<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 OCTOBER 28, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________________ TO _____________________
Commission file number: 1-12552
THE TALBOTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 41-1111318
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Beal Street, Hingham, Massachusetts 02043
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(781) 749-7600
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
CLASS December 6, 2000
----- -----------------
Common Stock, $0.01 par value 62,869,696
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INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Statements of Earnings for the Thirteen
and Thirty-Nine Weeks Ended October 28, 2000 and
October 30, 1999..........................................3
Consolidated Balance Sheets as of October 28, 2000,
January 29, 2000 and October 30, 1999.....................4
Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended October 28, 2000 and
October 30, 1999..........................................5
Notes to Consolidated Financial Statements................6-9
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................10-14
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K..............................15
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE TALBOTS, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 AND
OCTOBER 30, 1999
(Amounts in thousands except per share data)
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------- -------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $391,770 $317,347 $1,106,126 $915,346
COSTS AND EXPENSES
COST OF SALES, BUYING AND OCCUPANCY 210,227 185,735 639,656 570,963
SELLING, GENERAL AND ADMINISTRATIVE 123,799 97,371 329,419 269,213
-------- -------- ---------- --------
OPERATING INCOME 57,744 34,241 137,051 75,170
INTEREST EXPENSE - NET 982 1,682 3,425 4,988
-------- -------- ---------- --------
INCOME BEFORE TAXES 56,762 32,559 133,626 70,182
INCOME TAX EXPENSE 21,853 12,535 51,446 27,020
-------- -------- ---------- --------
NET INCOME $ 34,909 $ 20,024 $ 82,180 $ 43,162
======== ======== ========== ========
NET INCOME PER SHARE
BASIC $ 0.56 $ 0.32 $ 1.33 $ 0.69
======== ======== ========== ========
ASSUMING DILUTION $ 0.54 $ 0.31 $ 1.29 $ 0.68
======== ======== ========== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (IN THOUSANDS)
BASIC 62,156 62,716 61,588 62,516
======== ======== ========== ========
ASSUMING DILUTION 64,506 63,594 63,666 63,028
======== ======== ========== ========
CASH DIVIDENDS PER SHARE $ 0.07 $ 0.06 $ 0.20 $ 0.17
======== ======== ========== ========
</TABLE>
See notes to consolidated financial statements.
3
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THE TALBOTS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
OCTOBER 28, 2000, JANUARY 29, 2000 AND OCTOBER 30, 1999
(Dollar amounts in thousands)
--------------------------------------------------------------------------------
OCTOBER 28, JANUARY 29, OCTOBER 30,
2000 2000 1999
----------- ----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 53,571 $ 22,001 $ 11,585
Customer accounts receivable - net 135,569 116,737 119,896
Merchandise inventories 216,218 183,614 211,934
Deferred catalog costs 8,512 8,360 7,898
Due from affiliates 7,420 8,445 8,972
Deferred income taxes 10,590 9,516 7,626
Prepaid and other current assets 34,892 21,113 24,205
--------- --------- ---------
TOTAL CURRENT ASSETS 466,772 369,786 392,116
PROPERTY AND EQUIPMENT - NET 220,775 203,206 197,915
GOODWILL - NET 37,193 38,201 38,537
TRADEMARKS - NET 78,864 80,652 81,248
DEFERRED INCOME TAXES 7,009 2,059 3,914
--------- --------- ---------
TOTAL ASSETS $ 810,613 $ 693,904 $ 713,730
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks $ -- $ -- $ 15,000
Accounts payable 58,938 56,604 53,910
Accrued liabilities 111,438 87,327 82,202
--------- --------- ---------
TOTAL CURRENT LIABILITIES 170,376 143,931 151,112
LONG-TERM DEBT 100,000 100,000 100,000
DEFERRED RENT UNDER LEASE COMMITMENTS 19,639 18,641 18,232
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value;
100,000,000 authorized;
73,845,176 shares,
72,015,946 shares and
71,896,680 shares issued,
respectively, and 62,817,162
shares, 61,884,502 shares
and 63,053,324 shares
outstanding, respectively 738 720 718
Additional paid-in capital 351,737 314,378 312,182
Retained earnings 336,185 266,390 254,869
Accumulated other comprehensive
income (loss) (3,990) (2,037) (1,924)
Restricted stock awards (1,547) (2,140) (2,311)
Treasury stock, at cost; 11,028,014
shares, 10,131,444 shares
and 8,843,356 shares, respectively (162,525) (145,979) (119,148)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 520,598 431,332 444,386
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 810,613 $ 693,904 $ 713,730
========= ========= =========
See notes to consolidated financial statements.
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THE TALBOTS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 AND OCTOBER 30, 1999
(In thousands)
--------------------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED
-----------------------------
OCTOBER 28, OCTOBER 30,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 82,180 $ 43,162
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 35,433 31,919
Deferred rent 1,033 1,622
Net non-cash compensation activity 531 760
Loss on disposal of property and equipment 1,010 1,420
Deferred income taxes
(6,084) 668
Changes in current assets and liabilities:
Customer accounts receivable (18,907) (12,259)
Merchandise inventories (33,003) (38,769)
Deferred catalog costs (152) 502
Due from affiliates 1,025 (2,319)
Tax benefit from options exercised 11,691 3,932
Prepaid and other current assets (13,899) (2,986)
Accounts payable 2,085 (14,171)
Accrued liabilities 24,403 7,696
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 87,346 21,177
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (52,348) (38,891)
Proceeds from disposal of property and equipment 500 30
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (51,848) (38,861)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances under notes payable to banks -- 15,000
Proceeds from options exercised 25,557 14,048
Cash dividends (12,385) (10,612)
Purchase of treasury stock (16,372) (9,485)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (3,200) 8,951
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (728) 123
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 31,570 (8,610)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,001 20,195
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 53,571 $ 11,585
======== ========
See notes to consolidated financial statements.
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THE TALBOTS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
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 fiscal year ended January 29,
2000, 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 in consolidation.
On October 10, 2000, the Board of Directors authorized a two-for-one
stock split of its common stock. The stock split was effected by issuing
one additional share of common stock for each outstanding share of common
stock and each treasury share of common stock. The stock split was
effective as of November 7, 2000 to shareholders of record on October 25,
2000. All historic share information contained herein has been adjusted to
reflect the impact of the stock split.
The January 29, 2000 consolidated balance sheet has been derived from
the Company's audited consolidated balance sheet.
Certain prior year amounts have been reclassified to conform to
current year classifications.
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.
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4. COMPREHENSIVE INCOME
The following is the Company's comprehensive income for the periods
ended October 28, 2000 and October 30, 1999:
<TABLE>
<CAPTION>
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
-------------------------- --------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $34,909 $20,024 $82,180 $43,162
Other comprehensive income:
Cumulative foreign currency
translation adjustment (1,070) 5 (1,953) 507
------- ------- ------- -------
Comprehensive income $33,839 $20,029 $80,227 $43,669
======= ======= ======= =======
</TABLE>
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
October 28, 2000, all outstanding options to purchase common stock were
included in the computation of diluted net income per share. For the
thirteen week period ended October 30, 1999, options to purchase 21,000
shares of common stock were not included in the computation of diluted net
income per share because the options' exercise prices were greater than the
average market price of the common shares. For the thirty-nine week periods
ended October 28, 2000 and October 30, 1999, 123,000 and 716,000 shares,
respectively, were not included in the computation of diluted net income
per share.
<TABLE>
<CAPTION>
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
-------------------------- --------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Shares for computation of
basic net income per share 62,156 62,716 61,588 62,516
Effect of stock compensation
plans 2,350 878 2,078 512
------ ------ ------ ------
Shares for computation of
diluted net income per share 64,506 63,594 63,666 63,028
====== ====== ====== ======
</TABLE>
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
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<PAGE> 8
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 and 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 29 distinct catalog mailings
per year and through its e-commerce site at www.talbots.com.
The following is the Stores Segment and Catalog Segment information for the
thirteen and thirty-nine weeks ended October 28, 2000 and October 30, 1999:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------------------------------------------------------
October 28, 2000 October 30, 1999
------------------------------ ------------------------------
Stores Catalog Total Stores Catalog Total
------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Sales to external
customers $331,350 $ 60,420 $391,770 $271,404 $ 45,943 $317,347
Direct profit 76,407 14,433 90,840 51,086 7,707 58,793
</TABLE>
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
------------------------------------------------------------------------
October 28, 2000 October 30, 1999
------------------------------ ------------------------------
Stores Catalog Total Stores Catalog Total
------ ------- ----- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Sales to external
customers $938,250 $167,876 $1,106,126 $779,008 $136,338 $915,346
Direct profit 192,760 32,890 225,650 128,706 19,357 148,063
</TABLE>
The following reconciles direct profit to consolidated operating income for
the thirteen and thirty-nine weeks ended October 28, 2000 and October 30,
1999:
<TABLE>
<CAPTION>
Thirteen Thirty-Nine
Weeks Ended Weeks Ended
------------------------------ -------------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total direct profit for reportable
segments $ 90,840 $ 58,793 $225,650 $148,063
Less: indirect expenses 33,096 24,552 88,599 72,893
-------- -------- -------- --------
Consolidated operating income $ 57,744 $ 34,241 $137,051 $ 75,170
======== ======== ======== ========
</TABLE>
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7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133". This Statement defers the
effective date for SFAS No. 133 for all fiscal quarters of all fiscal years
beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities". SFAS No. 138 amends the accounting and reporting standards of
SFAS No. 133 for certain derivatives and hedging activities. These
statements are not expected to have a material impact on the Company's
consolidated financial statements.
In September 2000, the Emerging Issues Task Force ("EITF") reached a
final consensus on EITF Issue No. 00-10, "Accounting for Shipping and
Handling Fees and Costs". The consensus stated that a seller of goods
should classify amounts billed to the customer for shipping and handling as
revenue and the costs incurred by the seller for performing such services
as an element of expense. The consensus should be applied in the fourth
quarter of the fiscal year beginning after December 15, 1999 with all prior
periods reclassified to comply with the guidelines in the consensus. The
Company is currently evaluating the impact of this issue on its financial
statements.
9
<PAGE> 10
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 Thirty-Nine Weeks Ended
-----------------------------------------------------------------------------------------------------------------
October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999
(unaudited) (unaudited) (unaudited) (unaudited)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
-----------------------------------------------------------------------------------------------------------------
Cost of sales, buying and occupancy
expenses 53.7% 58.5% 57.8% 62.4%
-----------------------------------------------------------------------------------------------------------------
Selling, general and administrative
expenses 31.6% 30.7% 29.8% 29.4%
-----------------------------------------------------------------------------------------------------------------
Operating income 14.7% 10.8% 12.4% 8.2%
-----------------------------------------------------------------------------------------------------------------
Interest expense, net 0.3% 0.5% 0.3% 0.5%
-----------------------------------------------------------------------------------------------------------------
Income before income taxes 14.5% 10.3% 12.1% 7.7%
-----------------------------------------------------------------------------------------------------------------
Income taxes 5.6% 4.0% 4.7% 3.0%
-----------------------------------------------------------------------------------------------------------------
Net income 8.9% 6.3% 7.4% 4.7%
=================================================================================================================
</TABLE>
THE THIRTEEN WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THE THIRTEEN WEEKS ENDED
OCTOBER 30, 1999 (THIRD QUARTER)
Net sales in the third quarter of 2000 increased by $74.4 million to $391.7
million, or 23.4% over the third quarter of 1999. Operating income was $57.7
million in the third quarter of 2000 compared to $34.2 million in the third
quarter of 1999, an increase of 68.7%.
Retail store sales in the third quarter of 2000 increased by $60.0 million
to $331.4 million, or 22.1%, over the third quarter of 1999. The percentage of
the Company's net sales derived from its retail stores decreased to 84.6% in the
third quarter of 2000 compared to 85.5% in the third quarter of
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1999. The decrease in retail store sales, as a percent of total sales, was
attributable to strong catalog sales in the third quarter. Store sales, in total
dollars, increased during the quarter due to the 22 net new stores opened in the
third quarter of 2000, the nine net new stores opened in the first two quarters
of 2000, the four net non-comparable stores that opened in the fourth quarter of
1999 and an increase of $49.3 million in comparable stores sales, or 21.0%, over
the same period last 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 Talbots Misses store which would qualify as a
comparable store, such Misses store is excluded from the computation of
comparable store sales for a period of 13 months so that the performance of the
full Misses assortment may be properly compared.
Catalog sales in the third quarter of 2000 increased by $14.4 million, to
$60.3 million, an increase of 31.4% from the third quarter of 1999. Included in
catalog sales are sales from the Company's e-commerce business which was
launched in November 1999. The percentage of the Company's net sales from its
catalogs increased to 15.4% in the third quarter of 2000 compared to 14.5% in
the third quarter of 1999 primarily due to catalog sales increasing at a greater
rate than store sales. The increase in catalog sales is attributable to strong
customer demand and continued strong full-price selling across all major
catalogs and through the Company's internet website.
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 53.7% in the third quarter of 2000 from 58.5% in the third quarter
of 1999 due to continued margin improvements attributable to strong full price
selling coupled with leverage improvements in store occupancy expenses.
Selling, general and administrative expenses as a percentage of net sales
increased in the third quarter of 2000 to 31.6% compared to 30.7% in the third
quarter of 1999. The increase was mainly due to the Company's increased
investment in marketing programs to enhance brand recognition coupled with an
increase in store maintenance expenses. These increases were partially offset by
increased leverage on other store operating expenses and catalog expenses.
Interest expense, net, decreased to $1.0 million in the third quarter of
2000 from $1.7 million in the third quarter of 1999 due to stronger cash flows,
enabling the Company to reduce its borrowing in a higher interest rate
environment. The average total debt level, including short-term and long-term
bank borrowings, was $100.0 million in the third quarter of 2000, consisting
solely of long-term borrowings, compared to $123.5 million in the third quarter
of 1999, consisting of both long-term and short-term borrowings. The average
interest rate, including interest on short-term and long-term bank borrowings,
was 7.5% in the third quarter of 2000 compared to 6.3% in the third quarter of
1999.
The effective tax rate for the Company remained at 38.5% in the third
quarter of 2000.
11
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THE THIRTY-NINE WEEKS ENDED OCTOBER 28, 2000 COMPARED TO THE THIRTY-NINE WEEKS
ENDED OCTOBER 30, 1999.
Net sales in the first 39 weeks of 2000 increased by $190.8 million to
$1,106.1 million, or 20.8%, over the first 39 weeks of 1999. Operating income
was $137.1 million in the first 39 weeks of 2000 compared to $75.2 million in
the first 39 weeks of 1999, an increase of 82.3%.
Retail store sales in the first 39 weeks of 2000 increased by $159.3
million, to $938.3 million, or 20.4%, over the first 39 weeks of 1999. The
percentage of the Company's net sales derived from its retail stores decreased
to 84.8% in the first 39 weeks of 2000 versus 85.1% in the first 39 weeks of
1999. The decrease in retail store sales, as a percent of total sales, was
attributable to strong catalog sales. Store sales, in total dollars, increased
due to the 31 net new stores opened in the first 39 weeks of 2000, the four net
non-comparable stores that opened in the fourth quarter of 1999 and an increase
of $120.8 million in comparable stores sales, or 17.6%, over the same period
last year.
Catalog sales in the first 39 weeks of 2000 increased by $31.5 million, to
$167.8 million, or 23.1% compared to the first 39 weeks of 1999. Included in
catalog sales are sales from the Company's e-commerce business which was
launched in November 1999. The percentage of the Company's net sales from its
catalogs increased to 15.2% for the first 39 weeks of 2000 compared to 14.9% for
the first 39 weeks of 1999 due to continued strong selling across all major
full-price and sale catalogs.
Cost of sales, buying and occupancy expenses decreased as a percentage of
net sales to 57.8% in the first 39 weeks of 2000 from 62.4% in the first 39
weeks of 1999. The decrease in cost of sales, buying and occupancy expenses as a
percentage of sales is primarily due to an improvement in gross margin
attributable to strong selling of full-priced merchandise coupled with continued
leverage improvements in store occupancy expenses.
Selling, general and administrative expenses remained essentially the same
as a percentage of net sales at 29.8% in the first 39 weeks of 2000 compared to
29.4% in the first 39 weeks of 1999. Increases in marketing and store
maintenance expenses were offset with continued leverage improvements on other
store operating expenses and catalog expenses.
Interest expense, net, decreased by $1.6 million to $3.4 million for the
first 39 weeks of 2000 compared to the first 39 weeks of 1999 due to lower
average debt levels resulting from strong cash flows and partially offset by
higher average borrowing rates. The average total debt level, including
short-term and long-term bank borrowings, was $104.5 million in the first 39
weeks of 2000 compared to $121.5 million in the first 39 weeks of 1999. The
average interest rate, including interest on short-term and long-term bank
borrowings, was 7.2% in the first 39 weeks of 2000 compared to 6.1% in the first
39 weeks of 1999.
The effective tax rate for the Company remained at 38.5% for the first 39
weeks of 2000.
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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 October 28, 2000, the
Company had no amounts outstanding under this facility and at October 30, 1999,
the Company had $15.0 million outstanding under this facility. Additionally, the
Company has a revolving credit facility with four banks. At October 28, 2000 and
October 30, 1999, the Company's borrowings under this facility was $100.0
million. The Company's working capital needs have typically been at their lowest
in the spring and peak during the fall selling season. However, due to strong
sales in fiscal 2000, the Company has eliminated the need to borrow funds on a
short-term basis during the fall season.
In the first 39 weeks of 2000, cash and cash equivalents increased $31.6
million compared to a decrease of $8.6 million for the same period in 1999. The
increase in cash and cash equivalents was primarily due to an increase in net
cash provided by operating activities of $66.2 million which included an
increase in net income of $39.0 million. This increase in cash flows from
operations allowed the Company to increase its investment in property and
equipment, increase its quarterly dividend and repurchase common stock under the
Company's stock repurchase program.
During the first 39 weeks of 2000, the Company repurchased $16.4 million,
or 873,170 shares, of its common stock under its stock repurchase program. A
portion of this repurchase activity completed the $20.0 million buyback
authorized by the Company's Board of Directors on January 20, 2000 under which a
total of 1,195,020 shares were repurchased. On May 25, 2000, the Board of
Directors approved another extension of the stock repurchase program which
allows the Company to purchase an additional $20.0 million in stock from time to
time over a two year period. As of October 28, 2000, the Company has repurchased
$6.5 million, or 255,950 shares, under this authorization. No purchases were
made under this program during the thirteen weeks ending October 28, 2000.
Capital expenditures for the first 39 weeks of fiscal 2000 were $52.3
million compared to $38.9 million in fiscal 1999. The Company used approximately
$29.4 million and $21.7 million in the first 39 weeks of fiscal 2000 and 1999,
respectively, for opening new stores and expanding and renovating existing
stores. During the first 39 weeks of fiscal 2000, the Company spent $16.1
million on the expansion of the Company's Hingham and Lakeville, Massachusetts
corporate facilities compared to $7.5 million spent in the same period in fiscal
1999. For the remainder of the fiscal year, the Company currently anticipates
approximately $24.7 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 and Lakeville 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 2000.
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The Company's primary ongoing cash requirements through the end of fiscal
2000 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, the purchase of treasury shares
and the payment of any dividends that may be declared from time to time. The
Company anticipates that cash from operating activities and from its borrowing
facilities will be sufficient to meet its cash requirements for the foreseeable
future.*
The payment of dividends and the amount of any dividends, if any, will be
determined by the Board of Directors and will depend on many factors, including
earnings, operations, financial condition, capital requirements and general
business outlook. On November 9, 2000, the Company's Board of Directors approved
a quarterly dividend of $0.07 per share payable on December 18, 2000 to
shareholders of record as of December 4, 2000.
During the second quarter 2000, the Company established a credit card bank,
Talbots Classics National Bank, as a wholly owned subsidiary of the Company, and
was issued a national banking charter for this new subsidiary. This new
structure allows the Company to conform all of its domestic Talbots charge
accounts to a consistent rate structure reducing the administrative burden of
managing consumer compliance laws in multiple states. To facilitate this new
structure and position the Company for future financing opportunities, Talbots
also formed a second subsidiary, Talbots Classics Finance Company, Inc., to
administer the credit card portfolio.
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The foregoing contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements were made a
number of times and may be identified by an "asterisk" ("*") or such
forward-looking terminology as "expect," "look," "believe," "may," "will,"
"intend," "plan," "target," "goal" and similar statements or variations of such
terms. Such forward-looking statements are based on our current expectations,
assumptions, estimates and projections about our Company and involve certain
significant risks and uncertainties including levels of sales, effectiveness of
the Company's brand awareness and marketing programs, effectiveness and
profitability of new concepts, effectiveness of its new e-commerce site and the
overall effect of e-commerce on Talbots business, store traffic, acceptance of
Talbots fashions, appropriate balance of merchandise offerings, and timing and
levels of markdowns. These and other important factors that may cause actual
results to differ materially 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. You are urged to consider
all such factors. In light of the uncertainty inherent in such forward-looking
statements, you should not consider their inclusion to be a representation that
such forward-looking matters will be achieved. The Company assumes no obligation
for updating any such forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting such
forward-looking statements.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 The computation of weighted average number of
shares outstanding used in determining
basic and 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
The Company filed a Current Report on Form 8-K on
October 11, 2000 pursuant to which various agreements and
documents were filed by the Company, as identified therein.
The Company filed a Current Report on Form 8-K on
November 1, 2000 announcing the availability of a
prerecorded October sales release call on the Talbots
website or by telephone.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TALBOTS, INC.
Dated: December 11, 2000 By: /s/ Edward L. Larsen
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Edward L. Larsen
Duly authorized officer and Senior
Vice President of Finance, Chief
Financial Officer, and Treasurer
(Principal Financial and Accounting
Officer)
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