<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
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)
(781) 749-7600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class December 1, 1998
-----
Common Stock, $0.01 par value 31,391,921
1
<PAGE> 2
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Statements of Earnings
for the Thirteen and Thirty-Nine Weeks Ended
October 31, 1998 and November 1, 1997......................3
Condensed Consolidated Balance Sheets as of
October 31, 1998, January 31, 1998 and
November 1, 1997...........................................4
Condensed Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended October 31,
1998 and November 1, 1997..................................5
Notes to Condensed Consolidated Financial
Statements...............................................6-8
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................9-14
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K................................15
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 AND THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 AND
NOVEMBER 1, 1997
(Amounts in thousands except per share data)
---------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------- ---------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $267,715 $255,968 $806,877 $741,562
COSTS AND EXPENSES
Cost of sales, buying and occupancy 160,877 157,528 516,555 497,988
Selling, general and administrative 84,548 78,090 238,281 212,209
-------- -------- -------- --------
OPERATING INCOME 22,290 20,350 52,041 31,365
INTEREST EXPENSE - net 1,591 2,209 5,617 5,049
-------- -------- -------- --------
INCOME BEFORE TAXES 20,699 18,141 46,424 26,316
INCOME TAXES 7,969 6,984 17,873 10,132
-------- -------- -------- --------
NET INCOME $ 12,730 $ 11,157 $ 28,551 $ 16,184
======== ======== ======== ========
NET INCOME PER SHARE - BASIC $ 0.40 $ 0.35 $ 0.89 $ 0.50
======== ======== ======== ========
NET INCOME PER SHARE - ASSUMING
DILUTION $ 0.40 $ 0.35 $ 0.89 $ 0.50
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING - BASIC 31,986 32,201 32,021 32,503
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING - ASSUMING DILUTION 31,986 32,271 32,021 32,572
======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ 0.11 $ 0.11 $ 0.33 $ 0.31
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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THE TALBOTS, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 31, 1998, JANUARY 31, 1998 AND NOVEMBER 1, 1997
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, NOVEMBER 1,
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
- ---------------
Cash and cash equivalents $ 6,279 $ 10,680 $ 13,331
Customer accounts receivable - net 97,727 97,092 93,587
Merchandise inventories 198,780 195,078 235,337
Deferred catalog costs 8,957 11,860 11,586
Due from affiliates 10,197 8,568 5,153
Deferred income taxes 6,457 6,862 3,867
Prepaid and other current assets 23,554 30,262 31,552
-------- -------- --------
TOTAL CURRENT ASSETS 351,951 360,402 394,413
PROPERTY AND EQUIPMENT - NET 183,071 182,610 176,063
GOODWILL - NET 39,881 40,888 41,225
INTANGIBLES - NET 147 589 889
TRADEMARKS - NET 83,632 85,421 86,017
DEFERRED INCOME TAXES 5,272 6,523 6,763
-------- -------- --------
TOTAL ASSETS $663,954 $676,433 $705,370
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
- --------------------
Notes payable to banks $ 15,000 $100,000 $120,000
Accounts payable 55,706 58,010 51,003
Accrued liabilities 67,874 57,291 51,582
Income taxes payable 1,511 - -
-------- -------- --------
TOTAL CURRENT LIABILITIES 140,091 215,301 222,585
LONG-TERM DEBT 100,000 50,000 50,000
DEFERRED RENT UNDER LEASE COMMITMENTS 16,306 14,666 14,362
STOCKHOLDERS' EQUITY:
- ---------------------
Common stock, $0.01 par value; 40,000,000 authorized;
35,258,798 shares, 34,955,179 shares and 34,938,425 shares
issued, respectively, and 31,623,217 shares, 31,805,415
shares and 32,189,590 shares outstanding, respectively 353 350 349
Additional paid-in capital 292,120 287,407 287,156
Retained earnings 217,654 199,657 213,543
Cumulative foreign currency translation adjustment (1,203) (1,998) (1,159)
Restricted stock awards (2,976) (529) (586)
Treasury stock, at cost; 3,635,581 shares, 3,149,764 shares
and 2,748,835 shares, respectively (98,391) (88,421) (80,880)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 407,557 396,466 418,423
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $663,954 $676,433 $705,370
======== ======== ========
</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 THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 AND NOVEMBER 1, 1997
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------------
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net income $ 28,551 $ 16,184
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 29,458 30,398
Deferred rent 1,668 1,415
Amortization of restricted stock awards 931 578
Loss on disposal of property and equipment 1,051 1,159
Deferred income taxes 1,656 49
Changes in current assets and liabilities:
Customer accounts receivable (666) 3,668
Merchandise inventories (3,970) (74,237)
Deferred catalog costs 2,903 (2,020)
Due from affiliates (1,629) (175)
Prepaid and other current assets 8,221 (8,271)
Accounts payable (2,284) (3,645)
Accrued liabilities 10,638 2,899
Income taxes payable 1,511 -
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 78,039 (31,998)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Additions to property and equipment (28,018) (33,225)
Proceeds from disposal of property and equipment 106 2
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (27,912) (33,223)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
(Payments) borrowings under notes payable to banks (85,000) 96,000
Borrowings of long-term debt 50,000 -
Proceeds from options exercised 1,211 235
Proceeds from issuance of restricted stock 3 -
Cash dividends (10,554) (10,074)
Purchase of treasury stock (9,970) (20,001)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (54,310) 66,160
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (218) 44
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,401) 983
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,680 12,348
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,279 $ 13,331
======== ========
</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 condensed consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended January 31, 1998,
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 January 31, 1998 condensed consolidated balance sheet
amounts have been derived from the Company's audited consolidated
balance sheet accounts.
2. NEW ACCOUNTING PRONOUNCEMENTS
For the fiscal period ended January 31, 1998, the Company
adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
SFAS No. 128 is intended to simplify the standards for computing
earnings per share and makes the United States standards for computing
earnings per share more comparable to international standards. SFAS No.
128 requires the presentation of "basic" earnings per share (which
excludes dilution) and "diluted" earnings per share. SFAS No. 128 was
applied retroactively and had no material impact on the Company's net
income per share calculations.
In February 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which became effective for the Company during
the quarter ended May 2, 1998. The Company's comprehensive income for
the thirteen and thirty-nine weeks ended October 31, 1998 were $12,528
and $29,346, respectively and $10,520 and $16,179, respectively for the
thirteen and thirty-nine weeks ended November 1, 1997, which is
comprised of the impact of the cumulative foreign currency translation
adjustment.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective
for the Company for the period ending January 30, 1999. The impact of
SFAS No. 131 on the Company has not yet been determined.
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2. NEW ACCOUNTING PRONOUNCEMENTS (continued)
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits," which is
effective for the Company for the period ending January 30, 1999. SFAS
No. 132 standardizes the disclosure requirements for pensions and other
postretirement benefit plans. The effect of this statement is limited
to the form and content of disclosures and will not impact the
Company's consolidated financial position, results of operations or
cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for
the Company for the quarter ended October 30, 1999. SFAS No. 133
establishes accounting and reporting standards for derivatives and for
hedging activities. The impact of SFAS No. 133, if any, on the Company
has not yet been determined.
In March 1998, the American Institute of Certified Public
Accountants (the"AICPA") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which is effective for the Company for the period
ending May 1, 1999. The impact of SOP 98-1 on the Company has not yet
been determined.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities," which is effective for the Company for
the period ending May 1, 1999. The application of SOP 98-5 is not
anticipated to have a material impact on the Company's consolidated
financial statements.
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.
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5. RECONCILIATION OF BASIC TO DILUTED NET INCOME PER SHARE
<TABLE>
<CAPTION>
For the 13 Weeks For the 13 Weeks
Ended October 31, 1998 Ended November 1, 1997
----------------------------------------- ------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ----------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE:
Income available to common
stockholders $12,730 31,986 $0.40 $11,157 32,201 $0.35
===== =====
EFFECT OF DILUTIVE SECURITIES
Dilutive stock options - - - - 70 -
------- ------ ----- ------- ------ -----
DILUTED NET INCOME PER SHARE:
Income available to common
stockholders plus assumed
conversions $12,730 31,986 $0.40 $11,157 32,271 $0.35
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the 39 Weeks For the 39 Weeks
Ended October 31, 1998 Ended November 1, 1997
----------------------------------------- ------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ----------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME PER SHARE:
Income available to common
stockholders $28,551 32,021 $0.89 $16,184 32,503 $0.50
===== =====
EFFECT OF DILUTIVE SECURITIES
Dilutive stock options - - - - 69 -
------- ------ ----- ------- ------ -----
DILUTED NET INCOME PER SHARE:
Income available to common
stockholders plus assumed
conversions $28,551 32,021 $0.89 $16,184 32,572 $0.50
======= ====== ===== ======= ====== =====
</TABLE>
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (unaudited)
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:
<TABLE>
<CAPTION>
==============================================================================================
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
- ----------------------------------------------------------------------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------
Cost of sales, buying and
occupancy expenses 60.1% 61.5% 64.0% 67.2%
- ----------------------------------------------------------------------------------------------
Selling, general and
administrative expenses 31.6% 30.5% 29.5% 28.6%
- ----------------------------------------------------------------------------------------------
Operating income 8.3% 8.0% 6.4% 4.2%
- ----------------------------------------------------------------------------------------------
Interest expense, net 0.6% 0.9% 0.7% 0.7%
- ----------------------------------------------------------------------------------------------
Income before income taxes 7.7% 7.1% 5.8% 3.5%
- ----------------------------------------------------------------------------------------------
Income taxes 3.0% 2.7% 2.2% 1.4%
- ----------------------------------------------------------------------------------------------
Net income 4.8% 4.4% 3.5% 2.2%
==============================================================================================
</TABLE>
THE THIRTEEN WEEKS ENDED OCTOBER 31, 1998 COMPARED TO THE THIRTEEN WEEKS ENDED
NOVEMBER 1, 1997 (THIRD QUARTER)
Net sales in the third quarter of 1998 increased by $11.7 million to
$267.7 million, or 4.6%, over the third quarter of 1997. Operating income was
$22.3 million in the third quarter of 1998 compared to operating income of $20.3
million in the third quarter of 1997, a 9.9% improvement.
Retail store sales in the third quarter of 1998 increased by $14.2
million to $227.9 million, a 6.6% increase over the third quarter of 1997. The
percentage of the Company's net sales derived
9
<PAGE> 10
from its retail stores was 85.1% in the third quarter of 1998 versus 83.5% in
the third quarter of 1997. The increase in retail store sales was attributable
to the 17 net new stores opened in the third quarter of 1998, the 15 net new
stores opened in the first and second quarters of 1998 and the 13 non-comparable
stores that opened in the last 13 weeks of 1997. Also contributing to the
increase in retail store sales was a comparable store sales increase of 1.8%
over 1997. The increase in comparable store sales was mainly due to continued
customer acceptance of Talbots assortment, which the Company believes more fully
incorporates merchandise with classic styling, fit and colors. 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 third quarter of 1998 decreased by $2.5 million,
to $39.8 million, a 5.9% decline from the third quarter of 1997. This decrease
is mainly the result of a planned reduction in pages per catalog and in catalogs
circulated during the quarter. The percentage of the Company's net sales derived
from its catalogs decreased to 14.9% in the third quarter of 1998 from 16.5% in
the third quarter of 1997.
Because the Company sells a wide range of products which by their
nature are subject to constantly changing business strategies and competitive
positioning, it is not possible to attribute changes in retail sales or catalog
sales to specific changes in prices, changes in volume or changes in product
mix.
Cost of sales, buying and occupancy expenses decreased as a percentage
of net sales to 60.1% in the third quarter of 1998 from 61.5% in the third
quarter of 1997 mainly due to higher merchandise gross margin, and partially
offset by higher buying and occupancy costs. The higher merchandise gross margin
is the result of fewer markdowns, due to stronger full-price selling and a
planned reduction in inventory levels for the 1998 period compared to 1997.
Selling, general and administrative expenses as a percentage of net
sales increased in the third quarter of 1998 to 31.6%, compared to 30.5% in the
third quarter of 1997 reflecting increased advertising and marketing expenses
related to the Company's "Brand Essence" advertising campaign. Also contributing
to the increase were higher store payroll costs incurred to continue to provide
a high level of customer service. Partially offsetting the increase were
decreased catalog production costs, mainly resulting from fewer catalogs
circulated during the period and in fewer pages per catalog.
Interest expense, net, decreased to $1.6 million in the third quarter
of 1998 from $2.2 million in the prior year. Higher average interest rates were
more than offset by lower average total debt levels during the quarter. The
average total debt level, including short-term and long-term bank borrowings,
was $104.9 million in the third quarter of 1998 compared to $153.6 million in
the third quarter of 1997. The average interest rate, including interest on
short-term and long-term bank borrowings, was 6.7% in the third quarter of 1998
compared to 6.1% in the third quarter of 1997.
The effective tax rate for the Company was 38.5% in both the third
quarter of 1998 and 1997.
10
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THE 39 WEEKS ENDED OCTOBER 31, 1998 COMPARED TO THE 39 WEEKS ENDED NOVEMBER 1,
1997
Net sales in the first 39 weeks of 1998 increased by $65.3 million to
$806.9 million, or 8.8%, over the first 39 weeks of 1997. Operating income was
$52.0 million in the first 39 weeks of 1998 compared to $31.4 million in the
first 39 weeks of 1997, a 65.6% improvement.
Retail store sales in the first 39 weeks of 1998 increased by $60.6
million, to $689.1 million, or 9.6%, over the first 39 weeks of 1997. The
percentage of the Company's net sales derived from its retail stores was 85.4%
in the first 39 weeks of 1998 versus 84.7% in the first 39 weeks of 1997 as a
result of retail store sales growing at a faster rate than catalog sales. The
increase in retail store sales was attributable to the 32 net new stores opened
in the first 39 weeks of 1998 and the 13 non-comparable stores that opened in
the last 13 weeks of 1997, and an increase of $22.8 million in comparable store
sales, or 4.4%, over the comparable 39 week period in the previous year. The
increase in comparable store sales was mainly due to continued customer
acceptance of Talbots assortment, which the Company believes more fully
incorporates merchandise with classic styling, fit and colors.
Catalog sales in the first 39 weeks of 1998 increased by $4.7 million,
to $117.8 million, or 4.2% compared to the first 39 weeks of 1997. The increase
in catalog sales was mainly attributable to stronger demand for Talbots
assortment, which the Company believes more fully incorporates merchandise with
classic styling, fit and colors.
Cost of sales, buying and occupancy expenses decreased as a percentage
of net sales to 64.0% in the first 39 weeks of 1998 from 67.2% in the first 39
weeks of 1997. The decrease in cost of sales, buying and occupancy as a
percentage of sales is due primarily to higher merchandise gross margin and was
offset slightly by higher buying and occupancy costs. The higher merchandise
gross margin was the result of fewer markdowns, which resulted from stronger
full-price selling and a planned reduction in inventory levels for the 1998
period compared to 1997.
Selling, general and administrative expenses increased as a percentage
of net sales to 29.5% in the first 39 weeks of 1998 from 28.6% in the first 39
weeks of 1997 due mainly to incremental store payroll and operating expenses
incurred to increase customer service, and higher marketing expenses related to
the Company's "Brand Essence" advertising campaign and direct marketing efforts
aimed at stimulating core customer demand. Partially offsetting the increase
were decreased catalog production costs, mainly resulting from fewer catalogs
circulated during the period and in fewer pages per catalog.
Interest expense, net, increased by $0.6 million, to $5.6 million for
the first 39 weeks of 1998 from the first 39 weeks of 1997 due to higher
interest rates and slightly higher average debt levels. The average total debt
level, including short-term and long-term bank borrowings, was $128.3 million in
the first 39 weeks of 1998 compared to $124.5 million in the first 39 weeks of
1997. The average interest rate, including interest on short-term and long-term
bank borrowings, was 6.6% in the first 39 weeks of 1998 compared to 6.1% in the
first 39 weeks of 1997.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from
operating activities and a line-of-credit facility from five banks, with maximum
available short-term borrowings of $125.0 million. The Company had $15.0 million
and $120.0 million of outstanding borrowings under this facility as of October
31, 1998 and November 1, 1997, respectively. Additionally, the Company has a
revolving credit facility with maximum available borrowings of $100.0 million.
At October 31, 1998 and November 1, 1997, the Company's borrowings under the
revolving credit facility were $100.0 million and $50.0 million, respectively.
The Company's working capital needs are typically at their lowest in the spring
and peak during the fall selling season.
In the first 39 weeks of 1998, cash flow generated from operations was
$78.0 million compared to $32.0 million used during the first 39 weeks of 1997.
Contributing to the increase in cash flow from operations were decreases in
inventories, which resulted from more rigorous management of inventory levels
and better than anticipated sales, a decrease in prepaid and other current
assets, which resulted mainly from lower prepaid income taxes, and higher net
income, partially offset by an increase in customer accounts receivable and
higher amounts due from affiliates.
Capital expenditures for the first 39 weeks of 1998 were $28.0 million
compared to $33.2 million in the first 39 weeks of 1997. The Company used
approximately $20.5 million and $28.5 million in the first 39 weeks of 1998 and
1997, respectively, for opening new stores and expanding and renovating existing
stores. This change in capital expenditures was largely caused by more stores
being opened in 1997 than 1998. For the remainder of the fiscal year, the
Company currently anticipates an additional approximately $17.0 million of
capital expenditures primarily for the opening of new stores and expanding and
renovating existing stores, for enhancing the Company's computer information
systems and for initiating expansions of its Hingham and Lakeville facilities.*
The actual amount of such capital expenditures will depend mainly on the number
and type of stores being opened, expanded and renovated, as well as the schedule
of its capital spending during the remainder of fiscal 1998.
A third authorization under the Company's stock repurchase plan was
established on May 22, 1997 and authorizes the Company to utilize up to $40
million to purchase shares of its common stock from time to time over a two year
period, including repurchases from the Company's majority shareholder, JUSCO
(USA), Inc. During the first 39 weeks of 1998, the Company repurchased 468,926
shares of its common stock under this program at an average price of
approximately $21 per share.
The Company's primary ongoing cash requirements through the end of
fiscal 1999 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 execution of the Company's Year 2000 plan, the funding
of purchases under the third stock repurchase plan that was authorized by the
Board of Directors in May 1997, 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.*
12
<PAGE> 13
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 November 17, 1998, the Company announced that the Board of
Directors approved a quarterly dividend of $0.11 per share payable on December
14, 1998 to shareholders of record as of November 30, 1998.
YEAR 2000
Most computer programs have historically been written using two digits
rather than four to define the applicable year. These programs were written
without considering the impact of the upcoming change in the century and may
experience problems handling dates beyond the year 1999. This could cause
computer applications to fail or to create erroneous results unless corrective
measures are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K")
issue could have a material adverse impact on the Company's business, operations
and financial condition in the future.*
The Company has conducted a comprehensive review of (1) its information systems
software and hardware; (2) its facilities and distribution equipment; and (3)
its third-party relationships to identify material systems that could be
affected by the Y2K issue and has developed an implementation plan intended to
address this issue.
The Company has adopted a five-phase Y2K program consisting of:
Phase I: Identification and ranking of the components of the Company's
systems, equipment and material suppliers and vendors that may
be vulnerable to Y2K problems
Phase II: Assessment of items identified in Phase I
Phase III: Remediation or replacement of non-compliant internal systems
and components and determination of solutions for
non-compliant suppliers and vendors
Phase IV: Testing of systems and components following remediation
Phase V: Developing contingency plans to address the most reasonably
likely worst case Y2K scenarios
The identification and assessment phases of the Y2K program have been
substantially completed and these phases included both the Company's material
information technology systems and hardware ("IT Systems") and the Company's
significant non-information technology equipment known to have microchips or
other embedded technology ("non-IT Equipment"). The Company has also
substantially completed the remediation phase for its IT Systems and its non-IT
Equipment. The Company currently expects to complete the testing phase,
including installation and testing of Year 2000 versions, by approximately fall
1999. Subsequent to preliminary testing, the Company expects to continue
periodic testing for new installations, versions or changes. Virtually all the
compliance has been performed and is currently expected to be performed using
internal and external resources.*
In addition to Y2K implementation for the Company's internal systems and
equipment, the Company is communicating with material suppliers and vendors to
determine their state of readiness with respect to Y2K. Assessment of material
third party Y2K readiness is currently expected to be substantially completed in
early 1999. Failure of significant suppliers, vendors or other third parties
to timely address and remedy Y2K problems or to develop and effect appropriate
contingency plans could have a material
13
<PAGE> 14
adverse effect on the Company's business and operations. The Company believes
that the geographically disbursed nature of its business and its large supplier
and vendor base should minimize such potential adverse effects.*
The Company presently believes that with modifications to existing software and
conversions to new software for certain applications, the Y2K problem will not
cause a significant disruption of its operations. However, the Y2K problem is
unique and the Company's Y2K compliance program is based on various assumptions
and expectations which cannot be assured. Potential risks include loss of
electric power or certain communication links, other disruptions to its business
such as delayed deliveries from suppliers, as well as disruptions to
distribution channels, including ports, transportation services and the
Company's own Distribution Center. The Company is in the process of developing
contingency plans for critical systems and processes, which will be based on the
Company's continuing assessment of potential risks. The Company anticipates that
these contingency plans will be completed by approximately fall 1999.*
Based on current information, the total estimated cost to address Y2K is $14.0
million; of this, approximately $6.0 million will be charged to expense as
incurred. Approximately $3.1 million has been incurred to date, of which $1.7
million was charged to expense as incurred, or approximately 7% of the Company's
fiscal 1998 IT budget. All costs incurred to date were budgeted expenditures and
were funded through operating cash flows. The costs associated with completion
of Y2K will be expensed as incurred or capitalized in accordance with normal
policy and are not currently expected to have a material adverse impact on the
Company's financial position or results of operations. The Company has not
deferred any material information technology projects as a result of its Year
2000 program. The Company's cost estimates do not include costs associated with
addressing and resolving issues as a result of the failure of third parties to
become Y2K compliant.*
- --------------------------------------------------------------------------------
*The foregoing contains forward-looking information within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements may be
identified by an "asterisk" ("*") or such forward-looking terminology as
"expect", "look", "believe", "anticipate", "plan","may", "will" or similar
statements or variations of such terms. Such forward-looking statements involve
certain risks and uncertainties including levels of sales, effectiveness of the
Company's brand awareness and marketing programs, store traffic, acceptance of
Talbots fashion, store expansion plans, appropriate balance of merchandise
offerings and responsiveness of the Company's core customers, timing and levels
of markdowns, and disruptions to the Company's operations caused by failure of
any of the Company's IT Systems, non-IT Equipment, or third party suppliers or
vendors to be Y2K ready, and, in each case, actual results may differ materially
from such forward-looking information. Certain other 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 781-741-4500) 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.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 The computation of weighted average number of shares
outstanding used in determining primary and fully
diluted earnings per share is incorporated by
reference to footnote 5 "Reconciliation of Basic to
Diluted Net Income Per Share" on page 8 of this
Form 10-Q.
27 Financial Data Schedule (for electronic filing only)
(b) REPORTS ON FORM 8-K
None
15
<PAGE> 16
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: December 14, 1998 By: /s/ Edward L. Larsen
-------------------------------
Edward L. Larsen
Duly Authorized Officer and Senior
Vice President of Finance, Chief
Financial Officer, and Treasurer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1998 AND THE BALANCE SHEETS AS OF OCTOBER 31, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,279
<SECURITIES> 0
<RECEIVABLES> 97,727
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<INVENTORY> 198,780
<CURRENT-ASSETS> 351,951
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0
0
<COMMON> 353
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<TOTAL-LIABILITY-AND-EQUITY> 663,954
<SALES> 806,877
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