<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 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)
Delaware 41-1111318
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Beal Street, Hingham, Massachusetts 02043
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(781) 749-7600
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class September 7, 1999
-----
Common Stock, $0.01 par value 31,264,729
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INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1: Financial Statements
Consolidated Statements of Earnings for the Thirteen
and Twenty-Six Weeks Ended July 31, 1999 and August
1,1998 ........................................................................... 3
Consolidated Balance Sheets as of July 31, 1999,
January 30, 1999 and August 1, 1998 .............................................. 4
Consolidated Statements of Cash Flows for the
Twenty-Six Weeks Ended July 31, 1999 and August 1,
1998 ............................................................................. 5
Notes to Consolidated Financial Statements ............................................. 6-9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................. 10-15
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders ......................................... 16
Item 6: Exhibits and Reports on Form 8-K ............................................................ 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE TALBOTS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 31, 1999 AND AUGUST 1, 1998
(Amounts in thousands except per share data)
--------------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------- ----------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $304,993 $267,687 $597,999 $539,162
COSTS AND EXPENSES
COST OF SALES, BUYING AND OCCUPANCY 216,347 192,392 385,228 355,678
SELLING, GENERAL AND ADMINISTRATIVE 81,016 71,632 171,842 153,733
-------- -------- -------- --------
OPERATING INCOME 7,630 3,663 40,929 29,751
INTEREST EXPENSE - NET 1,516 1,574 3,306 4,026
-------- -------- -------- --------
INCOME BEFORE TAXES 6,114 2,089 37,623 25,725
INCOME TAX EXPENSE 2,354 804 14,485 9,904
-------- -------- -------- --------
NET INCOME $ 3,760 $ 1,285 $ 23,138 $ 15,821
======== ======== ======== ========
NET INCOME PER SHARE - BASIC $ 0.12 $ 0.04 $ 0.74 $ 0.49
======== ======== ======== ========
NET INCOME PER SHARE - ASSUMING
DILUTION $ 0.12 $ 0.04 $ 0.74 $ 0.49
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING - BASIC 31,179 32,062 31,208 32,038
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OF COMMON STOCK
OUTSTANDING - ASSUMING DILUTION 31,557 32,120 31,414 32,038
======== ======== ======== ========
CASH DIVIDENDS PER SHARE $ 0.11 $ 0.11 $ 0.22 $ 0.22
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
THE TALBOTS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (unaudited)
JULY 31, 1999, JANUARY 30, 1999 AND AUGUST 1, 1998
- ------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
JULY 31, JANUARY 30, AUGUST 1,
1999 1999 1998
--------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,235 $ 20,195 $ 26,562
Customer accounts receivable - net 101,495 100,825 90,346
Merchandise inventories 173,068 175,678 145,141
Deferred catalog costs 4,863 8,400 8,428
Due from affiliates 8,085 6,653 10,681
Deferred income taxes 6,987 7,139 8,579
Prepaid and other current assets 28,922 21,025 23,899
--------- --------- --------
TOTAL CURRENT ASSETS 341,655 339,915 313,636
PROPERTY AND EQUIPMENT - NET 192,259 189,510 178,275
GOODWILL - NET 38,873 39,544 40,217
INTANGIBLES - NET -- -- 294
TRADEMARKS - NET 81,844 83,036 84,229
DEFERRED INCOME TAXES 5,519 5,059 5,640
--------- --------- --------
TOTAL ASSETS $ 660,150 $ 657,064 $622,291
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 55,556 $ 66,356 $ 39,526
Accrued liabilities 66,732 72,038 57,888
Income taxes payable -- -- 849
--------- --------- --------
TOTAL CURRENT LIABILITIES 122,288 138,394 98,263
LONG-TERM DEBT 100,000 100,000 100,000
DEFERRED RENT UNDER LEASE COMMITMENTS 17,789 16,597 15,812
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 40,000,000 authorized;
35,603,250 shares, 35,321,545 shares and 32,252,098 shares issued,
respectively, and 31,264,729 shares, 31,258,903 shares and 32,086,680
shares outstanding, respectively 356 353 353
Additional paid-in capital 301,400 294,089 291,983
Retained earnings 238,597 222,318 208,453
Accumulated other comprehensive income (loss) (1,929) (2,431) (1,001)
Restricted stock awards (2,482) (3,157) (3,151)
Treasury stock, at cost; 4,338,521 shares, 4,062,642 shares
and 3,165,418 shares, respectively (115,869) (109,099) (88,421)
--------- --------- --------
TOTAL STOCKHOLDERS' EQUITY 420,073 402,073 408,216
--------- --------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 660,150 $ 657,064 $622,291
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
4
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<TABLE>
<CAPTION>
THE TALBOTS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED JULY 31, 1999 AND AUGUST 1, 1998
(In thousands)
- ---------------------------------------------------------------------------------------------------------
TWENTY-SIX WEEKS ENDED
-------------------------
July 31, August 1,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 23,138 $ 15,821
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 21,105 19,962
Deferred rent 1,196 1,168
Net non-cash compensation activity 589 641
Loss on disposal of property and equipment 626 797
Deferred income taxes (306) (833)
Changes in current assets and liabilities:
Customer accounts receivable (671) 6,723
Merchandise inventories 2,593 49,799
Deferred catalog costs 3,537 3,432
Due from affiliates (1,432) (2,113)
Prepaid and other current assets (5,755) 8,001
Accounts payable (10,798) (18,475)
Accrued liabilities (5,273) 646
Income taxes payable -- 849
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,549 86,418
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (22,686) (14,526)
Proceeds from disposal of property and equipment 5 97
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (22,681) (14,429)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under notes payable to banks -- (100,000)
Borrowings of long-term debt -- 50,000
Proceeds from options exercised 5,274 1,192
Proceeds from issuance of restricted stock -- 3
Cash dividends (6,860) (7,023)
Purchase of treasury stock (6,206) --
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES (7,792) (55,828)
-------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (36) (279)
-------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,960) 15,882
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,195 10,680
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,235 $ 26,562
======== =========
</TABLE>
See notes to consolidated financial statements.
5
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THE TALBOTS, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
1. OPINION OF MANAGEMENT
With respect to the unaudited consolidated financial statements set forth
herein, it is the opinion of management of The Talbots, Inc. and its
subsidiaries (the "Company") that all adjustments, which consist only of normal
recurring adjustments, necessary to present a fair statement of the results for
such interim periods, have been included. These financial statements should be
read in conjunction with the Company's audited consolidated financial statements
for the year ended January 30, 1999, included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission. All significant
intercompany accounts and transactions have been eliminated.
The January 30, 1999 consolidated balance sheet amounts have been derived
from the Company's audited consolidated balance sheet accounts.
2. SEASONAL VARIATIONS IN BUSINESS
Due to seasonal variations in the retail industry, the results of
operations for any interim period are not necessarily indicative of the results
expected for the full fiscal year.
3. FEDERAL AND STATE INCOME TAXES
The Company has provided for income taxes based on the estimated annual
effective rate method.
4. COMPREHENSIVE INCOME
In February 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The Company's comprehensive income for the thirteen and
twenty-six weeks ended July 31, 1999 are $4,281 and $23,640, respectively, and
$1,831 and $16,818, respectively, for the thirteen and twenty-six weeks ended
August 1, 1998, which is comprised of net income and the impact of the
cumulative foreign currency translation adjustment.
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5. NET INCOME PER SHARE
The weighted average shares used in computing basic and diluted net income
per share are presented below. For the thirteen week period ended July 31, 1999
all outstanding options to purchase common stock were included in the
computation of diluted net income per share; however, for the thirteen week
period ended August 1, 1998, options to purchase 1,349,890 shares of common
stock were not included because the options' exercise prices were greater than
the average market price of the common shares. For the twenty-six week period
ended July 31, 1999 and August 1, 1998, 462,666 and 1,828,654 shares,
respectively, were not included in the computation.
For the
For the thirteen Twenty-six weeks
weeks ended ended
------------------- --------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
------------------- --------------------
Shares for computation of
basic net income per share 31,179 32,062 31,208 32,038
Effect of assumed option
exercises 378 58 206 --
------ ------ ------ ------
Shares for computation of
diluted net income per share 31,557 32,120 31,414 32,038
====== ====== ====== ======
6. SEGMENT INFORMATION
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 from the sale of the same products through its
approximately 28 distinct catalog mailings per year.
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The following is segment information for the thirteen and twenty-six weeks
ending July 31, 1999 and August 1, 1998:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------------------------------------------------------
July 31, 1999 August 1, 1998
--------------------------------- ----------------------------------
Stores Catalog Total Stores Catalog Total
<S> <C> <C> <C> <C> <C> <C>
--------------------------------- ----------------------------------
Sales to external
customers $264,154 $40,839 $304,993 $235,352 $32,335 $267,687
Direct profit 28,217 3,904 32,121 23,934 564 24,498
</TABLE>
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
------------------------------------------------------------------------
July 31, 1999 August 1, 1998
--------------------------------- ----------------------------------
Stores Catalog Total Stores Catalog Total
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to external
customers $507,604 $90,395 $597,999 $461,172 $77,990 $539,162
Direct profit 76,035 13,286 89,321 64,041 6,876 70,917
</TABLE>
The following reconciles direct profit to consolidated operating income:
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-Six Weeks
Ended Ended
--------------------- ---------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Total direct profit for reportable
segments $32,121 $24,498 $89,321 $70,917
Less: indirect expenses 24,491 20,835 48,392 41,166
------- ------- ------- -------
Consolidated operating income 7,630 3,663 40,929 29,751
======= ======= ======= =======
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
On January 31, 1999 the Company adopted Statement of Position ("SOP") No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" which 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 adoption of SOP 98-1
did not have a material effect on the Company's financial statements.
On January 31, 1999, the Company adopted SOP 98-5, "Reporting on the Costs
of Start-up Activities," which requires that start-up activities be expensed as
incurred. The adoption of SOP 98-5 did not have a material effect on the
Company's financial statements.
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In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 significantly modifies
accounting and reporting standards for derivatives and hedging activities. In
June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," deferred
the implementation for the Company until the quarter ending April 27, 2001. The
impact of SFAS No. 133 and SFAS No. 137 on the Company, if any, has not yet been
determined.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this document.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net sales of certain items in the Company's consolidated
statements of earnings for the fiscal periods shown below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Thirteen Weeks Ended Twenty-Six Weeks Ended
- ---------------------------------------------------------------------------------------------------------------------
July 31, 1999 August 1, 1998 July 31, 1999 August 1, 1998
(unaudited) (unaudited) (unaudited) (unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
- ---------------------------------------------------------------------------------------------------------------------
Cost of sales, buying and occupancy 70.9% 71.9% 64.4% 66.0%
expenses
- ---------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 26.6% 26.8% 28.7% 28.5%
expenses
- ---------------------------------------------------------------------------------------------------------------------
Operating income 2.5% 1.4% 6.8% 5.5%
- ---------------------------------------------------------------------------------------------------------------------
Interest expense, net 0.5% 0.6% 0.6% 0.7%
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 2.0% 0.8% 6.3% 4.8%
- ---------------------------------------------------------------------------------------------------------------------
Income taxes 0.8% 0.3% 2.4% 1.8%
- ---------------------------------------------------------------------------------------------------------------------
Net income 1.2% 0.5% 3.9% 2.9%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THE THIRTEEN WEEKS ENDED JULY 31, 1999 COMPARED TO THE THIRTEEN WEEKS ENDED
AUGUST 1, 1998 (SECOND QUARTER)
Net sales in the second quarter of 1999 increased by $37.3 million to
$305.0 million, or 13.9% over the second quarter of 1998. Operating income was
$7.6 million in the second quarter of 1999 compared to $3.7 million in the
second quarter of 1998, an increase of 105.4%.
Retail store sales in the second quarter of 1999 increased by $28.8 million
to $264.2 million, or 12.2%, over the second quarter of 1998. The percentage of
the Company's net sales derived from its retail stores decreased to 86.6% in the
second quarter of 1999 compared to
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87.9% in the second quarter of 1998, primarily due to strong catalog sales. The
increase in retail store sales in total dollars was attributable to an increase
of $17.4 million in comparable stores sales, or 8.3%, from the same period for
the previous year. Comparable stores are those which were open for at least one
full fiscal year. When a new Talbots Petites store, Talbots Woman store or
Talbots Accessories & Shoes store is opened adjacent to or in close proximity to
an existing Misses store which would qualify as a comparable store, such Misses
store is excluded from the computation of comparable store sales for a period of
13 months so that the performance of the full Misses assortment may be properly
compared. Also contributing to the increase in retail store sales was the three
net new stores opened in the second quarter of 1999, the 12 new stores opened in
the first quarter of 1999 and the 20 net non-comparable stores that opened in
the last two quarters of 1998.
Catalog sales in the second quarter of 1999 increased by $8.5 million, to
$40.8 million, an increase of 26.3% from the second quarter of 1998. The
percentage of the Company's net sales from its catalogs increased to 13.4% in
the second quarter of 1999 compared to 12.1% in the second quarter of 1998. The
increase in catalog sales was mainly attributable to continued strong full price
selling across all catalogs, including the new Summer Essentials book and a
strong response to the Company's June semi-annual sale book.
Because the Company sells a wide range of products which by their nature
are subject to constantly changing business strategies and competitive
positioning, it is not possible to attribute changes in retail sales or catalog
sales to specific changes in prices, changes in volume or changes in product
mix.
Cost of sales, buying and occupancy expenses decreased as a percentage of
net sales to 70.9% in the second quarter of 1999 from 71.9% in the second
quarter of 1998 due primarily to higher merchandise margins resulting from
continued strong selling of full-priced merchandise coupled with leverage
improvements in occupancy expenses.
Selling, general and administrative expenses as a percentage of net sales
decreased in the second quarter of 1999 to 26.6% compared to 26.8% in the second
quarter of 1998. Strong sales during the quarter generated additional leverage
on catalog production, store operating and store payroll expenses and was
partially offset by higher marketing expenses and higher MIS expenses relating
to the Company's Year 2000 remediation efforts.
Interest expense, net, decreased to $1.5 million in the second quarter of
1999 from $1.6 million in the second quarter of 1998 due to lower interest
rates, partially offset by slightly higher debt levels. The average total debt
level, including short-term and long-term bank borrowings, was $120.8 million in
the second quarter of 1999 compared to $117.0 million in the second quarter of
1998. The average interest rate, including interest on short-term and long-term
bank borrowings, was 6.0% in the second quarter of 1999 compared to 6.6% in the
second quarter of 1998.
The effective tax rate for the Company remained 38.5% in the second quarter
of 1999.
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THE TWENTY-SIX WEEKS ENDED JULY 31, 1999 COMPARED TO THE TWENTY-SIX WEEKS ENDED
AUGUST 1, 1998.
Net sales in the first 26 weeks of 1999 increased by $58.8 million to
$598.0 million, or 10.9%, over the first 26 weeks of 1998. Operating income was
$40.9 million in the first 26 weeks of 1999 compared to $29.8 million in the
first 26 weeks of 1998, an increase of 37.2%.
Retail store sales in the first 26 weeks of 1999 increased by $46.4
million, to $507.6 million, or 10.1%, over the first 26 weeks of 1998. The
percentage of the Company's net sales derived from its retail stores was 84.9%
in the first 26 weeks of 1999 versus 85.5% in the first 26 weeks of 1998. The
increase in retail store sales in total dollars was attributable to an increase
of $22.9 million in comparable store sales, or 5.6%, over the comparable 26 week
period in the previous year. The increase in comparable store sales was mainly
due to strong customer acceptance of the Company's spring assortment, strong
response to its June semi-annual sale and strong performance in its newer
concepts including Talbots Kids and Talbots Accessories and Shoes. Additionally,
the increase in retail store sales was attributable to the 15 net new stores
opened in the first 26 weeks of 1999 and the 20 net non-comparable stores that
opened in the last 26 weeks of 1998.
Catalog sales in the first 26 weeks of 1999 increased by $12.4 million, to
$90.4 million, or 15.9% compared to the first 26 weeks of 1998. The increase in
catalog sales was mainly attributable to continued strong full price selling
across all catalogs, including the Company's new Summer Essentials book, its
Talbots Woman books and a strong response to its June semi-annual sale book.
Cost of sales, buying and occupancy expenses decreased as a percentage of
net sales to 64.4% in the first 26 weeks of 1999 from 66.0% in the first 26
weeks of 1998. The decrease in cost of sales, buying and occupancy expenses as a
percentage of sales is due primarily to higher merchandise gross margin and
increased leverage on store occupancy expenses. The higher merchandise gross
margin was the result of stronger full-price selling for the 1999 period
compared to 1998.
Selling, general and administrative expenses increased as a percentage of
net sales to 28.7% in the first 26 weeks of 1999 from 28.5% in the first 26
weeks of 1998 due to higher marketing expenses related to the Company's
advertising campaign and higher MIS expenses relating to its year 2000
remediation efforts. The increase was substantially offset by lower catalog
production costs and lower store operating expenses as a percent of sales.
Interest expense, net, decreased by $0.7 million, to $3.3 million for the
first 26 weeks of 1999 from the first 26 weeks of 1998 due to lower average debt
levels and interest rates. The average total debt level, including short-term
and long-term bank borrowings, was $120.5 million in the first 26 weeks of 1999
compared to $140.0 million in the first 26 weeks of 1998. The average interest
rate, including interest on short-term and long-term bank borrowings, was 6.1%
in the first 26 weeks of 1999 compared to 6.5% in the first 26 weeks of 1998.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from
operating activities and a line-of-credit facility from five banks, with maximum
available short-term borrowings of $125.0 million. At July 31, 1999 and at
August 1, 1998 the Company had no outstanding borrowings under this facility.
Additionally, the Company has a $100.0 million revolving credit facility with
four banks. At July 31, 1999 and August 1, 1998, the Company's borrowings under
this revolving credit facility were $100.0 million. The Company's working
capital needs are typically at their lowest in the spring and peak during the
fall selling season.
In the first 26 weeks of 1999, cash and cash equivalents decreased $2.0
million compared to an increase of $15.9 million for the same period in 1998.
Contributing to the decrease in cash and cash equivalents were increases in
capital expenditures for store expansion and renovations, significant MIS
projects including Year 2000 remediation efforts, the expansion of the Hingham,
Massachusetts corporate offices, merchandise inventory purchases and the
repurchase of common stock under the Company's stock repurchase program.
During the first quarter of 1999, the Company repurchased $6.2 million, or
241,879 shares of its common stock under its stock repurchase program. This
completed the $40.0 million buyback authorized by the Board of Directors in May
1997 under which a total of 1.7 million shares were repurchased. On May 27,
1999, the Company's Board of Directors approved a fourth stock repurchase
program, which authorizes the Company to spend up to an additional $20.0 million
to purchase shares of its common stock from time to time over a two year period,
including repurchases from JUSCO (U.S.A.), Inc., its 62.2% majority owner, on a
pro rata basis consistent with the earlier repurchase programs. No purchases
were made under this program during the thirteen weeks ending July 31, 1999.
Capital expenditures for the first 26 weeks of fiscal 1999 were $22.7
million compared to $14.5 million in fiscal 1998. The Company used approximately
$12.3 million and $10.2 million in the first 26 weeks of fiscal 1999 and 1998,
respectively, for opening new stores and expanding and renovating existing
stores. For the remainder of the fiscal year, the Company currently anticipates
approximately $32.3 million in additional capital expenditures for the opening
of new stores and expanding and renovating existing stores, to enhance the
Company's computer information systems and to continue expansions of the
Company's Hingham Massachusetts and Lakeville Massachusetts facilities.* The
actual amount of such capital expenditures will depend on the number and type of
stores and facilities being opened, expanded and renovated, and the schedule of
its capital expenditure activity during the remainder of fiscal 1999.
The Company's primary ongoing cash requirements through the next twelve
months are expected to be for the financing of working capital buildups during
peak selling seasons, capital expenditures for new stores and the expansion and
renovation of existing stores and facilities, expenditures related to the
execution of the Company's Year 2000 remediation plan and for the payment of any
dividends that may be declared from time to time. The Company anticipates that
cash from operating activities and from its borrowing facilities will be
sufficient to meet its currently expected cash requirements for the foreseeable
future.*
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The payment of dividends and the amount of any dividends will be determined
by the Board of Directors and will depend on many factors, including earnings,
operations, financial condition, capital requirements and general business
outlook. On August 12, 1999, the Company's Board of Directors approved an
increase in its quarterly dividend to $0.12 per share payable on September 20,
1999 to shareholders of record as of September 7, 1999.
YEAR 2000
Most computer programs have historically been written using two digits
rather than four to define the applicable year. These programs were written
without considering the impact of the upcoming change in the century and may
experience problems handling dates beyond the year 1999. This could cause
computer applications to fail or to create erroneous results unless corrective
measures are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K")
issue could have a material adverse impact on the Company's business, operations
and financial condition in the future.*
The Company has conducted a comprehensive review of (1) its information
systems software and hardware; (2) its facilities and distribution equipment;
and (3) its third party relationships to identify material systems that could be
affected by the Y2K issue and has developed an implementation plan intended to
address this issue.
The Company has adopted a five-phase Y2K program consisting of:
Phase I: Identification and ranking of the components of the Company's
systems, equipment and material suppliers and vendors that may be
vulnerable to Y2K problems
Phase II: Assessment of items identified in Phase I
Phase III: Remediation or replacement of non-compliant internal systems and
components and determination of solutions for non-compliant
suppliers and vendors
Phase IV: Testing of systems and components following remediation
Phase V: Developing contingency plans to address the most reasonably
likely worst case Y2K scenarios
The identification, 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 the fall of 1999. Subsequent to preliminary
testing, the Company expects to continue periodic testing for new installations,
versions or changes. Compliance has been performed using both internal and
external resources.
In addition to Y2K remediation of the Company's internal systems and
equipment, the
14
<PAGE> 15
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 substantially completed. 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 conversion 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 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 the fall of 1999.
Based on current information, the total estimated cost to address Y2K is
approximately $12.0 million; of this, approximately $6.0 million will be charged
to expense as incurred.* Approximately $9.6 million has been incurred to date,
of which $4.9 million was charged to expense as incurred. All costs incurred to
date were budgeted expenditures and were funded 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 the Year 2000 program. The Company's cost estimates do not include
internal personnel costs (primarily salaries and benefits) which the Company
does not 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.
- --------------------------------------------------------------------------------
*The foregoing contains forward-looking information within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements may be
identified by an "asterisk" ("*") or such forward-looking terminology as
"expect","look", "believe", "anticipate", "plan", "may", "will" or similar
statements or variations of such terms. Such forward-looking statements involve
certain risks and uncertainties including levels of sales, effectiveness of the
Company's brand awareness and marketing programs, store traffic, acceptance of
Talbots 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 by Y2K ready, and in each case,
actual results may differ materially from such forward-looking information.
Certain other factors that may cause actual results to differ from such
forward-looking statements are included in the Company's Current Report on Form
8-K (dated October 30, 1996) filed with the Securities and Exchange Commission
(a copy of which may also be obtained from the Company at 781-741-4500) as well
as other periodic reports filed by the Company with the Securities and Exchange
Commission and you are urged to consider such factors. The Company assumes no
obligation for updating any such forward-looking statements.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 27, 1999, the Company held its Annual Meeting of Shareholders
(the "Annual Meeting"). At the Annual Meeting, the following persons were
elected to serve as directors of the Company: Takuya Okada, Arnold B. Zetcher,
Eiji Akiyama, Elizabeth T. Kennan, H. James Metcher, Motoya Okada, Isao Tsuruta
and Mark H. Willes. There are no other directors of the Company.
At the Annual Meeting, no fewer than 29,343,429 votes were cast in
favor of, and no more than 184,929 were withheld with respect to, the proposal
to elect the above-listed persons as directors of the Company. See Schedule of
Votes attached hereto and made a part hereof for a separate tabulation with
respect to each nominee for office.
At the Annual Meeting, on a proposal to ratify the appointment of
Deloitte & Touche LLP to serve as independent auditors of the Company for the
1999 fiscal year, 29,384,287 votes were cast in favor of such proposal, 35,072
votes were cast against and 108,998 votes abstained.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 The computation of weighted average number of shares
outstanding used in determining primary and fully diluted
earnings per share is incorporated by reference to footnote
5 "Net Income Per Share" on page 7 of this Form 10-Q.
27 Financial Data Schedule (for electronic filing only)
(b) REPORTS ON FORM 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TALBOTS, INC.
Dated: September 13, 1999 By: /s/ Edward L. Larsen
--------------------------------------
Edward L. Larsen
Duly authorized officer and Senior
Vice President of Finance, Chief
Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
17
<PAGE> 18
ATTACHMENT TO REPORT ON FORM 10-Q
SCHEDULE OF VOTES
Total Votes For Total Votes Withheld
Each Director From Each Director
-------------------------------------------
Takuya Okada 29,343,474 184,884
Arnold B. Zetcher 29,344,105 184,253
Eiji Akiyama 29,343,547 184,811
Elizabeth T. Kennan 29,343,650 184,708
H. James Metscher 29,344,865 183,493
Motoya Okada 29,343,748 184,610
Isao Tsuruta 29,343,429 184,929
Mark H. Willes 29,344,670 183,688
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWENTY-SIX WEEKS ENDED
JULY 31, 1999 AND THE BALANCE SHEETS AS OF JULY 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 18,235
<SECURITIES> 0
<RECEIVABLES> 101,495
<ALLOWANCES> 0
<INVENTORY> 173,068
<CURRENT-ASSETS> 341,655
<PP&E> 192,259
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<TOTAL-ASSETS> 660,150
<CURRENT-LIABILITIES> 122,288
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0
0
<COMMON> 356
<OTHER-SE> 419,717
<TOTAL-LIABILITY-AND-EQUITY> 660,150
<SALES> 597,999
<TOTAL-REVENUES> 597,999
<CGS> 385,228
<TOTAL-COSTS> 557,070
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,306
<INCOME-PRETAX> 37,623
<INCOME-TAX> 14,485
<INCOME-CONTINUING> 23,138
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