<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 3, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________________ TO _____________________
Commission file number: 1-12552
THE TALBOTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1111318
------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Beal Street, Hingham, Massachusetts 02043
------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
(617) 749-7600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class June 11, 1997
----- -------------
Common Stock, $0.01 par value 32,432,646
1
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INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Statements of Earnings for the
Thirteen Weeks Ended May 3, 1997 and May 4, 1996................3
Condensed Consolidated Balance Sheets as of May 3, 1997,
February 1, 1997 and May 4, 1996................................4
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended May 3, 1997 and May 4, 1996................5
Notes to Condensed Consolidated Financial Statements............6-7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................8-11
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K................................12-13
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE TALBOTS, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED MAY 3, 1997 AND MAY 4, 1996
(Amounts in thousands except per share data)
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------
MAY 3, MAY 4,
1997 1996
-------- --------
<S> <C> <C>
NET SALES $240,742 $236,187
COSTS AND EXPENSES
Cost of sales, buying and occupancy 144,164 133,355
Selling, general and administrative 68,567 67,112
-------- --------
OPERATING INCOME 28,011 35,720
INTEREST EXPENSE, net 1,201 1,088
-------- --------
INCOME BEFORE TAXES 26,810 34,632
INCOME TAXES 10,322 13,853
-------- --------
NET INCOME $ 16,488 $ 20,779
======== ========
NET INCOME PER SHARE $ 0.50 $ 0.62
======== ========
CASH DIVIDENDS PER SHARE $ 0.09 $ 0.07
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 32,902 33,487
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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THE TALBOTS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MAY 3, 1997, FEBRUARY 1, 1997 AND MAY 4, 1996
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 3, FEBRUARY 1, MAY 4,
1997 1997 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
- ---------------
Cash and cash equivalents $ 10,720 $ 12,348 $ 20,837
Customer accounts receivable - net 92,943 97,274 77,910
Merchandise inventories 184,230 161,230 154,606
Deferred catalog costs 7,328 9,566 7,727
Due from affiliates 4,954 4,978 5,166
Deferred income taxes 3,444 3,319 2,996
Prepaid and other current assets 24,781 23,088 18,844
-------- -------- --------
TOTAL CURRENT ASSETS 328,400 311,803 288,086
PROPERTY AND EQUIPMENT - NET 171,856 170,805 162,873
GOODWILL - NET 41,896 42,233 43,241
INTANGIBLES - NET 1,489 1,789 3,589
TRADEMARKS - NET 87,209 87,805 89,593
DEFERRED INCOME TAXES 8,426 7,354 10,766
-------- -------- --------
TOTAL ASSETS $639,276 $621,789 $598,148
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
- --------------------
Notes payable to banks $ 49,000 $ 24,000 $ 49,000
Accounts payable 34,308 54,658 30,260
Accrued liabilities 44,696 48,703 43,935
Income taxes payable 7,939 10,221
-------- -------- --------
TOTAL CURRENT LIABILITIES 135,943 127,361 133,416
LONG-TERM DEBT 50,000 50,000 50,000
DEFERRED RENT UNDER LEASE COMMITMENTS 13,538 12,969 10,650
STOCKHOLDERS' EQUITY:
- ---------------------
Common stock, $0.01 par value; 40,000,000 authorized;
34,929,592 shares, 34,928,092 shares and
34,925,592 shares issued, respectively, and
32,726,605 shares, 32,916,257 shares and
33,202,142 shares outstanding, respectively 349 349 349
Additional paid-in capital 286,910 286,874 286,812
Retained earnings 220,959 207,433 173,528
Cumulative foreign currency translation adjustment (1,309) (1,154) (1,579)
Deferred pension cost (470)
Restricted stock award (1,005) (1,164) (1,642)
Treasury stock, at cost; 2,202,987 shares,
2,011,835 shares and 1,723,450 shares,
respectively (66,109) (60,879) (52,916)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 439,795 431,459 404,082
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $639,276 $621,789 $598,148
======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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THE TALBOTS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED MAY 3, 1997 AND MAY 4, 1996
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------
MAY 3, MAY 4,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income $ 16,488 $ 20,779
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 9,087 8,041
Deferred rent 581 500
Amortization of restricted stock award 159 159
Loss on disposal of property and equipment 106 44
Deferred income taxes (1,197) (5,930)
Changes in current assets and liabilities:
Customer accounts receivable 4,316 (4,148)
Merchandise inventories (23,086) (11,059)
Deferred catalog costs 2,238 5,030
Due from affiliates 24 (1,158)
Prepaid and other current assets (1,666) 4,107
Accounts payable (20,341) (14,076)
Accrued liabilities (3,984) (1,661)
Income taxes payable 7,939 10,273
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (9,336) 10,901
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Additions to property and equipment (9,146) (15,239)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (9,146) (15,239)
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowings under notes payable to banks 25,000 25,000
Proceeds from options exercised 30 287
Cash dividend (2,962) (2,343)
Purchase of treasury stock (5,230) (12,650)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,838 10,294
EFFECT OF EXCHANGE RATE CHANGES ON CASH 16 16
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,628) 5,972
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,348 14,865
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,720 $ 20,837
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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THE TALBOTS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
- --------------------------------------------------------------------------------
1. OPINION OF MANAGEMENT
With respect to the unaudited condensed consolidated financial
statements set forth herein, it is the opinion of management of The
Talbots, Inc. and its subsidiaries (the "Company") that all adjustments,
which consist only of normal recurring adjustments necessary to present a
fair statement of the results for such interim periods, have been included.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended February 1,
1997, included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. All significant intercompany accounts
and transactions have been eliminated.
The February 1, 1997 condensed consolidated balance sheet amounts have
been derived from the Company's audited consolidated balance sheet
accounts.
2. NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which is effective for the Company for the period
ended January 31, 1998. Implementation of SFAS No. 128 will not have a
material impact on the Company's net income per share calculation.
3. SEASONAL VARIATIONS IN BUSINESS
Due to seasonal variations in the retail industry, the results of
operations for any interim period are not necessarily indicative of the
results expected for the full fiscal year.
4. FEDERAL AND STATE INCOME TAXES
The Company has provided for income taxes based on the estimated
annual effective rate method.
6
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5. RECLASSIFICATIONS
Certain reclassifications have been made to the May 4, 1996 condensed
consolidated financial statements to conform with the May 3, 1997
presentation.
7
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements of the Company and the notes
thereto appearing elsewhere in this document.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's condensed
consolidated statements of earnings for the fiscal periods shown below:
================================================================================
Thirteen Weeks Ended
- --------------------------------------------------------------------------------
May 3, May 4,
1997 1996
(unaudited) (unaudited)
- --------------------------------------------------------------------------------
Net sales 100.0% 100.0%
- --------------------------------------------------------------------------------
Cost of sales, buying and occupancy expenses 59.9% 56.5%
- --------------------------------------------------------------------------------
Selling, general and administrative expenses 28.5% 28.4%
- --------------------------------------------------------------------------------
Operating income 11.6% 15.1%
- --------------------------------------------------------------------------------
Interest expense, net 0.5% 0.5%
- --------------------------------------------------------------------------------
Income before income taxes 11.1% 14.7%
- --------------------------------------------------------------------------------
Income taxes 4.3% 5.9%
- --------------------------------------------------------------------------------
Net income 6.8% 8.8%
================================================================================
THE THIRTEEN WEEKS ENDED MAY 3, 1997 COMPARED TO THE THIRTEEN WEEKS ENDED MAY 4,
1996 (FIRST QUARTER)
Net sales in the first quarter of 1997 increased by $4.5 million to $240.7
million, or 1.9% over the first quarter of 1996. Operating income was $28.0
million in the first quarter of 1997 compared to $35.7 million in the first
quarter of 1996, a decrease of 21.6%.
Retail store sales in the first quarter of 1997 increased by $11.1 million
to $199.2 million, or 5.9%, over the first quarter of 1996. The percentage of
the Company's net sales derived from its retail stores increased to 82.8% in the
first quarter of 1997 from 79.6% in the first quarter of
8
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1996. The increase in retail store sales as a percentage of the Company's total
net sales was due to growth in retail store sales and a decline in catalog
sales. The increase in retail store sales was attributable to the 23 new stores
opened in the first quarter of 1997 and the 54 non-comparable stores that opened
in the last three quarters of 1996 offset by a decrease of $8.3 million in
comparable stores sales, or 5.4%, from the same period for 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 Misses store which would
qualify as a comparable store, such Misses store is excluded from the
computation of comparable store sales for a period of 13 months so that the
performance of the full Misses assortment may be properly compared.
Catalog sales in the first quarter of 1997 decreased by $6.6 million, to
$41.5 million, a decrease of 13.7% from the first quarter of 1996. The
percentage of the Company's net sales derived from its catalogs decreased to
17.2% in the first quarter of 1997 from 20.4% in the first quarter of 1996. This
decrease in catalog sales in total dollars was mainly attributable to a change
in the Company's merchandise presentation, which it believes affected overall
response rates. The Company is making adjustments in its upcoming fall season
catalogs that will restore the density of the number of items being offered per
page back to historical levels.
Because the Company sells a wide range of products which by their nature
are subject to constantly changing business strategies and competitive
positioning, it is not possible to attribute changes in retail sales or catalog
sales to specific changes in prices, changes in volume or changes in product
mix.
Cost of sales, buying and occupancy expenses increased as a percentage of
net sales to 59.9% in the first quarter of 1997 from 56.5% in the first quarter
of 1996 due to buying and occupancy costs rising at a greater rate than sales
and an erosion in merchandise margins caused by higher than normal markdowns
during the Company's spring midseason sale.
Selling, general and administrative expenses as a percentage of net sales
remained virtually flat in the first quarter of 1997 at 28.5% compared to 28.4%
in the first quarter of 1996, reflecting the Company's continued efforts to
contain these costs.
Interest expense, net, increased by $0.1 million, to $1.2 million in the
first quarter of 1997 over the first quarter of 1996 due to higher average debt
levels. The average total debt level, including short-term and long-term bank
borrowings, was $100.6 million in the first quarter of 1997 compared to $93.6
million in the first quarter of 1996. The average interest rate, including
interest on short-term and long-term bank borrowings, was 6.1% in the first
quarter of 1997 compared to 6.0% in the first quarter of 1996.
The effective tax rate for the Company declined to 38.5% in the first
quarter of 1997 from 40.0% in the first quarter of 1996 following the
identification and implementation of several tax strategies at the federal,
state and international level.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from
operating activities and a line-of-credit facility from five banks, with maximum
available short-term borrowings of $125.0 million. At May 3, 1997 and May 4,
1996, the Company had $49.0 million of outstanding borrowings under this
line-of-credit facility. Additionally, the Company has a revolving credit
facility with maximum available borrowings of $50.0 million. At May 3, 1997 and
May 4, 1996, the Company's borrowings under the revolving credit facility were
$50.0 million. The Company's working capital needs are typically at their lowest
in the spring and peak during the fall selling season.
In the first quarter of 1997, cash and cash equivalents decreased $1.6
million compared to an increase of $6.0 million in the first quarter of 1996.
Contributing to the decrease in cash and cash equivalents were lower net income,
increases in inventories to support new store openings, and a decrease in
accounts payable, offset by decreases in capital expenditures and purchases of
treasury stock pursuant to the Company's extended stock repurchase plan. The
extended stock repurchase plan was established in November 1995 and authorized
the Company to utilize up to $40 million to purchase shares of its common stock
from time to time over a two year period. During the quarter, the Company
repurchased 191,152 shares of its common stock under this program at an average
price of approximately $27 per share. During the fiscal month of May 1997, the
Company completed this second repurchase authorization. On May 22, 1997, the
Company's Board of Directors approved a third stock repurchase plan, which
authorizes the Company to expend up to $40 million to purchase shares of its
common stock from time to time over a two year period, including repurchases
from JUSCO (USA), Inc., its 63.4% majority owner, on a basis consistent with the
earlier repurchase programs.
Capital expenditures for the first quarter of fiscal 1997 were $9.1 million
compared to $15.2 million in the first quarter of fiscal 1996. The Company used
approximately $8.1 million and $14.8 million in the first quarter of fiscal 1997
and 1996, respectively, for opening new stores and expanding and renovating
existing stores. This change in capital expenditures was largely caused by the
timing of construction allowances granted by landlords for the construction of
new stores. For the remainder of the fiscal year, the Company currently
anticipates an additional approximately $45.9 million of capital expenditures
primarily for the opening of new stores and expanding and renovating existing
stores.* The actual amount of such capital expenditures will depend on the
number and type of stores being opened, expanded and renovated, and the schedule
of such activity during the remainder of fiscal 1997.
The Company's primary ongoing cash requirements through the end of fiscal
1998 are expected to be the financing of working capital buildups during peak
selling seasons, the funding of new stores and the expansion and renovation of
existing stores, the funding of the third stock repurchase plan and the payment
of any dividends that may be declared from time to time. The Company anticipates
that cash from operating activities and from its borrowing facilities will be
sufficient to meet these current requirements.*
10
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The payment of dividends and the amount of any dividends will be determined
by the Board of Directors and will depend on many factors, including earnings,
operations, financial condition, capital requirements and general business
outlook. On May 22, 1997, the Company announced that the Board of Directors
approved an increase in the quarterly dividend to $.11 per share from $.09 per
share payable on June 16, 1997 to shareholders of record as of June 2, 1997.
- --------------------------------------------------------------------------------
*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.
11
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 Computation of weighted average number of shares outstanding
used in determining primary and fully diluted earnings per
share.
27 Financial Data Schedule (for electronic filing only)
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on May 1,
1997 pursuant to which various agreements and documents were
filed by the Company, as identified therein.
12
<PAGE> 1
EXHIBIT 11.1
Computation of weighted average number of shares outstanding used in determining
primary and fully diluted earnings per share:
<TABLE>
<CAPTION>
Fiscal Period Ended
-------------------
May 3, May 4,
1997 1996
------ ------
<S> <C> <C>
(Shares in 000's)
Primary (a)
- -----------
Weighted average number of common
shares outstanding 32,902 33,487
Assumed exercise of certain dilutive stock
options based on average market values 232 267
------ ------
Weighted average number of shares used
in primary per share computations 33,134 33,754
====== ======
Fully diluted (a)
- -----------------
Weighted average number of common
shares outstanding 32,902 33,487
Assumed exercise of all dilutive options
based on higher of average or closing
market value 232 267
------ ------
Weighted average number of shares used
in fully diluted per share computations 33,134 33,754
====== ======
</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%.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TALBOTS, INC.
Dated: June 12, 1997 By: /s/ Edward L. Larsen
-------------------------------------
Edward L. Larsen
Duly authorized officer and Senior
Vice President of Finance, Chief
Financial Officer, and Treasurer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THIRTEEN WEEKS ENDED MAY
3, 1997 AND THE BALANCE SHEETS AS OF MAY 3, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<EXCHANGE-RATE> 1
<CASH> 10,720
<SECURITIES> 0
<RECEIVABLES> 92,943
<ALLOWANCES> 0
<INVENTORY> 184,230
<CURRENT-ASSETS> 328,400
<PP&E> 171,856
<DEPRECIATION> 0
<TOTAL-ASSETS> 639,276
<CURRENT-LIABILITIES> 135,943
<BONDS> 0
0
0
<COMMON> 349
<OTHER-SE> 439,446
<TOTAL-LIABILITY-AND-EQUITY> 639,276
<SALES> 240,742
<TOTAL-REVENUES> 240,742
<CGS> 144,164
<TOTAL-COSTS> 212,731
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,201
<INCOME-PRETAX> 26,810
<INCOME-TAX> 10,322
<INCOME-CONTINUING> 16,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,488
<EPS-PRIMARY> .50
<EPS-DILUTED> 0
</TABLE>
