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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 APRIL 29, 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
incorporated 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 June 6, 2000
----------------------------- -----------------
Common Stock, $0.01 par value 30,950,036
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INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Consolidated Statements of Earnings for the Thirteen Weeks Ended
April 29, 2000 and May 1, 1999................................................3
Consolidated Balance Sheets as of April 29, 2000, January 29, 2000 and
May 1, 1999...................................................................4
Consolidated Statements of Cash Flows for the Thirteen Weeks Ended
April 29, 2000 and May 1, 1999................................................5
Notes to Consolidated Financial Statements..........................................6-8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................................9-12
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K...............................................................13
</TABLE>
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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 WEEKS ENDED APRIL 29, 2000 AND MAY 1, 1999
(Amounts in thousands except per share data)
--------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED
---------------------------
APRIL 29, MAY 1,
2000 1999
--------- --------
NET SALES $357,759 $293,006
COSTS AND EXPENSES
Cost of sales, buying and occupancy 197,320 168,881
Selling, general and administrative 105,785 90,826
-------- --------
OPERATING INCOME 54,654 33,299
INTEREST EXPENSE - net 1,559 1,790
-------- --------
INCOME BEFORE TAXES 53,095 31,509
INCOME TAXES 20,442 12,131
-------- --------
NET INCOME $ 32,653 $ 19,378
======== ========
NET INCOME PER SHARE
Basic $ 1.07 $ 0.62
======== ========
Assuming Dilution $ 1.04 $ 0.62
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (in thousands)
Basic 30,567 31,238
======== ========
Assuming Dilution 31,412 31,341
======== ========
CASH DIVIDENDS PER SHARE $ 0.12 $ 0.11
======== ========
See notes to consolidated financial statements.
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THE TALBOTS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
APRIL 29, 2000, JANUARY 29, 2000 AND MAY 1, 1999
(Dollar amounts in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 29, JANUARY 29, MAY 1,
2000 2000 1999
--------- ----------- ---------
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
---------------
Cash and cash equivalents $ 48,299 $ 22,001 $ 19,014
Customer accounts receivable-net 123,746 116,737 114,378
Merchandise inventories 189,879 183,614 187,484
Deferred catalog costs 5,158 8,360 4,348
Due from affiliates 8,023 8,445 9,901
Deferred income taxes 9,789 9,516 7,418
Prepaid and other current assets 19,369 21,113 22,272
--------- --------- ---------
TOTAL CURRENT ASSETS 404,263 369,786 364,815
PROPERTY AND EQUIPMENT-NET 205,647 203,206 190,676
GOODWILL-NET 37,864 38,201 39,209
TRADEMARKS-NET 80,056 80,652 82,440
DEFERRED INCOME TAXES 2,296 2,059 4,380
--------- --------- ---------
TOTAL ASSETS $ 730,126 $ 693,904 $ 681,520
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
--------------------
Notes payable to banks $ -- $ -- $ 30,000
Accounts payable 44,377 56,604 39,303
Accrued liabilities 91,352 87,327 70,758
Income taxes payable 15,868 -- 9,864
--------- --------- ---------
TOTAL CURRENT LIABILITIES 151,597 143,931 149,925
LONG-TERM DEBT 100,000 100,000 100,000
DEFERRED RENT UNDER LEASE COMMITMENTS 19,000 18,641 17,179
STOCKHOLDERS' EQUITY:
---------------------
Common stock, $0.01 par value; 40,000,000 authorized;
36,260,896 shares, 36,007,973 shares and 35,425,399
shares issued, respectively, and 30,886,564 shares,
30,942,251 shares and 31,086,878 shares outstanding,
respectively 363 360 354
Additional paid-in capital 324,338 314,738 296,777
Retained earnings 295,366 266,390 238,258
Accumulated other comprehensive income (loss) (2,712) (2,037) (2,450)
Restricted stock awards (1,968) (2,140) (2,654)
Treasury stock, at cost; 5,374,332 shares, 5,065,722 shares
and 4,338,521 shares, respectively (155,858) (145,979) (115,869)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 459,529 431,332 414,416
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 730,126 $ 693,904 $ 681,520
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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THE TALBOTS, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED APRIL 29, 2000 AND MAY 1, 1999
(In thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------
APRIL 29, MAY 1,
2000 1999
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------
<S> <C> <C>
Net income $ 32,653 $ 19,378
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,394 10,568
Deferred rent 376 571
Net non-cash compensation activity 259 418
Loss on disposal of property and equipment 53 177
Deferred income taxes (532) 400
Changes in current assets and liabilities:
Customer accounts receivable (7,037) (6,743)
Merchandise inventories (6,440) (14,300)
Deferred catalog costs 3,202 4,052
Due from affiliates 422 (3,248)
Prepaid and other current assets 4,261 (1,037)
Accounts payable (12,270) (28,774)
Accrued liabilities 4,166 (3,713)
Income taxes payable 15,868 9,864
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 46,375 (12,387)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
-------------------------------------
Additions to property and equipment (13,222) (10,973)
Proceeds from disposal of property and equipment -- 3
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (13,222) (10,970)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
-------------------------------------
Borrowings under notes payable to banks -- 30,000
Proceeds from options exercised 6,883 1,718
Cash dividend (3,677) (3,438)
Purchase of treasury stock (9,879) (6,206)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (6,673) 22,074
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (182) 102
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,298 (1,181)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,001 20,195
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 48,299 $ 19,014
======== ========
</TABLE>
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 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.
The January 29, 2000 consolidated balance sheet has been derived from
the Company's audited consolidated balance sheet.
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
The following is the Company's comprehensive income for the periods
ended April 29, 2000 and May 1, 1999:
<TABLE>
<CAPTION>
For the 13 weeks ended
---------------------------------------
April 29, 2000 May 1, 1999
---------------------------------------
<S> <C> <C>
Net Income $32,653 $19,378
Other comprehensive income:
Cumulative foreign currency translation adjustment (675) (19)
---------------------------------------
Comprehensive income $31,978 $19,359
=======================================
</TABLE>
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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. Options to purchase 10,500 and 1,237,164
shares of common stock were outstanding during the 13 week periods ending April
29, 2000 and May 1, 1999, 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>
For the 13 weeks ended
---------------------------------------
April 29, 2000 May 1, 1999
---------------------------------------
<S> <C> <C>
Shares for computation of basic net income per share 30,567 31,238
Effect of stock compensation plans 845 103
---------------------------------------
Shares for computation of diluted net income per share 31,412 31,341
=======================================
</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 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 it 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 mailings per year and, beginning in November 1999,
through its e-commerce site at www.talbots.com.
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The following is segment information as of and for the thirteen weeks ending
April 29, 2000 and May 1, 1999:
<TABLE>
<CAPTION>
April 29, 2000
-------------------------------------------
Stores Catalog Total
-------------------------------------------
<S> <C> <C> <C>
Sales to external customers $295,443 $62,316 $357,759
Direct Profit 65,907 15,814 81,721
May 1, 1999
-------------------------------------------
Stores Catalog Total
-------------------------------------------
Sales to external customers $243,450 $49,556 $293,006
Direct Profit 46,923 10,277 57,200
</TABLE>
The following reconciles direct profit to consolidated operating income as of
and for the 13 weeks ending April 29, 2000 and May 1, 1999:
<TABLE>
<CAPTION>
April 29, 2000 May 1, 1999
------------------ -----------------
<S> <C> <C>
Total direct profit for reportable segments $81,721 $57,200
Less: indirect expenses 27,067 23,901
------------------ -----------------
Consolidated operating income $54,654 $33,299
================== =================
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's
quarter ending April 28, 2001. SFAS No. 133 significantly modifies accounting
and reporting standards for derivatives and hedging activities. The impact, if
any, of SFAS No. 133 on the Company 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:
--------------------------------------------------------------------------------
Thirteen Weeks Ended
--------------------------------------------------------------------------------
APRIL 29, 2000 MAY 1, 1999
(unaudited) (unaudited)
--------------------------------------------------------------------------------
Net sales 100.0% 100.0%
--------------------------------------------------------------------------------
Cost of sales, buying and occupancy expenses 55.2% 57.6%
--------------------------------------------------------------------------------
Selling, general and administrative expenses 29.6% 31.0%
--------------------------------------------------------------------------------
Operating income 15.3% 11.4%
--------------------------------------------------------------------------------
Interest expense, net 0.4% 0.6%
--------------------------------------------------------------------------------
Income before income taxes 14.8% 10.8%
--------------------------------------------------------------------------------
Income taxes 5.7% 4.1%
--------------------------------------------------------------------------------
Net income 9.1% 6.6%
--------------------------------------------------------------------------------
THE THIRTEEN WEEKS ENDED APRIL 29, 2000 COMPARED TO THE THIRTEEN WEEKS ENDED MAY
1, 1999 (FIRST QUARTER)
Net sales in the first quarter of 2000 increased by $64.8 million to
$357.8 million, or 22.1% over the first quarter of 1999. Operating income was
$54.7 million in the first quarter of 2000 compared to $33.3 million in the
first quarter of 1999, an increase of 64.3%.
Retail store sales in the first quarter of 2000 increased by $51.9
million to $295.4 million, or 21.3%, over the first quarter of 1999. The
percentage of the Company's net sales derived from its retail stores decreased
to 82.6% in the first quarter of 2000 compared to 83.1% in the first quarter of
1999. This decrease as a percentage of total sales was due to a 26.1% increase
in catalog sales during the first quarter of fiscal 2000. The increase in retail
store sales, in total dollars, was attributable to the 3 net new stores opened
in the first quarter of 2000, the 23 net non-comparable stores that opened in
the last three quarters of 1999 and an increase of $37.5
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million in comparable stores sales, or 17.3%, 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.
Catalog sales in the first quarter of 2000 increased by $12.9 million,
to $62.4 million, an increase of 26.1% from the first quarter of 1999. The
percentage of the Company's net sales derived from its catalogs increased to
17.4% in the first quarter of 2000 compared to 16.9% in the first quarter of
1999. The increase in catalog sales in total dollars was mainly attributable to
stronger demand for the Company's spring assortment throughout all its major
books.
In November 1999, the Company launched its e-commerce website; sales
from this channel of distribution are reported in catalog sales.
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 55.2% in the first quarter of 2000 from 57.6% in the first
quarter of 1999 due primarily to stronger merchandise gross margin due to
continued strong selling of full-priced merchandise and improved inventory
control, which lowered inventory per square foot without adversely impacting
customer demand. Additionally, strong sales produced additional leverage on
store occupancy costs as a percent of sales.
Selling, general and administrative expenses as a percentage of net
sales decreased in the first quarter of 2000 to 29.6% compared to 31.0% in the
first quarter of 1999, mainly due to additional expense leverage on strong
sales. This was partially offset by increased spending on advertising in the
fiscal 2000 quarter over same period in 1999.
Interest expense, net, decreased to $1.6 million in the first quarter
of 2000 from $1.8 million in the first quarter of 1999 primarily due to lower
average debt levels, including short-term and long-term bank borrowings, of
$113.2 million in the first quarter of 2000 compared to $120.3 million in the
first quarter of 1999. The average interest rate, including interest on
short-term and long-term bank borrowings, was 7.0% in the first quarter of 2000
compared to 6.2% in the first quarter of 1999.
The effective tax rate for the Company remained 38.5% in the first
quarter 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 April 29, 2000, the
Company had no amounts outstanding under this line-of-credit compared to $30.0
million at May 1, 1999. Additionally, the Company has a revolving credit
facility with four banks. At April 29, 2000 and May 1, 1999, 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 quarter of 2000, cash and cash equivalents increased $26.3
million compared to a decrease of $1.2 million in the first quarter of 1999.
Primarily contributing to the increase in cash and cash equivalents was the
increase of $58.8 million in net cash provided by operating activities,
partially offset by a decrease of $30 million in short-term borrowing under
notes payable to banks.
During the quarter ending April 29, 2000, the Company repurchased $9.9
million or 308,610 shares of its common stock under its stock repurchase
program. This completed the $20.0 million buyback authorized by the Board of
Directors on January 20, 2000 under which a total of 597,510 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 the next two years.
Capital expenditures for the first quarter of fiscal 2000 were $13.2
million compared to $11.0 million in the first quarter of fiscal 1999. The
Company used approximately $6.1 million and $6.8 million in the first quarter of
fiscal 2000 and 1999, respectively, for opening new stores and expanding and
renovating existing stores. For the remainder of the fiscal year, the Company
currently anticipates approximately $58.8 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 2000.
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, purchase of treasury
stock 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 these current requirements.*
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
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condition, capital requirements and general business outlook. On May 24, 2000,
the Company's Board of Directors approved an increase in its quarterly dividend
to $0.14 per share payable on June 19, 2000 to shareholders of record as of June
5, 2000.
YEAR 2000
To date the Company has not experienced any significant problems with its
hardware and software systems or facilities and distribution equipment related
to the Year 2000 date change. The Company is not presently aware of any
significant exposure arising from potential third party failures. However, there
can be no assurance that the systems of other companies on which the Company's
systems or operations rely have been successfully converted or that any failure
of such parties to achieve Year 2000 compliance could not have an adverse effect
on the Company's results of operations.
--------------------------------------------------------------------------------
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," "may," "will," or similar statements
or variations of such terms. Such forward-looking statements involve 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, 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.
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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
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
The Company filed Current Reports on Form 8-K on
April 25, 2000, May 18, 2000 and June 12, 2000,
respectively, pursuant to which various agreements
and documents were filed by the Company, as
identified therein.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TALBOTS, INC.
Dated: June 13, 2000 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)
14
