphasizing timeless styles helps to create a loyal customer base and reduces
the risk that its apparel, shoes and accessories will be affected by sudden
changes in fashion trends.
TALBOTS PRIVATE LABEL. In 1988, the Company implemented a strategy to
increase the percentage of its merchandise that is sold exclusively under the
Talbots label. The clothing assortment under the Talbots private label grew from
approximately 25% in 1987 to approximately 98% in 1996. Sales of private label
merchandise generally provide the Company with a higher gross margin than it
believes would generally be obtained on other merchandise and establishes
Talbots identity as a brand of women's classic apparel. The Company's private
label merchandise features the building blocks of a classic wardrobe, including
key basic items such as the classic blazer, white blouse and turtleneck sweater,
as well as complementary fresh fashion items and accessories to create Talbots
signature "classic look".
The Company believes that the quality and value of its classic merchandise
and its commitment to personalized customer service are key factors to its
success. Most of Talbots merchandise is manufactured to the specifications of
the Company's technical designers and product developers, enabling Talbots to
offer consistently high quality merchandise that the Company believes
differentiates Talbots from its competitors. The Company continually monitors
the production of its domestic and overseas manufacturers to assure that all
apparel is of consistent fit and high quality.
FULL-PRICE RETAILER. The Company positions itself as a full-price retailer.
Talbots holds only four sale events a year in all of its stores other than its
Outlet stores, consisting of two end-of-season clearance sales and two
mid-season sales, each in conjunction with catalog sales events.
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No other promotional sale events are held. The Company believes that its
strategy of limiting sales to four events a year projects Talbots as a high
quality, reasonably priced brand that may be purchased at regular price. With
this policy, the Company believes that its customers are satisfied that the
regular retail price is the true price of the merchandise which will not be
marked down periodically during the selling season.
COMPLEMENTARY STORE AND CATALOG OPERATIONS. The Company's strategy is to
operate its stores and catalogs as an integrated business and to provide the
same personalized service to its customers regardless of whether merchandise is
purchased through its stores or catalogs. The Company believes that the synergy
between Talbots stores and catalogs offers an important convenience to its
customers and a competitive advantage to the Company in identifying new store
sites and testing new business concepts.
Talbots catalogs provide customers with a broader selection of merchandise,
sizes and colors than its stores. In each of its stores, Talbots offers a "Red
Line" phone which connects the store customer directly to a catalog
telemarketing sales associate. This service can be used by store customers to
order a particular size or color of an item that is a catalog-only item or that
is sold out in the store. Reduced shipping and handling charges are available to
customers who use the "Red Line" phone service. In addition to providing
customers the convenience of ordering Talbots merchandise, the Company generally
uses its catalogs to communicate its classic image, to provide customers with
fashion guidance in coordinating outfits and to generate store traffic. Catalog
merchandise can be easily returned or exchanged at any Talbots store as well as
returned to the Company by mail.
The Company believes that its catalog operations provide Talbots with a
competitive advantage. The customer database compiled through Talbots catalog
operations provides important demographic information and serves as an integral
part of the Company's expansion strategy by helping to identify markets with the
potential to support a new store. The Company also believes that its strategy of
using its catalogs to test new business concepts such as Talbots Kids and
Talbots Accessories & Shoes before buying merchandise for and building new
stores helps lessen the risk of these new ventures.
EXPANSION. The Company has followed an expansion program that is designed
to reach new and existing customers through the opening of new stores. The
Company selects store locations that it believes are convenient for its
customers and consistent with its image. In addition to opening new Talbots
stores in the United States during fiscal 1996, the Company opened three stores
in Canada, and two stores in the United Kingdom. The Company is exploring
further expansion opportunities in international markets.
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INTRODUCTION OF NEW BUSINESS CONCEPTS. The Company is currently introducing
new business concepts that complement its core business of women's classic
apparel in misses and petites sizes. The Company has used its catalog as a
vehicle to test new business concepts and merchandise before sending such
merchandise to its stores.
In 1984, Talbots began offering merchandise in petites sizes in its
catalogs, and in 1985, the Company opened its first Talbots Petites store.
During 1989, Talbots stores began to carry a selection of Talbots Petites
merchandise, and the Company opened three additional Talbots Petites stores in
1990 as the beginning of its strategy to expand Talbots Petites business. At
February 1, 1997, 100 Talbots Petites stores were open, and virtually every item
of womens apparel in the catalog was offered in both misses and petites sizes.
In 1989, the Company presented Talbots Kids merchandise in a separate
catalog dedicated to apparel for boys and girls. Based on successful customer
response to the catalog merchandise, the first Talbots Kids store opened in 1990
and by the end of 1996, 55 Talbots Kids stores were open. The Company will
continue to position Talbots Kids as a brand that offers a complete assortment
of high quality classic clothing and accessories for boys and girls.
Following the successful introduction of Talbots Kids, the Company
implemented a similar strategy to introduce Talbots Intimates, which offers
classic sleepwear, daywear (principally underwear) and loungewear. Talbots
initially offered only a limited selection of sleepwear and robes in stores and
catalogs during the holiday seasons and, beginning in 1991, offered a larger
assortment of intimate apparel in selected catalogs. The introduction of
intimate apparel strengthened Talbots wardrobing concept of dressing its
customers from "head-to-toe". At February 1, 1997, four Talbots Intimates stores
were open. Having operated these stores in a test mode for several years, the
Company has now decided that its most appropriate distribution channel for
selling intimate apparel is as a department within a Misses store, rather than
as a separate store. Therefore, the Company is implementing plans in 1997 to
introduce smaller collections of intimate apparel in approximately 40 Misses
stores. Furthermore, a portion of the present Intimates stores are being
converted into new Accessories & Shoes stores, with the remaining space being
integrated into adjacent Talbots Misses stores as intimate apparel departments.
During 1994, Talbots introduced a new test concept, Talbots Accessories and
Shoes, through the distribution of two catalogs devoted to classic accessories
and shoes. A limited collection of the merchandise was previously offered, and
continues to be offered, in each Misses catalog and in selected stores. The
Company opened five Talbots Accessories and Shoes stores in September 1995.
Based upon the positive response to these stores, the Company opened nine
additional Talbots Accessories & Shoes stores in 1996. This concept further
develops the Company's ability to present a "head-to-toe" wardrobe to its
customer.
Also during 1995, Talbots expanded the Talbots Kids merchandise by offering
an assortment for infants and toddlers, Talbots Babies. In addition to
presenting the merchandise in
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the catalog, Talbots introduced the new line in two new and two expanded Talbots
Kids stores. As a result of the performance of this new merchandise line in
1995, the Company expanded eight existing Talbots Kids stores to accommodate
Talbots Babies and included Talbots Babies in five of the six new Talbots Kids
stores opened during 1996. The Company intends to include Talbots Babies in all
new Talbots Kids stores going forward and is implementing plans in 1997 to add a
small assortment of Talbots Babies merchandise into approximately 19 existing
Talbots Kids stores. By the end of 1997, Talbots Babies is expected to be in
about two-thirds of all Talbots Kids stores.
MERCHANDISING
The Company's merchandising strategy focuses on achieving a "classic look,"
which emphasizes timeless styles. Talbots stores and catalogs offer a
distinctive collection of classic sportswear, casual wear, dresses, coats,
sweaters, accessories and shoes, consisting primarily of private label
merchandise made exclusively for Talbots in misses and petites sizes. Talbots
stores and catalogs offer a variety of key basic and fashion items and a
complementary assortment of accessories and shoes which enable customers to
assemble complete outfits. Sales associates are trained to assist customers in
merchandise selection and wardrobe coordination, helping them achieve the
Talbots look from "head-to-toe". The consistency in color, fabric and fit of
Talbots merchandise also allows a customer to create wardrobes across seasons
and years.
EXPANSION
An important aspect of the Company's business strategy has been an
expansion program designed to reach new and existing customers through the
opening of new stores. The Company has grown significantly over the past ten
years, with the number of stores increasing from 84 at the end of 1986 to 535
at the end of 1996. During that time, store net sales increased from
approximately $150.0 million in 1986 to approximately $839.0 million in 1996.
From the end of 1995 to the end of 1996, the number of Talbots stores increased
from 460 to 535.
The Company selects store locations which are convenient for its customers
and consistent with its image. Store sites are selected by the Company's real
estate department and approved by the Company's real estate committee on the
basis of various factors.
The Company generally adds additional locations in major cities, certain
suburbs and smaller markets, each where Talbots catalog has been successful. The
customer database compiled through Talbots catalog operations provides important
demographic information about potential store markets. Although the addition of
stores in areas where the catalog has been successful has resulted in slightly
lower catalog sales in such areas, such lower catalog sales have been more than
offset by the significantly higher sales generated in these areas by the opening
of new stores. The Company continues to pursue opportunities in smaller markets
for the opening of smaller sized Misses stores. The Company believes that by
opening stores in smaller markets, it can grow while enjoying lower rental,
construction and operating costs.
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The Company currently anticipates opening approximately 70 new stores
(including Misses, Petites, Kids & Babies, Accessories & Shoes and Outlet
stores) in 1997. The Company's ability to continue to expand will be dependent
upon general economic and business conditions affecting consumer confidence and
spending, the availability of desirable locations and the ability to negotiate
acceptable lease terms for new locations. The ability of the Company to open
additional Talbots Petites, Talbots Kids & Babies, Talbots Accessories & Shoes
and Talbots Outlet stores (and the mix of such openings) will be dependent upon
similar factors as well as the performance of Talbots existing stores at such
locations and the availability of suitable space. The Company will also consider
opening such stores in established Talbots markets where a Misses store is not
located, thereby broadening the growth potential for each concept. In addition,
the Company's expansion plans concerning its test concepts also will be
dependent upon the performance of the collections of such merchandise offered in
Misses stores and catalogs.
STORES
At February 1, 1997, the Company operated 535 stores in 44 states, the
District of Columbia, Canada and the United Kingdom. Talbots stores (other than
the eleven Talbots Outlet stores) are located in a wide variety of retail
settings, including malls, specialty centers, village locations, freestanding
buildings and urban locations.
Misses stores generally range in size from 3,500 to 6,500 gross square
feet, with a typical store averaging approximately 4,900 gross square feet.
Talbots Petites stores generally measure 2,400 gross square feet, and Talbots
Kids stores measure approximately 2,500 gross square feet, with those including
Talbots Babies measuring approximately 3,500 gross square feet. Flagship stores
are Misses stores which are utilized to generate greater awareness of Talbots
merchandise in major metropolitan locations, including Boston, New York City,
Washington D.C., Chicago, San Francisco and Toronto, and generally are larger
than the average Misses store. Approximately 75% of the floor area of all
Talbots stores is devoted to selling space (including fitting rooms), with the
balance allocated to stockroom and other non-selling space.
In certain markets, the Company has created Talbots "superstores" by
placing two or more other Talbots concepts in close proximity to a Misses store.
Together, these stores feature at least three of Talbots business
concepts--Misses, Petites, Kids, Intimates and/or Accessories & Shoes--in order
to create a one-stop shopping environment. The Company operates 46
"superstores," including eight four-concept "superstores" and two five-concept
"superstores."
The Company utilizes Talbots Outlet stores, which are separate from its
retail stores, to provide for the controlled and effective clearance of store
and catalog merchandise remaining from each sale event. The Company uses Talbots
Outlet stores only for the sale of past season and "as is" merchandise. The
Company does not purchase merchandise specifically for Talbots Outlet stores.
Merchandise in Talbots Outlet stores is sold at significant markdowns from
original retail prices. At February 1, 1997, the Company operated eleven Talbots
Outlet stores.
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Talbots stores are distinguished by a signature red door created for each
of the business concepts. Each interior is designed to have a gracious and
comfortable residential feel. This interior design theme is consistently used in
all Talbots Misses and Talbots Petites stores to promote familiarity, ease of
shopping and cost savings in the design and construction of new stores. Talbots
Kids, and Talbots Accessories & Shoes also have their respective signature red
doors and interior design themes. Talbots Kids stores are designed to create a
light atmosphere with colorful medallions, confetti flecked carpeting and
striped wall covering. Talbots Accessories & Shoes are designed to reflect the
atmosphere of a traditional carriage house, utilizing green and warm grey tones
to complement wood furniture and finishes. Management provides guidelines for
merchandise display to the stores throughout the year.
TALBOTS CATALOG
Since 1948, the Company has used its catalog to offer potential and
existing customers convenience in ordering Talbots merchandise. In 1996, the
Company distributed 26 separate catalogs with a combined circulation of
approximately 49.7 million, including catalogs sent to stores for display and
general distribution. During 1996, catalog sales represented approximately 17.6%
of total Company sales. Catalog circulation has included: base catalogs offering
the broadest assortment of Talbots merchandise; specialty catalogs such as the
Classics That Work series featuring career clothing; Talbots Kids catalogs;
Talbots Intimates catalogs; Talbots Accessories & Shoes catalogs; and sale
catalogs. In addition to providing customers convenience in ordering Talbots
merchandise, the Company generally uses its catalogs to communicate its classic
image, to provide customers with fashion guidance in coordinating outfits and to
generate store traffic. This past fall Talbots introduced Canada and U.K.
versions of several domestic catalogs, with prices listed in local currencies
and special toll-free numbers to call. The Company hopes that over time, the
international catalogs will provide the same synergy with its international
stores that the domestic market experiences, as well as reach new customers.
Furthermore, in conjunction with the Company's store strategy to incorporate
intimate apparel into its Misses and Petites assortment, the Company is
implementing plans in 1997 to add more intimate apparel pages to its base
catalogs, and to discontinue the distribution of separate catalogs dedicated to
intimate apparel.
Beginning in 1989, the Company implemented a program to improve the
productivity of its catalog operations by broadening its merchandise assortment
and adjusting its catalog circulation to better target established and
prospective buyers, which reduced catalog mailings by 36.4% from 1989 to 1996,
increased sales per catalog by 92.6% during the same period and provided savings
on production and mailing costs. The Company utilizes computer applications
which employ mathematical models to improve the efficiency of its catalog
mailings through refinement of its customer list. A principal factor in
improving customer response has been the Company's development of its own list
of active customers. The Company routinely updates and refines this list prior
to individual catalog mailings by monitoring customer interest as reflected in
criteria such as the frequency and dollar amount of purchases as well as the
last date of purchase.
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The Company attempts to make catalog shopping as convenient as possible.
The Company maintains a toll-free number, accessible 24 hours a day, seven days
a week (except Christmas Day), to accept requests for catalogs and to take
customer orders. In response to our catalog business from international
customers, toll-free numbers were established in the Company's seven top
performing countries and a foreign language interpreter service for telephone
orders is provided. The Company maintains telemarketing centers in Knoxville,
Tennessee and Hingham, Massachusetts which, linked by computer and telephone,
are designed to provide uninterrupted service to customers. Telephone calls are
answered by knowledgeable sales associates located at the telemarketing centers
who utilize on-line computer terminals to enter customer orders and to retrieve
information about merchandise and its availability. These sales associates also
suggest and help to select merchandise and can provide detailed information
regarding size, color, fit and other merchandise features. In both the Hingham
and Knoxville telemarketing centers, sales associates are able to refer to
current catalog items in a sample store, thereby allowing them to view
merchandise as they assist customers.
The Company employs state-of-the-art technology to process orders. Sales
associates enter orders on-line into a computerized inventory control system
which systematically updates Talbots customer list and permits the Company to
measure the response to individual merchandise and catalog mailings. Sales and
inventory information is available to the Company's Hingham-based buying staff
the next day. The Company has achieved efficiencies in order entry and
fulfillment which permit the shipment of most orders the following day.
PRIVATE LABEL MERCHANDISE DESIGN AND PURCHASING
Talbots private label merchandise is designed through the coordinated
efforts of the Company's merchandising and manufacturing team, which consists of
the New York-based Talbots product development office, the technical testing and
design staff, the buying staff, the production planning staff and Talbots
International, a Hong Kong-based product sourcing office. Styles for Talbots
private label merchandise are developed based upon prior years' sales history
and current fashion trends for each of the six merchandising periods (winter,
resort, spring, summer, transition and fall).
The New York-based Talbots product development office oversees the
conceptualization of Talbots product. This initial product determination
concerns styling, color, and fabrication recommendations. The style
recommendations include both the evolution of the traditional classic styles as
well as the development of new fashion pieces used throughout the merchandise
assortment. This process usually occurs approximately nine months before the
expected in-house delivery date of the merchandise.
The Company's Hingham-based buying staff is responsible for the
quantification of specific merchandise and departmental needs and plans. These
plans are used to place specific item orders on styles developed in teamwork
with the product development office and with the various merchandise vendors.
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In conjunction with the merchandise developed by the product managers and
the buying organization, the Company's Hingham-based technical testing and
design staff works to determine the technical specifications of all
private-label merchandise. In addition to preparing the initial specifications,
this group also reviews the first merchandise sample and the production samples
of each item to ensure that specifications and quality standards are met.
In 1996, Talbots purchased approximately 44% of its merchandise directly
from off-shore manufacturers. During the year, the Company's Hong Kong office
accounted for approximately 70% of Talbots total direct off-shore sourcing, with
the remaining 30% being handled through various agents. The remaining 56% of
Talbots merchandise is sourced through domestic-based resources.
The Company typically transacts business on an order-by-order basis and
does not maintain any long-term or exclusive commitments or arrangements to
purchase from any vendor. The Company believes that it has good relationships
with its vendors and that, as the number of Talbots stores increases, there will
be adequate sources to produce a sufficient supply of quality goods in a timely
manner and on satisfactory economic terms. The Company does business with most
of its vendors in United States currency and has not experienced any material
difficulties as a result of any foreign political, economic or social
instabilities.
Approximately 30% of Talbots merchandise is currently sourced through Hong
Kong. Hong Kong is presently a British Crown Colony, but sovereignty over Hong
Kong will be transferred effective July 1, 1997 from the United Kingdom to the
People's Republic of China. The agreement provides that the social and economic
systems in Hong Kong will remain a matter of the people of Hong Kong's choice
for 50 years after June 30, 1997. The Company is considering alternative methods
of sourcing in the Far East should the business climate in Hong Kong change.
In order to diversify the Company's Far East sourcing operations,
additional overseas sourcing offices have been established in Jakarta, Indonesia
and Bangkok, Thailand. Under the terms of an agreement between the Company and
Eralda Industries ("Eralda"), a long time supplier of the Company, Eralda will
serve as the Company's exclusive agent and has established these offices to
serve the Company in this capacity.
In addition to the Company's office in Hong Kong, which deals with local
manufacturers, and the sourcing arrangement with Eralda, Talbots utilizes agents
in Japan, Korea, Singapore, Israel, Italy, Portugal, and England plus domestic
resources to source its merchandise. The Company analyzes its overall
distribution of manufacturing to assure that no one company or country is
responsible for a disproportionate amount of Talbots merchandise. Directly
sourced merchandise is currently manufactured to its specifications by
independent foreign factories, located primarily in Hong Kong, other Asian
countries such as Macao, China, Thailand, Korea and Indonesia, and Europe.
11
<PAGE> 12
The Company's domestic vendors include those who either manufacture their
own merchandise or supply merchandise manufactured by others, as well as vendors
that are both manufacturers and suppliers. In 1996, the David Brooks, Robert
Terry, Robert Scott and Smart Shirt divisions of The Kellwood Company accounted
for an aggregate of approximately 9% of the total merchandise purchased by
Talbots. Most of Talbots Hong Kong and other foreign vendors manufacture their
own merchandise. The Company believes that, consistent with the retail apparel
industry as a whole, many of its domestic vendors import part of their
merchandise from abroad.
INVENTORY CONTROL AND MERCHANDISE DISTRIBUTION
The Company uses a centralized distribution system, under which all
merchandise is received, processed and distributed through Talbots catalog and
store distribution center in Lakeville, Massachusetts. Merchandise received at
the distribution center is promptly inspected, assigned to individual stores,
packed for delivery and shipped to the stores. Talbots ships merchandise to its
stores virtually every business day, with each store generally receiving
merchandise twice a week. Generally, inventory turns over approximately two and
one half times annually. The Company believes that its strong store and catalog
synergy coupled with its central distribution system allows it to move
merchandise between the stores and catalog to better take advantage of sales
trends.
In June, 1995, the Company completed a $7.0 million expansion of its
distribution center in Lakeville, Massachusetts, by adding an additional 124,260
square feet to support its expansion plans. A 25,400 square foot mezzanine level
was added in 1996 to further support the Company's growth.
MANAGEMENT INFORMATION SYSTEMS
Talbots management information systems and electronic data processing
systems are located at the Company's Systems Center in Tampa, Florida. These
systems consist of a full range of retail, financial and merchandising systems,
including credit, inventory distribution and control, sales reporting, accounts
payable, merchandise reporting and distribution. In accordance with the
Company's strategy to update its management information systems, all systems,
both hardware and software, have either been installed or modified to be in line
with the current and planned domestic and international needs of Talbots.
All Talbots stores have point-of-sale terminals that transmit information
daily on sales by item, color and size at each store. Talbots stores are
equipped with bar code scanning programs for the recording of store inventories,
price changes, receipts and transfers. The Company evaluates this information,
together with weekly reports on merchandise statistics, prior to making
merchandising decisions regarding reorders of fast-selling items and allocation
of merchandise.
Also, sales associates can locate merchandise no longer available in their
store at any Talbots location with a single phone call, 24 hours a day, seven
days a week.
12
<PAGE> 13
SEASONALITY
Historically, catalog sales had been higher during the first and third
quarters due to the timing of catalog circulation and the placement of customer
orders early in the season. However, as shopping patterns have changed and
customers are buying closer to time of need, the difference in catalog sales
between the third and fourth quarters has diminished. Retail store sales
typically peak in the fourth quarter due to the holiday gift season and the
impact of new stores opened during the year. From a total Company perspective,
the highest sales are in the fourth quarter.
COMPETITION
The women's retail apparel industry is highly competitive. The Company
believes that the principal bases upon which it competes are quality, value and
service in offering classic apparel to build "head-to-toe" wardrobes through
both stores and catalogs.
Talbots competes with certain departments of national specialty department
stores such as Lord & Taylor, Saks Fifth Avenue and Nordstrom as well as strong
regional department store chains such as Macy's, Marshall Field and Dillard's.
The Company believes that it competes with these department stores by offering a
focused merchandise selection, personalized service and convenience. Talbots
also competes with other specialty retailers such as The Limited, Ann Taylor,
Eddie Bauer and The Gap, and with catalog companies such as L.L. Bean, Lands'
End and Spiegel. The Company believes that its focused merchandise selection in
classic apparel, consistent private label merchandise, superior customer service
and store site selection resulting from the synergy between its stores and
catalog operations, and the availability of its merchandise in extended misses
sizes and petites sizes distinguish it from other specialty retailers.
EMPLOYEES
At February 1, 1997, Talbots had approximately 7,200 employees, of whom
approximately 2,000 were full-time salaried employees, approximately 1,200 were
full-time hourly employees and approximately 4,000 were part-time hourly
employees. The Company believes that its relationship with its employees is
good.
13
<PAGE> 14
EXECUTIVE AND OTHER OFFICERS OF THE COMPANY
<TABLE>
The following table sets forth certain information regarding the executive
and other officers of the Company as of February 1, 1997:
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Arnold B. Zetcher 56 President and Chief Executive Officer
Clark J. Hinkley 55 Executive Vice President and Chief Operating Officer
J. Bruce Ash 48 Senior Vice President, Management Information
Systems
Paul V. Kastner 45 Senior Vice President, International and Strategic
Planning
Edward L. Larsen 52 Senior Vice President, Finance, Chief Financial
Officer and Treasurer
Michele M. Mandell 49 Senior Vice President, Stores
Richard T. O'Connell, Jr. 46 Senior Vice President, Legal and Real Estate, and
Secretary
Mary R. Pasciucco 42 Senior Vice President, Catalog Development and
Advertising
Ronald L. Ramseyer 54 Senior Vice President, Direct Marketing
Bruce C. Soderholm 54 Senior Vice President, Operations
Stuart M. Stolper 57 Senior Vice President, Human Resources
Jacqueline M. Corso 43 Vice President, General Merchandise Manager
Sandy F. Katz 48 Vice President, Audit and Control
Judy O'Keefe 53 Vice President, Merchandise Administration
Bruce Lee Prescott 40 Vice President, Customer Service and Telemarketing
Steven J. Siegler 44 Vice President, Product Development
Kathleen Ann Staab 49 Vice President, General Merchandise Manager
Lucy Main Tweet 44 Vice President, Manufacturing
John L. Florio 41 Director of Legal Services and Assistant Secretary
</TABLE>
Mr. Zetcher joined Talbots as President in 1987. He has been President and
Chief Executive Officer and a member of the Board of Directors since 1988. Mr.
Zetcher was Chairman and Chief Executive Officer of John Breuner Company, a home
furnishings division of BATUS in San Francisco, California, and prior to that,
Chairman and Chief Executive Officer of Kohl's Food Stores, another BATUS
division, in Wisconsin and Illinois. Mr. Zetcher also served as Chairman and
Chief Executive Officer of Bonwit Teller in New York and served in various
capacities during his ten years with Federated Department Stores.
Mr. Hinkley has been Executive Vice President and a member of the Board of
Directors since 1988 and Executive Vice President and Chief Operating Officer
since 1993. He joined Talbots in 1987 as Vice President, General Merchandise
Manager. From 1984 until 1987, he was Vice President, General Merchandise
Manager, Women's Apparel at Dayton Hudson Department Store in Minneapolis,
Minnesota. From 1979 to 1984, he was Vice President, General
14
<PAGE> 15
Merchandise Manager, Women's Apparel and Accessories at J.L. Hudson in Detroit,
Michigan and served in various other capacities at J.L. Hudson between 1963 and
1979.
Mr. Ash has been Senior Vice President, MIS since 1988. He joined Talbots
in 1988 as Vice President, MIS. Prior to that time, he was Vice President, MIS
at Filene's Department Stores in Boston.
Mr. Kastner joined Talbots in 1988 as Director, Business Planning and
Analysis and became Vice President, New Business Ventures and Strategic Planning
in 1989. In 1994, Mr. Kastner was promoted to the position of Senior Vice
President, International and Strategic Planning. Prior to joining Talbots, he
was Director of Research and Merchandise Information with John Breuner Company
in California.
Mr. Larsen became Senior Vice President, Finance, Chief Financial Officer
and Treasurer of Talbots in 1991. From 1989 to 1991, Mr. Larsen was Vice
President and Chief Financial Officer of Lillian Vernon Corporation. From 1977
to 1988, he held various positions with General Mills, Inc., including from 1985
to 1988 the position of Vice President and Group Controller of the Specialty
Retailing Group at General Mills, Inc.
Ms. Mandell has been Senior Vice President, Stores since 1992. She joined
Talbots in 1983 as Store Manager, became District Manager in 1984 and served as
Regional Director from 1985 until 1992. From 1971 to 1983 she held management
and buying positions for Price's of Oakland in Pittsburgh, Pennsylvania and A.E.
Troutman Co. in Indiana, Pennsylvania.
Mr. O'Connell, who joined Talbots in 1988 as Vice President, Legal and Real
Estate and Secretary, became Senior Vice President, Legal and Real Estate and
Secretary in 1989. Prior to joining Talbots, he served as Vice President, Group
Counsel of the Specialty Retailing Group at General Mills, Inc.
Ms. Pasciucco has been Senior Vice President, Catalog Development and
Advertising since 1989. From 1985 until 1989, she served as Vice President,
Catalog Development, and from 1982 until 1985, she served as Director, Catalog
Development.
Mr. Ramseyer joined Talbots in 1991 as Senior Vice President, Direct
Marketing. From 1989 to 1991, he was a consultant to clients in the catalog
business. He was the National Catalog Advertising Manager for Sears, Roebuck &
Co. from 1981 until 1989.
Mr. Soderholm has been Senior Vice President, Operations since 1989. He
joined Talbots in 1976 as Director of Operations and served as Vice President,
Operations from 1980 to 1989.
15
<PAGE> 16
Mr. Stolper joined Talbots in 1989 as Vice President, Human Resources and
assumed the position of Senior Vice President, Human Resources later that year.
From 1988 to 1989, he served as Vice President, Administration at JUSCO USA.
Prior to that time, he was Vice President, Human Resources of the Specialty
Retailing Group at General Mills, Inc.
Ms. Corso joined Talbots in 1991 as Vice President, General Merchandise
Manager. From 1990 to 1991, Ms. Corso was Divisional Merchandise Manager at
Montgomery Ward. From 1986 to 1989, she served as Divisional Vice
President/Divisional Merchandise Manager at May Department Stores.
Mr. Katz joined Talbots in 1989 as Vice President, Audit and Control. From
1988 to 1989, Mr. Katz was President of SFK & Associates, a consulting firm, and
from 1984 to 1989, he was Director, Loss Prevention of the Specialty Retailing
Group at General Mills, Inc.
Ms. O'Keefe joined Talbots in 1989 as Director, Merchandise Administration.
In 1994, she was promoted to the position of Vice President, Merchandise
Administration. Prior to joining Talbots, Ms. O'Keefe held various merchandising
positions at Dayton Hudson Department Store where she was employed for nearly 20
years.
Mr. Prescott joined Talbots in 1987 as Manager, Direct Marketing
Fulfillment. In 1988, he was promoted to the position of Director of Marketing
Fulfillment and in 1991 became Director, Customer Service and Telemarketing. In
1994, he was promoted to the position of Vice President, Customer Service and
Telemarketing. From 1976 to 1987, he was employed by Johnny Appleseed's serving
as manager of catalog operations and supervising retail distribution and
customer service.
Mr. Siegler joined Talbots in 1993 as Vice President, Product Development.
From 1991 to 1993 he was Vice President, Sales and Marketing at Segrets, Inc. in
Beverly, Massachusetts, and from 1988 to 1991 he was President and Chief
Executive Officer at Crazy Horse, Inc., a division of Ross Togs, Inc. in New
York, New York.
Ms. Staab was appointed Vice President, General Merchandise Manager in
1993. Ms. Staab joined Talbots as General Merchandise Manager in 1991. Prior to
joining Talbots, Ms. Staab was Senior Vice President, General Merchandise
Manager, Fashion Accessories, Shoes, Children's Clothing and Intimate Apparel at
Jordan Marsh. Prior to that time, she was Divisional Merchandise Manager,
Accessories and Better Sportswear and Special Sizes at Jordan Marsh.
Ms. Main Tweet joined Talbots in 1993 as Vice President, Manufacturing.
From 1991 to 1993, Ms. Main Tweet was Vice President, Sourcing for Crystal
Brands Women's Wear Group. From 1990 to 1991, Ms. Main Tweet was Director,
Production for J. Crew, Inc., and from 1988 to 1990 she was Vice President,
Production for Bernard Chaus, Inc.
16
<PAGE> 17
Mr. Florio joined Talbots in 1990 as Director of Legal Services and
Assistant Secretary. From 1985 to 1990, he was Counsel for Corporate Property
Investors, a New York-based nationwide commercial real estate investment and
development firm.
ITEM 2. PROPERTIES.
<TABLE>
The table below presents certain information relating to the Company's
properties at February 1, 1997:
<CAPTION>
Location Gross Square Feet Primary Function Interest
-------- ----------------- ---------------- --------
<S> <C> <C> <C>
Hingham, Massachusetts 214,000 Company headquarters Own (42 acres)
Lakeville, Massachusetts 717,260 Distribution center Own (85 acres)
Knoxville, Tennessee 23,595 Telemarketing Lease
Tampa, Florida 29,250 Systems center Lease
New York, New York 7,407 Product development office Lease
New York, New York 20,500 Product development office Lease
Hong Kong 10,455 Merchandising and sourcing Lease
Ontario, Canada 1,119 Canadian regional office Lease
Brimsdown, U.K. 1,000 U.K. management office Lease
Stores throughout the U.S.,
Canada and U.K. Retail stores Own and lease (a)
</TABLE>
- - -------------
(a) Talbots owns the property for eight of its 535 stores.
Except for retail store space, the Company believes that its operating
facilities and sales offices are adequate and suitable for its current needs.
Talbots long-term expansion program, if successful, may require additional
office and distribution space to service such facilities in the future.
At February 1, 1997, Talbots operated 535 stores, all but eight of which
were leased. The leases typically provide for an initial term of between ten and
fifteen years, with renewal options permitting the Company to extend the term
for between five and ten years thereafter. The Company generally has been
successful in renewing its store leases as they expire. Under most leases, the
Company pays a fixed annual base rent plus a contingent rent ("percentage rent")
based on the store's annual sales in excess of specified levels. The percentage
rent payment is typically 4% to 5% of annual sales in excess of the applicable
threshold. In a majority of leases negotiated since 1987, Talbots has a right to
terminate earlier than the specified expiration date if certain sales levels are
not achieved; such right is usually exercisable after five years of operation.
Most leases also require Talbots to pay real estate taxes, insurance and
utilities and, in shopping center locations, to make contributions toward the
shopping center's common area operating costs and
17
<PAGE> 18
marketing programs. The Company has many lease arrangements that provide for an
increase in annual fixed rental payments during the lease term. At February 1,
1997, the current terms of Talbots store leases (assuming solely for this
purpose that the Company exercises all lease renewal options) were as follows:
Years Lease Number of
Terms Expire Store Leases(a)
------------ ---------------
1997-1998.................................................6
1999-2001................................................18
2002-2004................................................32
2005 and later..........................................380
- - --------
(a) Certain leases have more than one store included within the leased premises.
ITEM 3. LEGAL PROCEEDINGS.
Talbots has been named as a defendant in certain legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to these actions cannot be accurately predicted, in the
opinion of the Company any such liability will not have a material adverse
effect on the financial position, results of operations or liquidity of Talbots.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1996.
18
<PAGE> 19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Information concerning the market in which the Company's common stock was
traded in 1996 and the approximate number of record holders of common stock and
certain other information called for by this Item 5 are set forth under the
captions "Selected Quarterly Financial Data" on page 31 and "Market for
Registrant's Common Stock and Related Stockholder Matters" on page 33 of Talbots
Annual Report to Shareholders for the fiscal year ended February 1, 1997 and is
incorporated herein by reference.
At April 3, 1997, approximately 63.4% of Talbots common stock was held by
JUSCO USA.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item 6 is set forth under the caption
"Five Year Financial Summary" on page 12 of Talbots Annual Report to
Shareholders for the fiscal year ended February 1, 1997 and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item 7 is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 13 to 16 of Talbots Annual Report to Shareholders for the
fiscal year ended February 1, 1997 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The report of independent auditors, the consolidated financial statements
of Talbots, the notes to consolidated financial statements, and the
supplementary financial information are set forth on pages 17 to 31 of Talbots
Annual Report to Shareholders for the fiscal year ended February 1, 1997 and are
incorporated herein by reference.
19
<PAGE> 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
20
<PAGE> 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning Talbots directors under the caption "Election of
Directors" on pages 2 to 4 of Talbots Proxy Statement for Talbots 1997 Annual
Meeting of Shareholders, and the information concerning Talbots executive
officers set forth in Part I, Item 1 above under the caption "Executive and
other Officers of the Company," are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" on
pages 5 to 9 of Talbots Proxy Statement for Talbots 1997 Annual Meeting of
Shareholders (other than the information included under the captions "Executive
Compensation--Report on Compensation of Executive Officers" and "Executive
Compensation--Performance Graph", which are not incorporated herein), the
information concerning director compensation under the caption "Director
Compensation; Attendance; Committees" on page 4 of Talbots Proxy Statement for
Talbots 1997 Annual Meeting of Shareholders, and the information concerning
certain consultant/advisor fees under the caption "Compensation Committee
Interlocks and Insider Participation" on pages 11 to 12 of Talbots Proxy
Statement for Talbots 1997 Annual Meeting of Shareholders, are each incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Beneficial Ownership of Common
Stock" on pages 13 to 14 of Talbots Proxy Statement for Talbots 1997 Annual
Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Executive
Compensation--Certain Transactions with Related Parties" on pages 12 to 13 of
Talbots Proxy Statement for Talbots 1997 Annual Meeting of Shareholders is
incorporated herein by reference.
21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS: The following Independent Auditors' Report
and Consolidated Financial Statements of Talbots are incorporated
herein by reference to pages 17 to 30 of Talbots Annual Report to
Shareholders for the fiscal year ended February 1, 1997:
Independent Auditors' Report
Consolidated Statements of Earnings for the Fifty-Two Weeks
Ended February 1, 1997, the Fifty-Three Weeks Ended February
3, 1996 and the Fifty-Two Weeks Ended January 28, 1995
Consolidated Balance Sheets at February 1, 1997 and February
3, 1996
Consolidated Statements of Cash Flows for the Fifty-Two
Weeks Ended February 1, 1997, the Fifty-Three Weeks Ended
February 3, 1996 and the Fifty-Two Weeks Ended January 28,
1995
Consolidated Statements of Stockholders' Equity for the
Fifty-Two Weeks Ended February 1, 1997, the Fifty-Three
Weeks Ended February 3, 1996 and the Fifty-Two Weeks Ended
January 28, 1995
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES: Financial statement schedules and
the Independent Auditors Report on Schedules have been omitted
because the required information is either presented in the
Consolidated Financial Statements or the Notes thereto or is not
applicable, required or material.
(a)(3) The following Exhibits are filed as part of, or incorporated by
reference into, this Annual Report:
22
<PAGE> 23
Exhibit
- - -------
(3) Articles of Incorporation and By-laws.
-------------------------------------
3.1 Certificate of Incorporation, as amended, of Talbots.(1)
3.2 By-laws of Talbots.(1)
(4) Instruments Defining the Rights of Security Holders, including Indentures.
-------------------------------------------------------------------------
4.1 Form of Common Stock Certificate of Talbots.(1)
(10) Material Contracts.
------------------
10.1 Stockholders Agreement, dated as of November 18, 1993, between
Talbots and JUSCO USA.(2)
10.2 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Dai-Ichi Kangyo Bank, Limited.(2)
10.3 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Bank of Tokyo Trust Company.(2)
10.4 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Norinchukin Bank.(2)
10.5 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Daiwa Bank, Limited.(2)
10.6 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Sakura Bank, Limited.(2)
10.7 Letter Agreement, dated as of January 31, 1994, concerning various
credit facilities, between Talbots and The First National Bank of
Boston.(2)
10.8 Letter Agreement, dated as of September 26, 1994, concerning
various credit facilities, between Talbots and The First National
Bank of Boston.(4)
10.9 Letter of Credit Agreement, dated as of August 10, 1993, between
Talbots and The First National Bank of Boston.(1)
10.10 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Dai-Ichi Kangyo
Bank, Limited,
23
<PAGE> 24
together with a Confirmation of Extension letter dated January 28,
1997 from The Dai-Ichi Kangyo Bank, Limited to Talbots.(7)
10.11 Request for Extension dated December 28, 1994, relating to the
Revolving Credit Agreement, from Talbots to The Daiwa Bank,
Limited, together with an acceptance letter dated January 27, 1995
from The Daiwa Bank, Limited to Talbots.(4)
10.12 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Norinchukin Bank,
together with an Acceptance of Extension letter dated January 17,
1997 from The Norinchukin Bank to Talbots.(7)
10.13 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Sakura Bank,
Limited, together with an acceptance letter dated January 24, 1997
from The Sakura Bank, Limited to Talbots.(7)
10.14 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Bank of
Tokyo-Mitsubishi Trust Company, together with an Acceptance of
Extension letter dated January 27, 1997 from The Bank of Tokyo
Trust Company to Talbots.(7)
10.15 Trademark Purchase and License Agreement, dated as of November 26,
1993, between JUSCO (Europe) B.V. and The Classics Chicago, Inc.(2)
10.16 Management Service Agreement, effective as of February 1, 1990, by
and between Talbots Japan Co., Ltd. and Talbots.(1)
10.17 Services Agreement, dated as of November 18, 1993, between Talbots
Japan Co., Ltd. and Talbots.(2)
10.18 Stock Purchase Agreement, dated as of November 26, 1993, between
Talbots and JUSCO.(2)
10.19 License Agreement, dated as of November 26, 1993, between The
Classics Chicago, Inc., Talbots, Talbots International Retailing
Limited, Inc., Talbots (Canada), Inc. and Talbots (U.K.) Retailing
Limited.(2)
10.20 Tax Allocation Agreement, dated as of November 18, 1993, between
JUSCO USA, Talbots, Talbots International Retailing Limited, Inc.,
Talbots (U.K.) Retailing Limited and The Classics Chicago, Inc.(2)
24
<PAGE> 25
10.21 The Talbots, Inc. Pension Plan for Salaried Employees, as amended
and restated January 1, 1989, including amendments through January
1, 1994.(4)
10.22 The Talbots, Inc. Retirement Savings Voluntary Plan, as amended
and restated, effective as of November 1, 1993.(4)
10.23 Agreement, dated as of November 26, 1993, between JUSCO (Europe)
B.V. and Talbots concerning the termination of the License
Agreement, effective as of June 26, 1988, between JUSCO Europe and
Talbots.(2)
10.24 Services Agreement, dated as of October 29, 1989, between Talbots
and JUSCO USA.(1)
10.25 Share Purchase Agreement dated as of February 21, 1995 between
Talbots and JUSCO USA.(3)
10.26 Extended Share Purchase Agreement, dated as of November 8, 1995,
between Talbots and JUSCO USA.(5)
10.27 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Dai-Ichi Kangyo Bank,
Ltd. dated November 21, 1995.(6)
10.28 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Norinchukin Bank dated
November 21, 1995.(6)
10.29 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Sakura Bank, Ltd. dated
November 21, 1995.(6)
10.30 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Bank of Tokyo Trust Co.
dated November 21, 1995.(6)
10.31 Termination Agreement dated as of November 27, 1995 between
Talbots and The Daiwa Bank, Ltd., New York Branch.(6)
10.32 HongkongBank Letter of Credit Service Agreement, dated as of April
19, 1996 together with a Continuing Commercial Letter of Credit
and Security Agreement dated May 15, 1996 and a Hexagon Customer
Agreement, dated May 15, 1996, between Talbots and The Hongkong
and Shanghai Banking Corporation Limited.(7)
25
<PAGE> 26
10.33 Amendment to License Agreement, dated January 29, 1997, among
The Classics Chicago, Inc., Talbots, Talbots International
Retailing Limited, Inc., Talbots (Canada), Inc., and Talbots
(U.K.) Retailing, Ltd.(7)
Management Contracts and Compensatory Plans and Arrangements.
-------------------------------------------------------------
10.34 Contract between Masaharu Isogai and Talbots, dated as of November
18, 1993.(2)
10.35 Talbots Phantom Stock Plan, effective as of January 29, 1989.(1)
10.36 Amendment No. 1 to the Talbots Phantom Stock Plan, dated as of
November 18, 1993.(2)
10.37 The Talbots, Inc. Supplemental Retirement Plan, effective as of
June 27, 1988.(1)
10.38 The Talbots, Inc. Supplemental Savings Plan (amended and restated
as of January 1, 1993).(1)
10.39 The Talbots, Inc. Deferred Compensation Plan (amended and restated
as of January 1, 1993).(1)
10.40 The Talbots, Inc. Supplemental Benefits Trust Agreement, dated as
of November 18, 1993, between Talbots and State Street Bank and
Trust Company.(2)
10.41 The Talbots, Inc. 1993 Executive Stock Based Incentive Plan.(2)
10.42 Employment Agreement, dated as of October 22, 1993, between Arnold
B. Zetcher and Talbots.(1) (as amended by Amendment No. 1 dated May
11, 1994).(4)
10.43 Amendment No. 1 to The Talbots, Inc. Supplemental Retirement Plan,
dated as of November 18, 1993.(2)
10.44 Amendment No. 1 to The Talbots, Inc. Supplemental Savings Plan,
dated as of November 18, 1993.(2)
10.45 Amendment No. 1 to The Talbots, Inc. Deferred Compensation Plan,
dated as of November 18, 1993.(2)
26
<PAGE> 27
10.46 Employment Agreement, dated as of October 22, 1993, between Clark
Hinkley and The Talbots, Inc.(2) (as amended by Amendment No. 1
dated May 11, 1994).(4)
10.47 Change in Control Agreements, dated as of November 11, 1993,
between Talbots and each of J. Bruce Ash, Edward Larsen, Michele
Mandell, Ronald Ramseyer, Richard T. O'Connell, Bruce Soderholm,
Stuart Stolper, Jacqueline Corso, Paul Kastner, Sandy Katz, Steven
Siegler and Lucy Main Tweet.(2)
10.48 Change in Control Agreements, dated August 22, 1994, between
Talbots and each of Judith O'Keefe and Bruce Prescott.(4)
(11) Statement re Computation of Per Share Earnings
----------------------------------------------
11.1 Computation of weighted average number of shares outstanding used
in determining primary and fully diluted earnings per share.
(13) Annual Report to Security Holders
---------------------------------
13.1 Excerpts from the 1996 Annual Report of Talbots incorporated by
reference.
(21) Subsidiaries.
------------
21.1 List of subsidiaries of Talbots.(1)
(23) Consents of Experts and Counsel.
-------------------------------
23.1 Independent Auditors' Consent of Deloitte & Touche LLP.
- - --------------------
(1) Incorporated by reference to the exhibits filed with Talbots
Registration Statement on Form S-1 (No. 33-69082), which Registration Statement
became effective November 18, 1993.
(2) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated April 25, 1994.
(3) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated February 21, 1995.
(4) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated April 27, 1995.
(5) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated November 8, 1995.
27
<PAGE> 28
(6) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated November 21, 1995.
(7) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated April 30, 1997.
(b) REPORT ON FORM 8-K: Reports on Form 8-K filed during the fourth quarter of
fiscal 1996:
(i) Current Report on Form 8-K dated October 30, 1996 and filed
November 13, 1996 concerning forward looking statements.
(ii) Current Report on Form 8-K dated April 30, 1997 and filed May 1,
1997 concerning exhibits to Form 10-K.
With the exception of the information incorporated by reference to the Annual
Report to Shareholders in Items 5, 6, 7 and 8 of Part II and Item 14 of Part IV
of this Annual Report, Talbots 1996 Annual Report to Shareholders is not to be
deemed filed as part of this Annual Report.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 30, 1997
THE TALBOTS, INC.
(Registrant)
By /s/ Edward Larsen
--------------------------------------------
Edward L. Larsen
Senior Vice President, Finance, and Chief
Financial Officer and Treasurer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of April 30, 1997:
/s/ Arnold B. Zetcher /s/ Masaharu Isogai
- - ----------------------------------- ---------------------------------
Arnold B. Zetcher Masaharu Isogai
President and Chief Executive Director
Officer and Director
/s/ Elizabeth T. Kennan
- - ----------------------------------- ---------------------------------
Takuya Okada Elizabeth T. Kennan
Chairman of the Board of Director
Directors
- - ----------------------------------- ---------------------------------
Eiji Akiyama Motoya Okada
Director Director
/s/ Clark J. Hinkley /s/ Mark H. Willes
- - ----------------------------------- ---------------------------------
Clark J. Hinkley Mark H. Willes
Director Director
<PAGE> 30
EXHIBIT INDEX
-------------
Exhibit
- - -------
(3) Articles of Incorporation and By-laws.
-------------------------------------
3.1 Certificate of Incorporation, as amended, of Talbots.(1)
3.2 By-laws of Talbots.(1)
(4) Instruments Defining the Rights of Security Holders, including Indentures.
-------------------------------------------------------------------------
4.1 Form of Common Stock Certificate of Talbots.(1)
(10) Material Contracts.
------------------
10.1 Stockholders Agreement, dated as of November 18, 1993, between
Talbots and JUSCO USA.(2)
10.2 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Dai-Ichi Kangyo Bank, Limited.(2)
10.3 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Bank of Tokyo Trust Company.(2)
10.4 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Norinchukin Bank.(2)
10.5 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Daiwa Bank, Limited.(2)
10.6 Revolving Credit Agreement, dated as of January 25, 1994 between
Talbots and The Sakura Bank, Limited.(2)
10.7 Letter Agreement, dated as of January 31, 1994, concerning various
credit facilities, between Talbots and The First National Bank of
Boston.(2)
10.8 Letter Agreement, dated as of September 26, 1994, concerning
various credit facilities, between Talbots and The First National
Bank of Boston.(4)
10.9 Letter of Credit Agreement, dated as of August 10, 1993, between
Talbots and The First National Bank of Boston.(1)
<PAGE> 31
10.10 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Dai-Ichi Kangyo
Bank, Limited, together with a Confirmation of Extension letter
dated January 28, 1997 from The Dai-Ichi Kangyo Bank, Limited to
Talbots.(7)
10.11 Request for Extension dated December 28, 1994, relating to the
Revolving Credit Agreement, from Talbots to The Daiwa Bank,
Limited, together with an acceptance letter dated January 27, 1995
from The Daiwa Bank, Limited to Talbots.(4)
10.12 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Norinchukin Bank,
together with an Acceptance of Extension letter dated January 17,
1997 from The Norinchukin Bank to Talbots.(7)
10.13 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Sakura Bank,
Limited, together with an acceptance letter dated January 24, 1997
from The Sakura Bank, Limited to Talbots.(7)
10.14 Request for Extension dated December 20, 1996, relating to the
Revolving Credit Agreement, from Talbots to The Bank of
Tokyo-Mitsubishi Trust Company, together with an Acceptance of
Extension letter dated January 27, 1997 from The Bank of Tokyo
Trust Company to Talbots.(7)
10.15 Trademark Purchase and License Agreement, dated as of November 26,
1993, between JUSCO (Europe) B.V. and The Classics Chicago, Inc.(2)
10.16 Management Service Agreement, effective as of February 1, 1990, by
and between Talbots Japan Co., Ltd. and Talbots.(1)
10.17 Services Agreement, dated as of November 18, 1993, between Talbots
Japan Co., Ltd. and Talbots.(2)
10.18 Stock Purchase Agreement, dated as of November 26, 1993, between
Talbots and JUSCO.(2)
10.19 License Agreement, dated as of November 26, 1993, between The
Classics Chicago, Inc., Talbots, Talbots
<PAGE> 32
International Retailing Limited, Inc., Talbots (Canada), Inc. and
Talbots (U.K.) Retailing Limited.(2)
10.20 Tax Allocation Agreement, dated as of November 18, 1993, between
JUSCO USA, Talbots, Talbots International Retailing Limited, Inc.,
Talbots (U.K.) Retailing Limited and The Classics Chicago, Inc.(2)
10.21 The Talbots, Inc. Pension Plan for Salaried Employees, as amended
and restated January 1, 1989, including amendments through January
1, 1994.(4)
10.22 The Talbots, Inc. Retirement Savings Voluntary Plan, as amended
and restated, effective as of November 1, 1993.(4)
10.23 Agreement, dated as of November 26, 1993, between JUSCO (Europe)
B.V. and Talbots concerning the termination of the License
Agreement, effective as of June 26, 1988, between JUSCO Europe and
Talbots.(2)
10.24 Services Agreement, dated as of October 29, 1989, between Talbots
and JUSCO USA.(1)
10.25 Share Purchase Agreement dated as of February 21, 1995 between
Talbots and JUSCO USA.(3)
10.26 Extended Share Purchase Agreement, dated as of November 8, 1995,
between Talbots and JUSCO USA.(5)
10.27 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Dai-Ichi Kangyo Bank,
Ltd. dated November 21, 1995.(6)
10.28 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Norinchukin Bank dated
November 21, 1995.(6)
10.29 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Sakura Bank, Ltd. dated
November 21, 1995.(6)
10.30 First Amendment to the Revolving Credit Agreement dated as of
January 25, 1994 between Talbots and The Bank of Tokyo Trust Co.
dated November 21, 1995.(6)
<PAGE> 33
10.31 Termination Agreement dated as of November 27, 1995 between
Talbots and The Daiwa Bank, Ltd., New York Branch.(6)
10.32 HongkongBank Letter of Credit Service Agreement, dated as of April
19, 1996 together with a Continuing Commercial Letter of Credit
and Security Agreement dated May 15, 1996 and a Hexagon Customer
Agreement, dated May 15, 1996, between Talbots and The Hongkong
and Shanghai Banking Corporation Limited.(7)
10.33 Amendment to License Agreement, dated January 29, 1997, among
The Classics Chicago, Inc., Talbots, Talbots International
Retailing Limited, Inc., Talbots (Canada), Inc., and Talbots
(U.K.) Retailing, Ltd.(7)
Management Contracts and Compensatory Plans and Arrangements.
-------------------------------------------------------------
10.34 Contract between Masaharu Isogai and Talbots, dated as of November
18, 1993.(2)
10.35 Talbots Phantom Stock Plan, effective as of January 29, 1989.(1)
10.36 Amendment No. 1 to the Talbots Phantom Stock Plan, dated as of
November 18, 1993.(2)
10.37 The Talbots, Inc. Supplemental Retirement Plan, effective as of
June 27, 1988.(1)
10.38 The Talbots, Inc. Supplemental Savings Plan (amended and restated
as of January 1, 1993).(1)
10.39 The Talbots, Inc. Deferred Compensation Plan (amended and restated
as of January 1, 1993).(1)
10.40 The Talbots, Inc. Supplemental Benefits Trust Agreement, dated as
of November 18, 1993, between Talbots and State Street Bank and
Trust Company.(2)
10.41 The Talbots, Inc. 1993 Executive Stock Based Incentive Plan.(2)
<PAGE> 34
10.42 Employment Agreement, dated as of October 22, 1993, between Arnold
B. Zetcher and Talbots.(1) (as amended by Amendment No. 1 dated May
11, 1994).(4)
10.43 Amendment No. 1 to The Talbots, Inc. Supplemental Retirement Plan,
dated as of November 18, 1993.(2)
10.44 Amendment No. 1 to The Talbots, Inc. Supplemental Savings Plan,
dated as of November 18, 1993.(2)
10.45 Amendment No. 1 to The Talbots, Inc. Deferred Compensation Plan,
dated as of November 18, 1993.(2)
10.46 Employment Agreement, dated as of October 22, 1993, between Clark
Hinkley and The Talbots, Inc.(2) (as amended by Amendment No. 1
dated May 11, 1994).(4)
10.47 Change in Control Agreements, dated as of November 11, 1993,
between Talbots and each of J. Bruce Ash, Edward Larsen, Michele
Mandell, Ronald Ramseyer, Richard T. O'Connell, Bruce Soderholm,
Stuart Stolper, Jacqueline Corso, Paul Kastner, Sandy Katz, Steven
Siegler and Lucy Main Tweet.(2)
10.48 Change in Control Agreements, dated August 22, 1994, between
Talbots and each of Judith O'Keefe and Bruce Prescott.(4)
(11) Statement re Computation of Per Share Earnings
----------------------------------------------
11.1 Computation of weighted average number of shares outstanding used
in determining primary and fully diluted earnings per share.
(13) Annual Report to Security Holders
---------------------------------
13.1 Excerpts from the 1996 Annual Report of Talbots incorporated by
reference.
(21) Subsidiaries.
------------
21.1 List of subsidiaries of Talbots.(1)
(23) Consents of Experts and Counsel.
-------------------------------
23.1 Independent Auditors' Consent of Deloitte & Touche LLP.
(99) Additional Exhibits
-------------------
99.1 Excerpts from the 1996 Annual Report of Talbots incorporated by
reference.
- - -------------
<PAGE> 35
(1) Incorporated by reference to the exhibits filed with Talbots
Registration Statement on Form S-1 (No. 33-69082), which Registration Statement
became effective November 18, 1993.
(2) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated April 25, 1994.
(3) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated February 21, 1995.
(4) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated April 27, 1995.
(5) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated November 8, 1995.
(6) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated November 21, 1995.
(7) Incorporated by reference to the exhibits filed with Talbots Current
Report on Form 8-K dated April 30, 1997.
<PAGE> 1
EXHIBIT 11.1
<TABLE>
Computation of weighted average number of shares outstanding used in determining
primary and fully diluted earnings per share:
<CAPTION>
Fiscal Year Ended
------------------------------------
February 1, February 3, January 28,
1997 1996 1995
----------- ----------- -----------
(Shares in 000's)
<S> <C> <C> <C>
Primary
- - -------
Weighted average number of common
shares outstanding 33,185 34,395 34,908
Assumed exercise of certain stock
options based on average market values 266 258 83
------ ------ ------
Weighted average number of shares used
in primary per share computations 33,451 34,653 34,991
====== ====== ======
Fully diluted (a)
- - -----------------
Weighted average number of common
shares outstanding 33,185 34,395 34,908
Assumed exercise of all dilutive options
based on higher of average or closing
market value 266 258 92
------ ------ ------
Weighted average number of shares used
in fully diluted per share computations 33,451 34,653 35,000
====== ====== ======
</TABLE>
(a) This calculation is submitted in accordance with the Securities Exchange
Act of 1934 Release No. 9083 although not required by Footnote 2 to
Paragraph 14 of APB Opinion No. 15 because it results in dilution of less
than 3%.
<PAGE> 1
EXHIBIT 13.1
FIVE YEAR FINANCIAL SUMMARY
Dollar amounts in thousands except per share data
================================================================================
The following selected financial data have been derived from the Company's
consolidated financial statements.
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
------------------------------------------------------------------
Year Ended
------------------------------------------------------------------
February 1, February 3, January 28, January 29, January 30,
1997 1996 1995 1994 1993
STATEMENT OF EARNINGS INFORMATION: (52 weeks) (53 weeks) (52 weeks) (52 weeks) (53 weeks)
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $1,018,801 $981,042 $879,585 $736,738 $641,839
- - --------------------------------------------------------------------------------------------------------------------
Net income 63,621 62,600 54,457 35,153 $ 20,417
- - --------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.92 $ 1.82 $ 1.56 $ 1.42 $ 0.92
- - --------------------------------------------------------------------------------------------------------------------
Cash dividends per share $ 0.34 $ 0.26 $ 0.18 -- --
- - --------------------------------------------------------------------------------------------------------------------
Weighted average number of shares of
- - --------------------------------------------------------------------------------------------------------------------
common stock outstanding (in thousands) 33,185 34,395 34,908 24,782 22,286
- - --------------------------------------------------------------------------------------------------------------------
BALANCE SHEET INFORMATION:
- - --------------------------------------------------------------------------------------------------------------------
Working capital $ 184,442 $161,361 $137,864 $ 89,462 $ 37,929
- - --------------------------------------------------------------------------------------------------------------------
Total assets 621,789 572,111 532,514 485,920 354,726
- - --------------------------------------------------------------------------------------------------------------------
Total long-term debt, including current portion 50,000 50,000 35,000 35,000 127,000
- - --------------------------------------------------------------------------------------------------------------------
Stockholders' equity 431,459 398,039 385,594 336,719 108,069
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
12
<PAGE> 2
TALBOTS 1996 ANNUAL REPORT
==========================
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 accompanying
the financial statements. The 1996 fiscal year had fifty-two weeks and ended
February 1, 1997. The 1995 fiscal year had fift y-three weeks and ended February
3, 1996. The 1994 fiscal year had fifty-two w eeks and ended January 28, 1995.
When making 52 week comparisons between fisca l 1996 and fiscal 1995, the
comparable fifty-two week period for fiscal 1995 e xcludes the first week of the
fifty-three week year. When making 52 week comparisons between fiscal 1995 and
fiscal 1994, the comparable fifty -two week period for fiscal 1995 excludes the
fifty-third week of the fifty-th ree week year.
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of earnings for the fiscal periods shown below:
<CAPTION>
Year Ended
--------------------------------------------------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy expenses 63.7% 62.7% 61.4%
Selling, general and administrative expenses 25.6% 26.2% 28.0%
Operating income 10.7% 11.1% 10.7%
Interest expense, net 0.5% 0.4% 0.3%
Income before income taxes 10.2% 10.6% 10.4%
Income taxes 3.9% 4.3% 4.2%
Net Income 6.2% 6.4% 6.2%
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $37.8 million, to $1,018.8 million, or 3.9% over
1995. Operating income was $108.8 million in 1996 compared to $108.6 million in
1995.
Retail store sales in 1996 increased by $39.3 million, to $839.0 million,
or 4.9% over 1995. The retail store sales attributable to the extra week in 1995
were $9.6 million. The percentage of the Company's net sales derived from its
retail stores increased to 82.4% in 1996 from 81.5% in 1995. The increase in
retail store sales as a percentage of the Company's total net sales was due to
the growth in retail store sales and a decrease in catalog sales. The increase
in retail store sales was attributable to the 75 new stores opened in 1996 and
the first full year of operat ion of the 65 non-comparable stores that opened in
1995, and was partially offset by a $19.3 million, or a 3.1% decline in
comparable store sales on a 52-week comparison basis, over the previous year.
Comparable stores are those which were open for at least one full fiscal year.
When a new Talbots Petites store or a new Talbots Accessories & Shoes store is
opened adjacent to or in close proximity to an existing comparable Misses 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 1996 decreased by $1.5 million, to $179.8 million, or .8%
less than 1995. The catalog sales attributable to the extra week in 1995 were
$2.9 million. The percentage of the Company's total sales derived from its
catalog decreased to 17.6% in 1996 from 18.5% in 1995. The decline in catalog
sales was largely due to the planned reduction in catalog circulation intended
to offset the increased cost of paper used to print the catalogs. The plan
included a reduction in the number of catalogs mailed to less likely to buy
customers and also an increase in the number of pages in individual catalogs
mailed to the Company's best customers. Catalog circulation decreased to 49.7
million catalogs in 1996, from 53.3 million catalogs in 1995 on a comparable
52-week basis. Despite the decrease in catalog circulation, catalog
productivity, as measured by sales per catalog on a comparable 52-week basis,
increased 8.1% in 1996 to $3.62 from $3.35 in 1995.
Cost of sales, buying and occupancy expenses increas ed as a percentage of
net sales to 63.7% from 62.7% in 1995 due to higher stor e occupancy costs as a
percentage of sales, which more than offset an improvement in merchandise
margin.
----------
13
<PAGE> 3
[TALBOTS LOGO]
==============
Selling, general and administrative expenses decreas ed as a percentage of
net sales to 25.6% in 1996 from 26.2% in 1995. The decre ase in selling, general
and administrative expenses as a percentage of net sal es was due to continued
tight control over corporate overhead expenses and an increase in finance charge
income, related to higher customer account s receivable, which resulted from the
reduction in minimum payment terms on th e Company's charge card. The increase
in customer accounts receivable did not adversely impact the Company's bad debt
expense ratio.
Interest expense, net, increased by $1.1 million, to $5.3 million in 1996,
due to higher average debt levels which more than offse t a decrease in interest
rates. The average total debt, including short-term a nd long-term bank
borrowings, was $109.3 million in 1996 compared to $80.0 mil lion in 1995. The
increase in borrowings supported the build-up of inventories to support new
stores and the Company's stock repurchase program. The average interest rate,
including interest on short-term and long-term bank borrowings , was 6.07% in
1996 compared to 6.88% in 1995.
The effective tax rate for the Company declined to 38.5% in 1996 from 40.0%
in 1995 following the identification and implementation of several tax
strategies at the federal, state and international level.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased by $101.4 million, to $981.0 million, or 11.5% over
1994. Operating income was $108.6 million in 1995 compared to $94.0 million in
1994, an increase of 15.5%.
Retail store sales in 1995 increased by $93.3 million, to $799.7 million,
or 13.2% over 1994. The percentage of the Company's net sales derived from its
retail stores increased to 81.5% in 1995 from 80.3% in 1994. The increase in
retail store sales as a percentage of the Company's total net sales was due to
the growth in retail store sales. The increase in retail store sales was
attributable to the 65 new stores opened in 1995, the first full year of
operation of the 56 non-comparable stores that opened in 1994, $8.8 million of
sales during the 53rd week of 1995 and an increase of $7.2 million in comparable
store sales on a 52-week comparison basis, or 1.2% over the previous year.
Catalog sales in 1995 increased by $8.1 million, to $181.3 million, or 4.7%
over 1994. The sales attributable to 1995's 53rd week were $2.7 million. The
percentage of the Company's total sales derived from its catalog decreased to
18.5% in 1995 from 19.7% in 1994. Catalog circulation decreased to 54.8 million
catalogs in 1995, on a 52-week comparable basis, from 59.0 million catalogs in
1994. The reduction in catalog circulation continues a strategic initiative to
better target the distribution of catalogs to known customers. Sales per catalog
increased by 11.3% to $3.26 in 1995 from $2.93 in 1994.
The percentage of cost of sales, buying and occupancy expenses to net sales
increased due to higher markdowns and, with the overall comparable store sales
increase lower than the previous year, higher occupancy costs as a percentage of
sales. The increase of private label merchandise, which rose to 97% in 1995 from
95% in 1994, had a minimal effect on reducing cost of sales, buying and
occupancy expenses as a percentage of net sales.
Selling, general and administrative expenses decreased as a percentage of
net sales to 26.2% in 1995 from 28.0% in 1994. The decrease in selling, general
and administrative expenses as a percentage of net sales was due primarily to
tighter than normal control of expenses, with some of the largest savings coming
in discretionary types of spending, such as non-essential store
maintenance-related expenses, marketing, professional services, travel,
consulting and research projects. None of these expense controls, however, were
noticeable to the customer or affected the level of service to the customer.
Interest expense, net, increased by $1.4 million, to $4.2 million in 1995,
due to higher debt levels and an increase in interest rates. The average total
debt, including short-term and long-term bank borrowings, was $80.0 million in
1995 compared to $64.0 million in 1994. The increase in borrowings supported the
build-up of inventories to support new stores and the initiation of the
Company's stock repurchase program. The average interest rate, including
interest on short-term and long-term bank borrowings, was 6.88% in 1995 compared
to 5.59% in 1994.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The nature of the Company's business is to have two distinct selling
seasons, spring and fall. The first and second quarters make up the spring
season and the third and fourth quarters make up the fall season. Within the
spring season, catalog sales are stronger in the first quarter while retail
store sales are stronger in the second quarter. Within the fall seaso n, catalog
sales and retail store sales are generally the strongest in the fourth quarter.
Historically, catalog sales had been higher during the first and third quarters
due to the timing of catalog circulation and the placement of customer orders
early in the season. However, as shopping patterns have changed and customers
are buying closer to
----------
14
<PAGE> 4
TALBOTS 1996 ANNUAL REPORT
==========================
time of need, the difference in catalog sales between the third and fourth
quarters has diminished. Retail store sales typically peak in the fourth quarter
due to the holiday gift season and the impact of new stores opened during the
year. From a total Company perspective, the highest sales are in the fourth
quarter.
<TABLE>
The following table sets forth certain items in the Company's unaudited
quarterly consolidated statement of earnings as a percentage of net sales. The
information as to any one quarter is not necessarily indicative of results for
any future period.
<CAPTION>
Fiscal Quarter Ended
----------------------------------------------------------------------------------------------------
May 4, August 3, November 2, February 1,
1996 1996 1996 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy expenses 56.5% 69.8% 58.9% 68.5%
Selling, general and administrative expenses 28.4% 25.0% 27.3% 22.7%
Operating income 15.1% 5.2% 13.7% 8.9%
----------------------------------------------------------------------------------------------------
April 29, July 29, October 28, February 3,
1995 1995 1995 1996
----------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy expenses 54.8% 68.2% 58.2% 68.1%
Selling, general and administrative expenses 29.2% 25.4% 26.9% 24.1%
Operating income 16.0% 6.4% 15.0% 7.9%
</TABLE>
The Company's merchandising strategy focuses on liquidating seasonal
inventory at the end of each selling season. The Company achieves this goal by
conducting major sale events at the end of the second and fourth quarters. These
events produce an increase in sales volume; however, since marking down the
value of inventory increases expenses, the Company's cost of sales, buying and
occupancy expenses as a percentage of net sales is increased. Merchandise
inventories typically reach their highest level in the third quarter.
The Company's selling, general and administrative expenses are strongly
affected by the seasonality of sales. The two key elements of this seasonality
are (1) the catalog circulation strategy, which affects catalog sales volume and
produces commensurately high catalog production costs and (2) the major
semiannual sale events in the second quarter and the fourth quarter, which
require additional store payroll and supplies. An additional factor is the
aggressive store expansion program, which results in ha ving substantially more
stores open in the fall than at the beginning of the year and therefore results
in higher store payroll and operations-related expenses. Despite annual
increases, selling, general and administrative expenses have been declining as a
percentage of net sales.
The combined effect of the patterns of net sales, cost of sales, buying and
occupancy expenses and selling, general and administrative expenses, described
above, has produced higher operating income margins in the first and third
quarters.
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 February 1, 1997 and
February 3, 1996, the Company had $24.0 million outstanding under the line of
credit facility. Additionally, the Company has a revolving credit facility with
maximum available borrowings of $50.0 million. At February 1, 1997 and February
3, 1996 the Company's outstanding borrowings under the revolving credit facility
were $50.0 million. The revolving credit facility currently extends to January
28, 1999, subject to annual extensions. The Company's working capital needs are
typically at their lowest during the spring season and peak during the fall
selling season.
Cash provided by operating activities totaled $75.2 million in 1996. Major
changes include an increase in accounts payabl e due to the timing of
merchandise receipts, a build up of inventories necessary to support a 15.6%
increase in selling square footage from 1995 to 1996, and an increase in
customer accounts receivable following a reduction in the minimum payment terms
on the Company's charge card.
Cash provided by operating activities totaled $46.5 million in 1995,
primarily due to the timing of the fiscal year end, which occurred subsequent to
the calendar month end. The prior year's month end fell into calendar January.
----------
15
<PAGE> 5
[TALBOTS LOGO]
==============
Cash used in investing activities for 1996 was $46.2 million. Of this
amount, approximately $43.9 million was used for leasehold improvements,
furniture, fixtures and other related expenditures for opening new stores and
expanding, renovating and relocating existing stores. Cash used in investing
activities for 1995 was $40.5 million, including approximately $33.3 million
used for new and existing stores and $4.4 million used for the expansion of the
Company's Lakeville, Massachusetts distribution center.
Capital expenditures for 1997 are currently expected to be $55.0 million.
The Company currently plans to open approximately 70 new stores during 1997.
Approximately $45.3 million is expected to be used for opening new stores and
expanding, renovating and relocating existing stores. The actual amount of such
capital expenditures will depend on the number and type of stores being opened,
expanded, renovated and relocated, and the schedule for such activity during
1997.*
Cash used in financing activities totaled $31.6 million in 1996. During
fiscal 1996 the Company paid cash dividends of $0.34 per share and repurchased
738,835 shares of Company common stock at an average price per share of $27.88.
Cash used in financing activities totaled $10.2 million in 1995. The
Company paid cash dividends of $0.26 per share and repurchased 1,273,000 shares
of Company common stock at an average price per share of $31.63. The payment of
cash dividends and the purchase of treasury stock was largely funded by $39.0
million of additional borrowings under debt agreements.
In 1996 and 1995 cash from operating activities was sufficient to meet
capital expenditures and debt service requirements. During 1996 and 1995 the
Company periodically refinanced amounts due under the line of credit facility.
The Company's usage of the line of credit facility peaked at $85.0 million in
1996 and at $94.0 million in 1995. The Company's primary ongoing cash
requirements will be to fund new stores and the expansions, renovations and
relocations of existing stores, to finance working capital build-ups during peak
selling seasons, to repurchase shares of the Company's common stock, and to pay
cash dividends that may be declared from time to time.
For the current fiscal year and the next fiscal year, the Company believes
its cash flows from operating activities and funds available to it under the
line of credit facility will be sufficient to meet its capital expenditure and
working capital requirements, including its debt service payments.*
INFLATION AND CHANGING PRICES
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 increases in retail sales or
catalog sales to specific changes in prices, changes in volume or changes in
product mix.
The Company has not experienced any significant impact from inflationary
factors. During 1996 and 1995 the Company did experience the effects from
increases in the costs of postage and paper, which affected its catalog
business. The Company developed and implemented a strategy to reduce the number
of catalogs circulated to help offset the effect of these cost increases. The
Company expects paper prices to stabilize in 1997 and is evaluating its catalog
circulation plans accordingly.*
EXCHANGE RATES
Most foreign purchase orders are denominated in U.S. dollars. Accordingly,
the Company has not experienced any significant impact from changes in exchange
rates.
NEW ACCOUNTING STANDARDS
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which is
effective for fiscal years ending after December 15, 1997. The Company has not
yet determined the impact that this statement may have on its net income per
share calculation.
*The foregoing contains forward-looking information within the meaning of The
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve certain risks and uncertainties including levels of sales,
store traffic and acceptance of Talbots fashion and, in each case, actual
results may differ materially from such forward-looking information. Certain
factors that may cause actual results to differ 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 617-741-4500) as well as other
periodic reports filed by the Company with the Securities and Exchange
Commission and you are urged to consider such factors. The Company assumes no
obligation for updating any such forward-looking statements.
----------
16
<PAGE> 6
TALBOTS 1996 ANNUAL REPORT
==========================
<TABLE>
Consolidated Statements of Earnings
Dollar amounts in thousands except per share data
<CAPTION>
Year Ended
--------------------------------------
February 1, February 3, January 28,
1997 1996 1995
(52 Weeks) (53 Weeks) (52 Weeks)
--------------------------------------
<S> <C> <C> <C>
NET SALES $1,018,801 $981,042 $879,585
COSTS AND EXPENSES:
Cost of sales, buying and occupancy 648,710 615,268 539,652
Selling, general and administrative 261,319 257,210 245,937
--------------------------------------
OPERATING INCOME 108,772 108,564 93,996
INTEREST EXPENSE, net 5,324 4,231 2,763
--------------------------------------
INCOME BEFORE TAXES 103,448 104,333 91,233
INCOME TAXES 39,827 41,733 36,776
--------------------------------------
NET INCOME $ 63,621 $ 62,600 $ 54,457
======================================
NET INCOME PER SHARE $ 1.92 $ 1.82 $ 1.56
======================================
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (in thousands) 33,185 34,395 34,908
======================================
</TABLE>
See notes to consolidated financial statements.
----------
17
<PAGE> 7
[TALBOTS LOGO]
==============
<TABLE>
CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands except per share data
<CAPTION>
February 1, February 3,
1997 1996
-------------------------
<S> <C> <C>
ASSETS
- - ------
CURRENT ASSETS:
Cash and cash equivalents $ 12,348 $ 14,865
Customer accounts receivable - net 97,274 73,758
Merchandise inventories 161,230 143,526
Deferred catalog costs 9,566 12,757
Due from affiliates 4,978 4,008
Deferred income taxes 3,319 3,121
Prepaid and other current assets 23,088 23,250
------------------------
TOTAL CURRENT ASSETS 311,803 275,285
PROPERTY AND EQUIPMENT - net 170,805 154,160
GOODWILL - net 42,233 43,577
INTANGIBLES - net 1,789 4,189
TRADEMARKS - net 87,805 90,189
DEFERRED INCOME TAXES 7,354 4,711
------------------------
TOTAL ASSETS $621,789 $572,111
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 24,000 $ 24,000
Accounts payable 54,658 44,331
Accrued liabilities 48,703 45,593
------------------------
TOTAL CURRENT LIABILITIES 127,361 113,924
LONG-TERM DEBT 50,000 50,000
DEFERRED RENT UNDER LEASE COMMITMENTS 12,969 10,148
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 40,000,000 authorized;
34,928,092 shares and 34,910,826 shares issued,
respectively, and 32,916,257 shares and
33,637,826 shares outstanding, respectively 349 349
Additional paid-in capital 286,874 286,472
Retained earnings 207,433 155,092
Cumulative foreign currency translation adjustment (1,154) (1,337)
Deferred pension cost (470)
Restricted stock award (1,164) (1,801)
Treasury stock, at cost (60,879) (40,266)
------------------------
TOTAL STOCKHOLDERS' EQUITY 431,459 398,039
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $621,789 $572,111
========================
</TABLE>
See notes to consolidated financial statements.
----------
18
<PAGE> 8
TALBOTS 1996 ANNUAL REPORT
==========================
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands
<CAPTION>
Year Ended
---------------------------------------
February 1, February 3, January 28,
1997 1996 1995
(52 Weeks) (53 Weeks) (52 Weeks)
---------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,621 $ 62,600 $ 54,457
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 35,095 33,607 30,961
Deferred rent 2,808 1,126 1,622
Amortization of restricted stock award 637 637 638
Loss on disposal of property and equipment 857 1,296 1,183
Deferred income taxes (2,835) 532 (144)
Changes in current assets and liabilities:
Customer accounts receivable (23,496) (8,458) (12,920)
Merchandise inventories (17,556) (19,878) (11,304)
Deferred catalog costs 3,191 (3,988) (2,615)
Due from affiliates (970) (1,437) 418
Prepaid and other current assets 63 (6,589) (2,874)
Accounts payable 10,290 (13,468) 15,832
Accrued liabilities 3,522 929 5,781
Income taxes payable (448) (2,529)
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 75,227 46,461 78,506
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (47,539) (40,478) (34,483)
Proceeds from disposal of property and equipment 1,302 14 86
--------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (46,237) (40,464) (34,397)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) under notes payable to banks 24,000 (23,000)
Borrowings of long-term debt 15,000
Cash dividends (11,280) (8,946) (6,283)
Proceeds from stock options exercised 337 45 20
Purchase of treasury stock (20,613) (40,266)
--------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (31,556) (10,167) (29,263)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 49 42 (16)
---------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,517) (4,128) 14,830
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,865 18,993 4,163
--------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,348 $ 14,865 $ 18,993
======================================
</TABLE>
See notes to consolidated financial statements.
----------
19
<PAGE> 9
[TALBOTS LOGO]
==============
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Dollar amounts in thousands except share data
<CAPTION>
Cumulative
Foreign
Common Stock dditional Currency Deferred Total
Paid-in Retained Translation Pension Restricted Treasury Stockholders'
Shares Amount Capital Earnings Adjustment Cost Stock Award Stock Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 29, 1994 34,907,494 $349 $286,387 $53,264 $167 ($372) ($3,076) $336,719
Net income 54,457 54,457
Cash dividends paid (6,283) (6,283)
Amortization of restricted
stock award 638 638
Stock options exercised,
including tax benefit 1,000 22 22
Other equity transactions 168 (127) 41
------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 28, 1995 34,908,494 349 286,409 101,438 335 (499) (2,438) 385,594
Net income 62,600 62,600
Cash dividends paid (8,946) (8,946)
Amortization of restricted
stock award 637 637
Stock options exercised,
including tax benefit 2,332 63 63
Purchase of 1,273,000 shares of
common stock ($40,266) (40,266)
Other equity transactions (1,672) 29 (1,643)
------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 3, 1996 34,910,826 349 286,472 155,092 (1,337) (470) (1,801) (40,266) 398,039
Net income 63,621 63,621
Cash dividends paid (11,280) (11,280)
Amortization of restricted
stock award 637 637
Stock options exercised,
including tax benefit 17,266 402 402
Purchase of 738,835 shares of
common stock (20,613) (20,613)
Other equity transactions 183 470 653
------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 1, 1997 34,928,092 $349 $286,874 $207,433 ($1,154) $0 ($1,164) ($60,879) $431,459
================================================================================================
</TABLE>
See notes to consolidated financial statements.
----------
20
<PAGE> 10
TALBOTS 1996 ANNUAL REPORT
==========================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data
1. DESCRIPTION OF BUSINESS
The Talbots, Inc. (together with its subsidiaries, the "Company") is a specialty
retailer with a direct marketing catalog operation. On November 18, 1993, the
Company effected an initial public offering of its common stock (the
"Offering"), issuing 12,621,594 shares of common stock. Prior to the Offering,
the Company was a wholly owned subsidiary of JUSCO (U.S.A.), Inc. ("JUSCO
(USA)"), which subsequent to the Offering, owns approximately 63.4% of the
outstanding common stock of the Company. The Company had been acquired by JUSCO
(USA) in 1988 from General Mills, Inc. The acquisition was accounted for under
the purchase method of accounting for business combinations.
The year ended February 1, 1997 was a fifty-two week reporting period, the year
ended February 3, 1996 was a fifty-three week reporting period and the year
ended January 28, 1995 was a fifty-two week reporting period. To conform with
other industry retailers, during fiscal 1995 the Company adopted the National
Retail Federation's (NRF) fiscal calendar.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity with
Generally Accepted Accounting Principles requires management to make 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
included within the financial statements include sales return reserve, inventory
reserve, allowance for doubtful accounts, and the economic life of intangible
assets.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents.
CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable are amounts due from
customers on the Company's credit card, net of an allowance for doubtful
accounts of $1,200 and $1,135 as of February 1, 1997 and February 3, 1996,
respectively.
DEFERRED CATALOG COSTS - Catalog costs, including cost of production and
mailing, are deferred and amortized over the estimated productive selling life
of the catalog, generally three to five months.
MERCHANDISE INVENTORIES - Inventories are stated at the lower of average cost or
market using the retail inventory method on a FIFO (first-in, first-out) basis.
PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation and amortization are provided over the following estimated useful
lives using the straight-line method:
<TABLE>
<CAPTION>
Description Years
------------------------------------------------------------------------------
<S> <C>
Buildings ................................ 15-50
Fixtures and equipment ................... 2-10
Software ................................. 5
Leasehold improvements ................... 5-15 or term of lease, if shorter
Leasehold interests ...................... 4-20
</TABLE>
----------
21
<PAGE> 11
[TALBOTS LOGO]
==============
Leasehold interests were established in June 1988 and represent the present
value of the excess of market rental rates over actual rents payable over the
remaining lives of certain leases.
Expenditures for new properties and improvements to existing facilities are
capitalized, while the cost of maintenance is charged to expense. The cost of
property retired, or otherwise disposed of, and the accumulated depreciation are
eliminated from the related accounts, and the resulting gain or loss is
reflected in earnings.
GOODWILL - The excess of purchase price over net assets acquired is being
amortized over 40 years using the straight-line method. At February 1, 1997 and
February 3, 1996 accumulated amortization on goodwill was $11,527 and $10,183,
respectively.
INTANGIBLES - Intangibles consist of the fair market value of existing customer
relationships established in June 1988 and are being amortized using a surviving
curve lifing analysis, which approximates straight-line, over their lives of
approximately nine years. At February 1, 1997 and February 3, 1996, accumulated
amortization on intangibles was $30,213 and $27,813, respectively.
TRADEMARKS - In November 1993 the Company purchased certain trademarks,
including the Talbots tradename, from JUSCO (Europe) B.V., a related party. The
trademarks, which are registered in the U.S. Patent and Trademark Office and may
be renewed indefinitely, are being amortized over 40 years using the
straight-line method. At February 1, 1997 and February 3, 1996 accumulated
amortization on the trademarks was $7,565 and $5,181, respectively.
During its fiscal year ended February 1, 1997, the Company adopted Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". This statement had no material impact on
the Company's consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of current assets, current liabilities and long-term debt.
Current assets (except inventories; see Merchandise Inventories) and current
liabilities are stated at fair market value; long-term debt, which is at
current market interest rates, approximates fair market value.
FINANCE CHARGE INCOME - Finance charge income on customer accounts receivable is
treated as a reduction of selling, general and administrative expense. For the
years ended February 1, 1997, February 3, 1996, and January 28, 1995, the
amounts were $12,921, $9,202, and $7,723, respectively.
STORE OPENING COSTS - Pre-opening store expenses are charged to selling, general
and administrative expense when the store opens.
STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation
awards to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees".
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's foreign
operations is the applicable local currency. The translation of the applicable
foreign currency into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date, and for revenue and
expense accounts using the average rates of exchange prevailing during the year.
Adjustments resulting from such translation are included as a separate component
of stockholders' equity.
INCOME TAXES - In accordance with SFAS No. 109 deferred income taxes are
provided to recognize the effect of temporary differences between tax and
financial statement reporting. The primary temporary differences are
depreciation, deferred rent, deferred catalog costs and merchandise inventory.
NET INCOME PER SHARE AND SHARE EQUIVALENTS - Net income per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding plus the common stock equivalents related to stock options, once the
latter causes dilution in net income per share in excess of 3%.
----------
22
<PAGE> 12
TALBOTS 1996 ANNUAL REPORT
==========================
SUPPLEMENTAL CASH FLOW INFORMATION - Interest paid on a cash basis for the years
ended February 1, 1997, February 3, 1996, and January 28, 1995, was $6,659,
$5,406, and $3,606, respectively. Income tax payments during the years ended
February 1, 1997, February 3, 1996, and January 28, 1995, were $42,609, $43,388,
and $39,899, respectively.
NEW ACCOUNTING STANDARDS - In March 1997, the FASB issued SFAS No. 128,
"Earnings Per Share" which is effective for fiscal years ending after December
15, 1997. The Company has not yet determined the impact that this statement may
have on its net income per share calculation.
RECLASSIFICATIONS - Certain reclassifications have been made to the February 3,
1996 financial statements to conform with the February 1, 1997 presentation.
3. EQUITY TRANSACTIONS
During the years ended February 1, 1997, February 3, 1996 and January 28, 1995,
the Company declared and paid dividends totaling $0.34 per share, $0.26 per
share, and $0.18 per share, respectively.
On February 21, 1995, the Company adopted a stock repurchase plan authorizing
the purchase of up to one million shares of its common stock outstanding over a
two year period. The plan was completed in October 1995. Additionally, in
November 1995, the plan was extended, authorizing the Company to purchase up to
an additional $40,000 of outstanding stock from time to time over a two year
period. As of February 1, 1997, $27,205 of outstanding stock had been purchased
under the extended plan. At February 1, 1997 and February 3, 1996, the Company
held 2,011,835 and 1,273,000 shares, respectively, as treasury shares.
4. STOCK OPTIONS
Effective June 1, 1995, the Company implemented a stock option plan for members
of its Board of Directors who do not qualify under other Company option plans.
The Company has reserved 130,000 shares of common stock for issuance under the
plan. The stock options vest over a three year period and expire within ten
years from the grant date. The stock options are grant ed at a price equal to
the fair market value of the Company's common stock at the date of grant.
On November 18, 1993, the Company reserved 2,650,000 shares of common stock for
issuance pursuant to the Company's 1993 Executive Stock Based Incentive Plan.
Under the provisions of this plan, the Company issued to certain key management
personnel 163,450 shares of restricted stock. The purchase price of the
restricted stock was $.01 per share. The difference between the Offering price
of $19.50 per share and management's cost of $.01 per share for the restricted
stock has been recorded as deferred compensation and is being amortized over a
five-year service period.
In accordance with the plan, the Company has issued stock options which vest
over a three year period and expire within ten years from the grant date. These
stock options have been granted at fair market value at the date of grant.
----------
23
<PAGE> 13
[TALBOTS LOGO]
==============
<TABLE>
The following table contains information on the stock options.
<CAPTION>
Weighted
Average Option
Shares Price per Share
----------------------------------------------------------------------
<S> <C> <C>
Granted:
Fiscal year 1996 531,500 $28.89
Fiscal year 1995 481,000 29.53
Fiscal year 1994 471,500 34.63
Fiscal year 1993 563,624 19.50
Exercised:
Fiscal year 1996 17,266 19.50
Fiscal year 1995 2,332 19.50
Fiscal year 1994 1,000 19.50
Forfeited:
Fiscal year 1996 6,001 31.95
Fiscal year 1994 1,500 19.50
Outstanding at year end:
Fiscal year 1996 2,019,525 27.85
Fiscal year 1995 1,511,292 27.41
Fiscal year 1994 1,032,624 26.41
Fiscal year 1993 563,624 19.50
Exercisable at year end:
Fiscal year 1996 1,026,821 25.83
Fiscal year 1995 528,555 24.00
Fiscal year 1994 186,375 19.50
The following table sets forth information regarding options outstanding at
February 1, 1997.
<CAPTION>
Weighted
Average Number
Number Exercise Remaining Currently
of Options Price Life Exercisable
--------------------------------------------------------------------
<S> <C> <C> <C>
541,526 $19.50 6.79 years 541,526
471,166 $34.63 7.77 years 314,314
5,000 $31.25 8.06 years 5,000
22,000 $33.00 8.33 years 7,332
475,333 $29.50 8.79 years 158,649
22,000 $32.63 9.33 years 0
482,500 $28.50 9.75 years 0
</TABLE>
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees. Had compensation cost for
the Company's stock option plans been determined based on the fair value method
at the grant date for awards in 1996 and 1995, consistent with the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's Net
Income and Net Income Per Share would have been $60,435 or $1.82 per share in
1996 and $60,958 or $1.77 per share in 1995.
The fair value of options on their grant date is measured using the
Black/Scholes option pricing model. The estimated weighted average fair value of
options granted during 1996 and 1995 were $15.05 and $15.83 per option,
respectively. Key assumptions used to apply this pricing model are as follows:
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average risk free interest rate 6.2% 6.0%
Weighted average expected life of option grants 8 years 8 years
Weighted average expected volatility of underlying stock 46.2% 46.0%
Weighted average expected dividend payment rate,
as a percentage of the stock price on the date of grant 1.2% 1.1%
</TABLE>
----------
24
<PAGE> 14
TALBOTS 1996 ANNUAL REPORT
==========================
The option pricing model used was designed to value readily tradeable stock
options with relatively short lives. The options granted to employees are not
tradeable and have contractual lives of ten years. The Company believes that the
assumptions used to value the options and the model applied yield a reasonable
estimate of the fair value of the grants made under the circumstances.
5. RELATED PARTY AND AFFILIATES
In November 1993 the Company purchased certain trademarks, including the Talbots
tradename, from JUSCO (Europe) B.V., a related party. JUSCO (Europe) B.V. has
retained rights to certain trademarks in specified Asian territories.
JUSCO Company, Ltd. owns and operates stores in Japan under the name of Talbots
Japan Co., Ltd. ("Talbots Japan"). The Company provides certain services for
Talbots Japan and is reimbursed for expenses incurred. At February 1, 1997 and
February 3, 1996 the Company was owed $4,954 and $3,985, respectively, for these
costs and for merchandise inventory purchases made on behalf of Talbots Japan.
6. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consists of the following:
<CAPTION>
February 1, February 3,
1997 1996
-------------------------------------------------------------------------------
<S> <C> <C>
Land $11,021 $11,522
Buildings 40,986 41,260
Fixtures and equipment 153,256 123,381
Software 4,054 3,845
Leasehold improvements 90,859 84,742
Leasehold interests 8,313 10,270
Construction in progress 7,783 5,717
-------------------------------------------------------------------------------
Property and equipment - gross 316,272 280,737
Less accumulated depreciation and amortization (145,467) (126,577)
-------------------------------------------------------------------------------
Property and equipment - net $170,805 $154,160
============================
</TABLE>
7. DEBT
At February 1, 1997 and February 3, 1996 the Company had $50,000 outstanding
under its revolving credit agreements. None of the outstanding balance is
currently payable.
REVOLVING CREDIT - The revolving credit agreements with four banks have two year
terms, are due January 28, 1999, and can be extended annually. Interest terms on
the revolving credit agreements are negotiable, at the Company's option, for
periods of one, three, and six months. The interest rates are currently set at
an adjusted LIBOR plus .5%. Under the agreements, the interest rate terms were
fixed at 6.25% at February 1, 1997 until July 28, 1997.
NOTES PAYABLE TO BANKS - The Company has available an unsecured line-of-credit
facility of $125,000 with five banks. At February 1, 1997 and February 3, 1996,
$24,000 was outstanding on this facility. The weighted average interest rate for
the year ended February 1, 1997 and February 3, 1996 was 5.85% and 6.63%, respec
tively.
LETTER OF CREDIT - The Company has two letter-of-credit banking agreements,
totaling $85,000, which it uses primarily for the purchase of merchandise
inventories. At February 1, 1997 and February 3, 1996, the Company held $36,994
and $25,494, respectively, in commitments.
INTEREST EXPENSE - Interest expense for the years ended February 1, 1997,
February 3, 1996, and January 28, 1995, was $6,636, $5,500, and $3,578,
respectively.
----------
25
<PAGE> 15
[TALBOTS LOGO]
==============
8. INCOME TAXES
<TABLE>
The provision for income taxes for the years ended February 1, 1997, February 3,
1996, and January 28, 1995, consists of the following:
<CAPTION>
Year Ended
--------------------------------------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C>
Currently Payable:
Federal $37,089 $33,448 $29,726
State 5,579 7,768 7,194
--------------------------------------------------------------------------
Total currently payable 42,668 41,216 36,920
Deferred:
Federal (1,508) 354 88
State (174) 163 (232)
Foreign (1,159)
--------------------------------------------------------------------------
Total deferred (2,841) 517 (144)
--------------------------------------------------------------------------
Total income tax expense $39,827 $41,733 $36,776
=====================================
</TABLE>
<TABLE>
The effect of temporary differences which give rise to deferred income tax
balances at February 1, 1997 and February 3, 1996, respectively, are as follows:
<CAPTION>
February 1, 1997 February 3, 1996
---------------------------------------------------------------------------------------------------------------
Assets Liabilities Total Assets Liabilities Total
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED STATES:
Current:
Merchandise inventories $ 813 $ 813 $ 1,405 $ 1,405
Deferred catalog costs ($ 2,021) (2,021) ($ 2,385) (2,385)
Accrued vacation pay 1,645 1,645 1,430 1,430
Deferred compensation 2,621 2,621 2,293 2,293
Other 1,968 (1,707) 261 1,997 (1,619) 378
---------------------------------------------------------------------------------------------------------------
Total current 7,047 (3,728) 3,319 7,125 (4,004) 3,121
---------------------------------------------------------------------------------------------------------------
Noncurrent:
Depreciation & amortization 1,322 1,322 77 77
Lease commitments 3,986 3,986 3,219 3,219
Other 1,977 (1,090) 887 2,204 (789) 1,415
---------------------------------------------------------------------------------------------------------------
Total noncurrent 7,285 (1,090) 6,195 5,500 (789) 4,711
---------------------------------------------------------------------------------------------------------------
FOREIGN:
Noncurrent:
Subsidiary tax loss carryforwards 3,424 3,424 2,723 2,723
Less: valuation allowance (2,265) (2,265) (2,723) (2,723)
---------------------------------------------------------------------------------------------------------------
Total noncurrent 1,159 0 1,159 0 0 0
---------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED INCOME TAXES $ 15,491 ($ 4,818) $10,673 $12,625 ($ 4,793) $ 7,832
=========================================================================
</TABLE>
----------
26
<PAGE> 16
TALBOTS 1996 ANNUAL REPORT
==========================
At February 1, 1997, a consolidated foreign subsidiary of the Company had a net
operating loss carryforward which begins to expire in fiscal year 1998.
Management records a valuation allowance each year reflecting the likelihood of
the realization of the related deferred tax asset. For the year ended February
1, 1997, the valuation allowance was reduced by $458. The valuation allowance
was increased $671 and $950 for the years ended February 3, 1996 and January 28,
1995, respectively.
For the years ended February 1, 1997, February 3, 1996, and January 28, 1995,
total income tax expense differs from that computed by multiplying income before
taxes by the United States federal income tax rates as follows:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
--------------------------------------------------------------------------------------------
Tax Rate Tax Rate Tax Rate
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense $36,207 35.0% $36,517 35.0% $31,932 35.0%
Adjustments resulting from:
State income taxes, net of
federal tax benefit 3,513 3.4 5,155 4.9 4,525 5.0
Goodwill amortization 470 0.5 470 0.5 470 0.5
Other (363) (0.4) (409) (0.4) (151) (0.2)
--------------------------------------------------------------------------------------------
Actual tax expense $39,827 38.5% $41,733 40.0% $36,776 40.3%
==========================================================
</TABLE>
9. BENEFIT PLANS
The Company sponsors a non-contributory defined benefit pension plan covering
substantially all salaried and hour ly employees. The plan provides retirement
benefits for employees who have attained age 21 and completed one year of
service. Effective December 31, 1996, the salaried and hourly pension plans were
merged and the benefit formulas modified. The benefit formula for salaried and
hourly corporate employees is a final average pay benefit formula and the
benefit formula for store employees is a career pay formula. The prior plan for
hourly employees was a flat dollar plan. The Company's general funding policy is
to contribute the greater of amounts that are deductible for federal income tax
purposes or required by law.
<TABLE>
Net pension cost for the fiscal years ended February 1, 1997, February 3, 1996
and January 25, 1995 included the following components:
<CAPTION>
Year Ended
-------------------------------------------------------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $1,763 $1,341 $1,315
Interest cost on projected benefit obligation 1,246 975 800
Return on assets (2,229) (720) 267
Net amortization and deferral 1,343 278 (520)
-------------------------------------------------------------------------------------------
Net pension expense $2,123 $1,874 $1,862
===================================
</TABLE>
----------
27
<PAGE> 17
[TALBOTS LOGO]
==============
The Company also has a non-qualified supplemental executive retirement plan
("SERP") for key executives impacted by Internal Revenue Code limits on benefits
and compensation. The plan is currently unfunded. Net SERP cost for the years
ended February 1, 1997, February 3, 1996, and January 28, 1995 included the
following components:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $195 $155 $141
Interest cost on projected benefit obligation 156 125 96
Net amortization and deferral 78 58 59
------------------------------------------------------------------------------------------
Net SERP expense $429 $338 $296
===================================
</TABLE>
For the years ended February 1, 1997, February 3, 1996, and January 28, 1995,
the discount rate used in determining the net pension expense was 7.25%, 8.0%,
and 7.5%, respectively. For the years ended February 1, 1997, February 3, 1996,
and January 28, 1995, the discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.75%, 7.25%, and 8.0%,
respectively. The rate of increase in future compensation levels was 4.75% for
the year ended February 1, 1997 and 5.5% for the years ended February 3, 1996
and January 28, 1995. The expected rate of return on assets was 9.0% in all
three years. Plan assets for the funded plans consist principally of fixed
income and equity securities.
<TABLE>
The following table sets forth the defined benefit plan's and the SERP's funded
status and amounts included in accrued liabilities in the Company's consolidated
balance sheets:
<CAPTION>
Pension Plan SERP
-------------------------------------------------------------------------------------------
February 1, February 3, February 1, February 3,
1997 1996 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit obligation ($13,349) ($10,461) ($1,635) ($1,317)
====================================================
Vested benefit obligation ($12,163) ($9,359) ($1,567) ($1,276)
====================================================
Projected benefit obligation for
service rendered to date ($17,955) ($14,492) ($2,121) ($1,776)
Plan assets at fair value 15,865 11,264
Unrecognized net loss 544 3,154 306 344
Prior service cost not yet recognized
in net periodic pension cost 1,505 (30) 319 364
Additional minimum liability (470)
-------------------------------------------------------------------------------------------
Unfunded accrued pension cost ($41) ($574) ($1,496) ($1,068)
====================================================
</TABLE>
The Company has a qualified defined contribution 401(k) plan, which covers
substantially all employees. Employees make contributions to the plan, and the
Company makes a contribution which matches 50% of an employee's contribution up
to a maximum of 6% of the employee's actual compensation. Company contributions
for the years ended February 1, 1997, February 3, 1996, and January 28, 1995,
were $2,252, $1,954, and $1,625, respectively.
----------
28
<PAGE> 18
TALBOTS 1996 ANNUAL REPORT
==========================
<TABLE>
The Company provides certain medical benefits for most retired employees. The
plan is currently unfunded. Below is a reconciliation of the liability as of
February 1, 1997, February 3, 1996 and January 28, 1995 and the expense for the
years then ending:
<CAPTION>
February 1, February 3, January 28,
1997 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ($34) ($44) ($22)
Actives eligible to retire (222) (164) (148)
Other actives (1,095) (991) (871)
----------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation (1,351) (1,199) (1,041)
Unrecognized gain (265) (184) (150)
----------------------------------------------------------------------------------------------
Accrued expense ($1,616) ($1,383) ($1,191)
========================================
Net periodic postretirement benefit expense:
Service cost $157 $129 $124
Interest cost 95 84 76
Unrecognized net gain (9) (13) (1)
----------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $243 $200 $199
========================================
</TABLE>
A one percentage point increase in the assumed cost escalation rate would
increase the accumulated postretirement benefit obligation at February 1, 1997
by $111 and the total of the service cost and interest cost components of net
periodic postretirement cost for 1996 by $33. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 7.75%
at February 1, 1997, 7.25% at February 3, 1996 and 8.0% at January 28, 1995.
Additionally, assumed cost escalation rates that start at 9.4% and grade down
gradually to 5.5% were used for the year ended February 1, 1997. Assumed cost
escalation rates that start at 11.2% and grade down gradually to 5.5% were used
for the year ended February 3, 1996. Assumed cost escalation rates that start at
12% and grade down gradually to 5.5% were used for the year ended January 28,
1995.
The Company provides postemployment benefits to certain employees on short-term
disability. The Company's obligation at February 1, 1997 and February 3, 1996
was $164 and $149, respectively.
10. COMMITMENTS
The Company conducts the major part of its operations in leased premises with
lease terms expiring at various dates through 2020. Most store leases provide
for base rentals plus contingent rentals which are a function of sales volume
and provide that the Company pay real estate taxes, maintenance and other
operating expenses applicable to the leased premises. Additionally, most store
leases provide renewal options and contain rent escalation clauses. These
escalation clauses are factored into a calculation of the future rental stream.
This stream is recorded on a straight-line basis over the life of the original
lease. The "deferred rent under lease commitments" caption represents rent
expensed in excess of cash paid. Management expects that in the normal course of
business expiring leases will be renewed or replaced by other leases.
<TABLE>
The aggregate minimum future rental commitments under noncancelable operating
leases at February 1, 1997 are as follows:
<S> <C>
1997 .................................. $56,005
1998 .................................. 56,950
1999 .................................. 56,225
2000 .................................. 55,089
2001 .................................. 53,651
Thereafter ............................ 227,709
</TABLE>
Rent expense for the years ended February 1, 1997, F ebruary 3, 1996, and
January 28, 1995, was $52,678, $44,238, and $38,141, resp ectively, which
includes $1,766, $2,195, and $2,278, respectively, of continge nt rental
expense.
----------
29
<PAGE> 19
[TALBOTS LOGO]
==============
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders of The Talbots, Inc.:
We have audited the accompanying consolidated balance sheets of The Talbots,
Inc. and its subsidiaries as of February 1, 1997, and February 3, 1996, and the
related consolidated statements of earnings, changes in stockholders' equity,
and cash flows for each of the three years in the period ended February 1, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of February 1, 1997,
and February 3, 1996, and the results of their operations and their cash flows
for each of the three years in the period ended February 1, 1997, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- - --------------------------------
Deloitte & Touche LLP
March 25, 1997
Boston, Massachusetts
----------
30
<PAGE> 20
TALBOTS 1996 ANNUAL REPORT
==========================
SELECTED QUARTERLY FINANCIAL DATA
Dollar amounts in thousands except per share data
<TABLE>
The following table shows certain unaudited quarterly information for the
Company during fiscal 1996 and fiscal 1995. The unaudited quarterly information
includes all normal recurring adjustments which management considers necessary
for a fair presentation of the information shown. The operating results for any
quarter are not necessarily indicative of results for any future period.
Quarterly per share amounts may not total the full year amount due to changes in
the number of shares outstanding.
<CAPTION>
Fiscal 1996 quarter ended
- - -------------------------------------------------------------------------------------------
May 4, August 3, November 2, February 1,
1996 1996 1996 1997
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $236,187 $232,109 $247,467 $303,038
Gross profit 102,832 70,093 101,592 95,574
Net income 20,779 6,605 19,764 16,473
Net Income per share $ 0.62 $0.20 $ 0.60 $ 0.50
Weighted average common shares
outstanding (in thousands) 33,487 33,191 33,074 32,987
Cash dividends per share $ 0.07 $ 0.09 $ 0.09 $ 0.09
Market price data
High $ 40.125 $ 35.125 $ 35.750 $ 29.875
Low $ 26.375 $ 27.875 $ 27.500 $ 26.250
<CAPTION>
Fiscal 1995 quarter ended
- - -------------------------------------------------------------------------------------------
April 29, July 29, October 28, February 3,
1995 1995 1995 1996
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $230,578 $226,907 $224,792 $298,765
Gross profit 104,124 72,187 93,995 95,468
Net income 21,617 8,261 19,423 13,299
Net income per share $ 0.62 $ 0.24 $ 0.57 $ 0.39
Weighted average common shares
outstanding (in thousands) 34,890 34,558 34,310 33,862
Cash dividends per share $ 0.05 $ 0.07 $ 0.07 $ 0.07
Market price data
High $ 34.750 $ 41.250 $ 43.000 $ 31.375
Low $ 28.875 $ 29.750 $ 23.875 $ 23.875
</TABLE>
----------
31
<PAGE> 21
MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
trading symbol "TLB." The number of holders of record of common stock at March
21, 1997 was 666. The common stock commenced public trading on November 19,
1993, at the time of the Company's initial public offering.
The payment of dividends and the amount thereof is determined by the Board of
Directors and depends, among other factors, upon the Company's earnings,
operations, financial condition, capital requirements and general business
outlook at the time payment is considered. The Company anticipates that
dividends on the common stock will continue to be declared on a quarterly basis.
----------
33
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-72086 and No. 33-86040 of The Talbots, Inc. and its subsidiaries on Form S-8
of our report dated March 25, 1997, incorporated by reference in the Annual
Report on Form 10-K of The Talbots, Inc. and its subsidiaries for the year ended
February 1, 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
May 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<EXCHANGE-RATE> 1
<CASH> 12,348
<SECURITIES> 0
<RECEIVABLES> 97,274
<ALLOWANCES> 0
<INVENTORY> 161,230
<CURRENT-ASSETS> 311,803
<PP&E> 170,805
<DEPRECIATION> 0
<TOTAL-ASSETS> 621,789
<CURRENT-LIABILITIES> 127,361
<BONDS> 0
0
0
<COMMON> 349
<OTHER-SE> 431,110
<TOTAL-LIABILITY-AND-EQUITY> 621,789
<SALES> 1,018,801
<TOTAL-REVENUES> 1,018,801
<CGS> 648,710
<TOTAL-COSTS> 910,029
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,324
<INCOME-PRETAX> 103,448
<INCOME-TAX> 39,827
<INCOME-CONTINUING> 63,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,621
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 0
</TABLE>
