<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
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 January 30, 1999
----------------
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)
<TABLE>
<S> <C>
Delaware 41-1111318
- -------------------------------------------------------------- -----------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
175 Beal Street, Hingham, Massachusetts 02043
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (781) 749-7600
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE of EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock New York Stock Exchange
$0.01 Par Value
</TABLE>
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
-- --
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 8,
1999 WAS APPROXIMATELY $283.3 MILLION.
NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF APRIL 8,
1999: 31,159,803
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE FISCAL YEAR
ENDED JANUARY 30, 1999 ARE INCORPORATED BY REFERENCE INTO PART I AND PART II,
AND PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF
SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
<PAGE> 2
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 and children's classic apparel, accessories
and shoes. Over the past ten years, the Company has implemented an aggressive
store expansion program, with the number of stores increasing from 137 at the
end of 1988 to 638 at the end of 1998. During 1998, Talbots issued 25 separate
catalogs with a combined circulation of approximately 52.6 million. Total net
sales were approximately $1,142.2 million in 1998, of which retail store sales
were approximately $973.0 million and catalog sales were approximately $169.2
million.
Talbots complies with the National Retail Federation's fiscal calendar.
Where a reference is made to a particular year or years, it is a reference to
Talbots 52-week or 53-week fiscal year. For example, "1998" refers to the
52-week fiscal year ended January 30, 1999, "1997" refers to the 52-week fiscal
year ended January 31, 1998 and "1996" refers to the fiscal year ended February
1, 1997. The last 53-week fiscal year was 1995, ending February 3, 1996; the
next 53-week fiscal year will be fiscal 2000, ending February 3, 2001.
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 & Babies 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 wardrobes. 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.
Talbots has established a market niche as a brand in women's and
children's classic apparel, accessories and shoes. In 1998, 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.
1
<PAGE> 3
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 remains
the Company's majority shareholder, and at January 30, 1999 owned approximately
62.7% 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 capitalize on the
strength of the Talbots name and its loyal customer base. By January 30, 1999,
the number of stores increased to 638, located in 44 states, the District of
Columbia, Canada and the United Kingdom. This number included 388 Talbots Misses
stores (including 19 Misses stores in Canada and six Misses stores in the United
Kingdom), 140 Talbots Petites stores (including one Petites store in Canada), 33
Talbots Accessories & Shoes stores, 57 Talbots Kids stores (43 of which include
a Talbots Babies assortment), one Talbots Woman store and 19 Talbots Outlet
stores.
Talbots catalog business also has undergone changes. The circulation of
catalogs has been reduced by 33% from 78.1 million catalogs in 1989 to 52.6
million catalogs in 1998. This circulation reduction has been an integral part
of a strategy to better focus the distribution of catalogs to proven customers.
Information concerning the Company's retail store business and the
Company's catalog business and certain geographic information is incorporated
by reference to note 9 of the Company's consolidated financial statements on
pages 36 and 37 of Talbots Annual Report to Shareholders for the fiscal year
ended January 30, 1999.
STRATEGY
The key elements of the Company's strategy are to: (1) maintain its
strong competitive position in the classics niche by providing consistently
classic women's and children's apparel, accessories and shoes, (2) continue to
operate as a predominantly private label retailer, (3) maintain its posture as a
limited promotion retailer, (4) continue to capitalize on its complementary
store and catalog operations, (5) continue to provide superior customer service
and (6) offer a broad mix of store locations.
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
2
<PAGE> 4
to enable customers to assemble complete outfits. An important aspect of the
Company's marketing strategy is wardrobing the customer from "head-to-toe." 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. The clothing assortment under the Talbots
private label was approximately 98% in 1998. Sales of private label merchandise
generally provide the Company with a higher gross margin than it believes would
be obtained on other merchandise and establishes Talbots identity as a brand of
women's classic apparel.
The Company believes that the quality and value of its classic
merchandise are key competitive factors. 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 ensure that all apparel is of consistent fit and high
quality.
LIMITED PROMOTION RETAILER. The Company positions itself as a limited
promotion retailer. Talbots typically holds only four major sale events a year
in its stores, consisting of two end-of-season clearance sales and two
mid-season sales. All mid-season and end-of-season store sale events are held in
conjunction with catalog sales events. No other major promotional sale events
are typically held. The Company believes that its strategy of limiting its
promotional events has reinforced the integrity of its regular prices.
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, provides a competitive advantage to the Company and is an important
element in identifying new store sites.
Talbots catalogs provide customers with a broader selection of
merchandise, sizes and colors than its stores. In each of its United States
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. A reduced shipping and
handling charge is provided 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 or 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
3
<PAGE> 5
strategy by helping to identify markets with the potential to support a new
store. 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.
CUSTOMER SERVICE. The Company believes that it provides store and
catalog customers an extraordinarily high level of customer service. The Company
is committed to constantly improving customer service by enhancing its training
programs to ensure that sales associates are knowledgeable about all Talbots
merchandise, that they are up to date with fashion trends and that they are able
to make appropriate wardrobing suggestions to customers.
BROAD MIX OF STORE LOCATIONS. The Company believes that providing a
broad mix of store locations helps insulate it from changes in customer shopping
patterns and allows it to offer locations that are convenient and consistent
with its image. As of January 30, 1999, the Company had 41% of its stores in
malls, 35% in specialty centers, 12% in village locations, 8% as freestanding
stores and 4% in urban locations.
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. 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.
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 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
Company's two main seasons, spring and fall.
The New York-based Talbots product development office oversees the
conceptualization of Talbots merchandise. This initial product determination
concerns styling, color, and fabrication recommendations. The development
process begins 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 conjunction
with the product development office and with the
4
<PAGE> 6
various merchandise vendors.
In conjunction with the merchandise developed by the product
development team 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 fit sample and,
together with the product development team, the pre-production samples of each
item to ensure that specifications and quality standards are met.
SOURCING. In 1998, Talbots purchased approximately 41% of its
merchandise directly from off-shore vendors, and the remaining 59% through
domestic-based vendors. During the year, the Company's Hong Kong office
accounted for approximately 62% of Talbots total direct off-shore sourcing, with
the remaining 38% being handled through various agents.
Approximately 26% of Talbots merchandise is currently sourced through
Hong Kong. Sovereignty over Hong Kong was 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 has not experienced any material difficulties as a result of this
transfer of power.
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 serves
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, Spain and the United
Kingdom 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, Thailand, Singapore, Korea and Indonesia, and Europe.
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 1998, certain divisions of
The Kellwood Company accounted for an aggregate of approximately 6% 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
a portion of their merchandise from abroad.
The Company typically transacts business on an order-by-order basis,
however, fabric
5
<PAGE> 7
projections are placed in order to better address fulfillment and replenishment
objectives. The Company 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.
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 137 at the end of 1988 to 638
at the end of 1998. During that time, store net sales increased from
approximately $253.4 million in 1988 to approximately $973.0 million in 1998.
From the end of 1997 to the end of 1998, the number of Talbots stores increased
from 603 to 638.
In addition to expanding its core Misses business, the Company has
introduced complementary new business concepts, Talbots Petites, Talbots Kids &
Babies, Talbots Accessories & Shoes and, in September 1998, two new test
concepts, Talbots Woman, a large size women's apparel line, and Talbots
Collection, an upper layer assortment of merchandise.
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
January 30, 1999, 140 Talbots Petites stores were open, and virtually every item
of women's 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. The first Talbots Kids store
opened in 1990. During 1995, Talbots expanded the Talbots Kids merchandise by
offering an assortment for infants and toddlers, Talbots Babies. By the end of
1998, 57 Talbots Kids stores were open, 43 of which included a Babies
assortment. Also in 1998, four separate Talbots Kids catalogs were circulated
nationally. The Company will continue to position Talbots Kids & Babies as a
brand that offers a complete assortment of high quality classic children's
clothing and accessories.
In 1991, the Company introduced Talbots Intimates, an assortment of
classic sleepwear and loungewear and daywear. The Company currently operates
Intimates collections in 52 Misses stores and in 1998 offered Intimates
merchandise in four of its larger base catalogs.
During 1994, Talbots introduced Talbots Accessories & Shoes in two
catalogs devoted to the category. The Company opened five Talbots Accessories &
Shoes stores in September 1995 and at the end of 1998 it operated 33 stores. A
limited collection of the merchandise continues to be offered in each Misses
catalog, in selected stores and, in 1998, in two catalogs.
6
<PAGE> 8
In September 1998, the Company introduced two new test concepts,
Talbots Woman and Talbots Collection. Talbots Woman was developed for customers
wearing sizes 12W to 24W who seek the same classic styling, high quality and fit
as the Company's misses and petites customers. It was introduced as a department
in seven existing Misses stores, as one separate store adjacent to other Talbots
concept stores, and in two nationally circulated catalogs.
Talbots Collection was developed for those customers seeking a
well-defined selection of tailored sportswear featuring fine fabrics,
interesting details and distinctive novelty prints. It was introduced as a
separate department in 80 existing Talbots Misses stores in September 1998.
The Company currently anticipates opening approximately 35 to 40 new
stores (including Misses, Petites, Accessories & Shoes, Kids and Woman stores)
in 1999.* The Company's ability to continue to expand its store base will be
dependent upon a number of factors, including its overall sales performance,
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 Company also considers opening
such stores in established Talbots markets where a Misses store is not located,
thereby broadening the growth potential for each concept.
STORES
Misses stores generally range in size from 3,500 to 6,500 gross square
feet, with a typical store averaging approximately 5,000 gross square feet.
Talbots Petites stores generally measure 2,500 gross square feet, and Talbots
Kids & Babies stores measure approximately 3,100 gross square feet. Talbots
Accessories & Shoes stores generally measure 1,900 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, London 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 & Babies and/or Accessories & Shoes--in order to
create a one-stop shopping environment. At January 30, 1999, the Company
operated 59 "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 January 30, 1999, the Company operated 19 Talbots
Outlet stores.
7
<PAGE> 9
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 & Babies, and Talbots Accessories & Shoes also have their respective
signature red doors and interior design themes. Talbots Kids & Babies stores are
designed to create a light atmosphere and Talbots Accessories & Shoes are
designed to reflect the atmosphere of a traditional carriage house. Management
provides guidelines for merchandise display to the stores throughout the year.
TALBOTS CATALOG
Since 1948, the Company has used its catalog to offer customers
convenience in ordering Talbots merchandise. In 1998, the Company distributed 25
separate catalogs with a combined circulation of approximately 52.6 million,
including catalogs sent to stores for display and general distribution. During
1998, catalog sales represented approximately 14.8% 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 & Babies catalogs; Talbots Accessories &
Shoes catalogs; Talbots Woman 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. In conjunction with the Company's store strategy to incorporate
intimate apparel into its Misses and Petites assortment, the Company added more
intimate apparel pages to its base catalogs, and discontinued the distribution
of separate catalogs dedicated to intimate apparel.
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.
The Company attempts to make catalog shopping as convenient as
possible. It 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. It 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.
8
<PAGE> 10
The Company employs advanced 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.
INVENTORY CONTROL AND MERCHANDISE DISTRIBUTION
The Company uses a centralized distribution system, under which all
merchandise is received, processed and distributed through its 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. 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 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. Additional mezzanine level space was
added in 1996 and 1997 to further support the Company's growth. Plans are
currently under way to expand the facility further, with a 125,000 square foot
addition expected to commence in the spring of 2000. A 75,000 square foot
addition is currently underway at the Company's Hingham, Massachusetts corporate
offices. The project is expected to be completed by the end of 1999.
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.
All Talbots stores have point-of-sale terminals that transmit
information daily on sales by item, color and size. 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 the
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 (except Christmas Day).
9
<PAGE> 11
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, catalog sales have been their
strongest in the fourth quarter. Retail store sales typically peak in the fourth
quarter due to the holiday season and the impact of new stores opened during the
year. Accordingly, 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, 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 January 30, 1999, Talbots had approximately 8,600 employees, of whom
approximately 2,350 were full-time salaried employees, approximately 1,150 were
full-time hourly employees and approximately 5,100 were part-time hourly
employees. The Company believes that its relationship with its employees is
good.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the
executive officers of the Company as of April 15, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Arnold B. Zetcher 58 President and Chief Executive Officer
H. James Metscher 42 Executive Vice President, Chief Merchandising Officer
Harold Bosworth 50 Senior Vice President, General Manager, Talbots Kids
Paul V. Kastner 47 Senior Vice President, International and Strategic Planning
Edward L. Larsen 54 Senior Vice President, Finance, Chief Financial Officer and Treasurer
Michele M. Mandell 51 Senior Vice President, Stores
Richard T. O'Connell, Jr. 48 Senior Vice President, Legal and Real Estate, and Secretary
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C>
Mary R. Pasciucco 45 Senior Vice President, Catalog Development and Advertising
Bruce Lee Prescott 43 Senior Vice President, Direct Marketing
Charles R. Richardson 40 Senior Vice President, Information Services
Bruce C. Soderholm 56 Senior Vice President, Operations
Stuart M. Stolper 59 Senior Vice President, Human Resources
</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, and prior to that, Chairman and Chief
Executive Officer of Kohl's Food Stores, another BATUS division. Mr. Zetcher
also served as Chairman and Chief Executive Officer of Bonwit Teller in New
York, a high quality specialty apparel chain, and served in various capacities
during his ten years with Federated Department Stores.
Mr. Metscher joined the Company in November 1998 as Executive Vice
President, Chief Merchandising Officer and in March 1999 was appointed to the
Company's Board of Directors. From 1996 to 1998, Mr. Metscher was President and
Chief Executive Officer of The Custom Foot, a specialty footwear company. From
1993 to 1996, Mr. Metscher was employed by Liz Claiborne, Inc., first as
President of its First Issue division and later as President of the Liz
Claiborne Retail division. Mr. Metscher had also been employed by the Company
from 1984 to 1993, holding positions of increasing responsibility including Vice
President, Merchandising and finally Vice President, Product Development.
Mr. Bosworth joined the Company in June 1997 as Senior Vice President
and General Manager for Talbots Kids. From 1988 to 1997, Mr. Bosworth served as
Senior Vice President, Retail, of Ermengildo Zegna; and Senior Vice President
and General Merchandise Manager at the I. Magnin/Bullick's Wilshire division of
R.H. Macy, where he was responsible for numerous merchandising areas, including
children's. He also served in various capacities from 1972 to 1988 at J.W.
Robinson's, a division of Associated Dry Goods; The Broadway, a division of
Carter Hawley Hale; and Jordan Marsh, a division of Allied Stores.
Mr. Kastner joined Talbots in 1988 as Director, Business Planning and
Analysis and became Vice President, New Business Ventures and Strategic
Planning, Assistant Treasurer and Assistant Secretary 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.
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.
11
<PAGE> 13
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 joined Talbots in 1988 as Vice President, Legal and Real
Estate and Secretary, and 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. Prescott became Senior Vice President, Direct Marketing in August
1998. He 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. Richardson joined Talbots in October 1998 as Senior Vice President,
Information Services. From 1997 to 1998, Mr. Richardson was Senior Vice
President and Chief Information Officer for Best Buy Company, Inc. From 1996 to
1997, Mr. Richardson was a Product Manager for Computer Associates
International, Inc. From 1992 to 1996, he was Senior Vice President, Information
Services for Ann Taylor, and spent ten years with The Limited, Inc. in various
positions at Abercrombie and Fitch, Limited Stores and Lane Bryant.
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.
Mr. Stolper joined Talbots in 1989 as Vice President, Human Resources
and assumed the position of Senior Vice President, Human Resources and Assistant
Secretary 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.
FORWARD LOOKING STATEMENTS
*This Annual Report on Form 10-K 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," "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 fashions, expansion plans and schedule, appropriate balance of
merchandise offerings and responsiveness of the Company's core customers, timing
and levels of markdowns, and any potential 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
12
<PAGE> 14
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 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.
13
<PAGE> 15
ITEM 2. PROPERTIES.
The table below presents certain information relating to the Company's
properties at January 30, 1999:
<TABLE>
<CAPTION>
Location Gross Square Feet Primary Function Interest
-------- ----------------- ---------------- ---------
<S> <C> <C> <C>
Hingham, Massachusetts 237,161 Company headquarters Own (46 acres)
Lakeville, Massachusetts 764,745 Distribution center Own (110 acres)
Knoxville, Tennessee 23,595 Telemarketing Lease
Tampa, Florida 34,552 Systems center 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
London, U.K. 1,093 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 638 stores.
Except for retail store space, the Company believes that its operating
facilities and sales offices are adequate and suitable for its current needs. To
address expected future office and distribution space needs, the Company has
begun an expansion of its Hingham, Massachusetts offices and expects to commence
construction on additional space at its Lakeville, Massachusetts distribution
facility in fiscal 2000. Talbots long-term expansion program, if successful, may
require additional office and distribution space to service its operations in
the future.
At January 30, 1999, Talbots operated 638 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 marketing programs. The
Company has many lease arrangements that provide for an increase in annual fixed
rental payments during the lease term. At January 30, 1999, the current terms of
Talbots store leases (assuming solely for this purpose that the Company
exercises all lease renewal options) were as follows:
14
<PAGE> 16
<TABLE>
<CAPTION>
Years Lease Number of
Terms Expire Store Leases(a)
------------ ---------------
<S> <C>
1999-2000.................................................9
2001-2003................................................24
2004-2006................................................82
2007 and later..........................................376
</TABLE>
- ----------
(a) Certain leases have more than one store included within the leased premises.
ITEM 3. LEGAL PROCEEDINGS.
Talbots is a party to certain legal actions arising in the normal
course of its business. 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 1998.
15
<PAGE> 17
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 1998 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 43 and "Market for
Registrant's Common Stock and Related Shareholder Matters" on page 44 of Talbots
Annual Report to Shareholders for the fiscal year ended January 30, 1999 and is
incorporated herein by reference.
At April 1, 1999, approximately 62.7% 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 17 of Talbots Annual Report to
Shareholders for the fiscal year ended January 30, 1999 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 18 to 24 of Talbots Annual Report to Shareholders for
the fiscal year ended January 30, 1999 and is incorporated herein by reference.
16
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by this Item 7A is set forth under the
caption "Quantitative and Qualitative Disclosures about Market Risk" in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 22 of Talbots Annual Report to Shareholders for the fiscal
year ended January 30, 1999 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 called for by this Item 8 are set forth on
pages 25 to 42 of Talbots Annual Report to Shareholders for the fiscal year
ended January 30, 1999 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
17
<PAGE> 19
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 1999 Annual
Meeting of Shareholders, the information concerning Talbots executive officers
set forth in Part I, Item 1 above under the caption "Executive Officers of the
Company,"and the information under the caption "Section 16 (a) Beneficial
Ownership Reporting Compliance" on page 15 of Talbots Proxy Statement for
Talbots 1999 Annual Meeting of Shareholders, are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" on
pages 5 to 11 of Talbots Proxy Statement for Talbots 1999 Annual Meeting of
Shareholders, the information concerning director compensation under the caption
"Director Compensation; Attendance; Committees" on pages 3 and 4 of Talbots
Proxy Statement for Talbots 1999 Annual Meeting of Shareholders, and the
information under the caption "Compensation Committee Interlocks and Insider
Participation" on page 12 of Talbots Proxy Statement for Talbots 1999 Annual
Meeting of Shareholders, are each incorporated herein by reference. The
information included under "Executive Compensation-Report on Compensation of
Executive Officers" and "Executive Compensation-Performance Graph" is not
incorporated in this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Beneficial Ownership of
Common Stock" on pages 14 to 15 of Talbots Proxy Statement for Talbots 1999
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 14 of
Talbots Proxy Statement for Talbots 1999 Annual Meeting of Shareholders and the
information under the caption "Compensation Committee Interlocks and Insider
Participation" concerning Mr. Isogai on page 12 of Talbots Proxy Statement for
Talbots 1999 Annual Meeting of Shareholders, are incorporated herein by
reference.
18
<PAGE> 20
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 25 to 42 of Talbots Annual Report to
Shareholders for the fiscal year ended January 30, 1999:
Consolidated Statements of Earnings for the Fifty-two Weeks
Ended January 30, 1999, the Fifty-two Weeks Ended January 31,
1998 and the Fifty-two Weeks Ended February 1, 1997
Consolidated Balance Sheets at January 30, 1999 and January
31, 1998
Consolidated Statements of Cash Flows for the Fifty-two Weeks
Ended January 30, 1999, the Fifty-two Weeks Ended January 31,
1998 and the Fifty-two Weeks Ended February 1, 1997
Consolidated Statements of Stockholders' Equity for the
Fifty-two Weeks Ended January 30, 1999, the Fifty-two Weeks
Ended January 31, 1998 and the Fifty-two Weeks Ended February
1, 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) FINANCIAL STATEMENT SCHEDULES: The document and schedule listed below
are filed as part of this Form 10-K:
Page in Form 10-K
Independent Auditors' Report on
Financial Statement Schedule F-1
Schedule II -- Valuation and
Qualifying Accounts and Reserves
F-2
All other financial statement 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:
19
<PAGE> 21
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, as amended.(2), (6), (7), (9), (10)
10.3 Revolving Credit Agreement, dated as of January 25,
1994, between Talbots and The Bank of Tokyo-Mitsubishi
Trust Company, as amended.(2), (6), (7), (9),(10)
10.4 Revolving Credit Agreement, dated as of January 25,
1994, between Talbots and The Norinchukin Bank, as
amended.(2), (6), (7), (9), (10)
10.5 Revolving Credit Agreement, dated as of January 25,
1994, between Talbots and The Sakura Bank, Limited, as
amended.(2), (6), (7), (9), (10)
10.6 Revolving Credit Agreement between Talbots and The
Dai-Ichi Kangyo Bank, Limited, dated as of April 14,
1998.(9)
10.7 Credit Agreement between Talbots and The Bank of
Tokyo-Mitsubishi, Ltd., dated as of April 17, 1998.
(9), (10)
10.8 Letter of Credit Agreement, dated as of August 10, 1993,
between Talbots and The First National Bank of
Boston.(1)
10.9 Letter Agreement, dated as of June 1, 1998, concerning
credit facilities, between Talbots and BankBoston,
N.A.(10)
10.10 Letter Agreement, dated August 11, 1998, concerning
credit facilities, between HSBC Corporate Banking,
Marine Midland Bank and Talbots.(10)
20
<PAGE> 22
10.11 Trademark Purchase and License Agreement, dated as of
November 26, 1993, between JUSCO (Europe) B.V. and The
Classics Chicago, Inc.(2)
10.12 Services Agreement, dated as of November 18, 1993,
between Talbots Japan Co., Ltd. and Talbots.(2)
10.13 Stock Purchase Agreement, dated as of November 26, 1993,
between Talbots and JUSCO.(2)
10.14 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)
10.15 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)
10.16 The Talbots, Inc. Pension Plan for Salaried Employees,
as amended and restated January 1, 1989, including
amendments through January 1, 1994.(4)
10.17 The Talbots, Inc. Retirement Savings Voluntary Plan, as
amended and restated, effective as of November 1,
1993.(4)
10.18 Services Agreement, dated as of October 29, 1989,
between Talbots and JUSCO USA.(1)
10.19 Share Purchase Agreement, dated as of February 21, 1995,
between Talbots and JUSCO USA.(3)
10.20 Second Extension of Share Repurchase Program, dated as
of May 23, 1997, between Talbots and JUSCO USA.(5)
10.21 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.
10.22 Contract between Masaharu Isogai and Talbots, dated as
of November 18, 1993.(2)
10.23 The Talbots, Inc. Supplemental Retirement Plan, as
amended.(1), (2)
10.24 The Talbots, Inc. Supplemental Savings Plan, as
amended.(1), (2)
10.25 The Talbots, Inc. Deferred Compensation Plan, as
amended.(1), (2)
21
<PAGE> 23
10.26 The Talbots, Inc. Supplemental Benefits Trust Agreement,
dated as of November 18, 1993, between Talbots and
State Street Bank and Trust Company.(2)
10.27 The Talbots, Inc. Amended and Restated 1993 Executive
Stock Based Incentive Plan.(10)
10.28 Employment Agreement, dated as of October 22, 1993,
between Arnold B. Zetcher and Talbots, as amended by
Amendment No. 1 dated May 11, 1994.(1), (4)
10.29 Change in Control Agreements, between Talbots and each
of Edward Larsen, Michele Mandell, Richard T.
O'Connell, Bruce Soderholm, Stuart Stolper, Paul
Kastner, Sandy Katz, Lucy Main Tweet, Judith O'Keefe
and Bruce Prescott.(2), (4)
10.30 Employment Agreement, dated as of October 27, 1997,
between the Company and Mark Shulman.(8)
10.31 Employment Agreement, dated as of November 23, 1998,
between the Company and H. James Metscher.(10)
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Incorporated by reference to footnote 12
"Net Income Per Share" on page 41 of Talbots Annual
Report to Shareholders for the fiscal year ended
January 30, 1999.
(13) ANNUAL REPORT TO SECURITY HOLDERS.
13.1 Excerpts from the 1998 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.
(27) FINANCIAL DATA SCHEDULES.
27.1 Financial Data Schedule for the year ended January 30,
1999, submitted to the Securities and Exchange
Commission in electronic format.
22
<PAGE> 24
- --------------------
(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 Current Report on
Form 8-K dated April 25, 1994.
(3) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated February 21, 1995.
(4) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated April 27, 1995.
(5) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated May 23, 1997.
(6) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated November 21, 1995.
(7) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated April 30, 1997.
(8) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated October 27, 1997.
(9) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated November 30, 1997.
(10) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated April 29, 1999.
(b) REPORT ON FORM 8-K: No Current Reports on Form 8-K filed were filed
during the fourth quarter of fiscal 1998.
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 1998 Annual Report to Shareholders is not to be
deemed filed as part of this Annual Report.
23
<PAGE> 25
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, 1999
THE TALBOTS, INC.
(Registrant)
By /s/ Edward L. Larsen
------------------------------------------
Edward L. Larsen
Senior Vice President, Finance, 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, 1999:
/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/ H. James Metscher /s/ Mark H. Willes
- -------------------------------- --------------------------
H. James Metscher Mark H. Willes
Officer and Director Director
<PAGE> 26
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
---------------
THE TALBOTS, INC.
(exact name of registrant as specified in its charter)
---------------
EXHIBITS
---------------
==============================================================================
<PAGE> 27
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, as amended.(2), (6), (7), (9), (10)
10.3 Revolving Credit Agreement, dated as of January 25,
1994, between Talbots and The Bank of
Tokyo-Mitsubishi Trust Company, as amended.(2), (6),
(7), (9), (10)
10.4 Revolving Credit Agreement, dated as of January 25,
1994, between Talbots and The Norinchukin Bank, as
amended.(2), (6), (7), (9), (10)
10.5 Revolving Credit Agreement, dated as of January 25,
1994, between Talbots and The Sakura Bank, Limited,
as amended.(2), (6), (7), (9), (10)
10.6 Revolving Credit Agreement between Talbots and The
Dai-Ichi Kangyo Bank, Limited, dated as of April 14,
1998.(9),
10.7 Credit Agreement between Talbots and The Bank of
Tokyo-Mitsubishi, Ltd., dated as of April 17, 1998.
(9), (10)
10.8 Letter of Credit Agreement, dated as of August 10,
1993, between Talbots and The First National Bank of
Boston.(1)
10.9 Letter Agreement, dated as of June 1, 1998, concerning
credit facilities, between Talbots and BankBoston,
N.A.(10)
10.10 Letter Agreement, dated August 11, 1998, concerning
credit facilities, between HSBC Corporate Banking,
Marine Midland Bank and Talbots.(10)
<PAGE> 28
10.11 Trademark Purchase and License Agreement, dated as of
November 26, 1993, between JUSCO (Europe) B.V. and
The Classics Chicago, Inc.(2)
10.12 Services Agreement, dated as of November 18, 1993,
between Talbots Japan Co., Ltd. and Talbots.(2)
10.13 Stock Purchase Agreement, dated as of November 26,
1993, between Talbots and JUSCO.(2)
10.14 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)
10.15 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)
10.16 The Talbots, Inc. Pension Plan for Salaried Employees,
as amended and restated January 1, 1989, including
amendments through January 1, 1994.(4)
10.17 The Talbots, Inc. Retirement Savings Voluntary Plan, as
amended and restated, effective as of November 1,
1993.(4)
10.18 Services Agreement, dated as of October 29, 1989,
between Talbots and JUSCO USA.(1)
10.19 Share Purchase Agreement, dated as of February 21, 1995,
between Talbots and JUSCO USA.(3)
10.20 Second Extension of Share Repurchase Program, dated as
of May 23, 1997, between Talbots and JUSCO USA.(5)
10.21 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.
10.22 Contract between Masaharu Isogai and Talbots, dated as
of November 18, 1993.(2)
10.23 The Talbots, Inc. Supplemental Retirement Plan, as
amended.(1), (2)
10.24 The Talbots, Inc. Supplemental Savings Plan, as
amended.(1), (2)
10.25 The Talbots, Inc. Deferred Compensation Plan, as
amended.(1), (2)
<PAGE> 29
10.26 The Talbots, Inc. Supplemental Benefits Trust
Agreement, dated as of November 18, 1993, between
Talbots and State Street Bank and Trust Company.(2)
10.27 The Talbots, Inc. Amended and Restated 1993 Executive
Stock Based Incentive Plan.(10)
10.28 Employment Agreement, dated as of October 22, 1993,
between Arnold B. Zetcher and Talbots, as amended by
Amendment No. 1 dated May 11, 1994.(1), (4)
10.29 Change in Control Agreements, between Talbots and each
of Edward Larsen, Michele Mandell, Richard T.
O'Connell, Bruce Soderholm, Stuart Stolper, Paul
Kastner, Sandy Katz, Lucy Main Tweet, Judith O'Keefe
and Bruce Prescott.(2), (4)
10.30 Employment Agreement, dated as of October 27, 1997,
between the Company and Mark Shulman.(8)
10.31 Employment Agreement, dated as of November 23, 1998,
between the Company and H. James Metscher.(10)
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Incorporated by reference to footnote 12
"Net Income Per Share" on page 41 of Talbots Annual
Report to Shareholders for the fiscal year ended
January 30, 1999.
(13) ANNUAL REPORT TO SECURITY HOLDERS.
13.1 Excerpts from the 1998 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.
(27) FINANCIAL DATA SCHEDULES.
27.1 Financial Data Schedule for the year ended January 30,
1999, submitted to the Securities and Exchange
Commission in electronic format.
<PAGE> 30
- --------------------
(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 Current Report on
Form 8-K dated April 25, 1994.
(3) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated February 21, 1995.
(4) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated April 27, 1995.
(5) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated May 23, 1997.
(6) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated November 21, 1995.
(7) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated April 30, 1997.
(8) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated October 27, 1997.
(9) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated November 30, 1997.
(10) Incorporated by reference to the exhibits filed with Current Report on
Form 8-K dated April 29, 1999.
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 1998 Annual Report to Shareholders is not deemed
filed as part of this Annual Report.
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Talbots, Inc.:
We have audited the consolidated financial statements of The Talbots, Inc. and
its subsidiaries as of January 30, 1999 and January 31, 1998, and for each of
the three years in the period ended January 30, 1999, and have issued our report
thereon dated March 17, 1999; such financial statements and report are included
in your 1998 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of The
Talbots, Inc., listed in Item 14. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 17, 1999
Boston, Massachusetts
F-1
<PAGE> 32
SCHEDULE II
The Talbots, Inc. and Subsidiaries
Valuation and Qualifying Accounts and Reserves
Three Years Ended January 30, 1999
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
--------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Deductions Balance at
Description Period Expenses Accounts (A) End of Period
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 30, 1999
Allowance for doubtful accounts
(deducted from accounts receivable) $1,400 3,152 - 2,952 $1,600
YEAR ENDED JANUARY 31, 1998
Allowance for doubtful accounts
(deducted from accounts receivable)
$1,200 3,254 - 3,054 $1,400
YEAR ENDED FEBRUARY 1, 1997
Allowance for doubtful accounts
(deducted from accounts receivable)
$1,135 1,798 - 1,733 $1,200
</TABLE>
(A) Write-off of uncollectible accounts net of recoveries.
F-2
<PAGE> 1
EXHIBIT 13.1
FIVE YEAR FINANCIAL SUMMARY
Dollar amount 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
----------------------------------------------------------------------------------
January 30, January 31, February 1, February 3, January 28,
1999 1998 1997 1996 1995
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
----------------------------------------------------------------------------------
STATEMENT OF EARNINGS INFORMATION:
<S> <C> <C> <C> <C> <C>
Net sales $1,142,246 $1,053,806 $1,018,801 $981,042 $879,585
Net income 36,668 5,838 63,621 62,600 54,457
Net income per share - basic $ 1.15 $ 0.18 $ 1.92 $ 1.82 $ 1.56
Net income per share - assuming dilution $ 1.15 $ 0.18 $ 1.91 $ 1.82 $ 1.56
Weighted average number of shares of common
stock outstanding (in thousands) - basic 31,878 32,386 33,185 34,395 34,908
Weighted average number of shares of common
stock outstanding (in thousands) -
assuming dilution 31,933 32,436 33,283 34,471 34,949
Cash dividends per share $ 0.44 $ 0.42 $ 0.34 $ 0.26 $ 0.18
BALANCE SHEET INFORMATION:
Working capital $ 201,521 $ 145,101 $ 184,442 $161,361 $137,864
Total assets 657,064 676,433 621,789 572,111 532,514
Total long-term debt 100,000 50,000 50,000 50,000 35,000
Stockholders' equity 402,073 396,466 431,459 398,039 385,594
</TABLE>
17
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of the Company and the notes accompanying the
consolidated financial statements. The 1998 fiscal year ended on January 30,
1999. The 1997 fiscal year ended on January 31, 1998. The 1996 fiscal year ended
on February 1, 1997. Each fiscal year had 52 weeks.
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 consolidated
statements of earnings for the fiscal periods shown below:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy expenses 65.6% 70.3% 63.7%
Selling, general and administrative expenses 28.6% 28.1% 25.6%
Operating income 5.9% 1.6% 10.7%
Interest expense, net 0.6% 0.7% 0.5%
Income before taxes 5.2% 0.9% 10.2%
Income taxes 2.0% 0.3% 3.9%
Net income 3.2% 0.6% 6.2%
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased by $88.4 million, to $1,142.2 million, or 8.4% over 1997.
Operating income was $66.9 million in 1998 compared to $17.1 million in 1997.
Retail store sales in 1998 increased by $78.4 million, to $973.0 million, or
8.8% over 1997. The percentage of the Company's net sales derived from its
retail stores increased to 85.2% in 1998 from 84.9% in 1997. 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 35 net new stores opened in 1998, the first full year of
operation of the 68 non-comparable stores that opened in 1997, and a $26.5
million, or 3.6% increase in comparable store sales from 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. The Company believes the increase in comparable store
sales can be attributed to improvements in its merchandise offerings which more
accurately reflect the styling, fit and colors which appeal to its core
customer.
Catalog sales in 1998 increased by $10.0 million, to $169.2 million, or 6.3%
over 1997. The percentage of the Company's total sales derived from its catalog
decreased to 14.8% in 1998 from 15.1% in 1997 due to retail sales increasing at
a higher rate than catalog sales. Catalog productivity, as measured by sales per
catalog, also improved over 1997. Sales per catalog increased 5.2%, to $3.22 in
1998 from $3.06 in 1997 on circulation of approximately 52.6 million catalogs in
1998 versus 52.0 million catalogs in 1997.
The Company believes that the increase in catalog sales was primarily due to
improvements in its merchandise offerings, which had a stronger appeal to its
core customers and more closely met their expectations. These improvements are
also believed to have contributed to a three percentage point decline in the
Company's catalog return rate. The Company attributes the improvement in catalog
productivity to its strategy of reducing catalog pages and eliminating certain
unproductive mailings.
18
<PAGE> 3
Cost of sales, buying and occupancy expenses decreased as a percentage of net
sales to 65.6% from 70.3% in 1997 due to improved merchandise margins which
resulted from stronger full price selling and significantly reduced markdowns
resulting from dramatically reduced merchandise inventories over the previous
year.
Selling, general and administrative expenses increased as a percentage of net
sales to 28.6% in 1998 from 28.1% in 1997. The increase in selling, general and
administrative expenses as a percentage of net sales was mainly due to
incremental payroll and store operating costs to enhance customer service and to
provide additional product training for store associates. Also contributing to
the increase was higher spending on information systems, chiefly toward Year
2000 initiatives.
Interest expense, net, decreased by $0.3 million, to $7.3 million in 1998, due
to lower average debt levels partially offset by an increase in average
borrowing rates. The average total debt, including short-term and long-term bank
borrowings, was $125.9 million in 1998 compared to $134.4 million in 1997. The
decrease in borrowings was mainly due to improved operating cash flows resulting
from an increase in net income and the significant tightening of inventories.
The average interest rate, including interest on short-term and long-term bank
borrowings, was 6.58% in 1998 compared to 6.22% in 1997.
The effective tax rate for the Company was 38.5% in 1998, the same as in 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased by $35.0 million, to $1,053.8 million, or 3.4% over 1996.
Operating income was $17.1 million in 1997 compared to $108.8 million in 1996.
Retail store sales in 1997 increased by $55.6 million, to $894.6 million, or
6.6% over 1996. The percentage of the Company's net sales derived from its
retail stores increased to 84.9% in 1997 from 82.4% in 1996. 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 68 net new stores opened in 1997
and the first full year of operation of the 75 non-comparable stores that opened
in 1996, and was partially offset by a $12.1 million decline, or 1.8%, in
comparable store sales from the previous year. Comparable stores are those which
were open for at least one full fiscal year. The Company believes that the
decrease in comparable store sales was mainly the result of weak customer
response to changes in its traditional merchandise styling and fit, which were
not appropriate for the Company's core customer. The Company is addressing these
merchandise issues by developing merchandise with more classic styling, fit and
colors.
Catalog sales in 1997 decreased by $20.6 million, to $159.2 million, or 11.5%
less than 1996. The percentage of the Company's total sales derived from its
catalog decreased to 15.1% in 1997 from 17.6% in 1996. Catalog productivity, as
measured by sales per catalog, decreased 15.5% in 1997 to $3.06 from $3.62 in
1996. The decline in catalog sales and productivity was due both to presentation
changes in early spring and fall catalogs as well as weak customer response to
merchandise styling and fit. To address these issues, the Company changed
subsequent catalog formats back to what it believes are more successful
presentations and is developing merchandise with more classic styling, fit and
colors. Catalog circulation increased to approximately 52.0 million catalogs in
1997, from 49.7 million catalogs in 1996.
Cost of sales, buying and occupancy expenses increased as a percentage of net
sales to 70.3% from 63.7% in 1996 mainly due to lower merchandise margins, which
were negatively impacted by the liquidation of excess inventory accumulated
because of lower than anticipated sales. Also contributing to the increase were
higher store occupancy costs as a percentage of sales.
Selling, general and administrative expenses increased as a percentage of net
sales to 28.1% in 1997 from 25.6% in 1996. The increase in selling, general and
administrative expenses as a percentage of net sales was mainly due to
incremental payroll and store operating costs to provide increased customer
service and to support the fall introduction of the Company's "Brand Essence"
advertising campaign. Also contributing to the increase were higher marketing
expenses related to the advertising campaign and increased costs associated with
the recruitment and hiring as well as other costs related to certain key
executives.
19
<PAGE> 4
Interest expense, net, increased by $2.3 million, to $7.6 million in 1997, due
to higher average debt levels and an increase in interest rates. The average
total debt, including short-term and long-term bank borrowings, was $134.4
million in 1997 compared to $109.3 million in 1996. The increase in borrowings
was mainly due to lower than anticipated net income, the build-up of inventories
in anticipation of improved sales trends and the funding of the Company's stock
repurchase program. The average interest rate, including interest on short-term
and long-term bank borrowings, was 6.22% in 1997 compared to 6.07% in 1996.
The effective tax rate for the Company remained at 38.5% in 1997.
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
slightly stronger in the second quarter. Within the fall season, catalog sales
and retail store sales are 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 time of need, catalog sales have been their strongest in the fourth
quarter. Retail store sales typically peak in the fourth quarter due to the
holiday season and the impact of new stores opened during the year.
The following table sets forth certain items in the Company's unaudited
quarterly consolidated statements 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.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------------------------------------
May 2, August 1, October 31, January 30,
1998 1998 1998 1999
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy expenses 60.1% 71.9% 60.1% 69.3%
Selling, general and administrative expenses 30.2% 26.8% 31.6% 26.2%
Operating income 9.6% 1.4% 8.3% 4.4%
-----------------------------------------------------------
May 3, August 2, November 1, January 31,
1997 1997 1997 1998
-----------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy expenses 59.9% 80.2% 61.5% 77.9%
Selling, general and administrative expenses 28.5% 26.8% 30.5% 26.7%
Operating income (loss) 11.6% (6.9)% 8.0% (4.6)%
</TABLE>
The Company's merchandising strategy focuses on liquidating seasonal inventory
at the end of each selling season. Generally, the Company achieves this goal by
conducting major sale events at the end of the second and fourth quarters. These
events sharply accelerate the rate of units sold and are effective in
liquidating season-end inventories. However, selling this clearance inventory at
marked down retail values has the effect of increasing the Company's cost of
sales, buying and occupancy expenses as a percentage of net sales in these
periods.
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 store
expansion program, which results in having more stores open in the fall than at
the beginning of the year and therefore results in higher store payroll and
operations-related expenses.
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.
20
<PAGE> 5
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 January 30, 1999, the Company had no
amounts outstanding under the line of credit facility. At January 31, 1998, the
Company had $100.0 million outstanding under this facility. Additionally, the
Company has a revolving credit facility with four banks (the "Facility"). In
April 1998, the Company entered into new agreements with these banks to increase
the Facility from $50.0 million to $100.0 million. At January 30, 1999 and
January 31, 1998 the Company's outstanding borrowings under the Facility were
$100.0 million and $50.0 million, respectively. Notes under the Facility
currently extend variously between February 2000 and January 2001, 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 $136.4 million in 1998. The
increase in cash provided by operating activities from the prior year is mainly
due to higher net income, and the tight control of inventories in the current
year.
Cash provided by operating activities totaled $12.8 million in 1997. The
decrease in cash provided by operating activities from the prior year is mainly
due to lower net income, higher levels of inventory, higher prepaid income taxes
caused by an overestimation of taxable income and a smaller increase in accounts
payable, partially offset by the lack of growth in accounts receivable compared
to the prior year.
Cash used in investing activities for 1998 was $45.1 million. Of this amount,
approximately $31.7 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
1997 was $49.5 million. Of this amount, approximately $42.8 million was used for
leasehold improvements, furniture, fixtures and other related expenditures for
opening new stores and expanding, renovating and relocating existing stores.
Capital expenditures for 1999 are currently expected to be approximately $55.0
million. The Company currently plans to open between 35 and 40 new stores during
1999. Approximately $30.4 million is expected to be used for opening new stores
and expanding, renovating and relocating existing stores. Approximately $9.0
million is expected to be used to enhance the Company's computer information
systems, and $11.1 million is expected to be used for the expansion of the
Company's Hingham and Lakeville, Massachusetts corporate facilities. The
remaining amount will be used for other capital needs in the normal course of
business. The actual amount of such capital expenditures will depend on a number
of factors, including the schedule of such activity during 1999, and the number,
type and timing of stores being opened, expanded, renovated and relocated.
Cash used in financing activities totaled $81.8 million in 1998. During fiscal
1998 the Company paid cash dividends of $0.44 per share and repurchased 912,878
shares of Company common stock at an average price per share of $21.96. The
payment of cash dividends and the purchase of treasury stock in 1998 were funded
through operating cash flows.
Cash provided by financing activities totaled $35.2 million in 1997. During
fiscal 1997, the Company paid cash dividends of $0.42 per share and repurchased
1,137,929 shares of Company common stock at an average price per share of
$24.18. The payment of cash dividends and the purchase of treasury stock in 1997
were funded through borrowings under the Company's existing credit facilities.
In 1998 and 1997 cash from operating activities and funds available to the
Company under its line of credit facility and its revolving credit facility were
sufficient to meet cash required for capital expenditures, dividends and the
purchase of treasury stock. The Company's usage of the line of credit facility
peaked at $120.0 million in both 1998 in 1997. 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, enhancements to the Company's information systems, expansion of
its Hingham and Lakeville facilities and payment of cash dividends that may be
declared from time to time.
21
<PAGE> 6
For the current fiscal year and next fiscal year, the Company currently believes
its cash flows from operating activities and funds available to it under its
credit facilities will be sufficient to meet its planned 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.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments and in its
financial position is the potential for loss arising from adverse changes in
interest rates. The Company does not enter into financial instruments for
trading purposes.
At January 30, 1999, the Company has $100.0 million of variable rate borrowings
outstanding under its revolving credit facility, which approximate fair market
value. A hypothetical 10% adverse change in current interest rates for this
variable rate debt would have an approximate $0.4 million negative impact on the
Company's earnings and cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants ("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's quarter ended May 1, 1999. SOP 98-1 establishes accounting standards
for costs incurred in the development or implementation of computer software.
These new standards require the capitalization of certain software
implementation costs and provide guidance on those costs which should be
expensed as incurred. The impact of SOP 98-1, if any, 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's quarter ended May 1, 1999. SOP
98-5 requires that start-up activities be expensed as incurred. The application
of SOP 98-5 is not expected to have a material impact on the Company's financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's
quarter ended April 29, 2000. SFAS No. 133 significantly modifies accounting and
reporting standards for derivatives and hedging activities. The impact of SFAS
No. 133, if any, on the Company has not yet been determined.
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
22
<PAGE> 7
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 material components of the
Company's systems and 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 such internal systems and components following
remediation
Phase V: Developing contingency plans to address the most reasonably
likely worst case Y2K scenarios
The identification, assessment and remediation 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
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 by
mid 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 adverse effect on the Company's business
and operations. The Company believes that the geographically dispersed nature of
its business and its diverse 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 $5.6 million has been incurred to date, of which $2.8
million was charged to expense as incurred, or approximately 12.1% 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 the Y2K program 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 internal personnel costs (primarily salaries and benefits) which the
Company doesn't separately track, costs associated with any contingency plans or
costs for addressing and resolving issues as a result of the failure of third
parties to become Y2K compliant.
23
<PAGE> 8
FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking information within the meaning of
The Private Securities Litigation Reform Act of 1995. The statements may be
identified by such forward-looking terminology as "expect", "look", "believe",
"anticipate", "may", "will", "plan", 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 fashions, expansion
plans and schedule, appropriate balance of merchandise offerings and
responsiveness of the Company's core customers, timing and levels of markdowns,
and any potential 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 factors that may cause actual
results to differ from such forward-looking statements are included in this
Annual Report and 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 be
obtained from the Company at 781-741-4500), as well as other periodic reports
filed by the Company with the Securities and Exchange Commission. You are urged
to consider such factors. The Company assumes no obligation for updating any
such forward-looking statements.
24
<PAGE> 9
CONSOLIDATED STATEMENTS OF EARNINGS
Dollar amounts in thousands except per share data
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
NET SALES $1,142,246 $1,053,806 $1,018,801
COSTS AND EXPENSES:
Cost of sales, buying and occupancy 749,112 741,133 648,710
Selling, general and administrative 326,203 295,620 261,319
---------------------------------------------
OPERATING INCOME 66,931 17,053 108,772
INTEREST EXPENSE - NET 7,308 7,560 5,324
---------------------------------------------
INCOME BEFORE TAXES 59,623 9,493 103,448
INCOME TAXES 22,955 3,655 39,827
---------------------------------------------
NET INCOME $ 36,668 $ 5,838 $ 63,621
=============================================
NET INCOME PER SHARE - BASIC $ 1.15 $ 0.18 $ 1.92
=============================================
NET INCOME PER SHARE - ASSUMING DILUTION $ 1.15 $ 0.18 $ 1.91
=============================================
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING -
BASIC (in thousands) 31,878 32,386 33,185
=============================================
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING -
ASSUMING DILUTION (in thousands) 31,933 32,436 33,283
=============================================
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands except per share data
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20,195 $ 10,680
Customer accounts receivable - net 100,825 97,092
Merchandise inventories 175,678 195,078
Deferred catalog costs 8,400 11,860
Due from affiliates 6,653 8,568
Deferred income taxes 7,139 6,862
Prepaid and other current assets 21,025 30,262
-------------------------
Total current assets 339,915 360,402
Property and Equipment - net 189,510 182,610
Goodwill - net 39,544 40,888
Intangibles - net -- 589
Trademarks - net 83,036 85,421
Deferred Income Taxes 5,059 6,523
-------------------------
Total Assets $657,064 $676,433
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks $ -- $100,000
Accounts payable 66,356 58,010
Accrued liabilities 72,038 57,291
-------------------------
Total current liabilities 138,394 215,301
Long-Term Debt 100,000 50,000
Deferred Rent Under Lease Commitments 16,597 14,666
Commitments
Stockholders' Equity:
Common stock, $0.01 par value; 40,000,000
authorized; 35,321,545 shares and
34,955,179 shares issued, respectively,
and 31,258,903 shares and 31,805,415
shares outstanding, respectively 353 350
Additional paid-in capital 294,089 287,407
Retained earnings 222,318 199,657
Accumulated other comprehensive income (loss) (2,431) (1,998)
Restricted stock awards (3,157) (529)
Treasury stock, at cost (109,099) (88,421)
-------------------------
Total stockholders' equity 402,073 396,466
-------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $657,064 $676,433
=========================
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollar amounts in thousands
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,668 $ 5,838 $63,621
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 40,035 40,392 35,095
Deferred rent 1,950 1,735 2,808
Amortization of restricted stock awards 1,137 780 637
Forfeiture of restricted stock awards (223) -- --
Loss on disposal of property and equipment 2,314 1,913 857
Deferred income taxes 1,187 (2,713) (2,835)
Changes in current assets and liabilities:
Customer accounts receivable (3,754) 137 (23,496)
Merchandise inventories 19,238 (34,165) (17,556)
Deferred catalog costs 3,460 (2,294) 3,191
Due from affiliates 1,915 (3,590) (970)
Prepaid and other current assets 9,338 (7,346) 63
Accounts payable 8,362 3,388 10,290
Accrued liabilities 14,793 8,676 3,522
--------------------------------------------
Net cash provided by operating activities 136,420 12,751 75,227
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (45,224) (49,684) (47,539)
Proceeds from disposal of property and equipment 159 144 1,302
--------------------------------------------
Net cash used in investing activities (45,065) (49,540) (46,237)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments) borrowings under notes payable to banks (100,000) 76,000 --
Borrowings of long-term debt 50,000 -- --
Cash dividends (14,007) (13,614) (11,280)
Proceeds from options exercised and restricted stock issued 2,271 332 337
Purchase of treasury stock (20,050) (27,542) (20,613)
--------------------------------------------
Net cash (used in) provided by financing activities (81,786) 35,176 (31,556)
--------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (54) (55) 49
--------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,515 (1,668) (2,517)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,680 12,348 14,865
--------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 20,195 $10,680 $12,348
============================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Dollar amounts in thousands except share data
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------ Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 3, 1996 34,910,826 $349 $286,472 $155,092 $(1,807)
Cash dividends paid -- -- -- (11,280) --
Amortization of restricted stock award -- -- -- -- --
Stock options exercised, including tax benefit 17,266 -- 402 -- --
Purchase of 738,835 shares of common stock -- -- -- -- --
Comprehensive income:
Net income -- -- -- 63,621 --
Translation adjustment -- -- -- -- 183
Deferred pension cost -- -- -- -- 470
Comprehensive income -- -- -- -- --
----------------------------------------------------------
BALANCE AT FEBRUARY 1, 1997 34,928,092 349 286,874 207,433 (1,154)
Cash dividends paid -- -- -- (13,614) --
Common stock issued as restricted
stock award 12,000 -- 299 -- --
Amortization of restricted stock award -- -- -- -- --
Stock options exercised, including tax benefit 15,087 1 388 -- --
Purchase of 1,137,929 shares of common stock -- -- -- -- --
Other equity transactions -- -- (154) -- --
Comprehensive income:
Net income -- -- -- 5,838 --
Translation adjustment -- -- -- -- (844)
Comprehensive income -- -- -- -- --
----------------------------------------------------------
BALANCE AT JANUARY 31, 1998 34,955,179 350 287,407 199,657 (1,998)
Cash dividends paid -- -- -- (14,007) --
Common stock issued as restricted
stock award 256,500 2 4,015 -- --
Amortization of restricted stock awards -- -- -- -- --
Stock options exercised, including tax benefit 109,866 1 2,560 -- --
Purchase of 912,878 shares of common stock -- -- -- -- --
Other equity transactions -- -- 107 -- --
Comprehensive income:
Net income -- -- -- 36,668 --
Translation adjustment -- -- -- -- (433)
Comprehensive income -- -- -- -- --
----------------------------------------------------------
BALANCE AT JANUARY 30, 1999 35,321,545 $353 $294,089 $222,318 $(2,431)
==========================================================
<CAPTION>
Restricted Total
Stock Treasury Comprehensive Stockholders'
Awards Stock Income Equity
--------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT FEBRUARY 3, 1996 $(1,801) $ (40,266) $398,039
Cash dividends paid -- -- (11,280)
Amortization of restricted stock award 637 -- 637
Stock options exercised, including tax benefit -- -- 402
Purchase of 738,835 shares of common stock -- (20,613) (20,613)
Comprehensive income:
Net income -- -- $ 63,621 63,621
Translation adjustment -- -- 183 183
Deferred pension cost -- -- 470 470
--------
Comprehensive income -- -- 64,274 --
--------------------------------------------------------
BALANCE AT FEBRUARY 1, 1997 (1,164) (60,879) 431,459
Cash dividends paid -- -- (13,614)
Common stock issued as restricted
stock award (299) -- --
Amortization of restricted stock award 780 -- 780
Stock options exercised, including tax benefit -- -- 389
Purchase of 1,137,929 shares of common stock -- (27,542) (27,542)
Other equity transactions 154 --
Comprehensive income:
Net income -- -- 5,838 5,838
Translation adjustment -- -- (844) (844)
--------
Comprehensive income -- -- 4,994 --
--------------------------------------------------------
BALANCE AT JANUARY 31, 1998 (529) (88,421) 396,466
Cash dividends paid -- -- (14,007)
Common stock issued as restricted
stock award (4,015) -- 2
Amortization of restricted stock awards 1,137 -- 1,137
Stock options exercised, including tax benefit -- -- 2,561
Purchase of 912,878 shares of common stock -- (20,050) (20,050)
Other equity transactions 250 (628) (271)
Comprehensive income:
Net income -- -- 36,668 36,668
Translation adjustment -- -- (433) (433)
--------
Comprehensive income -- -- 36,235 --
--------------------------------------------------------
BALANCE AT JANUARY 30, 1999 $(3,157) $(109,099) -- $ 402,073
========================================================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 13
THE TALBOTS, INC. AND SUBSIDIARIES
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, remains the Company's majority
shareholder, owning approximately 62.7% of the Company's outstanding common
stock. 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 years ended January 30, 1999, January 31, 1998 and February 1, 1997 were 52
week reporting periods. The Company conforms to the National Retail Federation's
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 consolidated financial statements include sales return
reserve, inventory reserve, allowance for doubtful accounts, and the lives 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 - 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 $1,600 and $1,400 as of January 30, 1999 and January 31, 1998,
respectively.
ADVERTISING - Advertising costs, which include media, production and catalogs
totaled $62,517, $65,283 and $58,037 in the years ended January 30, 1999,
January 31, 1998 and February 1, 1997. Media and production costs are expensed
in the period in which the advertising first takes place, while catalog costs
are 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 are recorded at cost.
Depreciation and amortization are provided over the following estimated useful
lives using the straight-line method:
DESCRIPTION YEARS
---------------------------------------------------------------------
Buildings 15-50
Fixtures and equipment 2-10
Software 5
Leasehold improvements 5-15 or term of lease, if shorter
Leasehold interests 4-20
29
<PAGE> 14
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 January 30, 1999 and
January 31, 1998 accumulated amortization on goodwill was $14,215 and $12,871,
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 January 30, 1999 and January 31, 1998 accumulated
amortization on intangibles was $32,002 and $31,413, respectively.
TRADEMARKS - In November 1993 the Company purchased certain trademarks,
including the Talbots trade name, from JUSCO (Europe) B.V., a related party (see
Note 5). 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 January 30, 1999 and January 31, 1998 accumulated
amortization on the trademarks was $12,334 and $9,950, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of current assets (except inventories), current liabilities
and long-term debt. The carrying value of current assets and current liabilities
approximates their fair market values; long-term debt, which has variable
interest rate terms, is therefore at current market interest rates, and its
carrying value approximates its 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 January 30, 1999, January 31, 1998 and February 1, 1997, the amounts
were $15,333, $14,701 and $12,921, respectively.
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" (see Note 4).
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 comprehensive income.
INCOME TAXES - In accordance with Statement of Financial Accounting Standard
("SFAS") No. 109, deferred income taxes are provided to recognize the effect of
temporary differences between tax and financial statement reporting.
BASIC AND DILUTED NET INCOME PER SHARE - Basic net income per share is computed
by dividing net income by the weighted average number of shares of common stock
outstanding. Diluted net income per share is computed by dividing net income by
the weighted average number of shares of common stock outstanding plus the
effect of all dilutive potential common shares (as determined by the treasury
stock method which includes the tax benefit on assumed stock option exercises).
COMPREHENSIVE INCOME - In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires that certain components of stockholders' equity from nonowner sources
be identified as "other comprehensive income." For the years
30
<PAGE> 15
ended January 30, 1999 and January 31, 1998, the Company's comprehensive net
income was comprised of the impact of changes in the cumulative foreign currency
translation adjustment. For the year ended February 1, 1997, comprehensive net
income was comprised of the impact of changes in the cumulative foreign currency
translation adjustment and the reversal of a deferred pension debit.
Comprehensive income is included in the consolidated statements of stockholders'
equity.
SUPPLEMENTAL CASH FLOW INFORMATION - Interest paid on a cash basis for the years
ended January 30, 1999, January 31, 1998 and February 1, 1997 was $7,538, $8,207
and $6,659, respectively. Income tax payments during the years ended January 30,
1999, January 31, 1998 and February 1, 1997 were $19,457, $14,517 and $42,609,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS - In March 1998, the American Institute of
Certified Public Accountants ("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's quarter ended May 1, 1999.
SOP 98-1 establishes accounting standards for costs incurred in the development
or implementation of computer software. These new standards require the
capitalization of certain software implementation costs and provide guidance on
those costs which should be expensed as incurred. The impact of SOP 98-1, if
any, 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's quarter ended May 1, 1999. SOP
98-5 requires that start-up activities be expensed as incurred. The application
of SOP 98-5 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's
quarter ended April 29, 2000. SFAS No. 133 significantly modifies accounting and
reporting standards for derivatives and hedging activities. The impact of SFAS
No. 133, if any, on the Company has not yet been determined.
RECLASSIFICATIONS - Certain reclassifications have been made to the February 1,
1997 and January 31, 1998 consolidated financial statements to conform with the
January 30, 1999 presentation.
[3] EQUITY TRANSACTIONS
During the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
the Company declared and paid dividends totaling $0.44 per share, $0.42 per
share, and $0.34 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. 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. In May
1997, this extended plan was completed and a second extension of the Plan was
authorized, allowing the Company to purchase up to an additional $40,000 of
outstanding stock from time to time over a two-year period. As of January 30,
1999, $33,766 of outstanding stock had been purchased under the second
extension. At January 30, 1999 and January 31, 1998, the Company held 4,062,642
and 3,149,764 shares, respectively, as treasury shares. Treasury shares also
include shares forfeited under the Company's restricted stock plan.
[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 granted at a price equal to the
fair market value of the Company's common stock at the date of grant.
31
<PAGE> 16
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
(the "Plan"). In February 1998, the Company's Board of Directors amended the
Plan to increase the number of shares of common stock authorized thereunder by
an additional 3,310,000 shares. This increase in authorized shares was approved
by the Company's shareholders at the Company's Annual Meeting in May 1998.
Under the provisions of the Plan, the Company has issued to certain key
management personnel shares of restricted stock. The purchase price of the
restricted stock is $.01 per share. The difference between the market price of
the shares on the date of grant and the individual's cost of $.01 per share is
recorded as deferred compensation and is amortized over a five-year service
period. At January 30, 1999, 250,800 shares of restricted stock were
outstanding.
A summary of the changes in restricted shares outstanding for the years ended
January 30, 1999, January 31, 1998 and February 1, 1997 is presented below.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
market market market
price of price of price of
shares on shares on shares on
Number date of Number date of Number date of
of shares grant of shares grant of shares grant
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 56,533 $20.08 108,973 $19.50 163,450 $19.50
Granted 256,500 $15.66 12,000 $24.94 -- --
Vested (45,342) $19.50 (56,532) $19.50 (54,477) $19.50
Forfeited (16,891) $16.25 (7,908) $19.50 -- --
------------------------------------------------------------------------
Outstanding at end of year 250,800 $15.92 56,533 $20.08 108,973 $19.50
========================================================================
</TABLE>
In accordance with the Plan, the Company has issued stock options which vest
over a three-year period and expire not later than ten years from the grant
date. These stock options have been granted at fair market value at the date of
grant.
A summary of activity in the Company's option plans during the years ended
January 30, 1999, January 31, 1998 and February 1, 1997 is presented below.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
option option option
Number price per Number price per Number price per
of shares share of shares share of shares share
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,406,693 $27.24 2,019,525 $27.85 1,511,292 $27.41
Granted 549,000 $16.29 516,425 $24.99 531,500 $28.89
Exercised (109,866) $20.67 (15,087) $19.72 (17,266) $19.50
Forfeited (244,315) $27.64 (114,170) $29.44 (6,001) $31.95
------------------------------------------------------------------------
Outstanding at end of year 2,601,512 $25.17 2,406,693 $27.24 2,019,525 $27.85
========================================================================
Exercisable at end of year 1,636,639 $27.69 1,470,231 $27.48 1,026,821 $25.83
========================================================================
</TABLE>
32
<PAGE> 17
The following table summarizes information regarding stock options outstanding
at January 30, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------
Number of Weighted Weighted Number of Weighted
Range of options average average options average
exercise prices outstanding remaining life exercise price exercisable exercise price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$14.81 425,500 9.0 years $14.81 0 $14.81
$18.38 - $20.31 459,823 4.9 years $19.48 425,823 $19.50
$22.75 8,500 9.6 years $22.75 0 $22.75
$24.94 - $26.81 473,025 8.8 years $25.05 135,668 $25.01
$28.19 - $29.50 793,998 7.0 years $28.98 641,817 $29.10
$32.13 - $34.63 440,666 5.4 years $34.44 433,331 $34.47
</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 1998, 1997 and 1996, consistent with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and basic and diluted net income per share would have been
reported as follows:
YEAR ENDED
-------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-------------------------------------
Net income $33,058 $1,427 $60,435
Net income per share - basic $ 1.04 $ 0.04 $ 1.82
Net income per share - assuming dilution $ 1.04 $ 0.04 $ 1.82
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 1998, 1997 and 1996 was $7.33, $11.58, and $15.05 per
option, respectively. Key assumptions used to apply this pricing model are as
follows:
<TABLE>
<CAPTION>
January 30, January 31, February 1,
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Weighted average risk free interest rate 5.5% 6.0% 6.2%
Weighted average expected life of option grants 8 years 8 years 8 years
Weighted average expected volatility of underlying stock 47.4% 42.7% 46.2%
Weighted average expected dividend payment rate,
as a percentage of the stock price on the date of grant 2.8% 2.0% 1.2%
</TABLE>
The option pricing model used was designed to value readily tradable stock
options with relatively short lives. The options granted to employees are not
tradable 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 trade name, 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 January 30, 1999 and
January 31, 1998 the Company was owed $6,641 and $8,534, respectively, for these
costs and for merchandise inventory purchases made on behalf of Talbots Japan.
33
<PAGE> 18
[6] PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
January 30, January 31,
1999 1998
---------------------------
Land $ 12,081 $ 11,011
Buildings 39,667 38,956
Fixtures and equipment 196,443 181,794
Software 5,040 4,717
Leasehold improvements 107,886 101,117
Leasehold interests 6,445 7,477
Construction in progress 15,092 9,555
---------------------------
Property and equipment - gross 382,654 354,627
Less accumulated depreciation and amortization (193,144) (172,017)
---------------------------
Property and equipment - net $ 189,510 $ 182,610
==========================
[7] DEBT
Revolving Credit - The revolving credit agreements with four banks have maximum
available borrowings of $100,000, have two-year terms, are due between February
2000 and January 2001, and can be extended annually. Interest terms on the
revolving credit agreements are negotiable, at the Company's option, for periods
of one, three or six months. At January 30, 1999 the Company had $100,000
outstanding under its revolving credit agreements. None of the outstanding
balance is currently payable.
A summary of the amounts outstanding, the current interest terms and the loan
maturities under the revolving credit agreements at January 30, 1999 follows.
Outstanding Interest rate Maturity
------------------------------------------------
$ 14,000 5.75% April 2000
8,000 6.13% January 2001
18,000 6.16% January 2001
14,000 6.25% April 2000
10,000 6.31% February 2000
12,000 6.37% April 2000
18,000 6.69% April 2000
6,000 7.13% February 2000
--------
$100,000
========
At January 31, 1998, the Company had $50,000 outstanding under its revolving
credit agreements. Interest terms were fixed at 6.47% until July 28, 1998. In
April 1998, the Company obtained an increase in the maximum available borrowings
under the revolving credit agreements from $50,000 to $100,000.
NOTES PAYABLE TO BANKS - The Company also has available an unsecured
line-of-credit facility of $125,000 with five banks. At January 30, 1999 no
amounts were outstanding on this facility. At January 31, 1998, $100,000 was
outstanding on this facility. The weighted average interest rate for the years
ended January 30, 1999 and January 31, 1998 was 6.41% and 6.13%, respectively.
LETTERS OF CREDIT - The Company has two letter-of-credit banking agreements
totaling $100,000, which it uses primarily for the purchase of merchandise
inventories. At January 30, 1999 and January 31, 1998, the Company held $50,482
and $38,324, respectively, in purchase commitments.
INTEREST EXPENSE - Interest expense for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997, was $8,281, $8,366 and $6,636,
respectively.
34
<PAGE> 19
[8] INCOME TAXES
The provision for income taxes for the years ended January 30, 1999, January 31,
1998 and February 1, 1997, consists of the following:
YEAR ENDED
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---------------------------------------
Currently payable:
Federal $20,088 $ 7,290 $37,089
State 1,680 (923) 5,579
---------------------------------------
Total currently payable 21,768 6,367 42,668
---------------------------------------
Deferred:
Federal 1,374 (1,288) (1,508)
State (187) (1,424) (174)
Foreign -- -- (1,159)
---------------------------------------
Total deferred 1,187 (2,712) (2,841)
---------------------------------------
Total income tax expense $22,955 $ 3,655 $39,827
=======================================
The effect of temporary differences which gives rise to deferred income tax
balances at January 30, 1999 and January 31, 1998, respectively, are as follows:
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
----------------------------------------------------------------------------
Assets Liabilities Total Assets Liabilities Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNITED STATES:
Current:
Merchandise inventories $ 2,587 $ -- $ 2,587 $ 2,684 $ -- $ 2,684
Deferred catalog costs -- (1,059) (1,059) -- (1,259) (1,259)
Accrued vacation pay 2,191 -- 2,191 1,840 -- 1,840
Deferred compensation 2,826 -- 2,826 3,094 -- 3,094
Other 1,964 (1,370) 594 2,177 (1,674) 503
----------------------------------------------------------------------------
Total current 9,568 (2,429) 7,139 9,795 (2,933) 6,862
----------------------------------------------------------------------------
Noncurrent:
Depreciation & amortization -- (4,386) (4,386) -- (1,512) (1,512)
Lease commitments 5,490 -- 5,490 4,693 -- 4,693
Other 3,585 (789) 2,796 2,972 (789) 2,183
----------------------------------------------------------------------------
Total noncurrent 9,075 (5,175) 3,900 7,665 (2,301) 5,364
----------------------------------------------------------------------------
FOREIGN:
Noncurrent:
Subsidiary tax loss carryforwards 4,042 -- 4,042 4,378 -- 4,378
Less: valuation allowance (2,883) -- (2,883) (3,219) -- (3,219)
----------------------------------------------------------------------------
Total noncurrent 1,159 -- 1,159 1,159 -- 1,159
----------------------------------------------------------------------------
Total deferred income taxes $19,802 $(7,604) $12,198 $18,619 $(5,234) $13,385
============================================================================
</TABLE>
At January 30, 1999, a consolidated foreign subsidiary of the Company had a net
operating loss carryforward which began 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 January
30, 1999, the valuation allowance was reduced by $336. For the year ended
January 31, 1998, the valuation allowance was increased by $954. The valuation
allowance was reduced by $458 for the year ended February 1, 1997.
At January 30, 1999, the Company had a federal charitable contribution
carryforward of $2,406 that expires in year 2003. Also at January 30, 1999, the
Company had state net operating loss and charitable contribution carryforwards
of $1,317 that expire in years 2001 through 2012.
35
<PAGE> 20
For the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
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
------------------------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
------------------------------------------------------------
Tax Rate Tax Rate Tax Rate
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense $20,868 35.0% $ 3,323 35.0% $36,207 35.0%
Adjustments resulting from:
State income taxes, net of federal
tax benefit 970 1.6 (1,525) (16.1) 3,513 3.4
Goodwill amortization 470 0.8 470 5.0 470 0.5
Other 647 1.1 1,387 14.6 (363) (0.4)
------------------------------------------------------------
Actual tax expense $22,955 38.5% $ 3,655 38.5% $39,827 38.5%
============================================================
</TABLE>
[9] SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" in 1998.
Accordingly, it has segmented its operations in a manner that reflects how its
chief operating decision-maker reviews the results of the operating segments
that make up the consolidated entity.
The Company evaluates the operating performance of its identified segments based
on a direct profit measure. Direct profit is calculated as net sales less cost
of goods sold and direct expenses, such as payroll, occupancy and other direct
costs. Indirect expenses are not allocated on a segment basis. Such indirect
expenses include corporate overhead expenses, finance charge income, and
amortization. Assets are not allocated between segments, therefore no measure of
segment assets is available.
The Company has two reportable segments, its retail stores (the "Stores
Segment"), which include the Company's United States, Canada and United Kingdom
retail store operations, and its catalog operations (the "Catalog Segment").
The Company's reportable segments offer similar products, however, each segment
requires different marketing and management strategies. The Stores Segment
derives its revenues from the sale of women's and children's classic apparel,
accessories and shoes, through its retail stores, while the Catalog Segment
derives its revenues through its approximately 25 distinct catalog mailings per
year.
The following is segment information as of and for the years ended January 30,
1999, January 31, 1998 and February 1, 1997:
January 30, 1999
------------------------------------
Stores Catalog Total
------------------------------------
Sales to external customers $972,974 $169,272 $1,142,246
Direct profit 134,258 18,644 152,902
January 31, 1998
------------------------------------
Stores Catalog Total
------------------------------------
Sales to external customers $894,620 $159,186 $1,053,806
Direct profit 83,236 4,151 87,387
February 1, 1997
------------------------------------
Stores Catalog Total
------------------------------------
Sales to external customers $838,992 $179,809 $1,018,801
Direct profit 152,642 22,396 175,038
36
<PAGE> 21
The accounting policies of the segments are generally the same as those
described in the summary of significant accounting policies, except as follows:
direct profit is calculated as net sales less cost of goods sold and direct
expenses, such as payroll, occupancy and other direct costs. Indirect expenses
are not allocated on a segment basis, therefore no measure of segment net income
or loss is available. Assets are not allocated between segments, therefore no
measure of segment assets is available.
The following reconciles direct profit to consolidated operating income as of
and for the years ended January 30, 1999, January 31, 1998 and February 1, 1997:
<TABLE>
<CAPTION>
January 30, January 31, February 1,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Total direct profit or loss for reportable segments $152,902 $ 87,387 $175,038
Less: indirect expenses 85,971 70,334 66,266
-------------------------------------------
Consolidated operating income $ 66,931 $ 17,053 $108,772
===========================================
</TABLE>
As a retailer that sells to the general public, the Company has no single
customer who accounts for greater than 10% of the Company's sales.
The following is geographical information as of and for the years ended January
30, 1999, January 31, 1998 and February 1, 1997:
<TABLE>
<CAPTION>
January 30, January 31, February 1,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
SALES
United States $1,101,135 $1,016,439 $ 979,548
Foreign 41,111 37,367 39,253
-------------------------------------------
Total consolidated revenues $1,142,246 $1,053,806 $1,018,801
===========================================
LONG-LIVED ASSETS
United States $ 302,607 $ 300,068 $ 292,758
Foreign 9,483 9,440 9,874
-------------------------------------------
Total long-lived assets $ 312,090 $ 309,508 $ 302,632
===========================================
</TABLE>
The classification "Foreign" is comprised of the Company's Canada and United
Kingdom retail store operations and the classification "United States" is
comprised of the Company's United States retail store operations and the
Company's catalog operations.
[10] BENEFIT PLANS
The Company sponsors a non-contributory defined benefit pension plan covering
substantially all salaried and hourly 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.
37
<PAGE> 22
During 1998, the Company adopted the provisions of SFAS No. 132 "Employer's
Disclosures About Pensions and Other Postretirement Benefits." The following
sets forth the funded status and prepaid pension cost for the Company's pension
plan:
January 30, January 31,
1999 1998
---------------------------
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation at beginning of year $(24,197) ($17,955)
Service cost (2,489) (2,150)
Interest cost (2,034) (1,703)
Actuarial loss (4,940) (2,688)
Benefits paid 934 299
---------------------------
Projected benefit obligation at end of year $(32,726) ($24,197)
==========================
CHANGE IN ASSETS:
Fair value at the beginning of year $ 21,772 $ 16,461
Actual return on plan assets 3,954 3,051
Employer contributions 3,000 2,559
Benefits paid (934) (299)
---------------------------
Fair value at end of year $ 27,792 $ 21,772
==========================
FUNDED STATUS:
Projected benefit obligation $(32,726) $(24,197)
Fair value of plan assets 27,792 21,772
---------------------------
Funded status (4,934) (2,425)
Unrecognized prior service cost 1,179 1,342
Unrecognized net loss 4,160 1,147
---------------------------
Prepaid pension asset $ 405 $ 64
==========================
Net pension cost for the fiscal years ended January 30, 1999, January 31, 1998
and February 1, 1997 included the following components:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 2,489 $ 2,150 $ 1,763
Interest cost on projected benefit obligation 2,034 1,703 1,246
Expected return on plan assets (2,041) (1,562) (1,122)
Net amortization and deferral 176 162 236
-----------------------------------------------
Net pension expense $ 2,658 $ 2,453 $ 2,123
===============================================
</TABLE>
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.
38
<PAGE> 23
The following sets forth the funded status and accrued benefit cost for the
Company's SERP plan.
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
-----------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation at beginning of year $(2,537) $(2,121)
Service cost (176) (195)
Interest cost (195) (171)
Actuarial loss (215) (50)
Benefits paid -- --
-----------------------------
Projected benefit obligation at end of year $(3,123) $(2,537)
=============================
FUNDED STATUS:
Projected benefit obligation $(3,123) $(2,537)
Fair value of plan assets -- --
-----------------------------
Funded status (3,123) (2,537)
Unrecognized prior service cost 228 273
Unrecognized net loss 561 356
-----------------------------
Accrued pension liability $(2,334) $(1,908)
=============================
</TABLE>
Net SERP cost for the fiscal years ended January 30, 1999, January 31, 1998 and
February 1, 1997 included the following components:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
January 30, January 31, February 1,
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $176 $195 $195
Interest cost on projected benefit obligation 195 171 156
Net amortization and deferral 56 46 78
---------------------------------------
Net SERP expense $427 $412 $429
=======================================
</TABLE>
As of January 30, 1999, January 31, 1998 and February 1, 1997, the discount rate
used in determining both the net pension and SERP expense was 7.25%, 7.75%, and
7.25%, respectively. For the years ended January 30, 1999, January 31, 1998 and
February 1, 1997, the discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.75%, 7.25% and 7.75%,
respectively. The rate of increase in future compensation levels was 4.0% for
the years ended January 30, 1999 and January 31, 1998 and 4.75% for the year
ended February 1, 1997. The expected rate of return on pension plan assets was
9.0% in all three years. Plan assets for the pension plan consist principally of
fixed income and equity securities.
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 January 30, 1999, January 31, 1998 and February 1, 1997 were
$2,431, $2,321 and $2,252, respectively.
39
<PAGE> 24
The Company provides certain medical benefits for most retired employees. The
following sets forth the funded status and accrued benefit cost for the plan.
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
-----------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Projected benefit obligation at beginning of year $(1,653) $(1,351)
Service cost (224) (162)
Interest cost (156) (117)
Actuarial loss (398) (33)
Benefits paid 39 10
-----------------------------
Projected benefit obligation at end of year $(2,392) $(1,653)
=============================
FUNDED STATUS:
Projected benefit obligation $(2,392) $(1,653)
Fair value of plan assets -- --
-----------------------------
Funded status (2,392) (1,653)
Unrecognized net loss (gain) 177 (221)
-----------------------------
Accrued postretirement liability $(2,215) $(1,874)
=============================
</TABLE>
The net cost of the plan for the fiscal years ended January 30, 1999, January
31, 1998 and February 1, 1997 included the following components:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period $224 $162 $157
Interest cost on projected benefit obligation 156 117 95
Net amortization and deferral -- (11) (9)
------------------------------------------
Net expense $380 $268 $243
==========================================
</TABLE>
A one percentage point increase in the assumed cost escalation rate would
increase the accumulated postretirement benefit obligation at January 30, 1999
by $216 and the total of the service cost and interest cost components of net
periodic postretirement cost for 1998 by $40. Similarly, decreasing the assumed
health care cost trend rate by one percentage point for all future years would
decrease the accumulated postretirement benefit obligation at January 30, 1999
by $234, and the total of the service cost and interest cost components of net
periodic postretirement cost by $44. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 6.75% at
January 30, 1999, 7.25% at January 31, 1998, and 7.75% at February 1, 1997.
Additionally, assumed cost escalation rates that start at 7% and grade down
gradually to 4.75% were used for the year ended January 30, 1999. Assumed cost
escalation rates that start at 9.4% and grade down gradually to 5.5% were used
for the years ended January 31, 1998 and February 1, 1997.
The Company provides postemployment benefits to certain employees on short-term
disability. The Company's obligation at January 30, 1999 and January 31, 1998
was $176 and $166, respectively.
[11] 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
40
<PAGE> 25
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.
The aggregate minimum future rental commitments under noncancelable operating
leases at January 30, 1999 are as follows:
1999 $ 65,582
2000 67,002
2001 66,398
2002 64,121
2003 60,276
Thereafter 226,920
Rent expense for the years ended January 30, 1999, January 31, 1998 and February
1, 1997, was $67,316, $60,469 and $52,678, respectively, and includes $1,734,
$1,426 and $1,766, respectively, of contingent rental expense.
[12] NET INCOME PER SHARE
Pursuant to SFAS No. 128, the weighted average shares used in computing basic
and diluted net income per share are presented in the table below. Options to
purchase 1,707,689, 1,403,996 and 520,166 shares of common stock at prices
ranging from $24.94 to $34.63 per share were outstanding during the years ended
January 30, 1999, January 31, 1998 and February 1, 1997, respectively, but were
not included in the computation of diluted net income per share because the
options' exercise prices were greater than the average market prices of the
common shares.
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
January 30, January 31, February 1,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Shares for computation of basic net income per share 31,878 32,386 33,185
Effect of assumed option exercises 55 50 98
-----------------------------------------
Shares for computation of diluted net income per share 31,933 32,436 33,283
=========================================
</TABLE>
41
<PAGE> 26
INDEPENDENT AUDITORS' 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 January 30, 1999 and January 31, 1998, and the
related consolidated statements of earnings, changes in stockholders' equity,
and cash flows for each of the three years in the period ended January 30, 1999.
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 companies as of January 30,
1999 and January 31, 1998, and the results of their operations and their cash
flows for each of the three years in the period ended January 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
March 17, 1999
Boston, Massachusetts
42
<PAGE> 27
SELECTED QUARTERLY FINANCIAL DATA
Dollar amounts in thousands except per share data
The following table shows certain unaudited quarterly information for the
Company during fiscal 1998 and fiscal 1997. 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.
<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED
--------------------------------------------------------
May 2, August 1, October 31, January 30,
1998 1998 1998 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $271,475 $267,687 $267,715 $335,369
Gross profit 108,189 75,295 106,838 102,812
Net income 14,536 1,285 12,730 8,117
Net income per share - basic $ 0.45 $ 0.04 $ 0.40 $ 0.26
Net income per share - assuming dilution $ 0.45 $ 0.04 $ 0.40 $ 0.26
Weighted average common shares outstanding
- basic (in thousands) 32,014 32,062 31,986 31,450
Weighted average common shares outstanding
- assuming dilution (in thousands) 32,014 32,120 31,986 31,566
Cash dividends per share $ 0.11 $ 0.11 $ 0.11 $ 0.11
Market price data
High $ 20.938 $ 30.250 $ 26.625 $ 31.375
Low $ 14.000 $ 19.375 $ 13.938 $ 22.438
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED
--------------------------------------------------------
May 3, August 2, November 1, January 31,
1997 1997 1997 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $240,742 $244,852 $255,968 $312,244
Gross profit 96,578 48,556 98,440 69,099
Net income (loss) 16,488 (11,461) 11,157 (10,346)
Net income (loss) per share - basic $ 0.50 $ (0.35) $ 0.35 $ (0.32)
Net income (loss) per share
- assuming dilution $ 0.50 $ (0.35) $ 0.35 $ (0.32)
Weighted average common shares outstanding
- basic (in thousands) 32,902 32,407 32,201 32,033
Weighted average common shares outstanding
- assuming dilution (in thousands) 33,009 32,407 32,271 32,033
Cash dividends per share $ 0.09 $ 0.11 $ 0.11 $ 0.11
Market price data
High $ 33.875 $ 34.000 $ 31.125 $ 25.000
Low $ 26.000 $ 22.500 $ 23.625 $ 13.938
</TABLE>
43
<PAGE> 28
MARKET FOR REGISTRANT'S COMMON STOCK
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
17, 1999 was 588. 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.
44
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-72086, No. 33-86040, No. 333-05643 and No. 333-56215 of The Talbots, Inc. and
its subsidiaries on Forms S-8 of our reports dated March 17, 1999, appearing in
and incorporated by reference in the Annual Report on Form 10-K of The Talbots,
Inc. and its subsidiaries for the year ended January 30, 1999.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
April 29, 1999
Boston, Massachusetts
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000912263
<NAME> THE TALBOTS, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<EXCHANGE-RATE> 1
<CASH> 20,195
<SECURITIES> 0
<RECEIVABLES> 100,825
<ALLOWANCES> 1,600
<INVENTORY> 175,678
<CURRENT-ASSETS> 339,915
<PP&E> 189,510
<DEPRECIATION> 193,144
<TOTAL-ASSETS> 657,064
<CURRENT-LIABILITIES> 138,394
<BONDS> 0
0
0
<COMMON> 353
<OTHER-SE> 401,720
<TOTAL-LIABILITY-AND-EQUITY> 657,064
<SALES> 1,142,246
<TOTAL-REVENUES> 1,142,246
<CGS> 749,112
<TOTAL-COSTS> 1,075,315
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,308
<INCOME-PRETAX> 59,623
<INCOME-TAX> 22,955
<INCOME-CONTINUING> 36,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,668
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
</TABLE>
