UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
February 2, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period
from to
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Commission File Number 1-12552
THE TALBOTS, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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41-1111318
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State or other jurisdiction
of
incorporation or organization
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(I.R.S. Employer
Identification No.)
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One Talbots Drive, Hingham, Massachusetts 02043
(Address of principal executive
offices)
Registrants telephone number, including area code
781-749-7600
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of exchange on which registered
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Common stock, $.01 par value
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New York Stock Exchange
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Securities registered pursuant to section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller reporting
company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold (based on the closing
price of $20.85 per share as quoted by the NYSE) as of the last
business day of the registrants most recently completed
second fiscal quarter, August 4, 2007, was
$483 million.
As of April 11, 2008, 55,536,571 shares of the registrants
common stock were outstanding.
Documents
Incorporated by Reference
Portions of the registrants Proxy Statement to be filed in
connection with the 2008 Annual Meeting of Shareholders are
incorporated by reference into Part III of this
Form 10-K.
The
Talbots, Inc.
Annual
Report on
Form 10-K
for the Fiscal Year Ended February 2, 2008
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Page
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PART I
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Business
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2
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Risk Factors
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14
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Unresolved Staff Comments
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22
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Properties
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22
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Legal Proceedings
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Submission of Matters to a Vote of Security
Holders
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23
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PART II
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Market for the Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
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23
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Selected Financial Data
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25
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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25
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Quantitative and Qualitative Disclosures About
Market Risk
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50
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Financial Statements and Supplementary Data
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51
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Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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51
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Controls and Procedures
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51
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Other Information
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PART III
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Directors, Executive Officers and Corporate
Governance
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53
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Executive Compensation
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53
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Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
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53
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Certain Relationships and Related Transactions,
and Director Independence
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53
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Principal Accounting Fees and Services
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53
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PART IV
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Exhibits, Financial Statement Schedules
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54
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EX-10.38 The Talbots, Inc. Deferred Compensation Plan, as amended
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EX-10.64 Offer Letter between The Talbots, Inc. and Paula Bennett, dated January 3, 2008
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EX-10.65 Change in Control Agreement between The Talbots, Inc. and Paula Bennett, dated January 28, 2008
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EX-10.66 Severance Agreement between The Talbots, Inc. and Paula Bennett, dated January 28, 2008
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EX-10.67 Offer Letter between The Talbots, Inc. and Basha Cohen, dated December 11, 2007
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EX-10.68 Change in Control Agreement between The Talbots, Inc. and Basha Cohen, dated December 17, 2007
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EX-10.69 Severance Agreement between The Talbots, Inc. and Basha Cohen, dated December 17, 2007
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EX-10.70 Offer Letter between The Talbots, Inc. and Lori Wagner, dated February 19, 2008
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EX-10.71 Change in Control Agreement between The Talbots, Inc. and Lori Wagner, dated March 24, 2008
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EX-10.72 Severance Agreement between The Talbots, Inc. and Lori Wagner, dated March 24, 2008
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EX-21.1 List of Subsidiaries of The Talbots, Inc.
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EX-23.1 Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP.
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EX-31.1 Certification of Trudy F. Sullivan, President and Chief Executive Officer
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EX-31.2 Certification of Edward L. Larsen, Senior Vice President, Finance, Chief Financial Officer and Treasurer
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EX-32.1 Certifications by Trudy F. Sullivan, President and Chief Executive Officer and Edward L. Larsen, Senior Vice President, Finance, Chief Financial Officer and Treasurer, pursuant to Section 906
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1
PART I
General
The Talbots, Inc., a Delaware corporation, together with its
wholly owned subsidiaries (the Company), is a
leading international specialty retailer and direct marketer of
womens apparel, shoes, and accessories. The Company
operates stores in the United States and Canada. In addition,
customers may shop online at www.talbots.com or www.jjill.com.
The Company sells its products under the following brand names:
Talbots brand.
The Talbots brand, which began
operations in 1947 as a single store in Hingham, Massachusetts,
offers a distinctive collection of classic sportswear, casual
wear, dresses, coats, sweaters, accessories and shoes,
consisting almost exclusively of Talbots own branded merchandise
in misses, petites, woman and woman petite sizes.
Talbots brand merchandising strategy focuses on achieving a
current classic look that emphasizes timeless yet
current styles and quality, designed to appeal to women
age 35 and older. Talbots brand stores, catalogs, and
website offer a variety of key basic and fashion items and a
complementary assortment of accessories and shoes which enable
customers to assemble complete wardrobes. The consistency in
color, fabric, and fit of Talbots brand merchandise allows a
customer to create wardrobes across seasons and years. The
Company believes that a majority of its Talbots brand customers
are high-income, college-educated, and employed, primarily in
professional and managerial occupations, and are attracted to
the Talbots brand by its focused merchandising strategy,
personalized customer service, and continual flow of high
quality, reasonably priced classic merchandise.
J. Jill brand.
On May 3, 2006, the
Company acquired the J. Jill brand, a multi-channel specialty
retailer of womens apparel.
J. Jills brand merchandising strategy focuses on offering
easy sophistication for every day that offers relevant,
flattering, and easy care styles designed to appeal to women
age 35 and older. J. Jill brand stores, catalog, and
website offer a variety of apparel and accessories in a wide
range of sizes, including misses, petite, tall, and woman. The
Company believes that the J. Jill brand merchandise reflects its
core customers desires and needs style,
comfort, individuality, artistic simplicity, a womans
version of femininity, and community. The J. Jill brand uses
lifestyle photography that depicts women with whom its core
customers can identify women with graceful
confidence, women with strong connections to friends, family,
and community, and women who are alluring yet real. The Company
believes that a majority of its J. Jill brand customers are mid
to high-income, well-educated, employed in a managerial or
leadership role, and are attracted to the J. Jill brand by its
unique aesthetic style, exceptional customer service, and
quality of well-priced merchandise.
Strategic
Review
In October 2007, the Company initiated a comprehensive strategic
review of its business and engaged a leading global consulting
firm to assist management in developing a long-range plan. This
review included the following areas: brand positioning,
productivity, store growth and store productivity, non-core
concepts, distribution channels, the J. Jill brand, and other
operating matters. The consulting firm completed its review in
the first quarter of 2008, from which the Company developed a
three-year strategic plan aimed at driving sustainable,
profitable growth, and to enhance the performance of the
Companys business.
Under the strategic plan, the Company plans on becoming a
design-led organization, focused on delivering compelling
merchandise assortments that reflect each brands unique
identity. In addition, under the plan the Company is seeking to
streamline its operations, control costs and inventories,
innovate its marketing programs, and implement more efficient
processes across its business functions. Further, the Company
has identified five key growth platforms upon which to build its
business going forward. See Expansion below for
further discussion on the Companys growth platforms.
Together, these initiatives are expected to drive meaningful
long-term growth and profitability.
During the latter half of 2007, the Company began to implement a
number of its identified strategic initiatives. The Company
significantly strengthened its senior management team with a
number of key executive
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appointments, announced that it will exit non-core
underperforming concepts, and is critically evaluating the
Companys store base for store conversions or further
closures.
On January 4, 2008, the Company announced that it will
close its Talbots Kids and Talbots Mens business concepts. The
75 remaining stores are expected to be closed by September 2008.
After a thorough assessment of the Talbots Kids and Talbots Mens
business concepts, the Company believes that these non-core
concepts are not demonstrating enough potential to deliver an
acceptable long-term return on investment. In addition, the
Company plans to close an additional 20 underperforming Talbots
and J. Jill brand stores, including all three stores in the
United Kingdom in 2008. See Operating Strategy below
for further discussion on the Companys initiatives to
restore profitability under the Companys strategic plan.
Description
of Operations
As of February 2, 2008, the Company operated its business
in two reportable segments: Retail Stores and Direct Marketing.
Retail
Stores
The Companys retail stores segment includes the
Companys stores in 47 states, the District of
Columbia, Canada, and the United Kingdom under the Talbots and
J. Jill brand names.
As of February 2, 2008, the Company operated a total of
1,421 stores with 1,150 stores under the Talbots brand name and
271 stores under the J. Jill brand name. In certain markets, the
Company has placed two or more Talbots or J. Jill brand business
concepts together in order to create a one-stop shopping
environment and refers to these multiple stores as one location.
As of February 2, 2008, the Company operated a total of 862
locations with 595 locations under the Talbots brand name and
267 locations under the J. Jill brand name.
The following tables set forth select information, as of
February 2, 2008, with respect to the Companys retail
stores:
U.S.
Retail Stores in 838 locations
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Number of
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Approximate Average Store
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Stores
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Size (Square Feet)
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Talbots Misses
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541
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4,710
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Talbots Petites
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298
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2,620
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Talbots Accessories and Shoes
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37
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1,820
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Talbots Woman
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142
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2,970
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Talbots Collection
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2
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1,940
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Talbots Outlet
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24
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11,500
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Talbots Mens
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12
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4,210
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Talbots Kids
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63
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3,490
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J. Jill Misses
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258
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3,840
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J. Jill Petites
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4
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2,010
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J. Jill Outlet
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9
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3,790
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Total
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1,390
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3
Foreign
Retail Stores in 24 locations
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Number of
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Approximate Average Store
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Stores
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Size (Square Feet)
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Talbots Misses Canada
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20
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4,440
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Talbots Petites Canada
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4
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2,270
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Talbots Woman Canada
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3
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3,020
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Talbots Outlet Canada
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1
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5,100
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Talbots Misses United Kingdom
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3
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6,420
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31
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Approximately 75% - 80% of the floor area of all the
Companys retail stores is devoted to selling space
(including fitting rooms), with the balance allocated to
stockroom and other non-selling space.
The Company utilizes outlet stores that are separate from its
retail stores to provide for the controlled and effective
clearance of store and catalog merchandise remaining from each
sale event. The Company currently uses outlet stores primarily
for the sale of past season and as is merchandise.
As of February 2, 2008, the Company had 47% of its store
locations in specialty centers, 37% in malls, 7% in village
locations, 5% as freestanding store locations, 2% in outlet
locations, and 2% in urban locations. The Company believes that
providing a broad mix of store location types helps insulate it
from changes in customer shopping patterns and allows it to
offer locations that are convenient to its customers.
See Expansion for further discussion on the
Companys retail stores. Detailed financial and certain
geographic information is set forth in Note 14,
Segment and Geographic Information, of the
Companys consolidated financial statements included in
this
Form 10-K.
Direct
Marketing
The Companys direct marketing segment includes both
catalog and Internet channels.
Since 1948, the Company has used its direct marketing business
to offer customers convenience in ordering Talbots brand
merchandise. In 2006, in connection with the acquisition of J.
Jill, the Company expanded its direct marketing business to
include J. Jills acquired direct marketing business. In
2007, the Companys direct marketing business segment
represented 19% of total Company sales, with the Internet
channel comprising 56% of the Companys total direct
marketing sales.
The Companys catalogs are designed to promote the
brands images and drive customers to their preferred
shopping channel, including stores, call centers, and online. In
2007, the Company issued 25 separate Talbots brand catalogs
across all business concepts with a circulation of approximately
48 million and issued 15 separate J. Jill brand catalogs
with a circulation of approximately 78 million. The Company
utilizes computer applications, which employ mathematical models
to improve the efficiency of its catalog mailings through
refinement of its customer list. A principal factor in improving
customer response has been the Companys development of its
own list of active customers. The Company routinely monitors
customer interest and updates and refines this list. The
Companys customer list also provides important demographic
information and serves as an integral part of the Companys
expansion strategy by helping to identify markets with the
potential to support a new store. Although the addition of
stores in areas where the catalog has been successful has
resulted in slightly lower catalog sales in these areas, the
significantly higher sales generated in these areas by the
opening of new stores have generally offset the lower catalog
sales. The Company follows the Direct Marketing
Associations recommendations on consumer privacy
protection practices.
The Company strives to make catalog shopping as convenient as
possible. It maintains toll-free numbers, accessible
24 hours a day, seven days a week (except Christmas Day),
to accept requests for catalogs and to take customer orders. The
Company maintains call centers in Knoxville, Tennessee and
Tilton, New Hampshire that are designed to provide uninterrupted
service to customers. Telephone calls are answered by
knowledgeable call center sales associates who enter customer
orders and retrieve information about merchandise and its
availability. These sales associates also suggest and help to
select merchandise and can provide detailed information
regarding size,
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color, fit, and other merchandise features. The Company has
achieved efficiencies in order entry and fulfillment, which
permit the shipment of most orders the following day.
The Companys Internet channels are a natural extension of
the Companys existing stores and catalog channels offering
the same broad assortment of Talbots and J. Jill brand existing
store and catalog merchandise. In 2007, the Company began to
utilize the Internet channel as an inventory clearance tool as
well as a means for social networking for the Talbots brand. The
Company is taking part in an ongoing interactive web-based
customer research program, Communispace, which unites over 400
target customers, including active and lapsed customers, and
provides the Company with insight on what the customer needs and
wants from the brand. The Company has been utilizing this
information in its process to reenergize and improve its Talbots
brand product offerings.
Sales orders from the websites are merged into the existing
catalog fulfillment system, allowing efficient shipping of
merchandise. Customers can check the availability of merchandise
at the time of purchase and the websites will provide examples
of alternative merchandise if items are unavailable.
Additionally, the websites online chat feature
allows customers to communicate with customer service
representatives. Customers shopping online at www.talbots.com
can also enjoy the benefit of the Companys style
search feature. Style search allows a customer to select
merchandise online and then reserve it at a Talbots brand store
of his or her choice. As with the catalog, customer online brand
purchases can be returned by mail or at the individual
brands retail stores.
Detailed financial information is set forth in Note 14,
Segment and Geographic Information, of the
Companys consolidated financial statements included in
this
Form 10-K.
Operating
Strategy
The Companys overall objective is to satisfy the fashion
needs of its target customer by offering relevant, sophisticated
clothing and complementary accessories. Both Talbots and J. Jill
serve the 35 plus population; J. Jill focusing on apparel for a
casual lifestyle, with artistically inspired merchandise and the
unique selling proposition of easy sophistication for every day,
an ideal counterpoint to Talbots offering of updated modern
classics.
While both brands appeal to the same highly desirable
demographic, the Company believes that the brands are truly
unique and not cannibalistic.
The Companys operating profits were well below
expectations in 2007. The Company believes that the
disappointing results reflect lower than expected sales and
gross margins at both brands due to weak product assortments,
decelerating consumer spending due to the uncertain
macro-economic environment, and increased promotional activity
necessary to clear excess inventory. In addition, the Company
recorded an impairment charge of $149.6 million, or $2.71
per share, on its J. Jill acquired intangible assets due to the
underperformance of the brand.
The Company marks 2008 as a year of transition for the Company
as it represents the launch of a three-year initiative to
strengthen and grow the Company. The Company is committed to its
adopted strategic plan to revitalize its brands and product
offerings. To assist in the execution of its plan for
profitability, the Company is under the direction of the newly
appointed Chief Executive Officer and President and has added
significant new key executive talent in the areas of brand
leadership, creative, merchandising, marketing, and merchandise
inventory planning and allocation.
The Company, in accordance with its strategic plan, is
implementing the following initiatives to improve operating
profit and restore profitability:
Brand
Improvements:
Talbots brand
Under new executive leadership
in design, merchandising, and marketing areas, the brands
mission is to form a distinct point of view for the brand
through improved merchandise offerings which will be
communicated consistently through all aspects that touch the
customer, including store visual signage, catalog design, and
website visuals. The brands key strategic initiatives for
2008 consist of the following:
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Build a lifestyle brand that creates synergy between refined and
casual product mix.
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Create brand icons, including hardware, trims, signature prints,
and legacy items.
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Focus on color and fabric by developing seasonal color palettes
that flow and build month to month to ensure newness;
establishing core fabrics by business and price matrix; and
developing strong vendor partnerships to develop exclusive
fabrics.
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Focus on accessories by reworking fashion accessories and
footwear mix to ensure common end-use for the consumer.
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Redesign merchandise flow with consistent merchandise and
marketing messages across all channels.
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J. Jill brand
With the addition of the
new design, merchandising, and marketing team leadership in 2006
and 2007, as well as the newly appointed brand President, the
team will focus in 2008 on merchandise improvement and building
brand awareness through a more aggressive catalog and direct
mail prospecting especially in the areas where retail stores are
located. The brand had a difficult year in 2007 but continued to
make progress in improving product offerings and customer
awareness to broaden and strengthen the appeal of the brand. The
brand began implementing the following initiatives in 2007,
which are the foundation for continued improvement in 2008:
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Build a more compelling and versatile product offering that is
focused, age appropriate, and fashion relevant in style and
color, with a consistent fit that is reflective of the J. Jill
unique selling proposition of easy sophistication for every day.
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Create an integrated multi-channel operating model with
consistent merchandise and marketing messages across all
channels.
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Increase customer acquisition and response by optimizing the
brands multi-channels with deep direct customer contact
and prospecting, improve creative design of catalog and on the
web, and enhance web functionality.
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Build brand awareness, overcome awareness deficits, and improve
productivity present in key markets through a highly targeted
direct mail effort.
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Ensure appropriate number of unique product offerings while
increasing the number of wardrobing options for each style.
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Gain extensive customer insight through intense customer
research providing quantitative and qualitative data to assist
in offering products that the customer desires.
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Operational
Improvements:
Reduce the Companys cost structure.
The
Company plans to streamline operations through tighter expense
controls, including reducing marketing spending, improving
inventory management and inventory turns, maximizing the
utilization of corporate assets, and right-sizing the
organization across brands.
Improve gross margin across brands.
The
Company intends to drive improved gross margins through a
combination of managing leaner inventories, better product flow,
improved regular price selling, a more optimal markdown cadence,
and the implementation of a price optimization software tool at
both the Talbots and J. Jill brand by the third quarter of 2008.
Specific to the Talbots brand, in November 2007, the brand
adjusted its markdown cadence from its historical four clearance
events per year to taking markdowns on a regular monthly basis.
The Company expects that its revised markdown cadence will allow
for improved markdown profitability as merchandise is offered at
higher markdown prices for longer periods of time compared to
prior practice. The Company believes that this change will allow
the brand to improve its product flow and better ensure new and
relevant offerings for its customer.
Reduce capital spending.
The Company plans to
reduce capital spending in 2008 to $75 million from
$85 million in 2007 by scaling back store expansion to
approximately 46 new store openings, including 27 Talbots brand
stores, and 19 J. Jill brand stores, from 75 new store openings
in 2007. The Companys reduced capital expansion plan is
expected to allow more spending for information technology
enhancements and store conversions.
Close underperforming stores.
In 2008, the
Company plans to close approximately 95 underperforming stores,
including the remaining 75 Talbots Kids and Talbots Mens stores
and all three stores in the United Kingdom. To date, the Company
has identified approximately 10 to 15 of the Talbots Kids and
Talbots Mens locations as
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probable conversions to other business concepts. The Company
will continue to critically assess individual store
profitability on an ongoing basis and either close or convert
stores in the future as appropriate.
Increase prospecting and frequency of direct
mail.
The Company plans to promote its brands to
target customers by increasing prospecting and the frequency of
its mailings in an effort to grow its customer base.
Continue to capitalize on its complementary store, catalog,
and online operations.
The Companys
strategy is to operate each brands stores, catalogs, and
websites as integrated businesses and to provide the same
personalized service and offer the same products to its
customers regardless of whether each brands merchandise is
purchased through its stores, catalogs, or online. The Company
believes that the synergy across these distribution channels
offers an important convenience to its customers, provides a
competitive advantage to the Company, and is an important
element in identifying new store sites.
Continue to provide superior customer
service.
The Company believes that it provides
store, catalog, and online customers with a high level of
customer service. The Company is committed to constantly
improving customer service by enhancing its training programs to
ensure that sales and customer service associates are
knowledgeable about Talbots and J. Jill brand merchandise, that
they are up to date with fashion trends, and are able to make
appropriate wardrobing suggestions to customers.
Merchandising,
Inventory Control and Distribution
Merchandising
The Company has two distinct merchandising teams; one to achieve
a classic look which emphasizes timeless styles and
quality across several product classifications for the Talbots
brand, and one to attain a casual lifestyle, with artistically
inspired merchandise, and the unique selling proposition of easy
sophistication for every day for the J. Jill brand. The
Companys stores, catalogs, and websites offer a variety of
key basic and fashion items and a complementary assortment of
accessories and shoes which enable customers to assemble
complete outfits. Sales associates are trained to assist
customers in merchandise selection and wardrobe coordination,
helping them achieve each brands look from
head-to-toe.
The consistency in color, fabric, and fit of each brands
merchandise also allows a customer to create wardrobes across
seasons and years.
Branded Merchandise Design and Purchasing.
The
Companys branded merchandise is designed and produced
through the coordinated efforts of the Companys design,
merchandising and manufacturing teams. By conceptualizing and
designing in-house, the Company has been able to realize higher
average initial gross profit margins for its clothing and
accessories, while at the same time providing value to its
customers. Styles for the Companys branded merchandise are
developed based upon historical sales data, anticipated future
sales, and current and future fashion trends that will appeal to
its target customers.
Talbots brand.
The Talbots brand teams consist
of the New York-based product development office, the Hingham,
Massachusetts-based buying and manufacturing staffs, and the
Hong Kong-based production office. In late 2007 and early 2008,
the Company appointed five key executives to lead its design and
merchandising areas including a newly established position of
Chief Creative Officer. The position of Chief Creative Officer
was established as part of the Companys goal to migrate to
a design driven brand. The new appointments will lead the design
and merchandising teams in New York and Hingham and were made as
part of the Companys strategy to strengthen, reposition
and reinvigorate the brand, a significant step in getting the
Talbots brand back on track to profitability.
J. Jill brand.
J. Jills brand teams
consist of the Quincy, Massachusetts-based product development,
buying, and manufacturing staffs and the India-based production
liaison office. In late 2007, the Company appointed a new brand
President with extensive expertise in merchandising, buying,
sourcing, and product development across both retail and direct
marketing channels. The Company also utilizes the India
production liaison office for the Talbots brand on a limited
basis and expects to continue to utilize the office across both
brands in the future.
Sourcing.
During 2007, the Company purchased
most of its merchandise directly from offshore vendors. The
balance of the merchandise was purchased from sources based in
the U.S. that may rely on their own offshore sources for
manufacturing goods. The Talbots brand utilizes its own Hong
Kong product office for sourcing a substantial portion of its
merchandise. Similarly, the J. Jill brand utilizes the India
liaison office for coordinating the sourcing of a portion of its
merchandise. In order to diversify the Companys sourcing
operations, the Company also
7
utilizes exclusive overseas sourcing arrangements in Indonesia,
Singapore, Thailand, Malaysia, and South Korea. Under the terms
of an agreement between the Company and Eralda Industries
(Eralda), a long-time supplier of the Company,
Eralda serves as an exclusive agent in Indonesia, Singapore,
Thailand, and Malaysia and as a non-exclusive agent in Hong
Kong, Macau, and China. Eralda has established offices in
Thailand, Indonesia, and Hong Kong to serve the Company in this
capacity. In addition, the Company utilizes non-exclusive agents
in other countries, including Japan, Italy, Portugal, Spain, and
Peru, as well as domestic resources to source its merchandise.
The Company analyzes its overall distribution of manufacturing
to ensure that no one company or country is responsible for a
disproportionate amount of the Companys merchandise.
Directly sourced merchandise is currently manufactured to the
Companys specifications by independent foreign factories
located primarily in Asia.
The following table shows the distribution of each brands
product sourcing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Sources
|
|
|
|
|
Hong Kong
|
|
India
|
|
Eralda
|
|
Other
|
|
Total
|
|
U.S.
|
|
|
Product
|
|
Liaison
|
|
(Exclusive
|
|
Offshore
|
|
Offshore
|
|
Based
|
Brand
|
|
Office
|
|
Office
|
|
Agent)
|
|
Sources
|
|
Sources
|
|
Sources
|
|
Talbots
|
|
|
32
|
%
|
|
|
0
|
%
|
|
|
25
|
%
|
|
|
21
|
%
|
|
|
78
|
%
|
|
|
22
|
%
|
J. Jill
|
|
|
0
|
%
|
|
|
15
|
%
|
|
|
3
|
%
|
|
|
69
|
%
|
|
|
87
|
%
|
|
|
13
|
%
|
The Company does not maintain any long-term or exclusive
commitments or arrangements to purchase merchandise from any
vendor. The Company takes measures to monitor its vendors for
compliance with the Fair Labor Standards Act, security
procedures, and rules mandated by the U.S. Customs and
Border Patrol, and believes that it has good relationships with
its vendors.
Inventory
Control and Distribution
The Company uses centralized distribution systems, under which
all U.S. merchandise is received, processed, and
distributed through its store and direct marketing distribution
centers in Lakeville, Massachusetts for the Talbots brand and in
Tilton, New Hampshire for the J. Jill brand. The Company also
outsources space in smaller distribution centers in both Canada
and the United Kingdom to process Talbots brand store inventory
in those locations. The distribution center in the United
Kingdom will be exited in 2008 as the Company has made the
decision to cease retail operations in the United Kingdom.
Merchandise received at the distribution centers is promptly
inspected, assigned to individual stores, packed for delivery,
and shipped to the stores, or assigned for catalog and online
sales fulfillment. The Company ships merchandise to its stores
virtually every business day, with each store generally
receiving merchandise twice a week. The Company believes that
its strong store, catalog, and online synergy, coupled with its
central distribution systems, allows it to move merchandise
efficiently between its three distribution channels to take
better advantage of sales trends.
Expansion
The Companys expansion program in the past has been
designed to reach new and existing customers through the opening
of new stores and through the introduction of brands and
business concepts within the brands. The Company opens new
stores in markets that it believes have a sufficient
concentration of its target customers. The Company also adds
stores, or expands the size of existing stores, in markets where
it already has a presence, as market conditions warrant and
sites become available. New store locations are identified on
the basis of various factors, including geographic location,
demographic studies, existing catalog demand, and space
availability.
The following table shows the changes in the number of retail
stores operated by the Company for the past five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
End of
|
|
Fiscal Year
|
|
of Year
|
|
|
Opened
|
|
|
Closed
|
|
|
Business
|
|
|
Year
|
|
|
2003
|
|
|
886
|
|
|
|
96
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
977
|
|
2004
|
|
|
977
|
|
|
|
75
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
1,049
|
|
2005
|
|
|
1,049
|
|
|
|
50
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
1,083
|
|
2006
|
|
|
1,083
|
|
|
|
84
|
|
|
|
(8
|
)
|
|
|
205
|
(a)
|
|
|
1,364
|
|
2007
|
|
|
1,364
|
|
|
|
75
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
1,421
|
|
|
|
|
(a)
|
|
Represents the stores acquired in the J. Jill acquisition on
May 3, 2006.
|
8
Under the Companys strategic plan for long-term growth
that was unveiled in the first quarter of 2008, the Company has
identified five key growth platforms upon which to build its
business going forward. The Company has recognized the
opportunity to build on its core close-in
businesses, which include Talbots Woman, Talbots
Accessories & Shoes, and Talbots Collection and also
plans to improve future growth through the penetration into
premium-level outlet centers and restoring profitability within
the J. Jill brand. See the brand and concept discussion below
for further detail on planned growth opportunities.
In addition to expanding the Companys core Talbots brand
Misses business, which consists of 564 stores as of
February 2, 2008, the Company has introduced or plans to
introduce the following brand and complementary business
concepts:
|
|
|
|
|
J. Jill brand.
In May 2006, the Company acquired the J.
Jill brand, which originated operations in 1987. In its early
years, J. Jill was a multi-brand single-channel market sourced
retailer. It subsequently changed its strategic direction to
become a single brand multi-channel private label retailer. In
1999, J. Jill began opening retail stores and launched its
website jjill.com. With the acquisition of J. Jill, the Company
acquired 205 retail stores and a direct marketing business. As
of February 2, 2008, there were 271 J. Jill stores open in
the United States. J. Jill offers misses and petites sizes in
its retail stores, and misses, petites, woman, and tall sizes in
its catalogs and on its website.
|
The Companys priority for the J. Jill brand is to improve
the performance of its existing brand store network through
improved merchandise, catalog prospecting to increase customer
acquisition, and marketing to build greater brand awareness. The
Company plans to improve management of the brands store
portfolio and plans to limit further expansion until the
brands performance improves. Once the improvement is
achieved, the Company plans to seek further expansion of the
brands store network. The Company is also evaluating the
opportunity for additional potential concepts including J. Jill
Woman, expansion into premium-level outlets, and possible
international expansion.
|
|
|
|
|
Talbots Petites.
In 1984, the Company began
offering Talbots brand merchandise in petites sizes in its
catalogs, and in 1985 the Company opened its first Talbots
Petites store. As of February 2, 2008, there were 302
Talbots Petites stores open, including four stores in Canada.
Virtually every item of womens apparel in the Talbots
catalog and online is offered in both misses and petites sizes.
|
|
|
|
Talbots Accessories & Shoes.
In
1994, the Company introduced Talbots Accessories &
Shoes in two catalogs devoted to this category. The Company
opened its first Talbots Accessories & Shoes stores in
1995. As of February 2, 2008, there were 37 Talbots
Accessories & Shoes stores. A limited collection of
this merchandise is offered in each major catalog and online, in
virtually all stores and, in 2007, in two separate catalogs.
|
In 2008, the Company plans to selectively increase accessory
inventory levels based on apparel volume and to develop more
cohesive accessory offerings to enhance apparel product lines.
|
|
|
|
|
Talbots Woman.
In 1998, the Company introduced
Talbots Woman, a large size concept, which offers the same
classic styling, high quality and fit as the Companys
misses and petites concepts to customers wearing sizes 12W to
24W. It was introduced as a department in seven existing Talbots
Misses stores, as one separate store adjacent to other Talbots
concept stores, and in two nationally circulated catalogs. In
2001, the Company expanded the concept with the introduction of
Talbots Woman Petites, which focuses on fuller figured women
54 and under. As of February 2, 2008, there
were 145 Talbots Woman stores open, including three stores in
Canada. All 145 Talbots Woman stores also offer Talbots Woman
Petites. Assortments of both Talbots Woman and Talbots Woman
Petites are also available through the Companys catalogs,
online, and as separate departments within 52 Talbots Misses
stores.
|
The Company plans to increase its penetration of Talbots Woman
by opening approximately 35 new stores over the next five years.
The Company also plans on piloting a new Talbots Woman Boutique
concept, which will offer a fuller assortment within Talbots
Misses stores. In addition, the Company plans to invest in
catalog prospecting and marketing programs that emphasize its
ability to outfit all women of every size.
|
|
|
|
|
Talbots Collection.
Also in 1998, the Company
introduced Talbots Collection, which was developed for those
customers seeking an upper-tier, well-defined selection of
apparel featuring more luxurious fabrics and sophisticated
styling. Talbots Collection is currently presented as a separate
department in 112 existing
|
9
|
|
|
|
|
Talbots Misses stores. In the fall of 2003, the Company opened
its first Talbots Collection store and a second store was opened
in 2005. Also during 2005, the Company introduced Collection
Petites and Collection Shoe departments in its Misses stores. As
of February 2, 2008, there were 68 stores that had
Collection Petite departments and 35 stores that had Collection
Shoe departments. An assortment of Talbots Collection
merchandise is also available through the Talbots brand catalogs
and online. The Company continues to use the Talbots Collection
concept to test new fabrics and fashion trends, which may later
be incorporated into the core Talbots lines.
|
Going forward, the Company intends to clearly differentiate its
Talbots Collection offering, while targeting the core Talbots
brand customer.
|
|
|
|
|
Talbots Premium-level Outlets.
Talbots is
currently evaluating premium-level outlet opportunities. As the
Company improves its inventory management, its need for pure
liquidation vehicles is expected to diminish. The Company plans
to design merchandise for sale in its outlet locations and
expects to target a new customer segment. The premium-level
outlet opportunity will allow the brand to create an assortment
tailored to this customer, while still preserving the
Companys ability to liquidate surplus merchandise as
needed. The Company has begun exploring this initiative, with
potential stores to open beginning in fiscal 2009.
|
On January 4, 2008, due to the underperformance of the
business concepts, the Company announced that it would exit the
Talbots Kids and Talbots Mens business concepts. The Company
expects all remaining 75 stores (63 Talbots Kids and 12 Talbots
Mens) to be closed by September 2008. The Company circulated its
last Talbots Kids catalog in March 2008 and no Talbots Mens
catalogs will be circulated in 2008.
During 2007, the Company opened 75 stores, 43 stores under the
Talbots brand name (17 Misses, nine Petites, 15 Woman, and two
Outlets), and 32 stores under the J. Jill brand name. The
Company is currently evaluating its portfolio of stores and is
planning on closing stores or converting stores into other
business concepts that are not meeting internal profitability
expectations. In addition to closing the Talbots Kids and
Talbots Mens business concepts, the Company currently plans on
closing approximately 20 stores across all concepts and brands
in 2008, including all three stores within the United Kingdom.
The Company is also reducing its capital spending in 2008 and
plans to scale down its store openings from 75 stores in 2007 to
approximately 46 stores in 2008; including 27 Talbots brand
stores and 19 J. Jill brand stores.
Customer
Credit
The Company has extended credit to its Talbots brand customers
since commencing business in 1947 through the use of its
privately held Talbots charge card. The Talbots charge card is
managed through Talbots Classics National Bank, a wholly owned
Rhode Island chartered national bank subsidiary, and Talbots
Classics Finance Company, a wholly owned subsidiary. The Company
believes that the offering of the Talbots charge card enhances
customer loyalty, produces finance charge income, and decreases
third-party bankcard fees.
U.S. Talbots charge card holders are automatically enrolled
in the brands customer loyalty program which rewards
U.S. Talbots brand customers with a twenty-five dollar
appreciation award for every five hundred dollars of merchandise
purchased on their Talbots charge card. The award can be
redeemed against future Talbots charge card purchases and
expires one year from the date of issuance. The program has led
to increased usage of the Talbots charge card, as customer usage
increased from 28% of total sales in 2000 to 45% of total sales
in 2007.
J. Jill brand customers may elect to pay for their
purchases using a J. Jill charge card. The J. Jill charge card
is administered through a third party that bears the credit risk
associated with the card without recourse to the Company. J.
Jill charge card holders are automatically enrolled in the
brands Take 5 customer loyalty program. The
program entitles a customer to a 10% discount on her first
purchase with the card and a 5% discount on any purchases made
with the card thereafter. The financial impact of the 5%
discount is offset partially by lower charge card processing
fees on the J. Jill card versus all other accepted credit cards.
Beginning in the fall of 2008, the Company plans to administer
the J. Jill credit card in-house, managed similarly to the
Talbots charge card. The Company expects to benefit from cost
synergies and finance charge income in late 2008 and beyond from
this initiative.
10
Management
Information Systems
The Companys management information systems and electronic
data processing systems are located at the Companys
systems center in Tampa, Florida, and at its corporate
facilities in Hingham, Massachusetts and Quincy, Massachusetts.
These systems consist of a full range of retail, financial, and
merchandising systems, including credit, inventory distribution
and control, sales reporting, accounts payable, budgeting and
forecasting, financial reporting, merchandise reporting, and
distribution. In 2007, the Company completed the majority of its
systems integration between Talbots and J. Jill, and has begun
to recognize the cost synergies gained by the initiative. The
Company seeks to protect company-sensitive information on its
servers from unauthorized access using industry standard network
security systems in addition to anti-virus and firewall
protection. The website makes use of encryption technology to
help protect sensitive customer information.
All Talbots and J. Jill brand stores have
point-of-sale
terminals that transmit information daily on sales by item,
color, and size. Talbots and J. Jill brand stores are equipped
with bar code scanning programs for the recording of store
sales, returns, inventories, price changes, receipts, and
transfers. The Company evaluates this information, together with
weekly reports on merchandise statistics, prior to making
merchandising decisions regarding reorders of fast-selling items
and the allocation of merchandise.
Also, sales associates can conduct customer searches for
merchandise not currently available in their store through the
register, with a single phone call, 24 hours a day, seven
days a week (except Christmas Day), or in J. Jill brand stores,
through the intranet site at the concierge desk. The intranet
site at the concierge desk in J. Jill brand stores continues to
play a pivotal role in ensuring that its retail customers have
access to virtually all products that are offered.
Seasonality
The nature of the Companys business is to have two
distinct selling seasons, spring and fall. The first and second
quarters of the fiscal year make up the spring season and the
third and fourth quarters of the fiscal year make up the fall
season. Within the spring season, direct marketing sales are
typically stronger in the first quarter and retail store sales
are typically slightly stronger in the second quarter. Within
the fall season, direct marketing sales and retail store sales
are generally the strongest in the fourth quarter.
Advertising
The Companys advertising initiatives have been developed
to elevate brand awareness and increase customer acquisition and
retention. The Talbots brand advertising programs consist of
catalogs distributed across all business concepts, as well as
ads placed in key fashion magazines, television advertising,
newspaper, radio, and Internet advertising. The J. Jill brand
markets its merchandise primarily through its catalog, website,
and other key strategic marketing partnerships. In an effort to
restore profitability, the Company has decided to eliminate
television and national print advertising in 2008 and will
redirect a portion of its marketing budget to enhance customer
outreach through increased catalog prospecting and web-based
marketing.
Competition
The retail apparel industry is highly competitive. The Company
believes that the principal basis upon which it competes are
quality, value, and service in offering modern classic Talbots
brand apparel and sophisticated, casual J. Jill brand apparel to
customers, through stores, catalogs, and online.
The Company competes with national department stores, regional
department store chains, specialty retailers, and catalog
companies. The Company believes that its focused apparel
merchandise selection, consistently branded merchandise,
superior customer service, store site selection resulting from
the synergy between its stores and direct marketing operations,
and the availability of its merchandise in multiple concepts,
distinguish it from department stores and other specialty
retailers.
Employees
As of February 2, 2008, the Company had approximately
16,600 employees, of whom approximately 3,800 were
full-time salaried employees, approximately 2,500 were full-time
hourly employees, and approximately 10,300 were part-time hourly
employees. The Company believes that its relationship with its
employees is good.
11
Principal
Officers of the Company
The following table sets forth certain information regarding the
principal officers of the Company as of April 11, 2008:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Trudy F. Sullivan*
|
|
|
58
|
|
|
President and Chief Executive Officer
|
Philip H. Kowalczyk*
|
|
|
47
|
|
|
Chief Operating Officer
|
Michael Smaldone
|
|
|
43
|
|
|
Chief Creative Officer, Talbots brand
|
Paula Bennett*
|
|
|
58
|
|
|
President, J. Jill brand
|
Basha Cohen*
|
|
|
47
|
|
|
Executive Vice President, Chief Merchandising Officer, Talbots
brand
|
Michele M. Mandell*
|
|
|
60
|
|
|
Executive Vice President, Stores, Talbots brand
|
Richard T, OConnell, Jr.*
|
|
|
57
|
|
|
Executive Vice President, Legal and Real Estate, and Secretary
|
Lori Wagner*
|
|
|
43
|
|
|
Executive Vice President, Chief Marketing Officer, Talbots brand
|
John Fiske, III*
|
|
|
44
|
|
|
Senior Vice President, Human Resources
|
Paul V. Kastner
|
|
|
56
|
|
|
Senior Vice President, International, Talbots brand, and
Strategic Planning
|
Edward L. Larsen*
|
|
|
63
|
|
|
Senior Vice President, Finance, Chief Financial Officer and
Treasurer
|
Bruce Lee Prescott
|
|
|
52
|
|
|
Senior Vice President, Direct Marketing, Talbots brand, and
Customer Service
|
Randy Richardson
|
|
|
49
|
|
|
Senior Vice President, Information Services
|
|
|
|
*
|
|
Executive officers of the Company.
|
Ms. Sullivan, 58, joined Talbots as President and Chief
Executive Officer and as a director in August 2007. Prior to
joining the Company, Ms. Sullivan served as President of
Liz Claiborne, Inc. from January 2006 until July 2007.
Ms. Sullivan joined Liz Claiborne, Inc. in 2001 as Group
President of the companys Casual, Collections, and
Elisabeth businesses. She was named Executive Vice President in
March 2002 with added responsibilities for all non-apparel
business, all
direct-to-consumer
business (retail and outlet) and the International Alliances
business at Liz Claiborne, Inc. She served in this position
until she was named President of Liz Claiborne, Inc. in 2006.
Prior to joining Liz Claiborne, Inc., Ms. Sullivan served
as President of J. Crew Group, Inc. from 1997 until 2001.
In October 2007, Mr. Kowalczyk was appointed Chief
Operating Officer of The Talbots, Inc. Previously,
Mr. Kowalczyk served as the President of the J. Jill brand
following the acquisition of J. Jill in May 2006.
Mr. Kowalczyk joined The Talbots, Inc. in October 2004 as
Executive Vice President, Chief Administrative Officer. From
1987 to 2004, Mr. Kowalczyk held various positions with
Kurt Salmon Associates, a global management consulting firm,
including the position of Managing Director from 2002 to 2004.
Prior to joining Kurt Salmon Associates, Mr. Kowalczyk was
employed by Federated Department Stores.
Mr. Smaldone joined The Talbots, Inc. as Chief Creative
Officer for the Talbots brand in December 2007. Prior to joining
Talbots, Mr. Smaldone served as Senior Vice President of
Design for Ann Taylor from September 2003 until December 2007.
Mr. Smaldone also held senior leadership roles in design at
Anne Klein where he served as Chief Design Officer from July
2001 to September 2003, Elie Tahari from May 2000 to July 2001,
and Banana Republic from January 1994 to August 2001.
Ms. Bennett joined The Talbots, Inc. as President of the J.
Jill brand in January 2008. Prior to joining the Company, she
served as President and Chief Executive Officer for the
Appleseeds, Tog Shop and WinterSilks brands of Orchard
Brands from October 2006 to January 2008. Prior to that,
Ms. Bennett served as Chief Operating Officer of Eileen
Fisher from February 2000 to May 2005 and Vice President of
Retail for Eileen Fisher from 1997 to 2000. Ms. Bennett
also held key leadership roles at Calvin Klein and at
Tiffany & Co., including serving as General Manager of
Tiffanys Fifth Avenue flagship store. Ms. Bennett
began her early career in buying and merchandising at
Bloomingdales and Federated Merchandising Services.
12
Ms. Cohen joined The Talbots, Inc. as Executive Vice
President and Chief Merchandising Officer for the Talbots brand
in December 2007. Prior to joining the Company, Ms. Cohen
held the role of Executive Vice President of Design and
Merchandising at the Kellwood Company from 2003 to 2005, where
she was responsible for conceiving and launching a new business
division Dockers Womens Tops. With over
25 years of diverse experience, Ms. Cohen also held
leadership roles at J. Crew, Laura Ashley, Carole Little, and
Associated Merchandising Corporation.
Ms. Mandell has been Executive Vice President of Stores for
the Talbots brand since August 2004. From 2003 to 2004,
Ms. Mandell was Executive Vice President of Stores and
Talbots Kids. Ms. Mandell joined The Talbots, Inc. in 1983
as Store Manager, became District Manager in 1984, Regional
Director in 1985, and was Senior Vice President, Stores from
1992 until 2003. From 1971 to 1983 she held various management
and merchandising positions for Prices of Oakland in
Pittsburgh, Pennsylvania and A.E. Troutman Co., a division of
Allied Stores.
Mr. OConnell has served as Executive Vice President,
Legal and Real Estate, and Secretary since November 2006.
Mr. OConnell joined The Talbots, Inc. in 1988 as Vice
President, Legal and Real Estate, and Secretary, and became
Senior Vice President, Legal and Real Estate, and Secretary in
1989. Prior to joining the Company, he served as Vice President,
Group Counsel of the Specialty Retailing Group at General Mills,
Inc.
Ms. Wagner joined The Talbots, Inc. as Executive Vice
President, Chief Marketing Officer of the Talbots Brand in March
2008. Ms. Wagner previously held the position of Senior
Vice President, Chief Marketing Officer at Cole Haan, a division
of Nike, from 2006. Prior to joining Cole Haan in 2006, she
served as Senior Vice President of Marketing for Kenneth Cole
Productions from 2001 to 2006 and, before that, as Senior Vice
President of Brand Marketing and Creative for J. Crew from 1991.
Mr. Fiske was appointed Senior Vice President, Human
Resources in April 2007. Prior to his appointment,
Mr. Fiske served as Senior Vice President, Human Resources
of J. Jill since 2005. Mr. Fiske was Vice President, Human
Resources, of Abercrombie & Fitch from 2002 to 2004.
From 1999 to 2002, Mr. Fiske was Corporate Vice President,
Human Resources and Organizational Development at Kenneth Cole
Productions. Mr. Fiske served in various Human Resource
positions at The Timberland Company from 1995 to 1999.
Mr. Fiske has also held positions in Human Resources at
Nike, TJX Companies, May Department Stores, and Federated
Department Stores.
Mr. Kastner joined The Talbots, Inc. in 1988 as Director,
Business Planning and Analysis and became Vice President, New
Business Ventures and Strategic Planning, Assistant Treasurer
and Assistant Secretary in 1989. In 1994, Mr. Kastner was
promoted to the position of Senior Vice President, International
and Strategic Planning. Prior to joining the Company, he was
Director of Research and Merchandise Information with John
Breuner Company.
Mr. Larsen became Senior Vice President, Finance, Chief
Financial Officer and Treasurer of The Talbots, Inc. in 1991.
From 1989 to 1991, Mr. Larsen was Vice President and Chief
Financial Officer of Lillian Vernon Corporation. From 1977 to
1988, he held various positions with General Mills, Inc.,
including, from 1985 to 1988, the position of Vice President and
Group Controller of the Specialty Retailing Group.
Mr. Prescott became Senior Vice President, Direct Marketing
and Customer Service in 1998. Mr. Prescott joined The
Talbots, Inc. in 1987 as Manager, Direct Marketing Fulfillment.
In 1988, he was promoted to the position of Director of Direct
Marketing Fulfillment and in 1991 became Director, Customer
Service and Telemarketing. In 1994, he was promoted to the
position of Vice President, Customer Service and Telemarketing.
From 1976 to 1987, he was employed by Johnny Appleseeds,
serving as manager of catalog operations and supervising retail
distribution and customer service.
Mr. Richardson joined The Talbots, Inc. in 1998 as Senior
Vice President, Information Services. From 1997 to 1998,
Mr. Richardson was Senior Vice President and Chief
Information Officer for Best Buy Company, Inc. From 1996 to
1997, Mr. Richardson was a Product Manager for Computer
Associates International, Inc. From 1992 to 1996, he was Senior
Vice President, Information Services for Ann Taylor, and spent
10 years with The Limited, Inc. in various positions at
Abercrombie & Fitch, Limited Stores and Lane Bryant.
Available
Information
The Companys annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to these reports filed or furnished pursuant
to Section 13(a) of 15(d) of the Securities Exchange
13
Act of 1934, are available free of charge on the Companys
website located at www.thetalbotsinc.com, as soon as reasonably
practicable after they are filed with or furnished to the
Securities Exchange Commission. These reports are also available
at the Securities and Exchange Commissions Internet
website as www.sec.gov.
A copy of the Companys Corporate Governance Guidance, its
Code of Business Conduct and Ethics, and the charters of the
Audit Committee, the Compensation Committee and the Corporate
Governance and Nominating Committee are posted on the
Companys website, www.thetalbotsinc.com, under
Investor Relations, and are available in print to
any person who requests copies by contacting Talbots Investor
Relations by calling
(781) 741-4500,
by writing to Investor Relations Department, The Talbots, Inc.,
One Talbots Drive, Hingham, MA, 02043, or by
e-mail
at
investor.relations@thetalbotsinc.com. Information contained on
the website is not incorporated by reference or otherwise
considered part of this document.
The following discussion of risk factors contains
forward-looking statements, as discussed in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations. These risk
factors may be important to understanding any statement in this
Form 10-K,
other filings with the Securities and Exchange Commission, and
in any other discussions of the Companys business. The
following information should be read in conjunction with
Item 7, and the consolidated financial statements and
related notes included in this report.
In addition to the other information set forth in this report,
the reader should carefully consider the following factors which
could materially affect the Companys business, financial
condition, or future results. The risks described below are not
the only risks facing the Company. Additional risks and
uncertainties not currently known or that are currently deemed
immaterial may also adversely affect the business, financial
condition,
and/or
operating results of the Company.
The
continued worsening of the U.S. economy has and can be expected
to have a material negative impact on consumer purchases of
discretionary items, which can be expected to continue to have a
material adverse impact on the Companys level of sales and
profitability.
Many factors affect the level of consumer spending in the
apparel industry, including:
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general business conditions;
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interest rates;
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the availability of consumer credit;
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taxation;
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employment levels;
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political conditions such as war, terrorism and political unrest;
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consumer confidence in future economic conditions;
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real estate market; and
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increasing energy prices.
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The U.S. economy is currently experiencing significant and
worsening macro-economic issues, including tightening of
U.S. credit markets, residential real estate crisis,
recessionary and inflationary pressures, high energy prices,
declining value of the U.S. dollar, higher unemployment
rates, and stock market declines, which the Company believes has
negatively impacted its business and will continue to do so in
the future. The Company believes that consumer purchases of
discretionary items have declined and may continue to decline
during periods of a negative economic environment and other
periods where disposable income is lower. A continued downturn
in the economies in which the Company sells its products,
whether in the U.S. or abroad, may adversely affect the
Companys level of sales, results of operations, and the
potential willingness of lenders to increase or provide
financing.
14
The
Company expects to purchase a substantial part of its
merchandise inventory going forward through open
account purchase terms from its vendors, without the use
of letter of credit facilities, which in the past have been used
for these purchases.
In connection with the continued tightening of the
U.S. credit and lending markets, the Companys banks
providing its letter of credit facilities, which historically
have been used by the Company for its merchandise purchases from
foreign vendors, have not renewed or extended those facilities
and the letter of credit facilities gradually reduce to zero
during 2008.
However, the Company has successfully negotiated open
account terms, with improved payment terms, with those
vendors that currently represent the majority of the
Companys merchandise purchases, and the Company may pursue
open account terms with other merchandise vendors as well. These
open account payment terms do not require letters of
credit and are expected to largely offset the reduction and
elimination of the letter of credit facilities. The negotiated
new vendor payment terms are also expected to favorably impact
cash flow.
The Company is also pursuing new letter of credit arrangements
with other lenders to utilize for certain inventory purchases,
particularly for smaller merchandise vendors. The Company will
continue to use the remaining balance of its letter of credit
facility up to August 8, 2008, when it is reduced to zero,
while it pursues a replacement letter of credit facility.
There can be no assurance that the Company will obtain new
letter of credit facilities to cover merchandise purchases if
and when needed or that the Company will at all times be able to
purchase all of its merchandise inventory through open account
payment terms with merchandise vendors.
The
Companys capital resources required to fund its working
capital requirements, capital expenditures, debt service and
operations are dependent upon cash flows from operations, cash
on hand, credit extended from merchandise vendors, and
availability under its credit facilities, and these cash
resources may be negatively impacted by many factors, some of
which are beyond the control of the Company.
The Companys primary sources of capital are cash flows
from operating activities, cash on hand, and short-term line of
credit facilities. The Company currently anticipates that cash
flows from operations, cash on hand, and borrowings available
under its short-term credit facilities will be sufficient to
fund its liquidity requirements for at least the next
12 months.
However, such sufficiency is dependent upon and may be adversely
impacted by many factors, including:
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achieving the Companys sales plan for the year;
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achieving the Companys operating cash flow plan for the
year, particularly during merchandise inventory
build-ups
in
advance of the principal selling seasons;
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continuation of merchandise purchases on open account purchase
terms from merchandise vendors at expected levels;
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replacement of the Companys letter of credit facilities at
levels sufficient to purchase adequate merchandise inventory
from any vendors who require letters of credit for merchandise
purchases;
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the Companys ability to obtain any necessary increases in
its line of credit facilities if needed to fund operating plans;
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the Companys ability to reduce any cash spending in the
amounts and at the times needed if borrowings available, cash on
hand, and available credit are not sufficient to fund existing
operating plans, merchandise purchases, planned capital
expenditures and strategic initiatives;
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successfully executing the Companys strategic initiatives,
including anticipated lower inventory levels and timing,
expected operating expense reductions and other cost reductions,
the success of the new promotional cadence for the Talbots
brand, reduced markdown exposure and improved gross margins, the
successful closing of the Talbots Kids and Talbots Mens business
concepts, and the closing of other announced underperforming
stores, including all stores within the United Kingdom;
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the impact of the continued deterioration in the economic
environment, including continued negative impact on
U.S. consumer discretionary spending, current residential
real estate downturn, the disruption and
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15
significant tightening in the U.S. credit markets,
recessionary and inflationary pressures, high energy prices,
declining value of the U.S. dollar, higher unemployment
rates and stock market declines; and
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the Companys ability to continue to satisfy its financial
covenants under its existing debt agreements.
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There can be no assurance that the Companys capital
resources will at all times be sufficient to satisfy its
liquidity needs or that the Company will be able to obtain
additional financing or other capital resource alternatives to
fund its cash needs in the amounts or at the times needed. In
the event the Company is unable to increase its borrowing
availability under its credit facilities in the amounts and
times needed, the Company would expect to explore other capital
or financing sources or reduce spending. There can be no
assurance that any such other capital or financing sources would
be available in the amounts or in the time periods needed.
The
successful and timely execution of the Companys strategic
plan is critical to the Companys short- term and long-
term profitability.
In October 2007, the Company announced that it had initiated a
comprehensive strategic review of its business and engaged a
leading global consulting firm to assist management in
developing a strategic plan. This review included the following
areas: brand positioning, productivity, store growth and store
productivity, non-core concepts, distribution channels, the J.
Jill brand, and other operating matters. The consulting firm
completed its review in the first quarter of 2008, from which
the Company developed a three-year strategic plan. The Company
has announced a number of strategic initiatives in order to
achieve its goal of achieving profitability and long-term
shareholder value. These initiatives include exiting the Talbots
Kids and Talbots Mens business concepts, revamping the marketing
strategy including the promotional cadence for the Talbots
brand, and developing a comprehensive plan to reduce the
Companys cost structure and operating expenses, among
other initiatives. Successful implementation of these
initiatives is critical to the Companys short-term and
long-term success and profitability.
The Company cannot assure that the strategic and other operating
initiatives being implemented as part of its revitalization plan
will favorably impact the Companys operations or will be
successfully executed or executed in the time period projected.
Any failure to successfully and timely implement these
initiatives can be expected to negatively impact the
Companys operating results and profitability. In the event
that the Company is at any time required to reduce its cash
spending, whether as a result of insufficient available credit
or otherwise, the Company may need to reduce or delay cash
spending on one or more of its strategic initiatives, which
could be expected to reduce or delay the positive benefits which
the Company believes will result from these initiatives as part
of its turnaround plans.
The
success of the business depends on the Companys ability to
respond to constantly changing fashion trends and consumer
demands.
The Companys success depends in large part on its ability
to originate and define fashion product trends, as well as to
anticipate, gauge, and react to changing consumer demands in a
timely manner. The retail business fluctuates according to
consumer preferences, dictated in part by fashion and season.
Decisions with respect to product designs are generally made
well in advance of the season and frequently before fashion
trends are evidenced by customer purchases. In addition, both
brands are undergoing significant personnel and operational
changes to their merchandising areas. As a result, the Company
is particularly vulnerable to demand and pricing shifts and is
less able to respond to customer demands or trends rapidly. To
the extent the Company fails to anticipate, identify, and
respond effectively to consumer preferences, or to successfully
integrate new personnel and operational changes, sales will be
adversely affected and the markdowns required to move the
resulting excess inventory will adversely affect the
Companys operating results.
The
Company incurred substantial debt to finance the J. Jill
acquisition. The Companys business may not generate
significant cash flow to meet these obligations and the debt
agreement restrictions may limit the Companys
activities.
In February 2006, the Company entered into a $400.0 million
bridge loan agreement in connection with its planned acquisition
of J. Jill. In July 2006, the bridge loan was converted into a
term loan (the Acquisition Debt) to
16
be repaid in equal quarterly installments over a five-year
period. Additionally, since the acquisition, borrowings under
the Companys short-term facilities have been higher than
it has historically experienced in order to meet current cash
needs.
The Companys ability at all times to satisfy its
obligations and to reduce its total debt depends on the
Companys future operating performance. The Companys
business may not generate sufficient cash flows to meet these
obligations. If the Company is unable to service its debt and
fund its business, the Company may be forced to reduce or delay
capital expenditures, or seek additional financing or equity
capital. There can be no assurance that the Companys cash
requirements will at all times be met by existing available
borrowing facilities. Additionally, a majority of the
Companys outstanding debt accrues interest at variable
rates; therefore, interest payment obligations on this
indebtedness will increase if interest rates increase.
The Companys Acquisition Debt agreement contains
restrictive covenants that limit the Companys ability to
engage in activities that could otherwise benefit it, including
restrictions on the Companys ability and the ability of
its subsidiaries to:
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incur additional indebtedness,
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make investments,
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create liens,
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sell assets,
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enter into sale and leaseback transactions, and
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consolidate, or merge.
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Although the Company has increased its borrowing capacity under
its short-term line of credit facilities and expects to seek
additional increased availability in the future, the
Companys ability to borrow under these facilities can be
limited by the financial covenants in the Companys
Acquisition Debt agreement, including the leverage ratio which
is impacted by total borrowings.
The Company is also required to meet specified financial ratios
under the terms of its Acquisition Debt agreement. The
Companys ability to comply with these financial
restrictions and covenants is dependent on its future
performance. In addition, any failure by the Company to meet its
sales plan at the Talbots brand or J. Jill brand at any time
will cause reduced levels of sales and likely increase markdowns
and clearance of unsold merchandise, which could negatively
impact gross margin, profitability, and the Companys
ability to meet its financial covenants. The Companys
failure to comply with its restrictions or covenants would
result in an event of default under its Acquisition Debt
agreement, which could permit acceleration of the debt under
that instrument as well as accelerate any other indebtedness
under its other existing or subsequent credit facilities. This
would require the Company to repay all of the debt before its
scheduled due dates. If an event of default occurs, the Company
may not have sufficient funds available to make the required
payments under its indebtedness.
There can be no assurance that the Company will satisfy its
financial covenants and other covenants as of each determination
date. If the Company determines that it is likely that it will
not satisfy any of these financial or other covenants, either as
a result of our actual or expected operating results or
borrowing needs or otherwise, the Company would expect to seek a
waiver or an amendment of such covenants. There can be no
assurance that the Company would be successful in obtaining any
such waiver or amendment.
The
Company may not be able to maintain proper inventory
levels.
Customer demand is difficult to predict since the design process
begins well in advance of the date the products are to be sold.
The Company must anticipate trends and customer demand well
ahead of time in order to accurately maintain inventory levels.
This lag in lead time makes responding to changes quickly
difficult and any misjudgments in customer preferences can be
detrimental to earnings as well as customer satisfaction.
In addition, the Company is taking significant steps to improve
inventory management by managing leaner inventories, changing
its markdown cadence, and the implementation of a price
optimizing software tool. The Company cannot provide assurance
that these steps will be successfully implemented. Moreover,
inventory levels in excess of customer demand could result in
inventory markdowns or movement of the inventory to the
Companys outlet facilities to be sold at discount or
closeout prices which could negatively impact operating results
and impair
17
the Companys brand image. In contrast to that scenario, if
the Company underestimates customer demand or for any other
reason fails to supply adequate levels of quality products in a
timely manner, the Company could experience inventory shortages
resulting in missed sales opportunities, negative impact on
customer loyalty and loss of revenues. The inability to fill
customer orders efficiently could lower customer satisfaction
and could cause customers to go to an alternate source for the
desired products. This lowered level of customer satisfaction
and improper inventory levels could adversely affect the
Companys operations.
The
retail apparel industry is highly competitive.
The Company competes with national department stores as well as
regional department store chains. The Company also competes with
other specialty retailers and catalog companies. The Company is
faced with a variety of competitive challenges including:
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anticipating and responding to changing consumer demands;
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maintaining favorable brand recognition;
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developing high quality merchandise in sizes, colors, and styles
that appeal to consumers;
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appropriately managing inventory levels;
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sourcing merchandise efficiently;
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effectively marketing the Companys products to
consumers; and
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pricing the Companys merchandise appropriately.
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Increased competition could cause the Companys sales and
margins to be reduced and adversely affect results of operations.
The
Company may not be able to successfully reposition J.
Jills operations.
The Company acquired J. Jill in May 2006. J. Jill sales have not
been at the levels that the Company originally anticipated and
therefore the Company was required to record an impairment
charge of $149.6 million on the acquired goodwill and
trademark. The Companys ability to continue to grow and
sustain long-term profitability may depend upon effectively
improving the operating performance and growing the J. Jill
business. The realization of revenue growth, additional cost
savings or synergies related to J. Jill will depend largely upon
the Companys ability to:
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implement key design changes to the J. Jill brand merchandise
that will lead to increased sales;
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appropriately price the J. Jill brand merchandise;
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open J. Jill brand stores in locations where operations will be
profitable; and
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refine and unify the J. Jill brands marketing and
promotional programs.
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There can be no assurance that the Company can successfully
execute any of the actions above or that the Companys
strategies for the J. Jill brand will achieve the results
necessary to generate profits. If the Company fails to improve
the J. Jill operations or cannot successfully execute its growth
strategy, the Companys results will be adversely impacted
and future impairment charges may be recognized.
The
Company cannot assure that its change in growth strategy will
result in improved profitability.
The Company has adjusted its strategy to build on five key
growth platforms: Talbots Woman, Talbots Accessories &
Shoes, Talbots Collection, J. Jill brand, and penetration into
premium-level outlets, rather than continuing to open new stores
at its historical levels. The Company is also committed to
regularly assessing the portfolio of its brand stores for
profitability and to closing underperforming stores when
appropriate. In 2008 the Company expects to close approximately
95 underperforming stores, including all remaining 75 stores
associated with the Talbots Kids and Talbots Mens business
concepts and all three stores within the United Kingdom. There
is no assurance that the Company will be successful in
negotiating settlements with the respective landlords and that
the cost will not exceed the anticipated amounts.
Additionally, during 2008, the Company plans to open
approximately 27 Talbots brand stores and 19 J. Jill brand
stores, which is 39% fewer stores than 2007. The Companys
planned expansion is dependent upon a number of factors,
including general economic and business conditions affecting
consumer confidence and spending, the
18
level of sales volume and profitability at existing store
locations, the availability of sufficient capital resources to
support expansion plans, the continuing availability of
desirable locations, the ability to negotiate acceptable lease
terms for prospective new and expanded locations, sourcing
sufficient levels of inventory, hiring and training qualified
management level and other associates, and integrating new
stores into its existing operations. There is no assurance that
the Companys changed growth strategy will lead to improved
operating results. There also can be no assurance that the
Company will achieve its planned growth strategy or that such
growth will be profitable or that the Company will be able to
manage its growth effectively.
Talented
personnel are critical to the Companys success. The
Company cannot assure that the current management team or the
additions to the Companys executive leadership team will
result in increased profitability for the Company.
The Companys success and ability to properly manage its
growth depends to a significant extent on both the performance
of its current executive and senior management team and its
ability to attract, hire, motivate, and retain qualified and
talented management personnel in the future. During 2007 and
early 2008, the Company hired a number of new key senior
executives in the areas of brand leadership, creative,
merchandising, marketing, and merchandise inventory planning and
allocation. There can be no assurance that the new key hires
will be successful in achieving better sales and other operating
results or long-term profitability for the Company.
Additionally, the Companys inability to retain these
personnel, or the loss of service of any other key employees,
would likely adversely impact the Companys operations.
The
Company experiences fluctuations in comparable store sales
results.
Comparable stores are those that 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 comparable
Misses store, such Misses store is excluded from the computation
of comparable store sales for a period of 13 months so that
the performance of the full Misses assortment may be properly
compared.
The Companys comparable store sales results have
fluctuated in the past on a monthly, quarterly, and annual
basis, and are expected to fluctuate in the future. A variety of
factors affect comparable store sales results, including changes
in fashion trends, timing of release of new merchandise and
promotional events, changes in the Companys merchandise
mix, timing of catalog mailings, calendar shifts of holiday
periods, actions by competitors, weather conditions, and general
economic conditions. Past comparable store sales are not an
indicator of future results, and there can be no assurance that
the Companys comparable store sales will not decrease in
the future. The Companys comparable store sales
performance is likely to have a significant effect on the
Companys results of operations.
The
Company experiences fluctuations in operating
results.
The Companys annual and quarterly operating results have
fluctuated, and are expected to continue to fluctuate. Among the
factors that may cause the Companys operating results to
fluctuate are customers response to merchandise offerings,
the timing of the rollout of new stores, closing existing stores
and concepts, seasonal variations in sales, the timing and size
of catalog mailings, the costs of producing and mailing
catalogs, the timing of merchandise receipts, the level of
merchandise returns, changes in merchandise mix and
presentation, the Companys cost of merchandise,
unanticipated operating costs, and other factors beyond the
Companys control, such as general economic conditions and
actions of competitors. As a result of these factors, the
Company believes that period-to-period comparisons of historical
and future results will not necessarily be meaningful and should
not be relied on as an indication of future performance.
In addition, similar to all specialty retailers, the Company can
be expected to face the impact of the continued deterioration in
the economic environment, including continued negative impact on
U.S. consumer discretionary spending, current residential
real estate downturn, the disruption and significant tightening
in the U.S. credit markets, recessionary and inflationary
pressures, high energy prices, declining value of the
U.S. dollar, higher unemployment rates and stock market
declines.
If the
Company fails to maintain the value of its brands, sales are
likely to decline.
The Companys success will depend upon its ability to
effectively define, evolve, and promote its brands. The Talbots
brand name and classic niche as well as the J. Jill
brand name and sophisticated casual niche is
integral
19
to the success of the brands businesses. Maintaining,
promoting, and positioning the Companys brands will depend
largely on the success of the brands design,
merchandising, and marketing efforts and the ability to provide
a consistent, high quality customer experience. Additionally,
the Company may need to increase investments in the development
of the brands through various means, including customer
research, increased prospecting, advertising and promotional
events, direct mail and Internet marketing. While the Company
believes that its objectives will help to build brand awareness
and attract new customers, the Company cannot provide assurance
that they will result in increased sales or profitability.
Additionally, the Companys brands could be adversely
affected if the Companys public image is tarnished by
negative sales or poor operating performance.
The
Company cannot assure that Internet sales will continue to
achieve sales and profitability growth.
The Company sells merchandise over the Internet through its
websites, www.talbots.com and www.jjill.com. The Companys
Internet operations are subject to numerous risks, including
unanticipated operating problems, reliance on third party
computer hardware and software providers, system failures, and
the need to invest in additional computer systems. The Internet
operations also involve other risks that could have an impact on
the Companys results of operations, including potential
electronic break-ins or other security breaches, hiring,
retention and training of personnel to conduct the
Companys Internet operations, diversion of sales from the
Companys stores, rapid technological change, liability for
online content, credit card fraud, violations of state or
federal privacy laws, and risks related to the failure of the
computer systems that operate the website and its related
support systems, including computer viruses, telecommunication
failures and similar disruptions. The many risks associated with
Internet sales could cause a decline in consumer confidence
which could reduce Internet sales. There can be no assurance
that the Companys Internet operations will continue to
achieve sales and profitability growth or even remain at their
current level.
The
Company could be adversely affected if any of its distribution
centers are shut down.
The Company operates store distribution and catalog fulfillment
facilities in Lakeville, Massachusetts, and Tilton, New
Hampshire for all of its U.S. stores and worldwide catalog
operations. If one center were to be shut down or lose
significant capacity for any reason, the other center may not be
able to adequately support the resulting additional distribution
and fulfillment demands, in part because of capacity constraints
and in part because each center services a particular brand. As
a result, the Company could incur significantly higher costs and
longer lead times associated with distributing merchandise to
its stores
and/or
fulfill catalog and Internet orders, which could have a
significant effect on the Companys results of operations.
The
Companys overseas merchandise purchasing strategy makes it
vulnerable to a number of risks.
The Company purchases a significant portion of its merchandise
directly from foreign sources. Approximately 78% of the Talbots
brand merchandise and 87% of the J. Jill brand merchandise
purchased in 2007 was purchased directly from foreign sources.
In addition, goods purchased from domestic vendors may be
sourced abroad by such vendors. As a result, the Companys
business remains subject to the various risks of doing business
in foreign markets and importing merchandise from abroad, such
as:
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political instability;
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imposition of new legislation relating to import quotas that may
limit the quantity of goods that may be imported into the
U.S. from countries in a region where the Company does
business;
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imposition of duties, taxes, and other charges on imports;
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natural disasters and public health concerns;
|
|
|
|
potential delays or disruption in shipping and related pricing
impacts; and
|
|
|
|
local business practices and political issues, including issues
relating to compliance with domestic or international labor
standards.
|
The Company cannot predict whether the foreign countries in
which the Companys apparel and accessories are currently
manufactured or any of the foreign countries in which the
Companys apparel and accessories may be manufactured in
the future will be subject to import restrictions by the
U.S. government, including the likelihood, type or effect
of any trade retaliation. Trade restrictions, including
increased tariffs or more restrictive quotas,
20
applicable to apparel items could affect the importation of
apparel and, in that event, could increase the cost or reduce
the supply of apparel available to the Company and adversely
affect the Companys operations.
The Company relies on third party manufacturers for its
merchandise, including many foreign sources of merchandise. The
Company has an extensive, formal program requiring all of its
manufacturers to comply with applicable labor laws and
acceptable labor practices. Any failure to comply with
applicable labor laws and practices by any of these
manufacturers could materially harm the Companys
reputation with its customers as well as disrupt the supply of
merchandise to the Company.
A
major failure of the Companys information systems could
harm the business.
The Company depends on information systems to manage its
operations. The Companys information systems consist of a
full range of retail, financial, and merchandising systems,
including credit, inventory distribution and control, sales
reporting, accounts payable, budgeting and forecasting,
financial reporting, merchandise reporting, and distribution.
The Company regularly makes investments to upgrade, enhance, or
replace such systems. Any delays or difficulties in
transitioning to these new systems, or in integrating these
systems with the Companys current systems, or any other
disruptions affecting the Companys information systems,
could have a material adverse impact on the Companys
operations.
The
Company has experienced significant variability between its
expectations and outlook for sales and profitability and its
actual results.
Over the past two years the Company has experienced significant
differences between its internal expectations and publicly
announced outlook for sales and profitability and our actual
reported results. This variability has resulted in significant
fluctuation and volatility in the market price of its common
stock. There can be no assurance that the Companys current
or future internal expectations and outlook for sales,
comparable sales, gross margin and profitability will prove to
be accurate.
The
market price of the Companys common stock is
volatile.
The market price of the Companys common stock has
fluctuated substantially in the past and there can be no
assurance that the market price of the common stock will not
continue to fluctuate significantly. Future announcements or
disclosures concerning the Company or its competitors, sales and
profitability results, quarterly variations in operating results
or comparable store net sales, changes in earnings estimates by
the Company or by analysts, among other factors, could cause the
market price of the common stock to fluctuate substantially. In
addition, stock markets, in general, have experienced extreme
price and volume volatility in recent years. This volatility has
had a substantial effect on the market prices of securities of
many public companies for reasons frequently unrelated to the
operating performance of the specific companies.
Greater
level of returns than anticipated could adversely affect the
Companys operations.
As part of the Companys commitment to its customer, it
maintains a liberal merchandise return policy that offers an
unconditional guarantee of satisfaction by allowing customers to
return any product for any reason with no time limit. The
Company makes allowances in its consolidated financial
statements based on historical return rates but these
expectations may be exceeded by actual returns. Any significant
increase in returns could adversely affect the Companys
operations.
The
Company cannot provide assurance that it will continue to pay
dividends.
The payment of dividends and the amount of any dividend is
determined by the Companys Board of Directors. The Board
considers many factors in making decision on dividends,
including its earnings, operations, financial condition, capital
and other cash requirements, and general business outlook.
In the light of the current macro-economic environment and the
Companys outlook and future results, there can be no
assurance that dividends will be paid at the same or lower rate,
or at all, in the future. If the Company lowers its dividend
rate or does not pay dividends, the price of its common stock
must appreciate for shareholders to receive a gain on their
investment in the Company. This appreciation may not occur.
The foregoing list of risk factors is not intended to be
exhaustive. The Company cannot assure that it has identified and
discussed all of the significant factors which might affect its
operations, results of operations or
21
financial condition. Investors are urged to review this entire
Annual Report as well as all of the Companys other public
disclosures and its filings with the SEC, all of which may be
found on the Companys website at thetalbotsinc.com under
Investor Relations.
|
|
Item 1B.
|
Unresolved
Staff Comments.
|
None.
The table below presents certain information relating to the
Companys properties at February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Location
|
|
Square Feet
|
|
|
Primary Function
|
|
Interest
|
|
Hingham, Massachusetts
|
|
|
313,000
|
|
|
Talbots brand headquarters
|
|
Own (44 acres)
|
Quincy, Massachusetts
|
|
|
126,869
|
|
|
J. Jill brand headquarters
|
|
Lease
|
Lakeville, Massachusetts
|
|
|
933,000
|
|
|
Talbots brand distribution center and fulfillment center
|
|
Own (115 acres)
|
Tilton, New Hampshire
|
|
|
573,000
|
|
|
J. Jill brand distribution center, fulfillment center,
and telemarketing center
|
|
Own (360 acres)
|
Tampa, Florida
|
|
|
51,736
|
|
|
Systems center
|
|
Lease
|
Knoxville, Tennessee
|
|
|
37,656
|
|
|
Telemarketing center
|
|
Lease
|
New York, New York
|
|
|
55,697
|
|
|
Product development office
|
|
Lease
|
Hong Kong
|
|
|
10,455
|
|
|
Talbots brand merchandise production office
|
|
Lease
|
India
|
|
|
3,913
|
|
|
Merchandise production liaison office
|
|
Lease
|
Lincoln, Rhode Island
|
|
|
9,645
|
|
|
Credit and banking facilities
|
|
Lease
|
Ontario, Canada
|
|
|
1,350
|
|
|
Canadian regional office
|
|
Lease
|
London, U.K.
|
|
|
270
|
|
|
U.K. management office
|
|
Lease
|
1,421 Stores in 862 locations throughout the U.S., Canada, and
U.K.
|
|
|
5,543, 767
|
|
|
Retail stores
|
|
Own and lease (a)
|
|
|
|
(a)
|
|
The Company owns the property for five of its 1,421 stores.
|
The Company believes that its operating facilities and sales
offices are adequate and suitable for its current needs;
however, the Companys long-term growth may require
additional office and distribution space to service its
operations in the future.
At February 2, 2008, the Company operated 1,421 stores in
862 locations; all but five were leased. The leases typically
provide for an initial term between 10 and 15 years, with
renewal options permitting the Company to extend the term
between five and 10 years thereafter. The Company generally
has been successful in renewing its store leases as they expire.
Under most leases, the Company pays a fixed annual base rent
plus a contingent rent (percentage rent) based on
the stores annual sales in excess of specified levels. In
a majority of leases, the Company has a right to terminate
earlier than the specified expiration date if certain sales
levels are not achieved; such right is usually exercisable after
five years of operation. Most leases also require the Company to
pay real estate taxes, insurance and utilities and, in shopping
center locations, to make contributions toward the shopping
centers common area operating costs and marketing
programs. Most of the Companys lease arrangements provide
for an increase in annual fixed rental payments during the lease
term.
At February 2, 2008, the current terms of the
Companys store leases (assuming solely for this purpose
that the Company exercises all lease renewal options) were as
follows:
|
|
|
|
|
Years Lease
|
|
Number of
|
|
Terms Expire
|
|
Store Leases(a)(b)
|
|
|
2008-2009
|
|
|
69
|
|
2010-2012
|
|
|
225
|
|
2013-2015
|
|
|
215
|
|
2016 and later
|
|
|
492
|
|
22
|
|
|
(a)
|
|
Certain leases have more than one store included within the
leased premises.
|
|
(b)
|
|
Includes 43 executed leases related to future stores not yet
opened at February 2, 2008.
|
|
|
Item 3.
|
Legal
Proceedings.
|
The Company is a party to certain legal actions arising in the
normal course of its business. Although the amount of any
liability that could arise with respect to these actions cannot
be accurately predicted, in the opinion of the Company, any such
liabilities individually and in the aggregate are not expected
to have a material adverse effect on the financial position,
results of operations, or liquidity of the Company.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
No matters were submitted to a vote of security holders during
the fourth quarter of the year ended February 2, 2008.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
The Companys common stock is traded on the New York Stock
Exchange under the trading symbol TLB. Information
regarding the high and low sales prices per share of common
stock in 2007 and 2006 is set forth in Note 18,
Quarterly Results, of the Companys
consolidated financial statements included in Item 15.
The payment of dividends and the amount thereof is determined by
the Board of Directors and depends upon, among other factors,
the Companys earnings, operations, financial condition,
sufficient line of credit facilities, credit extended from
merchandise vendors, availability of letter of credit
facilities, capital and other cash requirements, and general
business outlook at the time payment is considered. Information
regarding the Companys payment of dividends for 2007 and
2006 is set forth in Note 18, Quarterly
Results, of the Companys consolidated financial
statements included in Item 15.
The number of holders of record of the Companys common
stock at April 11, 2008 was 537.
A summary of the Companys repurchase activity under
certain equity programs for the thirteen weeks ended
February 2, 2008 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Value of Shares that
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
May Yet Be
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased(1)
|
|
|
Share
|
|
|
Programs(2)
|
|
|
November 4, 2007 through December 1, 2007
|
|
|
|
|
|
$
|
|
|
|
$
|
16,746
|
|
December 2, 2007 through January 5, 2008
|
|
|
12,000
|
|
|
|
0.01
|
|
|
|
17,626
|
|
January 6, 2008 through February 2, 2008
|
|
|
325
|
|
|
|
0.01
|
|
|
|
18,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,325
|
|
|
$
|
0.01
|
|
|
$
|
18,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company repurchased 12,325 shares in connection with
stock forfeited by employees upon termination prior to vesting
under the Companys equity compensation plan, at an
acquisition price of $0.01 per share.
|
|
(2)
|
|
As of February 2, 2008, there were 1,842,298 shares of
nonvested stock that were subject to buyback at $0.01 per share,
or $18,423 in the aggregate, that the Company has the option to
repurchase if the employee terminates employment prior to
vesting.
|
Additionally, the Company did not have any shares available to
be repurchased under any announced or approved repurchase
program or authorization as of February 2, 2008.
23
Stock
Performance Graph
The following graph compares the percentage change in the
cumulative total shareholders return on the Companys
common stock on a year end basis, using the last day of trading
prior to the Companys fiscal year end, from
January 31, 2003, through February 1, 2008, with the
cumulative total return on the Standard & Poors
500 Stock Index (S&P 500 Index) and the Dow
Jones U.S. General Retailers Index for the same period.
Returns are indexed to a value of $100 and assume that all
dividends were reinvested.
Comparison
of Cumulative Five-Year Total Return of The Talbots, Inc.,
S&P 500 Index, and Dow Jones General Retailers
Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
|
|
Indexed Returns
|
|
|
Period
|
|
for the Years Ended
|
Company/Index
|
|
1/31/03
|
|
1/30/04
|
|
1/28/05
|
|
1/27/06
|
|
2/2/07
|
|
2/1/08
|
The Talbots, Inc.
|
|
|
100.00
|
|
|
$
|
126.72
|
|
|
$
|
102.19
|
|
|
$
|
113.98
|
|
|
$
|
98.87
|
|
|
$
|
39.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index
|
|
|
100.00
|
|
|
$
|
134.57
|
|
|
$
|
141.76
|
|
|
$
|
158.24
|
|
|
$
|
181.97
|
|
|
$
|
178.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dow Jones U.S. General Retailers Index
|
|
|
100.00
|
|
|
$
|
136.04
|
|
|
$
|
144.87
|
|
|
$
|
153.45
|
|
|
$
|
168.59
|
|
|
$
|
151.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Performance Graph in this Item 5 is not deemed to be
soliciting material or to be filed with
the SEC or subject to Regulation 14A or 14C under the
Securities Exchange Act of 1934 or to the liabilities of
Section 18 of the Securities Exchange Act of 1934, and will
not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent we specifically incorporate it by
reference into such a filing.
24
|
|
Item 6.
|
Selected
Financial Data.
|
The following selected financial data has been derived from the
Companys consolidated financial statements. Financial
information includes the operations of J. Jill since the date of
the acquisition, May 3, 2006. The information set forth
below should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations included under Item 7 below and the
consolidated financial statements and notes thereto included in
Item 15 below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Earnings Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,289,296
|
|
|
$
|
2,231,033
|
|
|
$
|
1,808,606
|
|
|
$
|
1,697,843
|
|
|
$
|
1,594,790
|
|
Net (loss) income
|
|
|
(188,841
|
)(1)
|
|
|
31,576
|
|
|
|
93,151
|
|
|
|
95,366
|
|
|
|
102,891
|
|
Net (loss) income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.56
|
)
|
|
$
|
0.60
|
|
|
$
|
1.76
|
|
|
$
|
1.73
|
|
|
$
|
1.82
|
|
Diluted
|
|
$
|
(3.56
|
)
|
|
$
|
0.59
|
|
|
$
|
1.72
|
|
|
$
|
1.70
|
|
|
$
|
1.78
|
|
Weighted average number of shares of common stock outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,006
|
|
|
|
52,651
|
|
|
|
52,882
|
|
|
|
54,969
|
|
|
|
56,531
|
|
Diluted
|
|
|
53,006
|
|
|
|
53,485
|
|
|
|
54,103
|
|
|
|
56,252
|
|
|
|
57,901
|
|
Cash dividends per share
|
|
$
|
0.52
|
|
|
$
|
0.51
|
|
|
$
|
0.47
|
|
|
$
|
0.43
|
|
|
$
|
0.39
|
|
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
208,803
|
|
|
$
|
262,609
|
|
|
$
|
376,204
|
|
|
$
|
324,759
|
|
|
$
|
330,011
|
|
Total assets
|
|
|
1,502,979
|
|
|
|
1,748,688
|
|
|
|
1,146,144
|
|
|
|
1,062,130
|
|
|
|
1,018,647
|
|
Total long-term debt, including current portion
|
|
|
389,027
|
|
|
|
469,643
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Stockholders equity
|
|
|
454,779
|
|
|
|
643,311
|
|
|
|
626,968
|
|
|
|
588,588
|
|
|
|
604,911
|
|
|
|
|
(1)
|
|
In the fourth quarter of 2007, the Company recorded an
impairment charge of $149.6 million before an income tax
benefit of $5.8 million relating to its acquired goodwill
and trademark, as well as pretax restructuring charges of
$9.3 million.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion and analysis of financial condition and
results of operations is based upon the Companys
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America and should be read in conjunction with
these statements and the notes thereto.
The Company follows the National Retail Federations fiscal
calendar. Where a reference is made to a particular year or
years, it is a reference to the Companys 52-week or
53-week fiscal year. For example, 2007 refers to the
52-week fiscal week year ended February 2, 2008,
2006 refers to the 53-week fiscal year ended
February 3, 2007, and 2005 refers to the
52-week fiscal year ended January 28, 2006.
Comparable stores are those that 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 comparable
Talbots Misses store, such Talbots Misses store is excluded from
the computation of comparable store sales for a period of
13 months so that the performance of the full Talbots
Misses assortment may be properly compared.
The Company has provided data regarding the J. Jill brands
comparable store sales from the date of the acquisition,
May 3, 2006. These comparable store sale statistics refer
to the percentage change in comparable store sales from the
previous year period. Management believes that the percentage
change in comparable store sales is a
25
meaningful measure and provides important information that is
helpful in understanding the Companys performance.
Business
Overview
Overall, 2007 proved to be a challenging and disappointing year
for the Company. For the year ended February 2, 2008, the
Companys comparable store sales declined by 5.5%. The
Company reported a net loss of $188.8 million or $3.56 per
share, which included impairment charges on the Companys
acquired intangible assets of $149.6 million before an
income tax benefit of $5.8 million, or $2.71 per share, and
acquisition related costs of $34.2 million or $0.41 per
share, compared to net income of $31.6 million or $0.59 per
share in 2006, including acquisition related costs of
$39.6 million or $0.46 per share.
Strategic
review of the Company and new leadership
In October 2007, the Company initiated a comprehensive strategic
review of its business and engaged a leading global consulting
firm to assist management in developing a long-range plan. This
review included the following areas: brand positioning,
productivity, store growth and store productivity, non-core
concepts, distribution channels, the J. Jill brand, and other
operating matters. The consulting firm completed its review in
the first quarter of 2008, from which the Company developed a
three-year strategic plan. The Company plans to implement or has
already begun to implement the following key initiatives in an
effort to improve operating profit and restore profitability.
The Company has begun to implement or is committed to making the
following improvements to both brands:
Talbots brand
Under new executive leadership
in design, merchandising, and marketing areas, the brands
mission is to form a distinct point of view for the brand
through improved merchandise offerings which will be
communicated consistently through all aspects that touch the
customer, including store visual signage, catalog design, and
website visuals. The brands key strategic initiatives are
described in Item 1. Business above.
J. Jill brand
With the addition of the
new design, merchandising, and marketing team leadership in 2006
and 2007, as well as the newly appointed brand President, the
team will focus in 2008 on merchandise improvement and building
brand awareness through a more aggressive catalog and direct
mail prospecting especially in the areas where retail stores are
located. The brand had a difficult year in 2007 but continued to
make progress in improving the product offerings and customer
awareness to broaden and strengthen the appeal of the brand. The
brand began to implement a number of initiatives in 2007 which
are expected to be the foundation for the brands continued
improvement in 2008. These initiatives are described in
Item 1. Business above.
The Company has begun to implement or is committed to making the
following operational improvements:
|
|
|
|
|
Beginning in November 2007, the Talbots brand implemented a new
markdown cadence strategy which allows for markdowns on a
monthly basis ensuring markdown products at a more relevant time
for the customer and designed to improve gross margins through
better product flow.
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|
|
|
The Company plans to reduce its current cost structure by
maintaining tighter expense controls, including reducing
marketing spending, improving inventory management and inventory
turns, improving utilization of corporate assets, and
right-sizing the organization across brands.
|
|
|
|
The Company intends to drive improved gross margins by a
combination of managing leaner inventories, better product flow
and healthy regular price selling, and implementing a price
optimization software tool by the third quarter of 2008.
|
|
|
|
In 2008, the Company plans to close approximately 95
underperforming stores in 2008, including all remaining 75
stores within the Companys Talbots Kids and Talbots Mens
business concepts and all three stores within the United
Kingdom. The Company believes that it should concentrate on its
Talbots brand core concepts (Misses, Woman, and Petites) and has
identified approximately 15 of the Kids and Mens store locations
to date as convertible to other concepts. The Company is
committed to continually assessing individual stores
profitability and to closing or converting stores in the future
as appropriate.
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|
|
|
The Company is reducing its capital spending in 2008, especially
relating to store openings and renovations. Capital spending on
store openings and renovations is expected to decrease by
approximately 25% in comparison with 2007. The Company plans on
opening approximately 46 new stores, including 27 under the
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26
|
|
|
|
|
Talbots brand name and 19 under the J. Jill brand name, in
comparison to 75 stores opened in 2007, including 43 under the
Talbots brand name and 32 under the J. Jill brand name.
|
The Company has marked 2008 as a transition year as it
represents the launch of a three-year initiative to strengthen
and grow the business. In addition to the above initiatives, the
Company has identified five key growth platforms upon which to
build its business. Recognizing the opportunity to build on
Talbots brand close-in concepts, which include
Talbots Woman, Talbots Accessories & Shoes, and
Talbots Collection, the Company also plans to improve growth
through penetration into premium-level outlet centers and
restoring profitability at the J. Jill brand. To assist in the
execution of its plan for profitability, the Company is under
the direction of the newly appointed Chief Executive Officer and
President and has added significant new key executive talent in
the fourth quarter of 2007 and early 2008 in the areas of brand
leadership, creative, merchandising, marketing, and
merchandising planning and allocation. Included within the new
executive team is the newly established position of Chief
Creative Officer for the Talbots brand which was created as part
of the Companys goal to migrate to a design driven brand.
During 2007, the Company incurred $15.2 million or $0.18
per share, related to these executive hires and strategic review
consulting fees. The expenses incurred for the executive hires
include, but are not limited to, executive search fees, signing
bonuses, stock-based compensation expense, and relocation
expenses.
The J.
Jill brand and the effects of the acquisition on the
Companys results
The acquisition of J. Jill has had, and is expected to continue
to have, a material effect on the Companys financial
position, results of operations, and cash flows. For the year
ended February 2, 2008, J. Jill represented 21% of the
Companys net sales, compared to 16% for the year ended
February 3, 2007 from the date of acquisition. As of
February 2, 2008, the Company operated 271 J. Jill brand
retail stores, of which 66 have been opened since the date of
acquisition.
To date, the J. Jill brand has underperformed in comparison to
the Companys expectations. The J. Jill brands retail
store sales continue to reflect declines in comparable store
sales: 4.6% decline for the year ended February 2, 2008,
and 4.4% decline for the year ended February 3, 2007 from
the date of acquisition. Although the brand has implemented
initiatives since the date of the acquisition to improve its
overall product offerings, such as enhancing its color offering,
reducing the number of repeated styles in the total product
offering, and unifying its promotional and marketing calendars,
the brand has not seen the response from its customers it has
anticipated. In addition to the weak response to the
brands product offering, the Company believes that the
overall decline, especially in 2007, has been impacted by the
uncertain macro-economic environment causing consumers to reduce
their spending. The Company is committed to improving the J.
Jill brands performance of its existing store network
through improved merchandise, catalog prospecting to increase
customer acquisition, and marketing to build greater brand
awareness. The Company plans to better manage the brands
store portfolio and plans to limit further expansion until its
performance is improved.
During 2007, the brands direct marketing business,
especially within its catalog channel, has also operated below
expectations. The brands key strategy in 2007 was to drive
catalog sales by improving the overall creative presentation of
its catalog. This strategy was rolled out in the third quarter
of 2007 but the effects were not seen during 2007 at the levels
anticipated.
As a result of the poor operating performance from the brand,
both in its retail stores and direct marketing, coupled with the
weakened economy, the Company was required to complete an
impairment test on the acquired intangibles which resulted in a
write-down of goodwill of $134.0 million and a write-down
of trademarks of $15.6 million, before an income tax
benefit of $5.8 million.
Increased levels of selling, general, and administrative costs
have been incurred in 2007 primarily relating to the acquisition
of J. Jill. Of the 240 basis point increase in the
Companys selling, general, and administrative costs as a
percentage of net sales during 2007, approximately
150 basis points of the increase was due to higher J. Jill
brand incurred costs as a percentage of net sales in comparison
to the Talbots brand. The increases were primarily in the areas
of payroll, catalog production, and marketing costs. Management
currently is initiating steps with the objective of improving
the J. Jill brands sales productivity (measured by metrics
such as sales per square foot, sales per catalog page, etc).
This improvement, if achieved, would result in a decrease in
selling, general, and administrative costs as a percentage of
net sales compared to current results. However, management is
not able
27
to predict when, or if, such changes at the J. Jill brand will
occur and to what extent it may favorably impact the
Companys financial performance.
The Company has incurred approximately $73.8 million of
acquisition related costs since the date of acquisition, of
which $34.2 million was incurred during 2007. Acquisition
related costs include interest expense on the Companys
five year term loan facility that was used to largely finance
the acquisition, amortization of the acquired J. Jill
intangibles, and integration expenses. The Company has made
significant progress since the acquisition in integrating the
Companys two brands, especially in back office support
functions. The Company realized approximately $36 million
in cost synergies in 2007 resulting from four areas: sourcing,
retail catalog operations, distribution, and back office support
functions.
Since the acquisition of J. Jill, the Companys working
capital needs have increased. This increased working capital
requirement is being driven by the Companys net losses,
the capital required for new store openings for both brands, and
the repayments of the acquisition related debt. The Company has
increased its availability under its working capital line of
credit facilities by $25.0 million, from
$115.0 million to $140.0 million during 2007. In March
2008, the Company increased its availability under its working
capital line of credit facilities by an additional
$25.0 million, from $140.0 million to
$165.0 million. The Company is currently in discussions
with other banks to further increase its availability under its
existing $165.0 million working capital line of credit
facilities. The Companys Board of Directors has authorized
the Company to seek additional availability up to
$200.0 million in total to address future working capital
needs. There is no assurance that the Company will be successful
in increasing its current working capital facility or achieve
such additional availability. There also can be no assurance
that its current working capital availability will at all times
be sufficient to meet the Companys working capital needs
in the amounts needed.
The
effect of Talbots brand on the Companys
results
Talbots brand comparable store sales declined by 5.7% in 2007.
The brand saw declines in comparable store sales across all
business concepts and geographical regions in 2007. Management
believes that the brands negative sales results were
impacted by a weak customer response to the brands
merchandise, primarily in its casual merchandise, compounded by
an uncertain macro-economic environment throughout the year. As
a result, deeper discounts than planned were taken in order to
liquidate the excess inventory in both the Companys
mid-season and semi-annual sale events, which significantly
impacted gross margins for the brand.
The Companys Talbots charge card program accounted for
$43.1 million in finance charge income in 2007, down 1.6%
from 2006. Customer accounts receivable at the end of 2007 were
$210.9 million, up 3.1% from $204.6 million at the end
of 2006. As an initiative for 2008, the Company is planning to
administer the J. Jill charge card in-house commencing in the
third quarter of 2008. The Company expects to benefit from cost
synergies and finance charge income in late 2008 and beyond from
the initiative.
The
Companys direct marketing business
Net sales for the Companys direct marketing business
increased by approximately 11% in 2007 compared to 2006
primarily due to a full year of J. Jill brand direct marketing
sales included in 2007 in comparison to J. Jill brand direct
marketing sales since the date of the acquisition included in
2006. The Company continues to see strength in its Internet
channel with Internet representing 56% of the total
Companys direct marketing sales in 2007 compared to 49% in
the prior year. The Company was successful in selling markdown
merchandise in its new Talbots web-based outlet, which was
introduced in August 2007. The Company plans to continue to
utilize the web as a key clearance tool to improve product flow
in the future. In 2008, the Company expects to strengthen its
direct marketing business through increased prospecting and
improved web development.
Looking
ahead to 2008 and beyond
While the Company was disappointed with its operating
performance during 2007, the specialty apparel retail segment of
the industry as a whole, generally, experienced unfavorable
results. The Company is taking steps designed to improve its
performance in 2008 and beyond.
The future success of the Companys brands and improvements
in its sales and operating performance for 2008 and beyond is
substantially dependent upon the achievement of the above
initiatives to improve comparable store sales results, including
the level of full price versus markdown selling, and to reduce
the Companys current cost
28
structure. In addition, the Companys performance will
depend on managements ability to anticipate and
successfully respond to changing customer tastes and fashion
preferences and customer acceptance of each brands
seasonal fashion offerings. Decisions with respect to product
designs are generally made well in advance of the season and
frequently before fashion acceptance is evidenced by customer
purchases. To the extent that the Company fails to anticipate,
identify, and respond effectively to consumer preferences, sales
will be adversely affected and the markdowns required to move
the resulting excess inventory will adversely affect the
Companys results.
Sales at the Talbots brand to date in 2008 have been less than
planned, although significantly improved gross margin has
largely offset this sales shortfall, primarily as a result of
the brands new promotional markdown cadence. As discussed
above, the Talbots brand is in the early stages of implementing
its brand-specific strategic initiatives, which include a
design-driven merchandise approach and substantially increased
web-based customer marketing. The Company expects these
initiatives to further improve gross margin and operating
efficiencies in 2008. Sales to date at the J. Jill brand have
also been below plan, especially in the retail business, while
the Company revitalizes its merchandise assortments as part of
its recently announced strategic initiatives.
Additionally, general consumer confidence and retail economic
conditions influence the Companys operating results.
Currently, the United States is experiencing a continued
deterioration in the macro-environment, including continued
negative impact on U.S. consumer discretionary spending,
the current residential real estate downturn, the disruptions
and significant tightening in the U.S. credit markets,
recessionary and inflationary pressures, high energy prices,
declining value of the U.S. dollar, higher unemployment
rates, and stock market declines. As a result, it is difficult
to ascertain if the initiatives will be achieved and whether the
Company will be successful in achieving improved operating
performance in 2008 and beyond.
Results
of Operations
Cost of sales, buying and occupancy expenses are comprised
primarily of the cost of product merchandise, including inbound
freight charges; shipping, handling and distribution costs
associated with the Companys catalog operations; salaries
and expenses incurred by the Companys merchandising and
buying operations; and occupancy costs associated with the
Companys retail stores. Occupancy costs consist primarily
of rent and associated depreciation, maintenance, property
taxes, and utilities.
Selling, general and administrative expenses are comprised
primarily of the costs related to employee compensation and
benefits in the selling and administrative support functions;
catalog operation costs relating to catalog production and
telemarketing; advertising and marketing costs; the cost of the
Companys customer loyalty program; costs related to the
Companys management information systems and support; the
costs and income associated with the Companys credit card
operations; and amortization expense relating to the
Companys intangible assets. Additionally, costs associated
with the Companys warehouse operations are included in
selling, general and administrative expenses and include costs
of receiving, inspection, warehousing, and store distribution.
Warehouse operations costs for the years ended February 2,
2008, February 3, 2007, and January 28, 2006 were
approximately $37.2 million, $34.8 million, and
$25.7 million, respectively.
The Companys gross margins may not be comparable to
certain other companies, as there is diversity in practice as to
which costs companies include in selling, general and
administrative expenses and cost of sales, buying and occupancy
expenses. Specifically, the Company includes the majority of the
costs associated with its warehousing operations in selling,
general and administrative expenses, while other companies may
include these costs in cost of sales, buying and occupancy
expenses.
29
The following table sets forth the percentage relationship to
net sales of certain items in the Companys consolidated
statements of operations for the fiscal periods shown below:
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|
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|
|
|
|
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|
Year Ended
|
|
|
|
February 2,
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February 3,
|
|
|
January 28,
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|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy expenses
|
|
|
67.9
|
|
|
|
65.8
|
|
|
|
63.8
|
|
Selling, general and administrative expenses
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|
|
33.1
|
|
|
|
30.7
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|
|
|
27.8
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|
Impairment of goodwill and trademark
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|
|
6.5
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|
|
|
|
|
|
|
|
|
Impairment of store assets
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|
|
0.2
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|
|
|
0.1
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|
|
|
|
|
Restructuring charges
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|
|
0.4
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|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(8.1
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)
|
|
|
3.4
|
|
|
|
8.4
|
|
Interest expense, net
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|
|
1.5
|
|
|
|
1.1
|
|
|
|
0.2
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|
(Loss) Income before taxes
|
|
|
(9.6
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)
|
|
|
2.3
|
|
|
|
8.2
|
|
Income taxes (benefit )
|
|
|
(1.4
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)
|
|
|
0.9
|
|
|
|
3.0
|
|
Net (loss) income
|
|
|
(8.2
|
)%
|
|
|
1.4
|
%
|
|
|
5.2
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%
|
2007
Compared to 2006
Net
Sales
The following table shows net retail sales by brand and net
direct marketing sales in total for the years ended
February 2, 2008 and February 3, 2007 (in millions).
Net sales reported for the J. Jill brand for the year ended
February 3, 2007 included 40 weeks of net sales from
the May 3, 2006 acquisition date.
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|
|
|
|
|
|
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February 2,
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|
|
February 3,
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|
|
2008
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|
2007
|
|
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Net retail store sales: Talbots brand
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|
$
|
1,533.8
|
|
|
$
|
1,603.8
|
|
Net retail store sales: J. Jill brand
|
|
|
327.6
|
|
|
|
241.8
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|
Net direct marketing sales: total Company
|
|
|
427.9
|
|
|
|
385.4
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,289.3
|
|
|
$
|
2,231.0
|
|
|
|
|
|
|
|
|
|
|
Net sales in 2007 were $2,289.3 million compared to
2006 net sales of $2,231.0, an increase of
$58.3 million, or 2.6%.
Talbots
Brand Retail Stores
Talbots brand retail stores sales in 2007 decreased by
$70.0 million, or 4.4%, in comparison to retail store sales
in 2006. Reflected in Talbots brand retail store sales was an
$84.3 million, or 5.7%, decline in comparable store sales
for the period. Management believes that the brands
negative sales results were impacted by a weak customer response
to the brands merchandise, primarily its casual
merchandise. As a result, deeper discounts than planned were
taken in order to liquidate the excess inventory during the
Companys mid-season and semi-annual sale events. In
November 2007, the Company implemented a new promotional cadence
strategy which provides for sale events on a monthly basis
rather than the Companys historical mid-season and
semi-annual sale events. The change in promotions is expected to
provide consumers with marked down inventory at a more relevant
time and in turn is expected to improve product flow and gross
margins for the brand. Additionally, management believes that
the uncertain macro-economic environment impacted the decline in
sales as consumers reduced their spending. The Companys
goal in 2008 is to deliver more desirable merchandise
assortments, building a lifestyle brand that creates greater
synergy between the brands refined and casual product mix.
Partially offsetting the decline in comparable store sales for
the brand was the increase in store sales driven by the increase
in the number of Talbots brand retail stores. As of
February 2, 2008, the Company operated a total of 1,150
Talbots brand retail stores in 595 locations with gross and
selling square footage of approximately 4.5 million square
feet and 3.5 million square feet, respectively. This
represents an increase of approximately 2% in gross and
30
selling square footage from February 3, 2007, when the
Company operated 1,125 retail stores in 583 locations with gross
and selling square footage of approximately 4.4 million
square feet and 3.4 million square feet, respectively.
J.
Jill Brand Retail Stores
J. Jill brand retail store sales in 2007 include sales
results for the entire period, while J. Jill brand retail store
sales in 2006 include sales results since the date of
acquisition, May 3, 2006. As of February 2, 2008, the
Company operated 271 J. Jill brand retail stores in 267
locations with gross and selling square footage of approximately
1.0 million square feet and 0.8 million square feet,
respectively. This represents an increase of approximately 10%
in gross and selling square footage from February 3, 2007,
when the Company operated 239 J. Jill brand retail stores with
gross and selling square footage of approximately
0.9 million square feet and 0.8 million square feet,
respectively. Since the date of the acquisition, the Company has
opened 66 J. Jill brand stores and the gross and selling square
feet has increased by 24%.
The J. Jill brands retail store sales reflected a
$13.0 million, or 4.6%, decline in comparable store sales
for the fifty-two weeks ended February 2, 2008 compared to
the same period of the prior year. Management believes that the
decline in stores sales was due to a weak customer response to
its regular-price merchandise, especially in the classifications
of sweaters and pants. Management also believes that the
brands performance was negatively affected by the
uncertain macro-economic environment. Since the date of the
acquisition, the brands assortments have gone through
substantial changes and the response to the varying assortments
has not been at the levels anticipated. The brands
assortments have changed direction due to the implementation of
the brands new merchandising team and the migration to a
design driven brand. In the fourth quarter of 2007, the Company
hired another key member of the merchandising team, a new
President for the brand, with extensive womens apparel
merchandise experience. The Company believes that the steps
taken by the brands merchandising team to improve the
product offerings in 2008 will provide for assortments that
reflect easy sophistication which is in-line with what
management believes its customers desire. In addition, in 2008
the brand hopes to drive increased customer traffic through
promotional programs as well as increased direct mailings to
promote the overall brand awareness in key markets.
Based upon J. Jill brands operating performance during
2007 and the brands reduced forward projections, the
Company reported an impairment charge to the acquired goodwill
and trademark in the amount of $149.6 million before the
effect of income taxes, or $2.71 per share. See Impairment
of Goodwill and Trademark below.
Direct
Marketing Sales
The $42.5 million, or 11.0%, increase in direct marketing
sales is primarily attributable to the acquired catalog and
Internet business of the J. Jill brand. Direct marketing sales
in 2007 include the sales results for both the Talbots and J.
Jill brands for the entire period, while the direct marketing
sales in 2006 include the sales results for Talbots for the
entire period and sales results for J. Jill since the
acquisition date, May 3, 2006. The Talbots brand
contributed to the increased sales, especially within the
brands Internet channel primarily due to the introduction
of the Talbots brand web outlet in August 2007. Both brands
continue to experience growth in Internet sales, with Talbots
Internet brand representing 56% of its direct business in 2007
in comparison with 47% in 2006, and J. Jills Internet
brand representing 57% of its direct business in 2007 in
comparison with 54% for the period from the date of the
acquisition through February 3, 2007. The percentage of the
Companys net sales derived from direct marketing increased
from 17.3% in 2006 to 18.7% in 2007, primarily due to the
acquisition of J. Jill. In an effort to build a stronger direct
marketing business in 2008, the Companys key initiatives
are to focus on prospecting and recruiting customers as well as
developing web growth strategies.
Cost of
Sales, Buying, and Occupancy Expenses
Cost of sales, buying and occupancy expenses increased as a
percentage of net sales to 67.9% in 2007, which included results
for the Talbots and J. Jill brand for the entire period, from
65.8% in 2006, which included results for the Talbots brand for
the entire year and the J. Jill brand from the date of
acquisition. This represents a 210 basis point increase in
cost of sales, buying, and occupancy expenses as a percentage of
net sales over the prior year with pure merchandise gross margin
decreasing by approximately 50 basis points. The decline in
pure merchandise gross margin was primarily due to increased
levels of markdown selling of the Talbots brand as compared to
the prior year in an effort to clear out excess inventories from
the Companys mid-season and semi-annual sale events. In
31
November 2007, the Company implemented a new promotional cadence
strategy which will provide for markdowns on a monthly basis
rather than at the brands four historical sales events a
year. The Company expects that this strategy will achieve better
gross margins for the brand at the same time as providing the
customer with products at a more relevant time. The Company also
expects to improve its margins in 2008 by implementing a new
markdown optimization tool for both brands beginning in the
third quarter of 2008. This tool is expected to assist the
Company with its monthly markdown decision making.
Additionally, an approximately 140 basis point increase was
driven by higher occupancy and merchandising costs as a
percentage of sales, primarily related to the J. Jill brand. As
an initiative for 2008, the Company believes that it can reduce
merchandising costs through improved sourcing advantages,
including more direct sourcing and more effective fabric
purchasing strategies.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
net sales increased to 33.1% in 2007, which included results for
the Talbots and J. Jill brands for the entire period, compared
to 30.7% in 2006, which included results for the Talbots brand
for the entire period and the J. Jill brand since the
acquisition date. This represents a 240 basis point
increase in selling, general and administrative expenses as a
percentage of net sales over the prior year. Contributing to the
increased selling, general, and administrative costs were higher
J. Jill brand incurred costs as a percentage of net sales in
comparison to the Talbots brand, especially in the areas of
store payroll, catalog production, and marketing costs, which
accounted for approximately 150 basis points of the
increase, compounded by the decline in comparable store sales
during the period.
The Company expects to decrease its marketing costs in 2008 in
comparison to 2007 as the Company has decided to eliminate
television and national print advertising in 2008. The Company
will redirect a portion of the marketing costs to enhance
customer outreach through increased catalog prospecting and
web-based marketing.
Additionally, during the third and fourth quarter of 2007, the
Company incurred expenses for executive compensation related to
the commencement of employment of key members of the
Companys executive management team, including but not
limited to the President and Chief Executive Officer;
appointment of the Companys Chief Operating Officer; Chief
Creative Officer for the Talbots brand; President of the J. Jill
brand; and the Executive Vice President, Chief Merchandising
Officer for the Talbots brand. These expenses contributed to the
increase by approximately 35 basis points, or $0.15 per
share.
Impairment
of Goodwill and Trademark
In 2007, the Company recorded an impairment of goodwill and
trademarks of $149.6 million, before an income tax benefit
of $5.8 million. The Company applies the provisions of
SFAS No. 142,
Goodwill and Other Intangible
Assets
, to goodwill and indefinite lived trademarks and
reviews annually for impairment or more frequently if impairment
indicators arise. The Company has elected the first day of each
fiscal year as its annual measurement date. The Company reviewed
its goodwill and trademarks for impairment during the fourth
quarter of 2007 in addition to its annual measurement date due
to the weak sales and operating performance of the Company. As a
result of the goodwill and trademark impairment tests, the
Company concluded that the carrying amounts of the Stores and
Direct Marketing reporting units of the J. Jill brand exceeded
its fair value. The goodwill impairment charge of
$134.0 million was determined by comparing the carrying
value of goodwill of the reporting units with the implied fair
value of goodwill of the reporting units. The trademark
impairment charge of $15.6 million, before an income tax
benefit of $5.8 million, was determined by comparing the
carrying value of the trademark with the estimated fair value of
the trademark. No impairment charges were recorded during 2006.
The Company continues to believe in the potential of the J. Jill
brand as a significant future growth vehicle for the Company.
Impairment
of Store Assets
Impairment of store assets was $5.0 million in 2007,
excluding store impairments associated with the closing of the
Talbots Kids and Talbots Mens business concepts of
$1.0 million as these charges are included in restructuring
charges, in comparison to $1.3 million in 2006. As a result
of the decline in sales performance during 2007 for the
Companys retail stores coupled with revised future
projections, the Companys impairment charge on store
assets was increased from the prior year as well as historical
levels.
32
Restructuring
Charges
Restructuring charges were $9.3 million in 2007 compared to
$0 in 2006. In October 2007, the Company announced that it
initiated a comprehensive strategic review of its business and
engaged a leading global consulting firm to assist management in
developing a strategic plan. This review included the following
areas: brand positioning, productivity, store growth and store
productivity, non-core concepts, distribution channels, the J.
Jill brand, and other operating matters. The consulting firm
completed its review in the first quarter of 2008, from which
the Company developed a three-year strategic plan to strengthen
and grow the business. The Company incurred $9.3 million of
costs relating to its strategic business plan in the fourth
quarter of 2007 and refers to these costs as restructuring
charges. Of the $9.3 million, $5.4 million relates to
the closing of the Talbots Kids and Talbots Mens business
concepts (see discussion below), $2.7 million relates to
consulting services, $0.9 million relates to severance, and
$0.3 relates to other non-cash charges The Company expects to
incur material restructuring charges in 2008, in addition to the
closing of the Talbots Kids and Talbots Mens business concepts,
relating primarily to severance and professional services, as it
implements the initiatives of its long-term strategic plan.
As part of the strategic review, the Company announced on
January 4, 2008 that it would close its Talbots Kids and
Talbots Mens business concepts, which includes closing the
remaining 75 store locations. The strategic review revealed that
these business concepts did not demonstrate the potential to
deliver an acceptable long-term return on investment. For the
year ended February 2, 2008 the Talbots Kids and Talbots
Mens business concepts represented approximately 5% of the
Companys total net sales. The Company notified affected
employees in early January 2008 of the decision. The Company
plans to close all associated stores by September 2008. In the
fourth quarter of 2007, the Company recognized $5.4 million
of costs related to the closure of the Talbots Kids and Talbots
Mens business concepts, consisting of non-cash charges of
$3.5 million for asset impairments and accelerated
depreciation, $0.6 million of severance, $0.4 million
of lease exit costs (negotiated termination fees of
$0.7 million net of non-cash deferred credits of
$0.3 million), and $0.9 million of administrative and
other costs. The closures will result in a reduction of
workforce of approximately 800 full and part-time employees, or
approximately 5% of the Companys total workforce. The
related severance will be expensed over the period of retention.
The Company expects to incur additional costs of approximately
$40.0 million in 2008, primarily related to lease exit
costs. The lease exit costs are recorded when the Company
negotiates a settlement with the landlord or vacates the
existing space. If the Company is successful in negotiating
settlements with the respective landlords, the Company
anticipates that the lease exit costs will be paid by the third
quarter of 2008. In the event that the Company is not successful
in negotiating settlements, cash payments may be paid over the
various remaining lease terms, which is currently through 2020.
The Company will be reporting the operating results of the
Talbots Kids and Talbots Mens business concepts as part of
ongoing operations through the second quarter of 2008. Upon
closing the business concepts, which the Company believes will
occur in the third quarter of 2008, these business concepts will
be reported as discontinued operations and their operating
results will be reclassified accordingly.
Net
Interest Expense
Net interest expense in 2007 increased to $34.6 million
from $24.5 million in 2006. In February 2006, the Company
borrowed $400.0 million under a short-term facility in
connection with the acquisition of J. Jill. The interest cost
associated with this debt was largely offset by the earnings on
the invested cash until May 3, 2006, when the borrowed
funds were used to acquire J. Jill, resulting in less net
interest expense in 2006 compared to 2007. On July 27,
2006, the short-term facility was converted into a five-year
term loan, bearing interest at a rate of LIBOR plus an
applicable rate of 0.35%, with principal and interest due in
quarterly installments. The Companys average level of debt
outstanding, including short-term and long-term borrowings, as
well as average interest rates on the borrowings, were
relatively consistent in both periods; $541.2 million in
average borrowings in 2007 compared to $543.6 million in
average borrowings in 2006, and average interest rates of 5.8%
in both periods.
Additionally, a portion of the increase in interest expense was
due to the Companys election to change its financial
statement classification for interest related to income taxes in
connection with the Companys adoption of
FIN No. 48 on February 4, 2007. The Company has
recorded $4.1 million of tax-related interest in net
interest expense in 2007, while no tax-related interest was
recorded in net interest expense in 2006.
33
Income
Tax (Benefit) Expense
The income tax benefit in 2007 was $32.1 million, compared
to an income tax expense in 2006 of $18.9 million. The
effective tax rate in 2007 was 14.5%. Excluding the effect of
the impairment of goodwill the effective tax rate was 35.7%
compared to 37.5% in 2006. The decrease in the effective tax
rate was primarily due to the inclusion of certain foreign
income in 2007. On February 4, 2007, the Company adopted
FIN No. 48 and elected to classify its interest
related to income taxes in net interest expense rather than
income tax expense. In 2007, $4.1 million of tax-related
interest was recorded in net interest expense. In 2006, the
tax-related interest was reflected in income tax expense.
Acquisition
Related Costs
Acquisition related costs in 2007 were approximately
$34.2 million, compared to approximately $39.6 million
in 2006. Since the date of acquisition, the Company has incurred
$73.8 million of acquisition related costs. Acquisition
related costs include interest expense on the Companys
acquisition debt, amortization of acquired intangibles, and
integration expenses.
Of the total $34.2 million of acquisition related costs in
2007, $0.7 million was included in cost of sales, buying
and occupancy expense, $14.6 million was included in
selling, general and administrative expense, and
$18.9 million was included in interest expense within the
Companys consolidated statement of operations. Of the
total $39.6 million of acquisition costs in 2006,
$2.7 million was included in cost of sales, buying and
occupancy expense, $19.3 million was included in selling,
general and administrative expense, and $17.6 million was
included in interest expense within the Companys
consolidated statement of operations.
Interest expense in 2007 on the acquisition debt increased by
$1.3 million compared to 2006 due to the inclusion of a
full year of gross interest expense in 2007, offset by
repayments. The increased level of interest expense is expected
to continue until the term loan is fully repaid in 2011.
However, the interest expense specific to the term loan will
decrease over time as the principal is repaid. The interest
expense on the term loan will be impacted by changes in interest
rates, which are re-set every three months based on changes in
LIBOR.
Amortization of the J. Jill intangibles was $11.1 million
in 2007 compared to $8.2 million in 2006. The
$1.8 million increase in amortization expense is due to the
inclusion of a full year of amortization expense in 2007.
Amortization levels will continue to increase until 2010, at
which time the amortization levels will start to gradually
decline until 2019.
As the integration of J. Jill has progressed, integration
expenses as a percentage of total acquisition related costs have
decreased. Integration costs in 2007 were $4.2 million and
have decreased by $9.6 million from 2006 integration
expenses of $13.8 million.
The Company has made significant progress since the acquisition
integrating the Companys two brands, especially in back
office functions. The Company realized approximately
$36.0 million in cost synergies in 2007 resulting from four
areas: sourcing, retail catalog operations, distribution, and
back office support functions.
2006
Compared to 2005
Net
Sales
The following table shows net retail sales by brand and net
direct marketing sales in total for the years ended
February 3, 2007 and January 28, 2006 (in millions).
Net sales reported for the J. Jill brand include 40 weeks
of net sales from the May 3, 2006 acquisition date.
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net retail store sales: Talbots brand
|
|
$
|
1,603.8
|
|
|
$
|
1,543.6
|
|
Net retail store sales: J. Jill brand
|
|
|
241.8
|
|
|
|
|
|
Net direct marketing sales: total Company
|
|
|
385.4
|
|
|
|
265.0
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,231.0
|
|
|
$
|
1,808.6
|
|
|
|
|
|
|
|
|
|
|
Net sales in 2006 were $2,231.0 million compared to
2005 net sales of $1,808.6, an increase of
$422.4 million, or 23.4%.
34
Talbots
Brand Retail Stores
The $60.2 million, or 3.9%, increase in Talbots brand
retail store sales was driven by two factors. First, driving
increased sales was the increase in the number of Talbots brand
stores. As of February 3, 2007, the Company operated a
total of 1,125 Talbots brand stores with gross and selling
square footage of approximately 4.4 million square feet and
3.4 million square feet, respectively. This represents an
increase of approximately 2.7% in gross and selling square
footage from January 28, 2006, when the Company operated
1,083 stores with gross and selling square footage of
approximately 4.3 million square feet and 3.3 million
square feet, respectively.
Secondly, reflected in retail stores sales was a
$19.1 million, or 1.3%, increase in comparable stores
sales. Comparable store sales were strong during the April to
September period, these months representing a combined 5.5%
increase over the prior year, offset by declines in the other
months. Management believes that comparable store sales were
primarily driven by the brands improved classic
merchandise offering during the period, as well as certain key
initiatives put into place during the third quarter, such as
offering its customer more choices and diversity by increasing
style count, sharpening price points across virtually all
categories of merchandise, and responding to the customers
buying patterns and adjusting the Companys marketing and
promotional calendar. Due to the success of the early fall
season, the Company anticipated continued strong sales trends
for the fourth quarter and therefore increased inventory
purchases. The fourth quarter sales trends were lower than
anticipated leading to higher levels of markdown merchandise and
deeper discounts during the fourth quarter. Additionally,
management believes that the timing of promotions,
underperforming catalogs, as well as adverse weather conditions
in key markets led to decreased customer traffic and declines in
comparable store sales in February and March of 2006.
J.
Jill Brand Retail Stores
As of February 3, 2007, the Company operated 239 J. Jill
brand retail stores with gross and selling square footage of
approximately 0.9 million and 0.8 million,
respectively. Since the date of acquisition, May 3, 2006,
the Company has opened 34 J. Jill brand stores. The J. Jill
brands retail store sales reflected a 4.4% decline in
comparable store sales since the date of acquisition compared to
the same period of the prior year, which management believes was
a continuation of sales trends resulting from strategies put in
place prior to the acquisition. Specifically, management
believes that comparable store sales were influenced by a weak
top line performance of merchandise that was not brand
appropriate, which negatively impacted regular and markdown
selling for the brand. Additionally, management believes that a
number of significant shifts in the promotional calendar, as
well as the reduction in catalog circulation during the period,
led to decreased customer traffic and spending resulting in
lower than expected retail sales for the brand. The Company has
seen a sequential quarterly improvement during 2006 in
comparable store sales performance since the date of
acquisition, with the fourth quarter yielding 1.5% positive
comparable store sales results. The Company executed certain key
initiatives which management believes assisted in improved
comparable store sales, such as making adjustments to the color
offering of the merchandise, offering the customer a more
consistent price structure across all merchandise
classifications, and unifying the promotional and marketing
calendars.
Direct
Marketing Sales
The $120.4 million, or 45.4%, increase in direct marketing
sales is primarily attributable to the acquired catalog and
Internet business of the J. Jill brand. For the year ending
February 3, 2007, Talbots Internet sales represented 47% of
their direct marketing business in comparison to 42% for the
same period of the prior year, and J. Jills Internet sales
represented 54% of their direct marketing business since the
date of the acquisition. The percentage of the Companys
net sales derived from direct marketing increased from 14.6% in
2005 to 17.3% in 2006 due to the acquisition of J. Jill and the
continued growth of the Companys Internet sales.
Cost of
Sales, Buying, and Occupancy Expenses
Cost of sales, buying and occupancy expenses increased as a
percentage of net sales to 65.9% in 2006, which included results
for the Talbots brand for the entire year and the J. Jill brand
from the date of acquisition, from 63.8% in 2005, which included
results for the Talbots brand only. This represents a
210 basis point deterioration in cost of sales, buying, and
occupancy expenses as a percentage of net sales over the prior
year, with pure product gross margin decreasing by approximately
130 basis points. The decline in gross margin was primarily
due to lower markups resulting from sharper price points offered
across virtually all merchandise categories as well as increased
35
levels of markdown selling of the Talbots brand as compared to
the prior year. The increased markdown selling was attributable
to both the planned increased inventory levels for the second
quarter sales event and the clearing of excess inventory from
the fall season. Additionally, a 40 basis point
deterioration was driven by higher occupancy costs as a
percentage of net sales incurred across both brands.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses as a percentage of
net sales increased to 30.7% in 2006, which included results for
the Talbots brand for the entire year and the J. Jill brand from
the date of acquisition, compared to 27.8% in 2005, which
included results for the Talbots brand only. This represented a
290 basis point deterioration in selling, general, and
administrative expenses as a percentage of net sales over the
prior year, with acquisition related costs incurred during the
period accounting for approximately 90 basis points of the
increase. Also contributing to the increase was higher J. Jill
brand-incurred costs as a percentage of net sales in comparison
to the Talbots brand, especially in the area of catalog
production costs, which accounted for approximately
100 basis points of the increase. Additionally, stock-based
compensation expense recorded as a result of the adoption of
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised),
Share-Based Payment
(SFAS No. 123R) accounted for
approximately 60 basis points of the increase.
During 2006, the Company recorded stock-based compensation
expense related to stock options of $1.8 million and
$10.7 million within cost of sales, buying and occupancy
expense and selling, general and administrative expense,
respectively. On January 29, 2006, the Company adopted
SFAS No. 123R, which requires recognition of
share-based compensation costs based on fair value in financial
statements. Prior to the adoption of SFAS No. 123R,
the Company accounted for share-based compensation using the
intrinsic value method under Accounting Principles Board Opinion
No. 25,
Accounting for Stock Issued to Employees
,
and related interpretations, and provided pro forma disclosures
applying the fair value recognition provisions of
SFAS No. 123,
Accounting for Stock-Based
Compensation
(SFAS No. 123), to
stock-based awards. For 2006, the effect of the adoption of
SFAS No. 123R was a decrease to income before income
taxes of $12.5 million and a decrease to net income of
$7.8 million, or $0.15 per diluted common share. The
Company elected to use the modified-prospective application
method as its transition method under SFAS No. 123R.
Therefore, prior periods were not restated. Under this
transition method, the Company is recognizing stock-based
compensation expense on a straight-line basis over the requisite
service period of the awards for those awards granted following
the adoption of SFAS No. 123R. For unvested awards
outstanding upon the adoption of SFAS No. 123R, the
Company is recognizing stock-based compensation expense on a
straight-line basis over the remaining requisite service period
of the awards. The amount of stock-based compensation recognized
is based on the value of the portion of the award that is
expected to vest. SFAS No. 123R requires forfeitures
to be estimated at the time of grant and revised, if necessary,
in subsequent periods if actual forfeitures differ from those
estimates. For 2005, forfeitures were recognized as incurred for
purposes of the pro forma disclosures required under
SFAS No. 123.
Had the Company recognized compensation expense under the fair
value method during 2005, such expense would have decreased net
income before income taxes by $13.5 million and net income
by $8.4 million, or $0.16 per diluted common share.
Net
Interest Expense
Net interest expense in 2006 increased to $24.5 million
from $3.1 million in 2005. This increase was primarily due
to increased levels of borrowings in 2006 compared to the same
period of 2005. The average level of debt outstanding including
short-term and long-term borrowings was $543.6 million in
2006 compared to $107.8 in 2005. In February 2006, the Company
borrowed $400.0 million of debt under a short-term facility
in connection with the acquisition of J. Jill. The interest cost
associated with this debt was largely offset by the earnings on
the invested cash until May 3, 2006, when the borrowed
funds were used to acquire J. Jill. On July 27, 2006, the
short-term facility was converted into a five-year term loan,
bearing interest at a rate of LIBOR plus an applicable rate of
0.35%, with principal and interest due in quarterly
installments. Also impacting interest expense was increased
interest rates. The average interest rate on short-term and
long-term borrowings was 5.8% during 2006 compared to 4.2%
during 2005.
36
Income
Tax Expense
Income tax expense in 2006 was $18.9 million, compared to
income tax expense in 2005 of $55.9 million. The effective
tax rate for both years was 37.5%.
Acquisition
Related Costs
In 2006, the Company recorded approximately $39.6 million,
or $0.46 per diluted common share, of acquisition related costs.
Acquisition related costs include amortization of acquired
intangibles, integration expenses, employee retention plans, and
interest expense on the Companys term loan facility used
to partially fund the acquisition.
In 2006, the Company recorded approximately $2.7 million of
acquisition related costs within cost of sales, buying and
occupancy expenses, $19.3 million within selling, general
and administrative expenses, and $17.6 million within
interest expense. Acquisition related costs, including
integration expenses and retention plans, are expected to
continue into 2007, while interest expense is expected to
continue over the life of the term loan, or five years. The
amortization of the acquired intangible assets, which was
approximately $8.2 million in 2006, is expected to continue
for the estimated lives of the intangible assets, or a weighted
average life of approximately 11 years.
Seasonality
and Quarterly Fluctuations
The nature of the Companys business is to have two
distinct selling seasons, spring and fall. The first and second
quarters of the fiscal year make up the spring season and the
third and fourth quarters of the fiscal year make up the fall
season. Within the spring season, direct marketing sales are
typically stronger in the first quarter, while retail store
sales are slightly stronger in the second quarter. Within the
fall season, both retail and direct marketing sales are
generally stronger in the fourth quarter. Total Company sales
for the fourth quarters of 2007 and 2006 were 25.7% and 28.6%,
respectively, of total sales for the year.
The following table sets forth certain items in the
Companys unaudited quarterly consolidated statements of
operations as a percentage of net sales. The information as to
any one quarter is not necessarily indicative of results for any
future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
May 5,
|
|
|
August 4,
|
|
|
November 3,
|
|
|
February 2,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy expenses
|
|
|
62.7
|
|
|
|
71.4
|
|
|
|
65.5
|
|
|
|
71.7
|
|
Selling, general and administrative expenses
|
|
|
34.3
|
|
|
|
30.7
|
|
|
|
35.6
|
|
|
|
31.9
|
|
Impairment of goodwill and trademarks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.5
|
|
Impairment of store assets
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.6
|
|
Operating (loss) income
|
|
|
3.0
|
%
|
|
|
(2.1
|
)%
|
|
|
(1.5
|
)%
|
|
|
(31.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended
|
|
|
|
April 29,
|
|
|
July 29,
|
|
|
October 28,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy expenses
|
|
|
60.1
|
|
|
|
69.9
|
|
|
|
63.1
|
|
|
|
69.0
|
|
Selling, general and administrative expenses
|
|
|
29.9
|
|
|
|
30.0
|
|
|
|
33.2
|
|
|
|
9.7
|
|
Operating income
|
|
|
10.0
|
%
|
|
|
0.1
|
%
|
|
|
3.7
|
%
|
|
|
21.3
|
%
|
Historically, the Talbots brand merchandising strategy focused
on liquidating seasonal inventory at the end of each selling
season. Generally, the Company achieved this by conducting major
sale events at the end of the second and fourth quarters,
followed by clearance selling in the Talbots brand outlet
stores. In August 2007, the Talbots brand introduced a web
outlet as an additional vehicle to liquidate its markdown
inventory. The J. Jill brand merchandising strategy has focused
on liquidating overstock inventory through price reductions in
the retail stores and online, sale catalogs, and the J. Jill
brand outlet stores. These sales events and promotional
activities produce an increase in sales volume; however, since
marking down the value of inventory increases expense, the
Companys
37
cost of sales, buying and occupancy expenses increase as a
percentage of net sales. Merchandise inventories typically peak
in the third quarter in preparation for the fall and holiday
season. The Companys selling, general and administrative
expenses as a percentage of sales are generally highest in the
first and third quarters as a result of sales volumes.
The combined effect of the patterns of net sales, cost of sales,
buying and occupancy expenses and selling, general and
administrative expenses, described above, have historically
produced higher operating income margins, as a percent of sales,
in the first and third quarters. In the future and beyond, the
Company believes operating income margins, as a percent of
sales, could be more consistent across quarters due to the
change in merchandising strategy implemented by the Company at
the end of 2007. In November 2007, the Company altered its
markdown strategy from four major sale events per year to
regular monthly sale events. The Company plans to utilize this
strategy across both brands going forward. The change in
promotional cadence is expected to provide consumers sale
merchandise at a more relevant time and in turn is expected to
improve product flow and gross margins for the brand.
Liquidity
and Capital Resources
The Companys primary sources of capital are cash flows
from operating activities, cash on hand, and line of credit
facilities from four banks, with maximum available short-term
borrowings of $140.0 million as of February 2, 2008.
At February 2, 2008, and February 3, 2007, the Company
had borrowings outstanding under these facilities in the amounts
of $0 and $45.0 million, respectively. Average borrowings
under the Companys short-term line of credit facilities
were $103.7 million and $50.8 million during the years
ended February 2, 2008 and February 3, 2007,
respectively.
Since the acquisition of J. Jill, the Companys working
capital needs have significantly increased. When the Company
acquired J. Jill in May 2006, J. Jill had a $70.0 million
revolving credit facility that was used for working capital
needs and letters of credit related to inventory purchases. Upon
the acquisition of J. Jill, the J. Jill revolving credit
facility was terminated. In March 2007, the Company increased
its availability under its line of credit facilities by
$25.0 million from $115.0 million to
$140.0 million. In August 2007, the Company obtained
additional capacity under its line of credit facilities,
increasing its availability by $30.0 million from
$140.0 million to $170.0 million. The Companys
line of credit facilities are uncommitted and are maintained at
the sole discretion of the banks. In December 2007, one bank
retracted its existing $30.0 million line of credit
facility that was scheduled to expire in February 2008. The
Company repaid its outstanding balance on this
$30.0 million line of credit facility in December when it
became due. Subsequent to year end, in March 2008, the Company
increased its availability under its line of credit facilities
by $25.0 million from $140.0 million to
$165.0 million. The Company is currently in discussions
with other banks to further increase its availability under its
existing line of credit facilities. The Companys Board of
Directors has also authorized the Company to seek additional
availability up to a potential $200.0 million in total to
address future working capital needs. There is no assurance that
the Company will be successful in increasing its current working
capital facility or achieve such additional availability. There
also can be no assurance that its current working capital
availability will at all times be sufficient to meet the
Companys working capital needs in the amounts needed. In
the event that the Company is unable to increase its borrowing
availability under its credit facilities, the Company would
expect to explore other capital or financing sources. There can
be no assurance that any such other capital or financing sources
would be available in the amount or at the time needed.
While the Company has increased its capacity under its
short-term line of credit facilities and may do so further, the
Companys ability to borrow under these facilities is
constrained by financial covenants related to the Companys
term loan facility (the Acquisition Debt), including
its leverage ratio which is impacted by total borrowings. In the
event that the Company is in default on its covenants, the
Acquisition Debt could become immediately due and payable unless
a waiver of or an amendment to the financial covenants could be
obtained. In November 2007, the Company entered into an
amendment to the Acquisition Debt agreement with its lenders
which changed its leverage ratio and fixed charge coverage ratio
financial covenants through the remaining term of the loan,
effective November 3, 2007. The Company was in compliance
with its revised financial covenants as of February 2, 2008.
38
The Acquisition Debt agreement contains provisions which define
events of default upon the occurrence of which the repayment of
the Acquisition Debt could be accelerated. The agreement
contains covenants restricting a change in control in which AEON
USA is no longer the majority shareholder, liens and
encumbrances, sale and leaseback transactions, mergers,
consolidations, sales of assets, incurrence of additional
indebtedness and guaranties, investments and prepayment of
subordinated indebtedness. There are no restrictions on the
Companys ability to pay dividends or purchase its capital
stock so long as the Company is not in default under the
agreement. The agreement also includes financial covenants,
including a leverage ratio (calculated as total indebtedness
divided by a 12 month rolling consolidated earnings before
interest, taxes, depreciation and amortization, impairment
charges, restructuring charges, and discontinued operations
(EBITDA as defined in the agreement). In November
2007, the leverage ratio was amended. For the period from
November 3, 2007 through fiscal year 2008, the leverage
ratio is not to exceed 4.0 to 1.0. For fiscal year 2009, the
leverage ratio is not to exceed 3.5 to 1.0 and for fiscal year
2010 and thereafter, the leverage ratio is not to exceed 3.0 to
1.0. Other financial covenants under the agreement include a
minimum net worth (calculated as the sum of the par value of all
outstanding common stock, additional
paid-in-capital,
and retained earnings) of $500 million; and a fixed charge
coverage ratio (calculated as consolidated EBITDA plus amounts
paid on operating lease obligations (EBITDAR as
defined in the agreement) divided by net interest expense plus
amounts paid on operating lease obligations). In November 2007,
the fixed charge coverage ratio was amended. For the period from
November 3, 2007 through fiscal year 2008, the fixed charge
coverage ratio may not be less than 1.25 to 1.0. For fiscal year
2009, the fixed charge coverage ratio may not be less than 1.4
to 1.0 and for fiscal year 2010 and thereafter, the fixed charge
coverage ratio may not be less than 1.6 to 1.0.
The Companys financial covenants are required to be
calculated at the end of each of the Companys fiscal
quarters for as long as the Acquisition Debt is outstanding. The
Companys working capital requirements and borrowing needs
are typically highest during the third quarter in preparation
for the fall selling season and lowest during the second and
fourth quarters. The Company has considered its expected future
working capital and borrowing needs and expected future earnings
in evaluating its financial covenants. There can be no assurance
that the Company will satisfy its financial covenants as of each
determination date. In addition, any failure by the Company to
meet its sales plan at the Talbots brand or J. Jill brand at any
time would cause reduced sales and likely increased markdowns,
which could negatively impact gross margin and profitability and
the Companys ability to meet its financial covenants. If
the Company determines that it is likely that it will not
satisfy any of its financial covenants, either as a result of
its expected operating results or borrowing needs, the Company
would expect to seek a waiver or an amendment of such financial
covenants. In the event that the Company does not satisfy one or
more financial covenants as of the determination date and, in
addition, is unable to obtain a waiver or further amendment of
such financial covenants, the Acquisition Debt as well as other
indebtedness could be accelerated.
The Company had letter of credit agreements totaling
$265 million at February 2, 2008, which it has
historically used primarily for the purchase of the majority of
its merchandise inventories. At February 2, 2008 and
February 3, 2007, the Company had $158.4 million and
$180.5 million, respectively, outstanding under these
letters of credit. The $265.0 million of letter of credit
agreements at February 2, 2008 were held with two banks in
the amounts of $135.0 million and $130.0 million. In
April of 2008, the Companys letter of credit facility with
one of its banks was reduced from $135.0 million to
$60.0 million. The bank also notified the Company that the
revised $60.0 million limit would be gradually reduced to
$0 through August of 2008. Also, in February of 2008, the
Companys letter of credit agreement for the remaining
capacity of $130.0 million expired. The Company and the
bank held discussions through April of 2008 regarding the
agreement that had expired and the potential for a new
agreement. During that time, the bank continued to allow the
Company to utilize letters of credit under the terms of the
expired agreement. In April of 2008, the bank notified the
Company that it would honor the then current outstanding
drawings under the letter of credit agreement, but that no new
facility would be provided and no new drawings under the
agreement would be accepted.
However, the Company has successfully negotiated open
account terms, with improved payment terms, with those
vendors that currently represent the majority of the
Companys merchandise purchases, and the Company may pursue
open account terms with other merchandise vendors as well. These
open account payment terms do not require letters of
credit and are expected to largely offset the reduction and
elimination of the letter of credit facilities. The negotiated
new vendor payment terms are also expected to favorably impact
cash flow.
39
The Company is also pursuing new letter of credit arrangements
with other lenders to utilize for certain inventory purchases,
particularly for smaller merchandise vendors. The Company will
continue to use the remaining balance of its letter of credit
facility up to August 8, 2008, when it is reduced to zero,
while it pursues a replacement letter of credit facility.
There can be no assurance that the Company will obtain new
letter of credit facilities to cover merchandise purchases if
and when needed or that the Company will at all times be able to
purchase all of its merchandise inventory through open account
payment terms with merchandise vendors.
The following is a summary of our cash balances and cash flows
(in thousands) as of and for the years ended February 2,
2008, February 3, 2007, and January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net cash provided by operating activities
|
|
$
|
225,385
|
|
|
$
|
134,392
|
|
|
$
|
211,438
|
|
Net cash used in investing activities
|
|
|
(84,812
|
)
|
|
|
(580,813
|
)
|
|
|
(72,684
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(152,456
|
)
|
|
|
379,566
|
|
|
|
(67,596
|
)
|
Cash and cash equivalents, end of year
|
|
$
|
25,476
|
|
|
$
|
35,923
|
|
|
$
|
103,020
|
|
During 2007, cash and cash equivalents decreased by
$10.4 million compared to a decrease of $67.1 million
during 2006. Cash flows from operations during 2007 of
$225.4 million, as well as short-term borrowings, allowed
the Company to continue to integrate the Talbots and J. Jill
brands, invest in property and equipment, pay its scheduled
principal and interest on its Acquisition Debt, and pay
dividends for the thirteenth consecutive year.
Cash
provided by operating activities
Cash provided by operating activities increased by
$91.0 million to $225.4 million in 2007, as compared
to $134.4 million in 2006. The $188.8 million loss in
2007 was offset by non-cash charges of $286.4 million,
primarily including an impairment charge on the Companys
acquired goodwill and trademark of $149.6 million,
depreciation and amortization of $130.5 million,
stock-based compensation of $19.2 million, and an
impairment charge on store assets of $6.0 million. The
$31.6 million of net income in 2006 was increased by
non-cash charges of $146.3 million, primarily including
depreciation and amortization of $121.2 million,
stock-based compensation of $18.0 million, and an
impairment of store assets of $1.3 million. The remaining
increase in cash provided by operating activities was due
changes in inventory levels, accounts payable, and accrued
liabilities.
The change in inventory levels was due to the Companys
planned reduction of Talbots brand inventory receipts during
2007. The Company currently plans to reduce inventory receipts
across both brands further in both the spring and fall seasons
of 2008 in comparison to 2007, with both spring and fall
commitments currently expected to be down high single digits in
comparison to 2007. The Company believes that maintaining leaner
inventories will be a key component to improving gross margins
in 2008.
The change in accounts payable and accrued liabilities is
primarily due to the deferral of vendor payments for expenses
and merchandise shipments. The Company obtained better payment
terms from its vendors in order to pay down its short-term line
of credit facilities at February 2, 2008 which improved
cash flow, outstanding debt, and financial covenant coverage.
The Company expects to receive improved payment terms from its
merchandise vendors in 2008 which would provide for improved
cash flows from operating activities.
Cash
used in investing activities
Cash used in investing activities was $84.8 million in 2007
compared to cash used in investing activities of
$580.8 million in 2006. Additions to property and equipment
during 2007 primarily consisted of expenditures related to the
opening of new stores and expanding and renovating existing
stores. During 2007, the Company opened 43 new Talbots brand
stores and 32 new J. Jill brand stores, and spent approximately
$67.8 million on new store openings and expansions and
renovations of existing stores. During 2006, the Company opened
50 new Talbots brand stores and 34 new J. Jill brand stores from
the date of acquisition, and spent approximately
$94.4 million on new store openings and expansions and
renovations of existing stores. In 2008, the Company has elected
to reduce its expected capital spending in 2008 to
$75.0 million. The Company plans to scale back its store
expansion plan to approximately 46 stores, including 27 Talbots
brand stores and 19 J. Jill brand stores, during 2008. This
level of store expansion is significantly down from the
Companys historical levels and will enable the
40
Company to preserve more capital for information technology
enhancements, specifically for the growth of the brands
websites, and store conversions. The actual amount of such
capital expenditures will depend on a number of factors,
including the schedule of such activity during 2008 and the
number, type, and timing of stores being opened, expanded,
renovated and relocated.
The primary use of cash in investing activities during 2006 was
the purchase of J. Jill in May 2006. The Company paid
$518.3 million (or $493.9 million net of cash
acquired) in cash to purchase J. Jill.
Cash
(used in) provided by financing activities
Cash used in financing activities during 2007 was
$152.5 million compared to cash provided by financing
activities during 2006 of $379.6 million. The primary use
of funds during 2007 was to pay down $80.0 million of the
Acquisition Debt. The Acquisition Debt is expected to be repaid
in equal quarterly installments of $20.0 million over the
five-year term, ending in July 2011. Since the acquisition of J.
Jill, the Companys working capital needs have increased,
and have required the Company to borrow additional funds from
its existing line of credit facilities. During 2007, the Company
repaid net borrowings from its short-term line of credit
facilities in the amount of $45.0 million. Additionally,
the Company paid $28.4 million in dividends during 2007.
The dividends were paid at a rate of $0.13 per share during each
quarter. On February 29, 2008, the Company announced that
its Board of Directors approved the payment of a quarterly
dividend of $0.13 per share payable on or before March 24,
2008 to shareholders of record as of March 10, 2008. The
payment and amount of future 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 the general business outlook. In light
of the current macro-economic environment and the Companys
outlook and future results, there can be no assurance that
dividends will be paid at the same rate, or at all, in the
future.
The primary source of cash from financing activities during 2006
was the Companys borrowings of $400.0 million to
finance the acquisition of J. Jill. Also during 2006, the
Company paid $27.5 million in dividends. The dividends were
paid at a rate of $0.12 during the first quarter of 2006 and at
a rate of $0.13 during the second, third, and fourth quarters of
2006.
Future
cash flows
The Companys primary ongoing cash requirements are
currently expected to be for the financing of working capital
buildups during peak buying seasons typically in the first and
third quarters, ongoing operations, the repayment of debt,
capital expenditures for new Talbots brand and J. Jill brand
stores, the expansion and renovation of existing stores and
facilities, for information technology and other infrastructure
needs, and the payment of any dividends that may be declared
from time to time. For at least the next twelve months, the
Company believes its cash flows from operating activities and
funds that are expected to be available under its credit
facilities and credit from vendors will be sufficient to meet
its expected capital expenditures, working capital requirements,
and debt service payments.
The sufficiency of cash flows and available credit is dependent
upon and may be adversely impacted by many factors, including:
achieving the Companys sales plan for the year for each of
the Talbots brand and J. Jill brand; continued worsening of the
macro-economic environment; the Companys continued ability
to purchase merchandise on open account purchase terms from
merchandise vendors at expected levels; the Companys
ability to reduce cash spending in the event that cash flows
from operations and available credit and borrowings are not
sufficient to fund existing operating plans, merchandise
purchases, planned capital expenditures, and strategic
initiatives; executing and realizing the benefits of the
strategic initiatives being implemented in 2008 (including
anticipated lower inventory levels and timing, expected
operating and other cost reductions, reduced markdown exposure,
and the successful closing of the Talbots Kids and Talbots Mens
business concepts and other announced underperforming stores);
and whether the Company will be able to increase its borrowing
capacity under its credit facilities if and as may be needed. In
the event the Company is unable to increase its borrowing
capacity under its credit facilities and if at any time cash
flows from operations and available credit are not sufficient to
fund cash needs, particularly during peak working capital
buildup periods, the Company would expect to explore other
capital or financing sources. There can be no assurance that any
such other capital or financing sources would be available in
the amounts or in the time periods needed.
41
Critical
Accounting Policies
The preparation of the Companys financial statements
requires the Company to make estimates and judgments that affect
the reported amounts of assets and liabilities and disclosures
of contingent liabilities at the date of the applicable balance
sheets and the reported amounts of net sales and expenses during
the applicable reporting periods. On an on-going basis, the
Company evaluates its estimates, including those related to
inventories, product returns, customer programs and incentives,
retirement plans, impairment of long-lived assets, impairment of
goodwill and other intangible assets, income taxes, and
stock-based compensation. The estimates are based on historical
experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities. Actual results may differ materially
from these estimates if actual events or experience were
different from their assumptions.
The Company believes the following critical accounting policies
require its most significant judgments and estimates used in the
preparation of its consolidated financial statements. However,
there is no assurance that such judgments and estimates will
reflect actual results or that such estimates or their
underlying assumptions may not need to change materially in the
future to reflect actual experience.
Inventory Markdown Reserve.
Merchandise
inventory is a significant asset on the Companys balance
sheet, representing approximately 21.9% of total assets at
February 2, 2008. Historically, the Company managed its
Talbots brand inventory levels by typically holding four major
sale events per year in its stores and catalog, consisting of
two mid-season sales and two end-of-season clearance sales.
These events served to liquidate remaining inventory at the end
of each selling season after which remaining goods are
transferred to the Talbots brand outlet stores. In November
2007, the Company changed its markdown cadence from its
historical four clearance events per year to markdowns on a
monthly basis. The Company believes that this change will allow
the brand to improve its product flow to ensure new and relevant
offerings for its customer. The Company has managed its J. Jill
brand inventory levels primarily by internal liquidation
vehicles including sales catalogs, Internet, price reductions in
the retail stores, and the J. Jill brand outlet stores. After
the internal capacity is exceeded, external channels such as
discount marketers and inventory liquidators may be utilized.
Consistent with the retail inventory method, at the end of each
reporting period, reductions in gross margin and inventory are
recorded for estimated future markdowns necessary to liquidate
remaining markdown past-season inventory.
The key factors influencing the reserve calculation are the
overall level of markdown inventory at the end of the reporting
period and the expectation of future markdowns on this same
merchandise. The future markdown rate is reviewed regularly by
comparing actual markdowns taken against previous estimates.
These results are then factored into future estimates.
Historically, the difference between managements estimates
and actual markdowns has not been significant.
If market conditions were to decline or customer acceptance of
product was not favorable, the Company may have excess inventory
on hand and may be required to mark down inventory at a greater
rate than estimated, resulting in an incremental charge to
earnings. Management believes that at February 2, 2008 and
February 3, 2007, the markdown reserve was appropriate
based on current markdown inventory levels, historical markdown
trends, and forecasts of future sales of markdown inventory. The
markdown reserve rate at February 2, 2008 and
February 3, 2007 was 55% and 50%, respectively, of past
season markdown inventory. A 100 basis point increase or
decrease in this rate would impact pre-tax income by
approximately $0.3 million in both 2007 and 2006.
Sales Return Reserve.
As part of the normal
sales cycle, the Company receives customer merchandise returns
through both its catalog and store locations. To account for the
financial impact of this process, management estimates future
returns on previously sold merchandise. Reductions in sales and
gross margin are recorded for estimated merchandise returns
based on return history, current sales levels, and projected
future return levels.
The sales return reserve calculation consists of two separate
components. The stores component is based on an
analysis that tracks daily sales over the preceding six or
twelve month period and actual returns processed against those
sales. A six or twelve month rolling average return rate is
applied against the actual sales and the difference between the
estimated returns and actual returns is booked as a reserve. The
model also applies a component to reduce the reserve for returns
that result in merchandise exchanges. These types of returns are
tracked by the store
42
systems and the estimate is applied against the return reserve.
The direct marketing component is based on a similar
process except that sales are tracked by catalog and return
rates are based on forecasted estimates for the entire life of
the catalog and are based on current and historical return
experience. Periodically both components of the calculation are
validated by comparing the assumptions used to the actual
returns processed. Historically, the difference between
estimated sales returns and actual returns has not been
significant.
If customer acceptance of the product was not favorable or the
product quality were to deteriorate, future actual returns may
increase, resulting in a higher return rate and increased
charges to earnings. Management believes that the reserve
balances at February 2, 2008 and February 3, 2007 of
$13.2 million and $11.1 million, respectively, were
appropriate based on current sales return trends and reasonable
return forecasts.
Customer Loyalty Program.
The Company
maintains a customer loyalty program in which Talbots
U.S. brand customers receive appreciation
awards based on reaching a specified purchase level on
their Talbots charge accounts. Customers may redeem their
appreciation awards toward future merchandise purchases on the
Talbots charge card. Appreciation awards, by their terms, expire
one year from the date of issuance. Typically, the customer
receives one point for each one dollar purchased. Each time a
customer reaches 500 points within the program year, the
customer is issued a twenty-five dollar appreciation award.
Typically, the Company runs three promotional events, in March,
September, and December, where the customer is credited two
points for each one dollar purchased. In 2007, the Company also
ran an additional promotional event in June.
Appreciation award expense is calculated as a percent of Talbots
charge sales and is based on expected redemption rates and is
charged to selling, general and administrative expense. Each
month, the Company performs an analysis of the accrual account
balance and factors in the outstanding unredeemed awards, actual
redemptions, and the level of award points earned. The Company
also performs a monthly analysis of issuances and redemptions to
identify trends in the redemption rate. Adjustments are made to
the accrual based on trends and changes in the program. Several
key statistics are monitored regularly, including expense as a
percentage of sales, redemptions as a percentage of sales, and
cumulative redemptions. Trends in these statistics are then
factored into both the initial expense and the analysis of the
liability account.
Actual award grants and redemptions may vary from estimates
based on actual customer responsiveness to the program and could
result in additional expense. Management believes that the
accrual balances at February 2, 2008 and February 3,
2007 were appropriate based on recent purchase levels and
expected redemption levels. A 1% change in redemptions or
issuances would have changed pre-tax income by approximately
$0.1 million in 2007 and $0.2 million in 2006.
Retirement Plans.
The Company sponsors a
noncontributory defined benefit pension plan (Pension
Plan) covering substantially all full-time Talbots brand
and shared service employees; two non-qualified supplemental
executive retirement plans (collectively, the SERP)
for certain Talbots brand current and former key executives
impacted by Internal Revenue Code limits; and provides certain
medical benefits for most Talbots brand retired employees under
postretirement medical plans. In 2007, the Company elected to
close participation in the Pension Plan for all associates hired
or rehired after December 31, 2007, however the Company has
chosen not to stop the accrual for future benefits for employees
hired by the Company on or before December 31, 2007. In
calculating its retirement plan obligations and related expense,
the Company makes various assumptions and estimates. The annual
determination of expense involves calculating the estimated
total benefit ultimately payable to plan participants and
allocates this cost to the periods in which services are
expected to be rendered. The plans are valued annually as of
December 31
st
.
Significant assumptions related to the calculation of the
Companys obligations include the discount rate used to
calculate the actuarial present value of benefit obligations to
be paid in the future, the expected long-term rate of return on
assets held by the Pension Plan, the average rate of
compensation increase by certain plan participants, and the
assumed healthcare trend rates on the postretirement medical
plans. These assumptions are reviewed annually based upon
currently available information.
The assumed discount rate utilized is based, in part, upon a
discount rate modeling process that involves applying a
methodology which matches the future benefit payment stream to a
discount curve yield for the plan. The discount rate is utilized
principally in calculating the actuarial present value of the
Companys obligation and periodic expense attributable to
its employee benefits plans. At December 31, 2007 and 2006,
the discount rates used for the Pension Plan were 6.5% and 6.0%,
respectively. The discount rates used for the SERP were 6.25%
and
43
6.0% at December 31, 2007 and 2006, respectively. To the
extent that the discount rate increases or decreases, the
Companys obligations are decreased or increased
accordingly. A 25 basis point decrease in the discount
rates utilized would have impacted the Companys pre-tax
income by $1.3 million in 2007 and $1.5 million in
2006.
The expected long-term rate of return on assets is the weighted
average rate of earnings expected on the funds invested or to be
invested to provide for the pension obligation. The expected
average long-term rate of return on assets is based on an
analysis which considers: actual net returns for the Pension
Plan since inception, Ibbotson Associates historical investment
returns data for the three major classes of investments in which
the Company invests (debt, equity, and foreign securities) for
the period since the Pension Plans inception and for the
longer period commencing when the return data was first tracked,
and expectations of future market returns from outside sources
for the three major classes of investments in which the Company
invests. This rate is utilized primarily in estimating the
expected return on plan assets component of the annual pension
expense. To the extent the actual rate of return on assets is
less than or more than the assumed rate, that years annual
pension expense is not affected. Rather, this loss or gain
adjusts future pension expense over approximately five years.
During both 2007 and 2006, the Company utilized 9.0% as the
expected long-term rate of return on plan assets. A
25 basis point decrease in the expected long-term rate of
return on plan assets would have impacted the Companys
pre-tax income by $0.3 million and $0.2 million in
2007 and 2006, respectively.
The assumed average rate of compensation increase is the average
annual compensation increase expected over the remaining
employment periods for the participating employees and is based
on historical and expected compensation increases. The Company
utilized a rate of 4.0% for both periods beginning
December 31, 2006 and December 31, 2005. This rate is
utilized principally in estimating the retirement obligation and
annual expense. An increase in the assumed average rate of
compensation increase from 4% to 5% would have impacted the
Companys pre-tax income by $2.3 million in 2007 and
$2.2 million in 2006.
The assumed health care expense trend rates have a significant
effect on the amounts reported for the postretirement medical
plans. The healthcare cost escalation rate is used to determine
the postretirement obligation and annual expense. At
December 31, 2007 and 2006, the Company used 10.0% and
11.0%, respectively, as initial cost escalation rates that
gradually trend down to 5.0%. To the extent that these rates
increase or decrease, the Companys obligation and
associated expense are increased or decreased accordingly. An
increase in the assumed health care trend rate from 10% to 11%
in 2007 would have no material impact on the Companys
pre-tax income. An increase in the assumed health care trend
rates from 11% to 12% would have impacted the Companys
pre-tax income by $0.1 million in 2006.
At December 31, 2007 and 2006, management believes that the
assumptions used in the calculation of its retirement plans and
postretirement medical plan liabilities were reasonable.
Impairment of Long-lived Assets.
The Company
periodically reviews the period of depreciation or amortization
for long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets
, to determine whether current circumstances warrant
revised estimates of useful lives. The Company monitors the
carrying value of its assets for potential impairment based
primarily on projected future cash flows. If an impairment is
identified, the carrying value of the asset is compared to its
estimated fair value and provisions for impairment are recorded
as appropriate.
Impairment losses are significantly impacted by estimates of
future operating cash flows and estimates of fair value. The
Companys estimates of future operating cash flows are
based upon the Companys experience, knowledge, and
expectations. However, these estimates can be affected by
factors such as the Companys future operating results,
future store profitability, and future economic conditions that
can be difficult to predict. While the Company believes that its
estimates are reasonable, different assumptions regarding items
such as future cash flows could affect the Companys
evaluations and result in impairment charges against the
carrying value of those assets. Additionally, the Companys
initiative to continue to critically assess individual store
profitability on an ongoing basis in an effort to restore
profitability could result in an increased number of stores
closed, resulting in a larger impairment charge against the
carrying value of the associated store assets in future periods.
The Company recorded impairment charges relating to store assets
in the amount of $6.0 million (including store impairments
relating to the closing of the Talbots Kids and Talbots Mens
business concepts of $1.0 million included within
restructuring charges) and $1.3 million for the years ended
February 2, 2008 and February 3, 2007, respectively.
44
Impairment of Goodwill and Other Intangible
Assets.
The Company tests goodwill and trademarks
for impairment using a fair value approach at the reporting unit
level, or one level below an operating segment, on an annual
basis, or when events indicate that the carrying value of the
asset may be impaired. The Company has elected the first day of
each fiscal year as its measurement date. The Company completed
its annual goodwill and trademark impairment tests as of the
first day of each of the 2005, 2006 and 2007 fiscal years and as
a result, no impairments were recognized.
In the fourth quarter of 2007, the Company performed an
additional goodwill and trademark impairment test due to the
lower than expected sales and operating performance of the
Talbots and J. Jill brands as well as the overall decline on the
Companys market value.
The goodwill impairment test is a two-step impairment test. In
the first step, the Company compares the fair value of each
reporting unit to its carrying value. The Company determines the
fair value of its reporting units using a combination of a
discounted cash flow and a market value approach. The evaluation
of goodwill requires the Company to use significant judgments
and estimates, including but not limited to projected future
revenues, cash flows, and discount rates. The Companys
estimates may differ from actual results due to, among other
things, economic conditions, changes to its business models, or
changes in operating performance. Significant differences
between these estimates and actual results could result in
future impairment charges and could materially affect the
Companys future financial results. If the fair value of
the reporting unit exceeds the carrying value of the net assets
assigned to that reporting unit, goodwill is not impaired and
the Company is not required to perform further testing. If the
carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, then the Company
must perform the second step in order to determine the implied
fair value of the reporting units goodwill and compare it
to the carrying value of the reporting units goodwill. The
activities in the second step include valuing the tangible and
intangible assets and liabilities of the impaired reporting unit
based on their fair value and determining the fair value of the
impaired reporting units goodwill based upon the residual
of the summed identified tangible and intangible assets and
liabilities.
The fair value of the Talbots brand reporting units exceeded the
carrying value of the assigned net assets, therefore no further
testing was required and an impairment charge was not required.
The fair value of the J. Jill brand reporting units was below
the carrying value of the assigned net assets, therefore the
second step was required. As a result, the Company recorded an
impairment charge of $134.0 million relating to goodwill.
Trademarks that have been determined to have indefinite lives
are also not subject to amortization and are reviewed at least
annually for potential impairment, as mentioned above. The fair
value of the Companys trademarks are estimated and
compared to their carrying value. The Company estimates the fair
value of these intangible assets based on an income approach
using the relief-from-royalty method. This methodology assumes
that, in lieu of ownership, a third party would be willing to
pay a royalty in order to exploit the related benefits of these
types of assets. This approach is dependent on a number of
factors, including estimates of future growth and trends,
royalty rates in the category of intellectual property, discount
rates and other variables. Significant differences between these
estimates and actual results could materially affect the
Companys future financial results. The Company recognizes
an impairment charge when the estimated fair value of the
intangible asset is less than the carrying value.
As a result of the impairment analysis performed in connection
with the Companys trademarks with indefinite lives, the
Company determined that the carrying value of the trademark
related to its J. Jill reporting units exceeded its estimated
fair value. Accordingly, during 2007, the Company recorded
pre-tax charges of $15.6 million ($9.8 million
after-tax) to reduce the value of the trademark to its estimated
fair value. This impairment primarily resulted from a decline in
future anticipated cash flows relating to the J. Jill brand.
Income Taxes.
The Company is routinely under
audit by various domestic and foreign tax jurisdictions. The
Companys effective tax rate in a given financial statement
period may be materially impacted by changes in the mix and
level of earnings and changes in the expected outcome of audits.
Management believes that at February 2, 2008 and
February 3, 2007, the accruals for income taxes were
appropriate.
The Company adopted the provisions of FIN No. 48 on
February 4, 2007. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in the
financial statements by prescribing a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. As a result of the adoption of
FIN No. 48, as of February 4, 2007, the Company
45
recognized a $4.7 million increase in its reserve related
to uncertain tax positions which was recorded as a reduction to
the February 4, 2007 balance of retained earnings.
Additionally, the Company recorded an increase in deferred tax
assets of $24.0 million, a corresponding increase in the
reserve related to uncertain tax positions of
$18.6 million, and an increase in accrued tax related
interest of $5.4 million related primarily to federal tax
benefits associated with certain state tax and interest reserves
and timing differences. As of the adoption date, the Company had
unrecognized tax benefits of approximately $41.5 million of
which $23.0 million, if recognized, would impact the
effective tax rate. As of February 2, 2008, the Company had
unrecognized tax benefits of $37.9 million, of which
$20.9 million, if recognized, would impact the effective
tax rate. As of February 2, 2008 and February 4, 2007,
the total amount of accrued tax-related interest and penalties
included in other liabilities was as follows: tax-related
interest of $17.7 million and $13.6 million,
respectively, and penalties of $3.4 million and
$3.1 million, respectively.
There is inherent uncertainty in quantifying the Companys
income tax positions. The Company has assessed its income tax
positions and recorded tax benefits for all years subject to
examination based upon managements evaluation of the
facts, circumstances, and information available at the reporting
date. For those tax positions where it is more likely than not
that a tax benefit will be sustained, the Company has recorded
the largest amount of tax benefit with a greater than
50 percent likelihood of being realized upon ultimate
settlement with a taxing authority that has full knowledge of
all relevant information. For those income tax positions where
it is not more likely than not that a tax benefit will be
sustained, no tax benefit has been recognized in the financial
statements. Where applicable, the associated interest and
penalties have also been recognized. Changes in facts,
expiration of statutes of limitations and resolution of tax
positions can materially affect the estimate of the
Companys effective tax rate and consequently, affect the
Companys results.
Stock-Based Compensation.
The Company accounts
for stock-based compensation in accordance with the fair value
recognition provision of SFAS No. 123R. To calculate
the fair value of options, the Company uses the Black-Scholes
option-pricing model which requires the input of subjective
assumptions. These assumptions include estimating the length of
time employees will retain their vested stock options before
exercising them, the estimated expected volatility of the
Companys common stock price over the expected term, the
expected dividend rate, and the implied yield available on
U.S. Treasury zero-coupon bond issues with a term
approximately equal to the expected life of the options.
The expected life represents the weighted average period of time
that share-based awards are expected to be outstanding, giving
consideration to vesting schedules, historical exercise
patterns, and expectations of future exercise patterns. The
Companys expected volatility of its common stock price is
based primarily upon historical volatilities of the
Companys stock from public data sources and also considers
implied factors that may influence the Companys
volatility. The expected dividend yield is based on the
anticipated annual payment of dividends. The risk free interest
rate is based on data derived from public sources regarding
U.S. Treasury zero-coupon bond issues. Managements
estimates of expected volatility and expected life have the
greatest impact on determining the fair value of options
granted. If the expected volatility or expected life were to
increase, the fair value of the stock award would be higher
resulting in increased compensation charges. The assumptions
used in calculating the fair value of stock-based awards
represent managements best estimates, but these estimates
involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company
utilized different assumptions, the recorded stock-based
compensation expense could be materially different in the future.
The fair values of nonvested stock awards and restricted stock
units are based on the closing stock price on the date of grant
and the related stock-based compensation expense is recognized
on a straight-line basis over the vesting period. The vesting
period on awards granted as performance accelerated nonvested
stock is a five year period, but can be accelerated to three
years after the grant date depending on the achievement of
certain corporate financial goals. If the Company determined
that the achievement of certain corporate financial goals was
going to occur where it had previously concluded that
achievement of such goals would not occur, then the vesting
period would be reduced at that time and the future related
expense amounts would increase. Certain other shares of
nonvested stock are time vested generally between periods of two
to four years. Restricted stock units generally vest over one
year.
In addition, an estimated forfeiture rate is applied in the
recognition of the compensation charge. The Company estimates
the forfeiture rate based on historical experience as well as
expected future behavior. Management
46
compares actual forfeitures with estimates and revises its
estimates if differences occur. If actual forfeitures rates are
lower than managements estimates, the Companys
compensation expense would increase. Conversely, if actual
forfeitures are greater than managements estimates, the
Companys compensation expense would decrease. The
Companys results of operations will be impacted by
differences between estimated and actual forfeitures. A 1%
decrease in the assumed forfeiture rate would have decreased the
Companys pre-tax income by $0.2 million and
$0.1 million for the years ended February 2, 2008 and
February 3, 2007, respectively.
The future impact of the cost of share-based compensation on the
Companys results of operations, including net income and
earnings per diluted share, will depend on, among other factors,
the level of the Companys equity awards in the future as
well as the market price of shares at the time of award as well
as various other assumptions used in valuing such awards.
Contractual
Commitments
Below is a summary of the Companys on-going significant
contractual commitments as of February 2, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Less Than
|
|
|
1 to 3
|
|
|
3 to 5
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|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-term debt, including estimated interest payments*
|
|
$
|
418,832
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|
|
$
|
94,945
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|
|
$
|
261,397
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|
|
$
|
62,490
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|
|
$
|
|
|
Letter of credit agreements
|
|
|
158,365
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|
|
|
158,365
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|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Real estate
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|
1,110,536
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|
|
|
183,086
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|
|
|
351,345
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|
|
|
276,942
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|
|
|
299,163
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|
Equipment
|
|
|
14,094
|
|
|
|
5,678
|
|
|
|
7,881
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|
|
|
515
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|
|
|
20
|
|
Merchandise purchases
|
|
|
470,200
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|
|
|
470,200
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|
|
|
|
|
|
|
|
|
|
|
|
|
Construction contracts
|
|
|
12,737
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|
|
|
12,737
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|
|
|
|
|
|
|
|
|
|
|
|
|
Other contractual commitments
|
|
|
41,232
|
|
|
|
27,043
|
|
|
|
14,189
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|
|
|
|
|
|
|
|
|
Long-term obligations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified retirement plans
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|
|
38,991
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|
|
|
5,826
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|
|
|
9,774
|
|
|
|
5,907
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|
|
|
17,484
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments
|
|
$
|
2,264,987
|
|
|
$
|
957,880
|
|
|
$
|
644,586
|
|
|
$
|
345,854
|
|
|
$
|
316,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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*
|
|
Interest payments were estimated using the Companys
current borrowing rates as of February 2, 2008.
|
Long-term debt.
In February 2006, the Company
entered into a $400.0 million bridge loan agreement in
connection with its planned acquisition of J. Jill. On
July 27, 2006, the bridge loan was converted into a Term
Loan (the Acquisition Debt). Pursuant to the
Acquisition Debt agreement, the Company borrowed
$400.0 million to be repaid in equal $20.0 million
quarterly installments over five years through July 27,
2011. The Acquisition Debt constitutes a senior unsecured
obligation of the Company. The Acquisition Debt bears interest
at a rate per annum equal to LIBOR plus 0.35%. As of
February 2, 2008, there was $280.0 million in
borrowings outstanding under the Acquisition Debt. The interest
rate on the Acquisition Debt as of February 2, 2008 was
3.6%.
In addition, as of February 2, 2008, the Company has
revolving credit agreements with three banks (the
Revolving Credit Agreements) that provide for
maximum available borrowings of $80.0 million, have
two-year terms, and can be extended annually upon mutual
agreement. Interest terms on the unsecured Revolving Credit
Agreements are fixed, at the Companys option, for periods
of one, three, or six months. As of February 2, 2008, the
weighted average interest rate on the loans was 4.8%. None of
the outstanding balance is currently payable. At
February 2, 2008, the Company had $80.0 million
outstanding under its Revolving Credit Agreements. Of the
$80.0 million outstanding, $46.0 million is due in
April 2009 and $34.0 million is due in January 2010, but
may be extended upon approval from the banks. At
February 3, 2007, the Company had $100.0 million
outstanding under revolving credit agreements.
In April 2007, the Company converted $20.0 million of
revolving credit borrowings into a term loan (the Term
Loan). The principal on the Term Loan is due in April
2012. Interest on the Term Loan is due every six months and is
fixed at 5.8% for the first two interest periods from April 2007
through April 2008, and is fixed at
47
5.9% for the remaining interest periods through April 2012. As
of February 2, 2008, the Company had $20.0 million
outstanding under its Term Loan.
As part of the J. Jill acquisition, Talbots assumed a real
estate loan (the Tilton Facility Loan). The Tilton
Facility Loan is collateralized by a mortgage lien on the
operations, fulfillment and distribution center in Tilton, New
Hampshire (the Tilton Facility). Payments of
principal and interest on the Tilton Facility Loan, a
10-year
loan, are due monthly, based on a
20-year
amortization, with a balloon payment of the remaining balance
payable on April 1, 2009. The interest rate on the Tilton
Facility Loan is fixed at 7.3% per annum. As of February 2,
2008, the Company had $9.0 million outstanding under its
Tilton Facility Loan.
Line of Credit (Notes payable to banks).
At
February 2, 2008, the Company had $140.0 million
available under its line of credit facilities. The
Companys line of credit facilities are uncommitted and are
maintained at the sole discretion of the banks. At
February 2, 2008 and February 3, 2007, there was $0
and $45.0 million, respectively, outstanding under these
facilities. In March 2008, the Company increased its available
borrowings by $25.0 million from $140.0 million to
$165.0 million.
Letters of Credit.
The Company has letter of
credit agreements totaling $265.0 million at
February 2, 2008, which it uses primarily for the purchase
of merchandise inventories. At February 2, 2008 and
February 3, 2007, the Company had $158.4 million and
$180.5 million, respectively, outstanding under these
letters of credit. These letter of credit facilities will no
longer be available during 2008. See Managements
Discussion and Analysis Liquidity and Capital
Resources.
Operating Leases.
The Company conducts the
major part of its operations in leased premises with lease terms
expiring at various dates through 2024. Most store leases
provide for base rentals plus contingent rentals which are a
function of sales volume and provide that the Company pay real
estate taxes, maintenance, and other operating expenses
applicable to the leased premises. Included in the schedule
above are 43 executed leases related to future new stores not
yet opened at February 2, 2008. Additionally, included in
the table above are leases for both store equipment and other
corporate equipment with lease terms generally between three and
five years. The table above includes the remaining lease
payments for the Talbots Kids, Talbots Mens, and Talbots Misses
stores located in the United Kingdom, for which the Company has
not negotiated a lease settlement as of February 2, 2008.
The Company expects to incur approximately $34 million
relating to lease exit costs by the third quarter of 2008 if the
Company is successful in negotiating lease settlements
concerning remaining scheduled lease payments with the
respective landlords. These costs are not reflected in the table
above. If the Company is not successful in negotiating
settlements, cash payments (which may vary from estimated
amounts) may be made over the various remaining lease terms,
which is currently through 2020.
Merchandise Purchases.
The Company generally
makes merchandise purchase commitments up to six to twelve
months in advance of its selling season. The Company does not
maintain any long-term or exclusive commitments or arrangements
to purchase from any vendor. The table above includes all
merchandise commitments outstanding as of February 2, 2008.
Construction Contracts.
The Company enters
into contracts to facilitate the build-out and renovation of its
stores. The table above summarizes commitments as of
February 2, 2008. Total capital expenditures for 2008 are
currently expected to be reduced to approximately
$75 million, of which approximately $50 million, or
67%, is currently allocated for store construction and
renovation.
Other Contractual Commitments.
The Company
routinely enters into contracts with vendors for products and
services in the normal course of operation. These include
contracts for insurance, maintenance on equipment, services, and
advertising. These contracts vary in their terms but generally
carry 30 day to three-year terms.
Long-Term Obligations.
The Company sponsors
non-qualified retirement benefit plans for certain employees.
This includes the SERP and a supplemental 401(k) plan for
certain executives impacted by Internal Revenue Code limits on
benefits and compensation. Additionally, the Company sponsors
two deferred compensation plans that allow certain members of
the Companys management group to defer a portion of their
salary. The Company also provides post retirement medical plans
to its Talbots brand employees. Included in this table are
estimates of annual cash payments under these non-qualified
retirement plans.
The Companys defined benefit pension plan obligations
historically have been excluded from the contractual obligation
table above because the Company has had no current requirements
under the Employee Retirement
48
Security Act (ERISA) to contribute to the plan as
the Company had prepaid its liability for the 2007 and 2006 plan
years. In 2008, however, the Company is required to contribute
to the plan as the Company did not prepay its liability in 2007
for the 2008 plan year. The Company expects to make a
contribution to the plan of approximately $12.5 million,
and this amount is not reflected in the table above.
Unrecognized Tax Benefits.
The table above
does not include liabilities related to unrecognized tax
benefits under FIN No. 48. As the Company is unable to
reasonably predict the timing of settlement of such
FIN No. 48 liabilities, the table does not include
$59.0 million of income tax, interest, and penalties
relating to unrecognized tax benefits that are recorded as
noncurrent liabilities within the Companys consolidated
balance sheet as of February 2, 2008.
Inflation
and Changing Prices
The Company believes changes in revenues and net earnings that
have resulted from inflation or deflation have not been material
during the periods presented. There is no assurance, however,
that inflation or deflation will not materially affect the
Company in the future.
Exchange
Rates
Most foreign purchase orders are denominated in
U.S. dollars. However, as of February 2, 2008, the
Company operated 28 Talbots brand stores in Canada and three
Talbots brand stores in the United Kingdom. Each operation
generates sales and incurs expenses in its local currency;
however, each currency is generally stable and these operations
represent only a small portion of total Company operations.
Accordingly, the Company has not experienced any significant
impact from changes in exchange rates.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pensions and
Other Postretirement Plans, An Amendment of FASB Statements
No. 87, 88, 106, and 132(R)
(SFAS No. 158), which applies to all
employers who offer defined benefit postretirement plans.
SFAS No. 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit
post-retirement plan (other than a multiemployer plan) as an
asset or liability in its balance sheet and to recognize changes
in that funded status as unrealized gain or loss through
accumulated other comprehensive income when the changes occur.
The Company adopted the recognition provisions of
SFAS No. 158 as of February 3, 2007. Application
of this standard resulted in a decrease to other assets of
$1.3 million, an increase to other liabilities of
$27.7 million and a decrease to accumulated other
comprehensive income of $17.3 million, net of tax. The
adoption of SFAS No. 158 did not have an impact on the
Companys consolidated statements of operations or
statements of cash flows. In addition, SFAS No. 158
requires measurement of plan assets and benefit obligations as
of the date of the employers fiscal year end. The Company
is required to adopt the measurement provisions of
SFAS No. 158 for its fiscal year ending
January 31, 2009.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157,
Fair Value Measurements
(SFAS No. 157). This Standard defines
fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007 for financial assets and liabilities, as well as for any
other assets and liabilities that are carried at fair value on a
recurring basis in financial statements. In February 2008, the
FASB delayed the effective date of SFAS No. 157 for
all nonrecurring fair value measurements of nonfinancial assets
and nonfinancial liabilities until fiscal years beginning after
November 15, 2008. The Company does not expect the adoption
of SFAS No. 157 to have a material effect on its
financial position or results of operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). This Standard allows
companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate
volatility in earnings without having to apply complex hedge
accounting provisions. SFAS No. 159 is applicable only
to certain financial instruments and is effective for fiscal
years beginning after November 15, 2007. The adoption of
SFAS No. 159 on February 3, 2008 did not have a
material effect on the Companys financial position or
results of operations.
49
Forward-looking
Information
This Annual Report contains forward-looking information within
the meaning of The Private Securities Litigation Reform Act of
1995. These statements may be identified by such forward-looking
terminology as expect, look,
believe, anticipate,
outlook, would, or similar statements or
variations of such terms. All information concerning future
financial performance results or conditions constitutes
forward-looking information.
The Companys forward-looking statements are based on a
series of expectations, assumptions, estimates and projections
about the Company which involve substantial known and unknown
risks and uncertainties as to future events which may or may not
occur. All of these forward-looking statements are as of the
date of this Annual Report only. The Company can give no
assurance that such forward-looking statements will prove to be
correct and actual results may differ materially. The Company
does not plan to update or revise any forward-looking statements
to reflect actual results, changes in assumptions, estimates or
projections, or other circumstances occurring after the date of
this Annual Report, even if such results, changes or
circumstances make it clear that any projected results will not
be realized.
Certain factors that may cause actual results to differ from
such forward-looking statements are included in Item 1A to
this Annual Report and in the discussion included in this Annual
Report, as well as in other reports filed with the SEC and in
the Companys publicly disseminated earnings and sales
releases, all of the foregoing of which are available on the
Companys website at thetalbotsinc.com under Investor
Relations and you are urged to carefully consider all such
factors.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
The market risk inherent in the Companys financial
instruments and in its financial position represents the
potential loss arising from adverse changes in interest rates.
The Company does not enter into financial instruments for
trading purposes.
As of February 2, 2008, the Company had outstanding
variable rate borrowings of $280.0 million under its
$400.0 million term loan facility and $80.0 million
under its revolving credit facility. The impact of a
hypothetical 10% adverse change in interest rates for this
variable rate debt would have caused an additional pre-tax
charge of $1.4 million for the year ended February 2,
2008.
The Company enters into certain purchase obligations outside the
United States which are predominately settled in
U.S. dollars and, therefore, the Company has only minimal
exposure to foreign currency exchange risks. The Company does
not hedge against foreign currency risks and believes that the
foreign currency exchange risk is not material. In addition, the
Company operated 28 Talbots brand stores in Canada and three
Talbots brand stores in the United Kingdom as of
February 3, 2007. The Company believes its foreign currency
translation risk is minimal, as a hypothetical 10% strengthening
or weakening of the U.S. dollar relative to the applicable
foreign currency would not materially affect the Companys
results of operations or cash flow.
50
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The information required by this item may be found on pages F-2
through F-36 as listed below, including the quarterly
information required by this item.
INDEX
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|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Statements of Operations for the Years Ended
February 2, 2008, February 3, 2007, and
January 28, 2006
|
|
|
F-3
|
|
Consolidated Balance Sheets as of February 2, 2008 and
February 3, 2007
|
|
|
F-4
|
|
Consolidated Statements of Cash Flows for the Years Ended
February 2, 2008, February 3, 2007, and
January 28, 2006
|
|
|
F-5
|
|
Consolidated Statements of Stockholders Equity for the
Years Ended February 2, 2008, February 3, 2007, and
January 28, 2006
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7
|
|
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
The Company has established disclosure controls and procedures
designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized, and reported within the
time periods specified in the Commissions rules and forms
and is accumulated and communicated to management, including the
principal executive officer and principal financial officer, to
allow timely decisions regarding required disclosure.
In connection with the preparation of this annual report on
Form 10-K,
an evaluation was performed under the supervision, and with the
participation of, the Companys management, including its
principal executive officer and principal financial officer, of
the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of
February 2, 2008. Based on such evaluation, the
Companys Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure
controls and procedures are effective as of February 2,
2008.
Managements
Annual Report on Internal Control Over Financial
Reporting
The Companys management, with the participation of its
principal executive officer and principal financial officer, is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended. The
Companys internal control system is designed to provide
reasonable assurance to its management and Board of Directors
regarding the preparation and fair presentation of published
financial statements.
The Companys management assessed the effectiveness of its
internal control over financial reporting as of February 2,
2008. Management evaluates the effectiveness of the
Companys internal control over financial reporting using
the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Management,
with the participation of its principal executive officer and
principal financial officer, assessed the effectiveness of the
Companys internal control over financial reporting as of
February 2, 2008 and concluded that it was effective as of
that date.
The Companys independent registered public accounting
firm, Deloitte & Touche LLP, issued a report on the
Companys internal control over financial reporting. Their
report appears below.
Changes
in Internal Controls over Financial Reporting
There was no change in the Companys internal control over
financial reporting, as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended,
identified in connection with the evaluation of its internal
control performed during the quarter ended February 2, 2008
that has materially affected, or is reasonably likely to
materially affect, its internal control over financial reporting.
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Talbots, Inc.
Hingham, Massachusetts
We have audited the internal control over financial reporting of
The Talbots, Inc. and subsidiaries (the Company) as
of February 2, 2008 based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of February 2, 2008, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
February 2, 2008 of the Company and our report dated
April 16, 2008 expressed an unqualified opinion on those
financial statements and includes an explanatory paragraph
relating to the adoption of Financial Accounting Standards Board
(FASB) Interpretation 48,
Accounting for
Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109
.
/s/ Deloitte &
Touche LLP
Boston, Massachusetts
April 16, 2008
52
|
|
Item 9B.
|
Other
Information.
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance.
|
The information concerning the Companys directors and
nominees under the caption Election of Directors and
the information concerning the Audit Committee and the
audit committee financial expert under the caption
Corporate Governance in the Companys Proxy
Statement for the Companys 2008 Annual Meeting of
Shareholders, information concerning the Companys
executive officers set forth in Part I, Item 1 above
under the caption Executive Officers of the Company,
and the information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the
Companys Proxy Statement for the Companys 2008
Annual Meeting of Shareholders, are incorporated herein by
reference.
The Company has adopted a Code of Business Conduct and Ethics
(the Code of Ethics) that applies to the
Companys chief executive officer, senior financial
officers and all other Company employees, officers and Board
members. The Code of Ethics is available on the Companys
website, www.thetalbotsinc.com, under Investor
Relations, and is available in print to any person who
requests it. Any substantive amendment to the Code of Ethics and
any waiver in favor of a Board member or an executive officer
may only be granted by the Board of Directors and will be
publicly disclosed on the Companys website,
www.thetalbotsinc.com, under Investor Relations.
|
|
Item 11.
|
Executive
Compensation.
|
The information set forth under the caption Executive
Compensation, the information concerning director
compensation under the caption Director
Compensation, and the information under the caption
Corporate Governance-Compensation Committee Interlocks and
Insider Participation in the Companys Proxy
Statement for the Companys 2008 Annual Meeting of
Shareholders, are each incorporated herein by reference. The
information included under Compensation Committee
Report is incorporated herein by reference but shall be
deemed furnished with this report and shall not be
deemed filed with this report.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information set forth under the caption Beneficial
Ownership of Common Stock and the information under the
caption Equity Compensation Plans in the
Companys Proxy Statement for the Companys 2008
Annual Meeting of Shareholders is incorporated herein by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information set forth under the caption Transactions
with Related Persons in the Companys Proxy Statement
for the Companys 2008 Annual Meeting of Shareholders is
incorporated herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information regarding auditors fees and services and the
Companys pre-approval policies and procedures for audit
and non-audit services to be provided by the Companys
independent registered public accounting firm set forth under
the heading Ratification of Appointment of Independent
Registered Public Accounting Firm in the Companys
Proxy Statement for the 2008 Annual Meeting of Shareholders is
incorporated herein by reference.
53
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a)(1)
Financial Statements:
The following
Report of Independent Registered Public Accounting Firm and
Consolidated Financial Statements of Talbots are included in
this Report:
Consolidated Statements of Operations for the Years Ended
February 2, 2008, February 3, 2007, and
January 28, 2006
Consolidated Balance Sheets as of February 2, 2008 and
February 3, 2007
Consolidated Statements of Cash Flows for the Years Ended
February 2, 2008, February 3, 2007, and
January 28, 2006
Consolidated Statements of Stockholders Equity for the
Years Ended February 2, 2008, February 3, 2007, and
January 28, 2006
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(a)(2)
Financial Statement Schedules:
All financial statement schedules have been omitted because the
required information is either presented in the consolidated
financial statements or the notes thereto or is not applicable
or required.
(a)(3)
Exhibits:
The following exhibits are filed herewith or incorporated by
reference:
|
|
|
|
|
|
|
(2)
|
|
|
|
|
|
Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession.
|
2.1
|
|
|
|
|
|
Agreement and Plan of Merger, by and among The Talbots, Inc.,
Jack Merger Sub, Inc. and The J. Jill Group, Inc., dated
February 5, 2006.(31)
|
(3)
|
|
|
|
|
|
Articles of Incorporation and By-laws.
|
3.1
|
|
|
|
|
|
Certificate of Incorporation, as amended, of Talbots.(1)(12)(15)
|
3.2
|
|
|
|
|
|
By-laws of Talbots.(1)
|
(4)
|
|
|
|
|
|
Instruments Defining the Rights of Security Holders,
including Indentures.
|
4.1
|
|
|
|
|
|
Form of Common Stock Certificate of Talbots.(1)
|
(10)
|
|
|
|
|
|
Material Contracts.
|
10.1
|
|
|
|
|
|
Stockholders Agreement, dated as of November 18, 1993, between
Talbots and AEON U.S.A., Inc.(2)
|
10.2
|
|
|
|
|
|
Revolving Credit Agreement, dated as of January 25, 1994,
between Talbots and The Bank of Tokyo-Mitsubishi UFJ Trust
Company, as amended.(2)(4)(8)(19)(21)(26)(34)(44)
|
10.3
|
|
|
|
|
|
Termination Agreement dated as of April 13, 2007 between The
Talbots, Inc. and The Bank of Tokyo-Mitsubishi, Ltd. regarding
the Credit Agreement dated as of January 25, 1994.(50)
|
10.4
|
|
|
|
|
|
Credit Agreement between Talbots and The Bank of
Tokyo-Mitsubishi UFJ Trust Company, dated as of April 17, 1998,
as amended.(7)(10)(17)(22)(30)(36)
|
10.5
|
|
|
|
|
|
Termination Agreement dated as of April 13, 2007 between The
Talbots, Inc. and The Bank of Tokyo-Mitsubishi, Ltd. regarding
the Credit Agreement dated as of April 17, 1998.(50)
|
10.6
|
|
|
|
|
|
Credit Agreement dated as of March 28, 2007 between The Talbots,
Inc. and The Bank of Tokyo-Mitsubishi, Ltd., as amended.(50)(66)
|
10.7
|
|
|
|
|
|
Revolving Credit Agreement, dated as of January 25, 1994,
between Talbots and The Norinchukin Bank, as
amended.(2)(7)(8)(17)(21)(37)(50)
|
10.8
|
|
|
|
|
|
Revolving Credit Agreement, dated as of January 25, 1994,
between Talbots and Sumitomo Mitsui Banking Corporation
(formerly The Sakura Bank, Limited), as
amended.(2)(7)(11)(16)(19)(26)(34)(44)(63)(69)
|
10.9
|
|
|
|
|
|
Continuing Commercial Letter of Credit and Security Agreement
dated May 15, 1996 between Talbots and HSBC.(5)
|
10.10
|
|
|
|
|
|
Letter Agreement concerning credit facilities between HSBC and
The Talbots, Inc. and The J. Jill Group, Inc., dated July 20,
2006.(41)
|
54
|
|
|
|
|
|
|
10.11
|
|
|
|
|
|
Letter Agreement concerning credit facilities between HSBC and
The Talbots, Inc. and The J. Jill Group, Inc., dated July 16,
2007.(54)
|
10.12
|
|
|
|
|
|
Letter Agreement concerning credit facilities between HSBC and
The Talbots, Inc. and The Talbots Group Limited Partnership,
dated January 31, 2008.(62)
|
10.13
|
|
|
|
|
|
Sixth Amended and Restated Loan Agreement dated May 3, 2006
between The J. Jill Group, Inc. and Citizens Bank of
Massachusetts, HSBC Bank USA, National Association, and TD
Banknorth, N.A.(35)
|
10.14
|
|
|
|
|
|
Third Amendment to Lease Agreement, made as of May 3, 2006, by
and between National Fire Protection Association and The J. Jill
Group, Inc.(35)
|
10.15
|
|
|
|
|
|
Guarantee of Lease, made as of May 3, 2006, by The Talbots, Inc.
to National Fire Protection Association.(35)
|
10.16
|
|
|
|
|
|
Revolving Loan Credit Agreement, dated April 17, 2003, between
Mizuho Corporate Bank, Ltd. and Talbots.(17)(21)(38)(48)
|
10.17
|
|
|
|
|
|
Revolving Loan Credit Agreement, dated January 28, 2004, between
Talbots and Mizuho Corporate Bank, Ltd.(19)(26)(28)(44)(64)
|
10.18
|
|
|
|
|
|
Revolving Loan Credit Agreement by and between The Talbots, Inc.
and Mizuho Corporation, Ltd. dated February 2, 2006.(29)
|
10.19
|
|
|
|
|
|
Term Loan Agreement, dated as of July 24, 2006, among The
Talbots, Inc., the lenders from time to time party thereto and
Mizuho Corporate Bank, Ltd., as arranger and administrative
agent, as amended.(40)(52)(60)(67)
|
10.20
|
|
|
|
|
|
Guaranty (in connection with the Term Loan Agreement dated as of
July 24, 2006) dated December 31, 2007, made by The Talbots
Group, Limited Partnership, in favor of each of the Lenders and
Mizuho Corporate Bank, Ltd., as arranger and administrative
agent for the Lenders.(67)
|
10.21
|
|
|
|
|
|
General Financing Agreement between The Talbots, Inc. and Mizuho
Corporate Bank, Ltd., dated as of August 24, 2007.(57)
|
10.22
|
|
|
|
|
|
Amended and Restated Promissory Note between The Talbots, Inc.
and Mizuho Corporate Bank, Ltd., dated January 28, 2008.(65)
|
10.23
|
|
|
|
|
|
Uncommitted Letter of Credit Facility dated June 28, 2006
between The Talbots, Inc., The J. Jill Group, Inc., J.J.
Company, Inc., J. Jill LLC, and J. Jill GP (collectively
Talbots) and Bank of America.(39)
|
10.24
|
|
|
|
|
|
Uncommitted Lines of Credit Letter dated February 15, 2006
between The Talbots, Inc. and Bank of America.(27)
|
10.25
|
|
|
|
|
|
Uncommitted Line of Credit facility dated March 26, 2007 between
The Talbots, Inc. and Bank of America.(47)(61)
|
10.26
|
|
|
|
|
|
Uncommitted Letter of Credit facility dated March 26, 2007
between The Talbots, Inc., The J. Jill Group, Inc., J.J.
Company, Inc., J. Jill LLC, J. Jill GP and Bank of America.(47)
|
10.27
|
|
|
|
|
|
Stock Purchase Agreement, dated as of November 26, 1993, between
Talbots and AEON U.S.A.(2)
|
10.28
|
|
|
|
|
|
Amended Repurchase Program, dated as of April 29, 2005, between
Talbots and AEON (U.S.A.), Inc.(20)
|
10.29
|
|
|
|
|
|
Trademark Purchase and License Agreement, dated as of November
26, 1993, between AEON Co. Ltd., (as successor in interest to
JUSCO (Europe) B.V.) and The Classics Chicago, Inc.(2)
|
10.30
|
|
|
|
|
|
License Agreement, dated as of November 26, 1993, between The
Classics Chicago, Inc., Talbots, Talbots International Retailing
Limited, Inc., Talbots (Canada), Inc. and Talbots (U.K.)
Retailing Limited.(2)
|
10.31
|
|
|
|
|
|
Amendment to License Agreement, dated January 29, 1997, among
The Classics Chicago, Inc., Talbots, Talbots International
Retailing Limited, Inc., Talbots (Canada), Inc., and Talbots
(U.K.) Retailing, Ltd.(6)
|
10.32
|
|
|
|
|
|
Tax Allocation Agreement, dated as of November 18, 1993, between
AEON U.S.A., Talbots, Talbots International Retailing Limited,
Inc., Talbots (U.K.) Retailing Limited and The Classics Chicago,
Inc.(2)
|
10.33
|
|
|
|
|
|
Services Agreement, dated as of October 29, 1989, between
Talbots and AEON U.S.A.(3)
|
10.34
|
|
|
|
|
|
Services Agreement, dated as of November 18, 1993, between
Talbots Japan Co., Ltd. and Talbots.(2)
|
10.35
|
|
|
|
|
|
Consulting and Advisory Services Contract between AEON (U.S.A.),
Inc. and Talbots dated as of November 1, 1999.(9)
|
10.36
|
|
|
|
|
|
The Talbots, Inc. Supplemental Retirement Plan, as
amended.(1)(2)(14)*
|
10.37
|
|
|
|
|
|
The Talbots, Inc. Supplemental Savings Plan, as
amended.(1)(2)(14)*
|
55
|
|
|
|
|
|
|
10.38
|
|
|
|
|
|
The Talbots, Inc. Deferred Compensation Plan, as
amended.(1)(2)(14)(70)*
|
10.39
|
|
|
|
|
|
The Talbots, Inc. Amended and Restated 1993 Executive Stock
Based Incentive Plan.(15)*
|
10.40
|
|
|
|
|
|
The Talbots, Inc. 2003 Executive Stock Based Incentive Plan, as
amended through March 2, 2007.(51)*
|
10.41
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Nonqualified Stock Option Agreement.(68)*
|
10.42
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Restricted Stock Agreement.(68)*
|
10.43
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Restricted Stock Agreement (prior form).(24)*
|
10.44
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Nonqualified Stock Option Agreement (prior form).(24)*
|
10.45
|
|
|
|
|
|
The Talbots, Inc. Directors Deferred Compensation Plan restated
as of May 27, 2004.(23)*
|
10.46
|
|
|
|
|
|
The Talbots, Inc. Restated Directors Stock Plan as amended
through March 5, 2005.(13)*
|
10.47
|
|
|
|
|
|
Form of Restricted Stock Unit Award under The Talbots, Inc.
Restated Directors Stock Plan.(33)*
|
10.48
|
|
|
|
|
|
Form of Option Agreement pursuant to The Talbots, Inc. Restated
Director Stock Plan.(45)*
|
10.49
|
|
|
|
|
|
The Talbots, Inc. Management Incentive Plan Performance
Criteria.(42)(53)*
|
10.50
|
|
|
|
|
|
Summary of executive officer annual cash incentive program
(Management Incentive Plan and Turnaround Incentive Plan) and
long-term equity incentive program structure for 2008.(68)*
|
10.51
|
|
|
|
|
|
Employment Agreement by and between The Talbots, Inc. and Trudy
F. Sullivan, dated August 6, 2007.(56)*
|
10.52
|
|
|
|
|
|
Restricted Stock Agreement by and between The Talbots, Inc. and
Trudy F. Sullivan, dated August 7, 2007.(56)*
|
10.53
|
|
|
|
|
|
Stock Option Agreement by and between The Talbots, Inc. and
Trudy F. Sullivan, dated August 7, 2007.(56)*
|
10.54
|
|
|
|
|
|
Employment Agreement, dated as of October 22, 1993, between
Arnold B. Zetcher and Talbots, amended through September 28,
2006.(2)(3)(32)(43)*
|
10.55
|
|
|
|
|
|
The Talbots, Inc. Umbrella Supplemental Retirement Plan
effective as of May 25, 2005 between The Talbots, Inc. and
Arnold B. Zetcher.(32)*
|
10.56
|
|
|
|
|
|
Compensation arrangements in connection with transition of
Arnold B. Zetcher.(55)*
|
10.57
|
|
|
|
|
|
Employment Agreement, dated January 30, 2003, between Harold B.
Bosworth and Talbots.(17)*
|
10.58
|
|
|
|
|
|
Employment Agreement by and between The Talbots, Inc. and Philip
H. Kowalczyk, dated November 20, 2007.(59)*
|
10.59
|
|
|
|
|
|
Term Sheet between The Talbots, Inc. and Philip H. Kowalczyk,
dated October 4, 2007, subsequently superseded by definitive
employment agreement signed on November 20, 2007.(58)*
|
10.60
|
|
|
|
|
|
Employment Agreement, dated November 3, 2004, between Philip H.
Kowalczyk and The Talbots, Inc., amended through May 3, 2006,
subsequently superseded by definitive employment agreement
signed on November 20, 2007.(25)(35)(46)*
|
10.61
|
|
|
|
|
|
Restricted Stock Agreement by and between The Talbots, Inc. and
Philip H. Kowalczyk, dated November 20, 2007.(59)*
|
10.62
|
|
|
|
|
|
Grant Agreement by and between The Talbots, Inc. and John Fiske
III, dated March 1, 2007.(52)*
|
10.63
|
|
|
|
|
|
Change in Control Agreement by and between The Talbots, Inc. and
John Fiske III, effective April 1, 2007.(52)*
|
10.64
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Paula Bennett, dated
January 3, 2008.(70)*
|
10.65
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and Paula
Bennett, dated January 28, 2008.(70)*
|
10.66
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Paula Bennett,
dated January 28, 2008.(70)*
|
10.67
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Basha Cohen, dated
December 11, 2007.(70)*
|
10.68
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and Basha
Cohen, dated December 17, 2007.(70)*
|
10.69
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Basha Cohen,
dated December 17, 2007.(70)*
|
10.70
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Lori Wagner, dated
February 19, 2008.(70)*
|
56
|
|
|
|
|
|
|
10.71
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and Lori
Wagner, dated March 24, 2008.(70)*
|
10.72
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Lori Wagner,
dated March 24, 2008.(70)*
|
10.73
|
|
|
|
|
|
Grant Agreement by and among The Talbots, Inc., The J. Jill
Group, Inc., and Olga L. Conley dated May 8, 2006.(43)*
|
10.74
|
|
|
|
|
|
Change in Control Agreement by and between The Talbots, Inc. and
Olga L. Conley.(43)*
|
10.75
|
|
|
|
|
|
Change in Control Agreements between Talbots and certain
officers of Talbots.(2)(3)*
|
10.76
|
|
|
|
|
|
Severance Agreement by and between The Talbots, Inc. and each of
Richard T. OConnell, Jr., John Fiske, III, Paul V.
Kastner, Andrea M. McKenna, Bruce Lee Prescott and Randy
Richardson (forms of) and Edward L. Larsen and Michele M.
Mandell, dated August 6, 2007.(56)*
|
|
|
|
*
|
|
Management contract and compensatory plan or arrangement.
|
|
|
|
(11)
|
|
Statement re: Computation of Per Share Earnings
.
|
|
11.1
|
|
Incorporated by reference to Note 17, Net Income Per
Share, of the Companys consolidated financial
statements for the fiscal year ended February 2, 2008,
included in this Report.
|
|
(21)
|
|
Subsidiaries.
|
|
21.1
|
|
List of Subsidiaries of The Talbots, Inc.(70)
|
|
(23)
|
|
Consents of Experts and Counsel.
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm,
Deloitte & Touche LLP.(70)
|
|
(31)
|
|
Rule 13a-14(a)/15d-14(a)
Certifications.
|
|
|
|
31.1
|
|
Certification of Trudy F. Sullivan, President and Chief
Executive Officer of the Company, pursuant to Securities
Exchange Act
Rule 13a-14(a).(70)
|
|
31.2
|
|
Certification of Edward L. Larsen, Senior Vice President,
Finance, Chief Financial Officer and Treasurer of the Company,
pursuant to Securities Exchange Act
Rule 13a-14(a).(70)
|
|
|
|
(32)
|
|
Section 1350 Certifications.
|
|
|
|
32.1
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002, by Trudy F. Sullivan, President and Chief Executive
Officer of the Company and Edward L. Larsen, Senior Vice
President, Finance, Chief Financial Officer and Treasurer of the
Company.(70)
|
|
|
|
1
|
|
Incorporated by reference to the exhibits filed with Talbots
Registration Statement on
Form S-1
(No. 33-69082),
which Registration Statement became effective November 18,
1993.
|
|
2
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 26, 1994 (SEC file number reference
001-12552).
|
|
3
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 27, 1995 (SEC file number reference
001-12552).
|
|
4
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 23, 1995 (SEC file number reference
001-12552).
|
|
5
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 15, 1996 (SEC file number reference
001-12552).
|
|
6
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 1, 1997 (SEC file number reference
001-12552).
|
|
7
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 1, 1998 (SEC file number reference
001-12552).
|
|
8
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 29, 1999 (SEC file number reference
001-12552).
|
|
9
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 1, 1999 (SEC file number reference
001-12552).
|
|
10
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated November 24, 1999 (SEC file number reference
001-12552).
|
57
|
|
|
11
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 25, 2000 (SEC file number reference
001-12552).
|
|
12
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 24, 2000 (SEC file number reference
001-12552).
|
|
13
|
|
Incorporated by reference to the 2005 Proxy Statement
(Exhibit A) dated April 21, 2005.
|
|
14
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 6, 2001 (SEC file number reference
001-12552).
|
|
15
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated September 6, 2001 (SEC file number reference
001-12552).
|
|
16
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 13, 2003 (SEC file number reference
001-12552).
|
|
17
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 24, 2003.
|
|
18
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 19, 2003.
|
|
19
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 24, 2004.
|
|
20
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 29, 2005.
|
|
21
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 12, 2005.
|
|
22
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated June 4, 2004.
|
|
23
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended July 31, 2004.
|
|
24
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated November 18, 2004.
|
|
25
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 23, 2004.
|
|
26
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 26, 2005.
|
|
27
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 22, 2006.
|
|
28
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 20, 2006.
|
|
29
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 2, 2006.
|
|
30
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 6, 2005.
|
|
31
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K/A
dated February 5, 2006.
|
|
32
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated August 18, 2005.
|
|
33
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 3, 2005.
|
|
34
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 26, 2006.
|
|
35
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 3, 2006.
|
|
36
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 7, 2006.
|
|
37
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 17, 2006.
|
|
38
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 18, 2006.
|
|
39
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 7, 2006.
|
|
40
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 24, 2006.
|
|
41
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 27, 2006.
|
|
42
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated September 13, 2006.
|
|
43
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated September 22, 2006.
|
|
44
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 24, 2007
|
|
45
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 25, 2005.
|
|
46
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K/A
dated May 3, 2006.
|
|
47
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 26, 2007.
|
|
48
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 22, 2007.
|
|
49
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 29, 2007.
|
|
50
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 19, 2007.
|
58
|
|
|
51
|
|
Incorporated by reference to the 2007 Proxy Statement
(Exhibit A) dated April 23, 2007.
|
|
52
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended May 5, 2007.
|
|
53
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated March 1, 2007.
|
|
54
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 30, 2007.
|
|
55
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated August 6, 2007.
|
|
56
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended August 4, 2007.
|
|
57
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated August 27, 2007.
|
|
58
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended November 3, 2007.
|
|
59
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated November 20, 2007.
|
|
60
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated November 26, 2007.
|
|
61
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated December 5, 2007.
|
|
62
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 8, 2008.
|
|
63
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 1, 2008.
|
|
64
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 23, 2008.
|
|
65
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 28, 2008.
|
|
66
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 4, 2008.
|
|
67
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 31, 2007.
|
|
68
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated February 28, 2008 and the exhibits filed therewith.
|
|
69
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated March 13, 2008.
|
|
70
|
|
Filed with this
Form 10-K.
|
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 16, 2008
The Talbots, Inc.
Edward L. Larsen
Senior Vice President, Finance
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated as
of April 16, 2008.
|
|
|
|
|
/s/
Trudy
F. Sullivan
Trudy
F. Sullivan
President and
Chief Executive Officer (Principal Executive Officer)
|
|
/s/
John
W. Gleeson
John
W. Gleeson
Director
|
|
|
|
Tsutomu
Kajita
Director
|
|
Motoya
Okada
Director
|
|
|
|
/s/
Gary
M. Pfeiffer
Gary
M. Pfeiffer
Director
|
|
Yoshihiro
Sano
Director
|
|
|
|
/s/
Susan
M. Swain
Susan
M. Swain
Director
|
|
/s/
Isao
Tsuruta
Isao
Tsuruta
Director
|
60
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The Talbots, Inc.
Hingham, Massachusetts
We have audited the accompanying consolidated balance sheets of
The Talbots, Inc. and subsidiaries (the Company) as
of February 2, 2008 and February 3, 2007, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended February 2, 2008. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The
Talbots, Inc. and subsidiaries as of February 2, 2008 and
February 3, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
February 2, 2008, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation
No. 48,
Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109
effective February 4, 2007 and adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment
effective January 29, 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
February 2, 2008, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated April 16, 2008 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte &
Touche LLP
Boston, Massachusetts
April 16, 2008
F-2
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
|
Net Sales
|
|
$
|
2,289,296
|
|
|
$
|
2,231,033
|
|
|
$
|
1,808,606
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy
|
|
|
1,553,994
|
|
|
|
1,469,223
|
|
|
|
1,153,734
|
|
Selling, general and administrative
|
|
|
757,842
|
|
|
|
685,438
|
|
|
|
502,724
|
|
Impairment of goodwill
|
|
|
134,000
|
|
|
|
|
|
|
|
|
|
Impairment of trademark
|
|
|
15,600
|
|
|
|
|
|
|
|
|
|
Impairment of store assets
|
|
|
4,977
|
|
|
|
1,331
|
|
|
|
|
|
Restructuring charges
|
|
|
9,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
(186,392
|
)
|
|
|
75,041
|
|
|
|
152,148
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
35,927
|
|
|
|
31,542
|
|
|
|
4,480
|
|
Interest income
|
|
|
1,362
|
|
|
|
7,023
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense net
|
|
|
34,565
|
|
|
|
24,519
|
|
|
|
3,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Taxes
|
|
|
(220,957
|
)
|
|
|
50,522
|
|
|
|
149,042
|
|
Income Tax (Benefit) Expense
|
|
|
(32,116
|
)
|
|
|
18,946
|
|
|
|
55,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(188,841
|
)
|
|
$
|
31,576
|
|
|
$
|
93,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.56
|
)
|
|
$
|
0.60
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(3.56
|
)
|
|
$
|
0.59
|
|
|
$
|
1.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares of Common Stock Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,006
|
|
|
|
52,651
|
|
|
|
52,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
53,006
|
|
|
|
53,485
|
|
|
|
54,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands except share data
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,476
|
|
|
$
|
35,923
|
|
Customer accounts receivable net
|
|
|
210,853
|
|
|
|
204,619
|
|
Merchandise inventories
|
|
|
329,104
|
|
|
|
352,652
|
|
Deferred catalog costs
|
|
|
11,420
|
|
|
|
11,606
|
|
Due from affiliates
|
|
|
3,040
|
|
|
|
5,672
|
|
Deferred income taxes
|
|
|
25,084
|
|
|
|
28,752
|
|
Prepaid and other current assets
|
|
|
46,870
|
|
|
|
53,185
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
651,847
|
|
|
|
692,409
|
|
Property and equipment net
|
|
|
486,733
|
|
|
|
533,216
|
|
Goodwill
|
|
|
113,490
|
|
|
|
247,490
|
|
Trademarks
|
|
|
139,384
|
|
|
|
154,984
|
|
Other intangible assets net
|
|
|
80,980
|
|
|
|
92,038
|
|
Other assets
|
|
|
30,545
|
|
|
|
28,551
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,502,979
|
|
|
$
|
1,748,688
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
171,830
|
|
|
$
|
113,884
|
|
Accrued income taxes
|
|
|
4,829
|
|
|
|
31,684
|
|
Accrued liabilities
|
|
|
185,735
|
|
|
|
158,763
|
|
Current portion of long-term debt
|
|
|
80,650
|
|
|
|
80,469
|
|
Notes payable to banks
|
|
|
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
443,044
|
|
|
|
429,800
|
|
Long-term debt less current portion
|
|
|
308,377
|
|
|
|
389,174
|
|
Deferred rent under lease commitments
|
|
|
144,569
|
|
|
|
133,025
|
|
Deferred income taxes
|
|
|
5,646
|
|
|
|
61,537
|
|
Other liabilities
|
|
|
146,564
|
|
|
|
91,841
|
|
Commitments
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 authorized;
79,755,443 shares and 78,567,387 shares issued, and
54,921,777 shares and 53,999,261 shares outstanding
|
|
|
797
|
|
|
|
786
|
|
Additional paid-in capital
|
|
|
485,629
|
|
|
|
464,701
|
|
Retained earnings
|
|
|
565,805
|
|
|
|
787,483
|
|
Accumulated other comprehensive loss
|
|
|
(13,474
|
)
|
|
|
(26,202
|
)
|
Treasury stock, at cost: 24,833,666 shares and 24,568,126
shares
|
|
|
(583,978
|
)
|
|
|
(583,457
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
454,779
|
|
|
|
643,311
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
1,502,979
|
|
|
$
|
1,748,688
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(188,841
|
)
|
|
$
|
31,576
|
|
|
$
|
93,151
|
|
Adjustments to reconcile net (loss) income to net cash provided
by
|
|
|
|
|
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and trademark
|
|
|
149,600
|
|
|
|
|
|
|
|
|
|
Impairment of store assets, including $1,028 relating to the
closing of Talbots Kids and Talbots Mens included in
restructuring
|
|
|
6,005
|
|
|
|
1,331
|
|
|
|
|
|
Depreciation and amortization
|
|
|
130,521
|
|
|
|
121,203
|
|
|
|
90,127
|
|
Amortization of debt issuance costs
|
|
|
271
|
|
|
|
325
|
|
|
|
|
|
Deferred rent
|
|
|
11,401
|
|
|
|
22,173
|
|
|
|
930
|
|
Compensation expense related to stock options
|
|
|
10,946
|
|
|
|
12,492
|
|
|
|
|
|
Compensation expense related to issuance of nonvested stock
awards and other stock transactions
|
|
|
8,296
|
|
|
|
5,504
|
|
|
|
8,417
|
|
Loss on disposal of property and equipment
|
|
|
3,932
|
|
|
|
133
|
|
|
|
215
|
|
Tax benefit from options exercised
|
|
|
347
|
|
|
|
1,109
|
|
|
|
3,947
|
|
Excess tax benefit from options exercised
|
|
|
(347
|
)
|
|
|
(1,156
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
(39,556
|
)
|
|
|
(16,786
|
)
|
|
|
(12,086
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
(6,087
|
)
|
|
|
5,124
|
|
|
|
(10,494
|
)
|
Merchandise inventories
|
|
|
24,257
|
|
|
|
(58,491
|
)
|
|
|
(8,167
|
)
|
Deferred catalog costs
|
|
|
186
|
|
|
|
520
|
|
|
|
(903
|
)
|
Due from affiliates
|
|
|
2,632
|
|
|
|
2,220
|
|
|
|
1,181
|
|
Prepaid and other current assets
|
|
|
15,289
|
|
|
|
1,441
|
|
|
|
(3,521
|
)
|
Accounts payable
|
|
|
58,960
|
|
|
|
20,074
|
|
|
|
20,685
|
|
Income taxes payable
|
|
|
(423
|
)
|
|
|
3,083
|
|
|
|
10,717
|
|
Accrued liabilities
|
|
|
26,846
|
|
|
|
(20,421
|
)
|
|
|
10,837
|
|
Other assets
|
|
|
(2,265
|
)
|
|
|
(7,146
|
)
|
|
|
(1,920
|
)
|
Other liabilities
|
|
|
13,415
|
|
|
|
10,084
|
|
|
|
8,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
225,385
|
|
|
|
134,392
|
|
|
|
211,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(84,905
|
)
|
|
|
(104,208
|
)
|
|
|
(72,684
|
)
|
Proceeds from disposal on property and equipment
|
|
|
93
|
|
|
|
612
|
|
|
|
|
|
Acquisition of The J. Jill Group, Inc., net of cash acquired
|
|
|
|
|
|
|
(493,946
|
)
|
|
|
|
|
Maturities of marketable securities
|
|
|
|
|
|
|
16,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(84,812
|
)
|
|
|
(580,813
|
)
|
|
|
(72,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Payments) proceeds on working capital lines of credit
(notes payable), net
|
|
|
(45,000
|
)
|
|
|
45,000
|
|
|
|
|
|
Payments on long-term borrowings
|
|
|
(80,469
|
)
|
|
|
(40,358
|
)
|
|
|
|
|
Proceeds from financing related to acquisition
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
Proceeds from options exercised
|
|
|
1,550
|
|
|
|
3,785
|
|
|
|
7,731
|
|
Excess tax benefit from options exercised
|
|
|
347
|
|
|
|
1,156
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
(1,414
|
)
|
|
|
|
|
Cash dividends
|
|
|
(28,363
|
)
|
|
|
(27,490
|
)
|
|
|
(25,334
|
)
|
Purchase of treasury stock
|
|
|
(521
|
)
|
|
|
(1,113
|
)
|
|
|
(49,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(152,456
|
)
|
|
|
379,566
|
|
|
|
(67,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
1,436
|
|
|
|
(242
|
)
|
|
|
51
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(10,447
|
)
|
|
|
(67,097
|
)
|
|
|
71,209
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
35,923
|
|
|
|
103,020
|
|
|
|
31,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
25,476
|
|
|
$
|
35,923
|
|
|
$
|
103,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Deferred
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Compensation
|
|
|
Stock
|
|
|
(Loss) Income
|
|
|
Equity
|
|
|
BALANCE AT JANUARY 29, 2005 (52 weeks)
|
|
|
76,940,134
|
|
|
$
|
769
|
|
|
$
|
432,912
|
|
|
$
|
715,580
|
|
|
$
|
(17,142
|
)
|
|
$
|
(11,821
|
)
|
|
$
|
(531,710
|
)
|
|
|
|
|
|
$
|
588,588
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,334
|
)
|
Common stock issued as nonvested stock award
|
|
|
322,425
|
|
|
|
3
|
|
|
|
9,844
|
|
|
|
|
|
|
|
|
|
|
|
(9,844
|
)
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Nonvested stock units issued
|
|
|
|
|
|
|
|
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
(844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited nonvested stock units
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to nonvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
8,669
|
|
|
|
|
|
|
|
|
|
|
|
8,701
|
|
Stock options exercised, including tax benefit
|
|
|
598,569
|
|
|
|
7
|
|
|
|
11,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,675
|
|
Purchase of 1,663,430 shares of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,993
|
)
|
|
|
|
|
|
|
(49,993
|
)
|
Purchase of 21,675 shares of nonvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
|
|
(641
|
)
|
|
|
|
|
|
|
(283
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,151
|
|
|
|
93,151
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
|
(138
|
)
|
|
|
(138
|
)
|
Change in pension and postretirement liabilities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
598
|
|
|
|
598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JANUARY 28, 2006 (53 weeks)
|
|
|
77,861,128
|
|
|
|
779
|
|
|
|
455,221
|
|
|
|
783,397
|
|
|
|
(16,682
|
)
|
|
|
(13,403
|
)
|
|
|
(582,344
|
)
|
|
|
|
|
|
|
626,968
|
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,490
|
)
|
Common stock issued as stock award
|
|
|
439,091
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Adoption of SFAS No. 123R
|
|
|
|
|
|
|
|
|
|
|
(13,403
|
)
|
|
|
|
|
|
|
|
|
|
|
13,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
12,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,492
|
|
Compensation expense related to nonvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
5,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,504
|
|
Stock options exercised, including tax benefit
|
|
|
267,168
|
|
|
|
3
|
|
|
|
4,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,890
|
|
Purchase of 66,554 shares of vested and nonvested common
stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,113
|
)
|
|
|
|
|
|
|
(1,113
|
)
|
Adoption of SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,345
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,576
|
|
|
|
31,576
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
(315
|
)
|
|
|
(315
|
)
|
Change in pension and postretirement liabilities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,140
|
|
|
|
|
|
|
|
|
|
|
|
8,140
|
|
|
|
8,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT FEBRUARY 3, 2007 (52 weeks)
|
|
|
78,567,387
|
|
|
|
786
|
|
|
|
464,701
|
|
|
|
787,483
|
|
|
|
(26,202
|
)
|
|
|
|
|
|
|
(583,457
|
)
|
|
|
|
|
|
|
643,311
|
|
Adjustment to retained earnings upon the adoption of
FIN No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,674
|
)
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
(28,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,363
|
)
|
Common stock issued as stock award
|
|
|
1,014,336
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
10,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,946
|
|
Compensation expense related to nonvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
8,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,296
|
|
Stock options exercised, including tax benefit
|
|
|
173,720
|
|
|
|
1
|
|
|
|
1,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,887
|
|
Purchase of 265,540 shares of vested and nonvested common
stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(521
|
)
|
|
|
|
|
|
|
(521
|
)
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(188,841
|
)
|
|
|
(188,841
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
|
2,528
|
|
|
|
2,528
|
|
Change in pension and postretirement liabilities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,200
|
|
|
|
|
|
|
|
|
|
|
|
10,200
|
|
|
|
10,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(176,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT FEBRUARY 2, 2008
|
|
|
79,755,443
|
|
|
$
|
797
|
|
|
$
|
485,629
|
|
|
$
|
565,805
|
|
|
$
|
(13,474
|
)
|
|
$
|
|
|
|
$
|
(583,978
|
)
|
|
|
|
|
|
$
|
454,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands except share and per share data
|
|
1.
|
Description
of Business
|
The Talbots, Inc., a Delaware corporation, together with its
wholly owned subsidiaries (the Company), is an
international specialty retailer and direct marketer of
womens apparel, accessories and shoes sold under the
Talbots and J. Jill brand names. The Companys products are
sold through its 1,421 retail stores (in 862 locations), its
circulation of approximately 126 million catalogs annually,
and online through its websites, www.talbots.com and
www.jjill.com. AEON (U.S.A.), Inc. (AEON USA), is
the Companys majority shareholder, owning approximately
55% of the Companys outstanding common stock at
February 2, 2008.
On May 3, 2006, the Company acquired the J. Jill brand (see
Note 3 below), a multi-channel specialty retailer of
womens apparel. The accompanying consolidated financial
statements include J. Jill since the date of the acquisition.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates
The preparation of
these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the
applicable balance sheets and the reported amounts of net sales
and expenses during the applicable reporting periods. The
Companys significant estimates within the consolidated
financial statements include those related to inventory markdown
reserves, product returns, customer programs and incentives,
retirement plans, valuation of long-lived assets, valuation of
intangibles, income taxes, and stock-based compensation. Actual
results could differ materially from those estimates.
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company conforms to
the National Retail Federations fiscal calendar. The years
ended February 2, 2008 and January 28, 2006 were
52-week
reporting periods. The year ended February 3, 2007 was a
53-week
reporting period. References to 2007,
2006 and 2005 are for the fiscal years
ended February 2, 2008, February 3, 2007 and
January 28, 2006, respectively.
Cash and Cash Equivalents
The Company
considers all highly liquid instruments with a purchased
maturity of three months or less to be cash equivalents. The
Company had outstanding checks in excess of funds on deposit at
certain banks of $12,592 at February 2, 2008. This amount
is included in accounts payable in the accompanying consolidated
balance sheet as of February 2, 2008. The majority of
payments due from credit card processors and banks for
third-party credit card and debit card transactions are
processed within one to five business days. The Company
classifies all credit card and debit card transactions as cash
and cash equivalents. Amounts due from banks for these
transactions classified as cash and cash equivalents totaled
$8,014 and $7,596 at February 2, 2008 and February 3,
2007, respectively.
Marketable securities
In 2006, the
Companys marketable securities consisted primarily of
investments in municipal debt securities. The Company maintained
a liquid portfolio and accordingly, all marketable securities
were classified as available-for-sale and reported at their fair
value. As of February 3, 2007, all of the Companys
marketable securities held during the year had matured. Realized
gains recognized during the year ended February 3, 2007
were immaterial. The Company did not hold any marketable
securities during the years ended February 2, 2008 and
January 28, 2006.
Customer Accounts Receivable
Customer
accounts receivable are amounts due from customers as a result
of customer purchases on the Talbots brand proprietary charge
card, net of an allowance for doubtful accounts. The Talbots
charge card program is administered through Talbots Classics
National Bank and Talbots Classics Finance Company, Inc., both
wholly owned subsidiaries. Concentration of credit risk with
respect to customer accounts receivable is limited due to the
large number of customers to whom the Company extends credit.
Ongoing credit
F-7
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
evaluation of customers financial positions are performed
and collateral is not required as a condition of credit. The
allowance for doubtful accounts is maintained for estimated
losses from the inability of customers to make required payments
and is based on a percentage of outstanding balances, historical
charge-offs, and charge-off forecasts. Delinquent accounts are
generally written off after a period of 180 days. Accounts
are written off sooner in the event of customer bankruptcy or
other circumstances that make collectibility unlikely.
Customer Loyalty Program
The Company
maintains a customer loyalty program for the Talbots brand
through which the customers receive appreciation
awards based on reaching a certain purchase level on their
Talbots credit card. Appreciation awards may be applied to
future Talbots charge card merchandise purchases and expire one
year after issuance. The cost of the appreciation award is
recognized at the time of the initial customer purchase and is
charged to selling, general and administrative expenses based on
purchase levels, actual awards issued, and historical redemption
rates. The related liability is included in accrued liabilities.
Merchandise Inventories
Inventories
are stated at the lower of average cost or market using the
retail inventory method on a FIFO (first-in, first-out) basis.
Under the retail inventory method, the valuation of inventories
at cost and the resulting gross margins are adjusted for
estimated future markdowns on currently held past season
merchandise in advance of selling the marked-down merchandise.
Estimated future markdowns are calculated based on current
information related to inventory levels, historical markdown
trends, and forecasted markdown levels. Certain distribution
costs, warehousing costs, and purchasing costs are capitalized
in inventory.
Property and Equipment
Property and
equipment are recorded at cost. Depreciation and amortization
are calculated using the straight-line method over the following
estimated useful lives:
|
|
|
Description
|
|
Years
|
|
Buildings
|
|
10-50
|
Fixtures and equipment
|
|
3-10
|
Software
|
|
3-7
|
Leasehold improvements
|
|
3-10 or term of lease, if shorter
|
Expenditures for new properties and improvements to existing
facilities are capitalized, while the cost of maintenance is
charged to expense. The cost of property retired or otherwise
disposed of and the accumulated depreciation is eliminated from
the related accounts, and the resulting gain or loss is
reflected in operations.
Preopening Expenses
Costs associated
with the opening of new stores are expensed as incurred.
Goodwill and Other Intangible Assets
The Company tests goodwill and indefinite lived
trademarks for impairment using a fair value approach at the
reporting unit level, or one level below an operating segment,
on an annual basis, or when events indicate that the carrying
value of the asset may be impaired. The Company has elected the
first day of each fiscal year as its measurement date. The
Company completed its annual goodwill and indefinite lived
trademark impairment tests as of the first day of each of 2005,
2006, and 2007 and as a result, no impairments were recognized.
In the fourth quarter of 2007, the Company performed an
additional goodwill and indefinite lived trademark impairment
test due to the lower than expected sales and operating
performance of the Talbots and J. Jill brands as well as the
overall decline of the Companys market value.
The goodwill impairment test is a two-step impairment test. In
the first step, the Company compares the fair value of each
reporting unit to its carrying value. The Company determines the
fair value of its reporting units using a combination of a
discounted cash flow and a market value approach. If the fair
value of the reporting unit exceeds the carrying value of the
net assets assigned to that reporting unit, goodwill is not
impaired and the Company is not required to perform further
testing. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit,
then the Company must perform the second step in order to
determine the implied fair value of the reporting units
goodwill and compare it to the carrying value of the reporting
units goodwill. The activities in the second step include
valuing the tangible and intangible assets and liabilities of
the impaired
F-8
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
reporting unit based on their fair value and determining the
fair value of the impaired reporting units goodwill based
upon the residual of the summed identified tangible and
intangible assets and liabilities.
The fair value of the Talbots brand reporting units exceeded the
carrying value of the assigned net assets, therefore no further
testing was required and an impairment charge was not required.
The fair value of the J. Jill brand reporting units was below
the carrying value of the assigned net assets, therefore the
second step was required. As a result, the Company recorded an
impairment charge of $134,000 relating to goodwill.
Trademarks that have been determined to have indefinite lives
are also not subject to amortization and are reviewed at least
annually for potential impairment, as mentioned above. The fair
value of the Companys trademarks are estimated and
compared to their carrying value. The Company estimates the fair
value of these intangible assets based on an income approach
using the relief-from-royalty method. This methodology assumes
that, in lieu of ownership, a third party would be willing to
pay a royalty in order to exploit the related benefits of these
types of assets. This approach is dependent on a number of
factors, including estimates of future growth and trends,
royalty rates in the category of intellectual property, discount
rates and other variables. The Company recognizes an impairment
charge when the estimated fair value of the intangible asset is
less than the carrying value.
As a result of the impairment analysis performed in connection
with the Companys trademarks with indefinite lives, the
Company determined that the carrying value of the intangible
asset related to its J. Jill reporting units exceeded its
estimated fair value. Accordingly, during 2007, the Company
recorded a pre-tax charge of $15,600 ($9,766 after-tax) to
reduce the value of the trademark to its estimated fair value.
This impairment charge primarily resulted from a decline in
future anticipated cash flows relating to the J. Jill brand.
The Companys intangible assets that are subject to
amortization include customer relationships, favorable leasehold
interests, and non-compete agreements. The intangible assets are
being amortized using either the discounted cash flow method or
the straight-line method over periods ranging from
20 months to 14 years with a weighted average life of
approximately 11 years. The intangible asset lives have
been determined based on the anticipated period over which the
Company will derive future cash flow benefits from the
intangible assets. The Company has considered the effects of
legal, regulatory, contractual, competitive, and other economic
factors in determining these useful lives. See Note 4 for
further discussion on goodwill and other intangible assets.
Impairment of Long-lived Assets
The
Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amount. The
Company recorded an impairment loss on its store assets of
$6,005, of which $1,028 relates to assets associated with the
closing of Talbots Kids and Talbots Mens business concepts which
is included in restructuring charges within the Companys
consolidated statement of operations for the year ended
February 2, 2008. The Company recorded an impairment loss
on its store assets of $1,331 for the year ended
February 3, 2007.
Grantor Trust
The Company maintains an
irrevocable grantors trust (Rabbi Trust) to
hold assets that fund benefit obligations under the
Companys Supplemental Retirement Savings Plan and Deferred
Compensation Plan. The assets held in the Rabbi Trust consist of
money market and insurance policies (in which the Company is the
owner and designated beneficiary) which are recorded at the cash
surrender value. At February 2, 2008 and February 3,
2007, the values were $27,218 and $24,159, respectively, and
were included in other assets in the Companys consolidated
balance sheets. The Companys obligation related to the
Supplemental Retirement Savings Plan and Deferred Compensation
Plan was $25,722 and $25,839, respectively, at February 2,
2008 and February 3, 2007, and is included in other
liabilities in the Companys consolidated balance sheets.
Deferred Rent Obligations
Deferred
rent obligations consists of step rent and allowances from
landlords related to the Companys retail stores. Step rent
represents the difference between actual operating lease
payments due and straight-line rent expense, which is recorded
by the Company over the term of the lease, including the
build-out
period (which typically ranges from 90 to 120 days prior to
the store opening). This amount is recorded as a deferred credit
in the early years of the lease, when cash payments are
generally lower than straight-line rent
F-9
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
expense, and reduced in the later years of the lease when
payments begin to exceed the straight-line expense. Landlord
allowances are generally comprised of amounts pledged to the
Company by landlords in the form of cash or rent abatements.
These allowances are part of the negotiated terms of the lease.
In situations where cash is to be received, the Company records
an asset for the full amount of the allowance when certain
performance criteria articulated in the lease are met, typically
when the store opens, and a liability is concurrently
established. This deferred credit from landlords is amortized
into income over the term of the applicable lease and the asset
is reduced as amounts are received from the landlord.
Fair Value of Financial Instruments
The Companys financial instruments consist
primarily of cash, accounts receivable, accounts payable, notes
payable, and long-term debt. The carrying value of current
assets and current liabilities approximates their fair market
values. The carrying value of long-term debt, which has variable
interest rate terms, approximates its fair value. In addition,
the Company had $29,027 and $9,643 of debt with fixed interest
rates at February 2, 2008 and February 3, 2007,
respectively for which the Company believes carrying value
approximates fair value.
Foreign Currency Translation
The
functional currency of the Companys foreign operations is
the applicable local currency. The translation of the applicable
foreign currency into U.S. dollars is performed for balance
sheet accounts using current exchange rates in effect at the
balance sheet date, and for revenue and expense accounts using
the exchange rates throughout the year. Adjustments resulting
from such translation are included as a separate component of
comprehensive income. Foreign currency transaction gains or
losses, whether realized or unrealized, are recorded directly to
operations.
Revenue Recognition
The Company
recognizes revenue at the point-of-sale or, in the case of
catalog and online sales, upon estimated receipt by the
customer. Amounts charged by the Company to its customers for
shipping and handling are included in net sales. The Company
provides for estimated returns based on return history and sales
levels. The Company does not include sales tax collected from
its customers in revenue.
Gift Cards and Merchandise Credits
Upon the sale of a gift card or the issuance of a
merchandise credit, the Company records a liability representing
the purchase price of the gift card or the retail value of the
merchandise credit. The liability is relieved and revenue is
recognized when the gift card or merchandise credit is redeemed
by a customer in exchange for merchandise. Unredeemed gift cards
and merchandise credits are escheated to the appropriate
jurisdiction.
Cost of Sales, Buying and Occupancy
Cost of sales, buying and occupancy expenses are
comprised primarily of the cost of product merchandise,
including inbound freight charges; shipping, handling and
distribution costs associated with the Companys catalog
operations; salaries and expenses incurred by the Companys
merchandising and buying operations; and occupancy costs
associated with the Companys retail stores. Occupancy
costs consist primarily of rent and associated depreciation,
maintenance, property taxes, and utilities.
Selling, General and Administrative expenses
Selling, general and administrative expenses are
comprised primarily of the costs related to employee
compensation and benefits in the selling and administrative
support functions; catalog operation costs relating to
production and telemarketing; advertising and marketing costs;
the cost of the Companys customer loyalty program; costs
related to the Companys management information systems and
support; the costs and income associated with the Companys
credit card operations; and amortization expense relating to the
Companys intangible assets. Additionally, costs associated
with the Companys warehouse operations are included in
selling, general and administrative expenses and include costs
of receiving, inspection, warehousing, and store distribution.
Warehouse operations costs for the years ended February 2,
2008, February 3, 2007, and January 28, 2006, were
approximately $37,159, $34,784, and $25,712, respectively.
Finance Charge Income
Finance charge
income on customer accounts receivable is treated as a reduction
of selling, general and administrative expense, and includes
interest and late fees.
Advertising
Advertising costs, which
include media, production, and catalogs, totaled $118,134,
$97,486, and $65,957, for the years ended February 2, 2008,
February 3, 2007, and January 28, 2006, respectively.
Media and
F-10
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
production costs are expensed in the period in which the
advertising first takes place, while catalog costs are amortized
over the estimated productive selling life of the catalog, which
is generally one to five months.
Income Taxes
Deferred income taxes are
provided to recognize the effect of temporary differences
between tax and financial statement reporting. Such taxes are
provided for using enacted tax rates expected to be in place
when such temporary differences are realized. A valuation
allowance is recorded to reduce deferred tax assets if it is
determined that it is more likely than not that the full
deferred tax asset would not be realized. If it is subsequently
determined that a deferred tax asset will more likely than not
be realized, a credit to earnings is recorded to reduce the
allowance.
The Company adopted Financial Accounting Standards Board
(FASB) Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes
,
an interpretation of FASB
Statement No. 109
(FIN No. 48) on
February 4, 2007. The Company has classified uncertain tax
positions as non-current income tax liabilities unless expected
to be paid in one year. The Company has assessed its income tax
positions and recorded tax benefits for all years subject to
examination based upon managements evaluation of the
facts, circumstances, and information available at the reporting
date. For those tax positions where it is more likely than not
that a tax benefit will be sustained, the Company has recorded
the largest amount of tax benefit with a greater than
50 percent likelihood of being realized upon ultimate
settlement with a taxing authority that has full knowledge of
all relevant information. For those income tax positions where
it is not more likely than not that a tax benefit will be
sustained, no tax benefit has been recognized in the financial
statements. Upon the adoption of FIN No. 48, the
Company elected to classify interest on uncertain tax positions
in interest expense, interest income from income tax refunds in
other interest income, and penalties in selling, general and
administrative expenses. Previously, these amounts were
reflected in income tax expense. See Note 13 for further
discussion on income taxes.
Stock-Based Compensation
On
January 29, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123
(revised),
Share-Based Payment
(SFAS No. 123R), which requires all
stock-based compensation to be recognized in the financial
statements at their fair values. The Company elected to use the
modified-prospective application as its transition method and
accordingly, prior period amounts have not been restated. Under
this transition method, the Company is recognizing stock-based
compensation expense, less estimated forfeitures, on a
straight-line basis over the requisite service period of the
awards for those awards granted following the adoption of
SFAS No. 123R. For nonvested awards outstanding upon
the adoption of SFAS No. 123R, the Company is
recognizing stock-based compensation expense, less estimated
forfeitures, on a straight-line basis over the remaining
requisite service period of the awards. Prior to the adoption of
SFAS No. 123R, the Company accounted for share-based
compensation using the intrinsic value method under Accounting
Principles Board Opinion No. 25,
Accounting for Stock
Issued to Employees
, and the related interpretations, and
provided pro forma disclosures applying the fair value
recognition provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation
, to stock-based awards. See
Note 7 for further discussion on stock-based compensation.
Comprehensive (Loss) Income
The
Companys comprehensive (loss) income is comprised of
reported net (loss) income plus the impact of changes in the
cumulative foreign currency translation adjustment and the
changes in the minimum postretirement plan liabilities, net of
tax. Accumulated other comprehensive loss (AOCI) is
included in the consolidated balance sheets and consolidated
statements of stockholders equity. Pursuant to the
adoption of SFAS No. 158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans An Amendment of FASB Statements
No. 87, 88, 106 and 132(R)
(SFAS No. 158), any changes to the
Companys defined benefit plans funded status is required
to be recognized as an unrealized gain or loss through AOCI. The
Company was required to adopt the recognition provisions of
SFAS No. 158 as of February 3, 2007.
During 2007, the Company recorded a decrease to its pension and
postretirement liabilities of $17,000, offset by an increase to
AOCI of $10,200, net of tax. As of February 2, 2008, the
balance of AOCI included a cumulative pension and postretirement
liability, net of tax, of $13,565 and a cumulative foreign
currency translation gain of $91. During 2006, the Company
recorded an increase to its pension and postretirement plan
liabilities of $13,567, offset by an increase to AOCI of $8,140,
net of tax. Additionally, as a result of the adoption of
SFAS No. 158 in
F-11
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
2006, the Company recorded an adjustment to the funded status of
the Companys defined benefit postretirement plans of
$27,652, offset by a charge to AOCI of $17,345, net of tax. As
of February 3, 2007, the balance of AOCI included a
cumulative pension and postretirement plan liability, net of
tax, of $6,420, an adjustment to the funded status of the
Companys defined benefit plans of $17,345, net of tax, as
a result of the adoption of SFAS No. 158, and a
cumulative foreign currency translation loss of $2,437. During
2005, the Company recorded a decrease to its pension and
postretirement plan liabilities of $996, offset by an increase
to AOCI of $598, net of tax. As of January 28, 2006, the
balance of AOCI included a cumulative pension and postretirement
plan liability, net of tax, of $14,560 and a cumulative foreign
currency translation loss of $2,122.
Basic and Diluted Net (Loss) Income Per Share
Basic net (loss) income per share is computed by
dividing net (loss) income by the weighted average number of
shares of common stock outstanding. Nonvested stock awards and
restricted stock units are excluded from basic net (loss) income
per share as the awards are contingently returnable. Once the
nonvested stock awards and restricted stock units have vested,
they are included in the computation of basic net (loss) income
per share. The calculation of diluted (loss) net income per
share is consistent with that of basic net (loss) income per
share but gives effect to all potential common shares, which
includes stock options, nonvested stock awards, and restricted
stock units that were outstanding during the period, unless the
effect is antidilutive.
Supplemental Cash Flow Information
Interest paid for the years ended February 2, 2008,
February 3, 2007, and January 28, 2006 was $30,785,
$30,108, and $4,167 respectively. Income tax payments during the
years ended February 2, 2008, February 3, 2007, and
January 28, 2006 were $12,080, $31,217, and $54,489,
respectively.
Reclassifications
The Company
reclassified certain 2006 amounts to conform to the current
period presentation. The Company reclassified $1,331 relating to
store impairments from of cost of sales, buying and occupancy
expense into its separate line item within the Companys
consolidated statement of operations. The Company also
reclassified this amount from loss on disposal of property and
equipment into its separate line item within the Companys
consolidated statement of cash flows. Additionally, within the
Companys consolidated statement of cash flows, the Company
reclassified certain amounts within its financing section. The
prior year presentation reflected cash provided from borrowings
under notes payable of $490,000, and cash used for payments of
notes payable of $85,358. The current period presentation
reflects proceeds on working capital lines of credit (notes
payable) of $45,000, payments on long-term borrowings of
$40,358, and proceeds from financing related to acquisition of
$400,000.
New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 158, which
applies to all employers who offer defined benefit
post-retirement plans. SFAS No. 158 requires an
employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its balance sheet and to
recognize changes in that funded status as unrealized gain or
loss through AOCI when the changes occur. The Company adopted
the recognition provisions of SFAS No. 158 as of
February 3, 2007. Application of this standard resulted in
a decrease to other assets of $1,256, an increase to other
liabilities of $27,652, and a decrease to AOCI of $17,345, net
of tax. The adoption of this standard did not impact the
consolidated statements of operations or statements of cash
flows in 2006. In addition, SFAS No. 158 requires
measurement of plan assets and benefit obligations as of the
date of the employers fiscal year end. The Company is
required to adopt the measurement provisions of
SFAS No. 158 for its fiscal year ending
January 31, 2009.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). This Standard defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007 for financial assets and liabilities, as well as for any
other assets and liabilities that are carried at fair value on a
recurring basis in financial statements. In February 2008, the
FASB delayed the effective date of SFAS No. 157 for
all nonrecurring fair value measurements of nonfinancial assets
and nonfinancial liabilities until fiscal years beginning after
November 15, 2008. The Company does not expect the adoption
of SFAS No. 157 to have a material effect on its
financial position or results of operations.
F-12
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS No. 159). This Standard allows
companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate
volatility in earnings without having to apply complex hedge
accounting provisions. SFAS No. 159 is applicable only
to certain financial instruments and is effective for fiscal
years beginning after November 15, 2007. The adoption of
SFAS No. 159 on February 3, 2008 did not have a
material effect on the Companys financial position or
results of operations.
|
|
3.
|
Acquisition
of J. Jill
|
On May 3, 2006, the Company acquired J. Jill, a
multi-channel specialty retailer of womens apparel. J.
Jill markets its products through retail stores, catalogs, and
online. Talbots acquired all of the outstanding shares of J.
Jill for $24.05 per share for total consideration of $518,320 in
cash, net of cash acquired of $30,445. The Company also incurred
acquisition related fees and expenses of $6,071. The Company
used the proceeds from its $400,000 loan facility (see
Note 12), as well as cash on hand to fund the acquisition.
The acquisition of J. Jill was accounted for in accordance with
SFAS No. 141,
Business Combinations
.
In accordance with Emerging Issues Task Force (EITF)
Issue No. 95-3,
Recognition of Liabilities in Connection
with a Purchase Combination
, the Company recorded $10,049 of
liabilities as of the date of acquisition primarily related to
the involuntary terminations of employees of the acquired
Company. As of February 2, 2008, the entire balance has
been paid out. In addition, the Company offered certain J. Jill
employees retention payments of $931 which have been recorded
within the consolidated statement of operations over the
retention period. The Company recorded $867 during 2006 and the
remaining $64 was recorded within selling, general, and
administrative expenses during 2007.
|
|
4.
|
Goodwill
and Intangible Assets
|
The changes in the carrying value of goodwill by reportable
segment during the year ended February 2, 2008 and
February 3, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
Stores
|
|
|
Marketing
|
|
|
Consolidated
|
|
|
Balance at January 28, 2006
|
|
$
|
35,513
|
|
|
$
|
|
|
|
$
|
35,513
|
|
Increase due to J. Jill acquisition
|
|
|
160,453
|
|
|
|
51,524
|
|
|
|
211,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
|
195,966
|
|
|
|
51,524
|
|
|
|
247,490
|
|
Impairment charge
|
|
|
(95,900
|
)
|
|
|
(38,100
|
)
|
|
|
(134,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
$
|
100,066
|
|
|
$
|
13,424
|
|
|
$
|
113,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2007, the Company concluded that a
goodwill impairment test was required to be performed due to the
weak sales and operating performance of the J. Jill and Talbots
brands as well as the overall decline of the Companys
market value. As a result of the impairment test, the Company
determined that the goodwill of its J. Jill Stores and Direct
Marketing reporting units were impaired and recorded an
impairment charge of $134,000 during the fourth quarter of 2007.
No impairment charges were recorded for goodwill during the
years ended February 3, 2007 and January 28, 2006.
F-13
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
Intangible assets consist of the following as of the years ended
February 2, 2008 and February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
February 3, 2007
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Economic
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Life
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Trademarks
|
|
$
|
139,384
|
|
|
$
|
|
|
|
$
|
139,384
|
|
|
|
indefinite
|
|
|
$
|
154,984
|
|
|
$
|
|
|
|
$
|
154,984
|
|
Customer relationships
|
|
|
84,200
|
|
|
|
(11,381
|
)
|
|
|
72,819
|
|
|
|
12
|
|
|
|
84,200
|
|
|
|
(4,723
|
)
|
|
|
79,477
|
|
Leasehold interests
|
|
|
11,085
|
|
|
|
(2,924
|
)
|
|
|
8,161
|
|
|
|
8
|
|
|
|
11,740
|
|
|
|
(1,836
|
)
|
|
|
9,904
|
|
Non-Compete agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
4,900
|
|
|
|
(2,243
|
)
|
|
|
2,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
234,669
|
|
|
$
|
(14,305
|
)
|
|
$
|
220,364
|
|
|
|
|
|
|
$
|
255,824
|
|
|
$
|
(8,802
|
)
|
|
$
|
247,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the impairment analysis performed in connection
with the Companys trademarks with indefinite lives, the
Company determined that the carrying value of the trademark
related to its J. Jill Stores and Direct Marketing reporting
units exceeded its estimated fair value. Accordingly, during
2007, the Company recorded a charge of $15,600 ($9,766
after-tax) to reduce the value of the trademark to its estimated
fair value. Of the $15,600 impairment charge, $10,400 was
recorded to the brands Stores reporting unit and $5,200
was recorded to the brands Direct Marketing reporting
unit. This impairment resulted from a decline in future
anticipated cash flows relating to the brand. No impairment
charges were recorded for trademarks during the years ended
February 3, 2007 and January 28, 2006.
During the fourth quarter of 2007, the time period for which the
non-compete agreements were enforceable lapsed. Therefore, the
fully amortized asset was removed from the Companys
consolidated balance sheet as of February 2, 2008.
Amortization expense relating to intangible assets was recorded
within the consolidated statements of operations for the years
ended February 2, 2008 and February 3, 2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cost of sales, buying, and occupancy
|
|
$
|
1,743
|
|
|
$
|
1,246
|
|
Selling, general, and administrative
|
|
|
9,315
|
|
|
|
6,965
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,058
|
|
|
$
|
8,211
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense of intangible assets is as
follows:
|
|
|
|
|
|
|
Amount
|
|
|
2008
|
|
$
|
10,016
|
|
2009
|
|
|
10,257
|
|
2010
|
|
|
10,507
|
|
2011
|
|
|
9,709
|
|
2012
|
|
|
8,793
|
|
Thereafter
|
|
|
31,698
|
|
|
|
|
|
|
Total
|
|
$
|
80,980
|
|
|
|
|
|
|
F-14
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
|
|
5.
|
Restructuring
Charges, including the Closure of the Talbots Kids and Talbots
Mens Business Concepts
|
In October 2007, the Company initiated a comprehensive strategic
review of its business and engaged a leading global consulting
firm to assist management in developing a long-range plan. This
review included the following areas: brand positioning,
productivity, store growth and store productivity, non-core
concepts, distribution channels, the J. Jill brand, and other
operating matters. The consulting firm completed its review in
the first quarter of 2008, from which the Company developed a
three-year business plan to strengthen and grow the business.
The Company incurred $9,275 of costs relating to its strategic
business plan in the fourth quarter of 2007 and has included
these costs as restructuring charges within the Companys
consolidated statement of operations for the year ended
February 2, 2008. Of the $9,275, $5,375 relates to the
closing of the Companys Talbots Kids and Talbots Mens
business concepts, $2,732 relates to consulting services, $904
relates to severance, and $264 relates to other non-cash charges.
As part of the strategic review, the Company announced on
January 4, 2008 that it would close its Talbots Kids and
Talbots Mens business concepts. The strategic review revealed
that these business concepts did not demonstrate the potential
to deliver an acceptable long-term return on investment. The
Company notified affected employees on January 3, 2008 of
the decision. The Company plans to close the remaining 75 stores
by September 2008. In the fourth quarter of 2007, the Company
recognized $5,375 of costs related to the closure of the Talbots
Kids and Talbots Mens business concepts, consisting of non-cash
charges of $3,454 of asset impairments and accelerated
depreciation, $628 of severance, $421 of lease exit costs
(negotiated termination fees of $697 net of non-cash
deferred credits of $276), and $872 of administrative and other
costs. The closures will result in a reduction of workforce of
approximately 800 full and part-time employees, or approximately
5% of the Companys total workforce. The severance will be
expensed over the period of retention. The Company expects to
incur additional costs of approximately $40,000 in 2008,
primarily related to lease exit costs. Lease exit costs are
recorded when the Company negotiates a settlement with the
landlord or vacates the existing space. If the Company is
successful in negotiating settlements with the respective
landlords, the Company anticipates that the lease exit costs
will be paid by the third quarter of 2008. In the event that the
Company is not successful in negotiating settlements, cash
payments may be paid over the various remaining lease terms,
which is currently through 2020. All costs incurred to date
relating to the closing of Talbots Kids and Talbots Mens have
been recorded in restructuring costs within the Companys
consolidated statement of operations for the year ended
February 2, 2008.
Below is a rollforward of the restructuring liabilities, which
are included within accrued liabilities within the
Companys consolidated balance sheet as of the year ended
February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate-Wide
|
|
|
Closing of Talbots Kids and Mens Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
|
Asset
|
|
|
|
|
|
|
Severance
|
|
|
Consulting
|
|
|
Other
|
|
|
Severance
|
|
|
exit
|
|
|
Other
|
|
|
writedowns
|
|
|
Total
|
|
|
Charges
|
|
$
|
904
|
|
|
$
|
2,732
|
|
|
$
|
264
|
|
|
$
|
628
|
|
|
$
|
421
|
|
|
$
|
872
|
|
|
$
|
3,454
|
|
|
$
|
9,275
|
|
Cash payment
|
|
|
(226
|
)
|
|
|
(1,200
|
)
|
|
|
|
|
|
|
(19
|
)
|
|
|
(320
|
)
|
|
|
(497
|
)
|
|
|
|
|
|
|
(2,262
|
)
|
Non-cash charges
|
|
|
|
|
|
|
|
|
|
|
(264
|
)
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
(3,454
|
)
|
|
|
(3,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
678
|
|
|
$
|
1,532
|
|
|
$
|
|
|
|
$
|
609
|
|
|
$
|
377
|
|
|
$
|
375
|
|
|
$
|
|
|
|
$
|
3,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of $3,571 is expected to be paid during 2008. The
Company expects to incur material restructuring charges in 2008,
in addition to the closing of the Talbots Kids and Talbots Mens
business concepts, relating primarily to severance and
professional services, as it implements its initiatives of its
long-term strategic plan to restore the Company to profitability.
During the years ended February 2, 2008, February 3,
2007, and January 28, 2006, the Company declared and paid
dividends totaling $0.52 per share, $0.51 per share, and $0.47
per share, respectively.
F-15
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
At February 2, 2008 and February 3, 2007, the Company
held 24,833,666 shares and 24,568,126 shares,
respectively, as treasury shares. The Companys treasury
shares include the repurchase of its shares under approved stock
repurchase programs as well as the repurchase of shares awarded
under the Companys 1993 Stock Based Incentive Plan (the
1993 Plan), the Amended and Restated 2003 Executive
Stock Based Incentive Plan (the 2003 Plan), and the
Amended and Restated Directors Plan (the Directors
Plan).
In 1995, the Company adopted a stock repurchase plan authorizing
the purchase of shares of its common stock. Subsequently, the
Companys Board of Directors approved additional
authorizations under its stock repurchase program. During 2007
and 2006, the Company did not repurchase any shares under its
repurchase program. During 2005, the Company repurchased
1,663,430 shares of the Companys common stock under
its repurchase program at an average price per share of $30.04.
These repurchases were made under a stock repurchase program
approved by the Companys Board of Directors during 2005
authorizing the Company to purchase an aggregate of $50,000 in
stock. The repurchases under this authorization were completed
in October 2005.
During 2007, the Company repurchased 20,965 shares of its
common stock at an average price per share of $24.71 from an
employee to cover tax withholding obligations associated with
the vesting of common stock awarded under the 2003 Plan. In
addition, the Company repurchased 244,575 nonvested common
shares that were forfeited upon employee termination at a price
per share of $0.01. During 2006, the Company repurchased
46,528 shares of its common stock at an average price per
share of $23.91 from employees to cover tax withholding
obligations associated with the vesting of common stock awarded
under the 2003 Plan. In addition, in 2006, the Company
repurchased 20,026 nonvested common shares that were forfeited
upon employee termination at a price per share of $0.01. During
2005, the Company repurchased 1,200 shares of its common
stock at a price per share of $25.57 to cover tax withholding
obligations associated with the vesting of common stock awarded
under the Directors Plan. In addition, in 2005, the Company
repurchased 20,475 nonvested common shares that were forfeited
upon employee termination at a price per share of $0.01.
|
|
7.
|
Stock-Based
Compensation
|
Amended
and Restated 2003 Executive Stock Based Incentive
Plan
The Companys 2003 Plan provides for the grant of stock
options and nonvested stock awards to certain key members of
management. In accordance with the 2003 Plan, the Company has
issued stock options that generally vest over a three-year
period at each anniversary date and expire no later than ten
years from the grant date. During 2007 and 2006, the Company
granted 1,695,200 and 1,092,600 options, respectively, to
purchase shares of its common stock to employees at an exercise
price equal to the fair market value at the date of grant.
Additionally, under the provisions of the 2003 Plan, upon the
grant of nonvested stock, the recipient or the Company on the
recipients behalf is required to pay the par value of such
shares, $0.01 per share. The shares of nonvested stock generally
are forfeited to the Company, through the repurchase of such
shares, at the $0.01 par value if the employee terminates
employment prior to the vesting date. Certain shares granted as
performance accelerated nonvested stock vest at the end of a
five-year service period, however, all or a portion of the
vesting may be accelerated to three years after the grant date
depending on the achievement of certain corporate financial
goals. Certain other shares of nonvested stock are time vested
and generally vest between two and four years. During 2007 and
2006, the Company granted 1,008,336 and 430,091 shares of
nonvested stock, respectively. For the years ended
February 2, 2008, February 3, 2007, and
January 28, 2006, the Company recorded $7,685, $4,839, and
$7,517, respectively, of compensation expense, relating to
nonvested stock within its consolidated statement of operations.
The Company has reserved 9,500,000 shares of common stock
under the 2003 Plan for issuance. Any authorized but unissued
shares of common stock available for future awards under the
Companys previous 1993 Executive Stock Based Incentive
Plan were added to the 2003 Plan together with any shares under
outstanding awards under the 1993 Plan which are forfeited,
settled in cash, expired, canceled or otherwise become available
to the Company. At February 2, 2008 there were
2,896,747 shares available for future grant under the 2003
Plan.
F-16
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
Amended
and Restated Directors Plan
The Companys Directors Plan provides for the grant of
stock options and restricted stock units (RSUs) to
non-management directors on the Companys Board of
Directors. In accordance with the Directors Plan, the Company
had issued stock options that generally vest over a three-year
period, but accelerate upon retirement, and expire no later than
ten years from the date of grant. No stock options were granted
under the Directors Plan during 2007 and 2006.
Additionally, in accordance with the Directors Plan, the Company
has awarded RSUs which generally vest over one year. The RSUs
may be mandatorily or electively deferred, in which case the
RSUs will be issued as common stock to the holder upon departing
from the Board, but not before vesting. If the RSUs are not
deferred, the RSUs will be issued as common stock upon vesting.
Holders of RSUs are entitled to dividends equivalent to common
stock dividends but RSUs do not have voting rights. During 2007
and 2006, 28,000 RSUs were granted, respectively. For the years
ended February 2, 2008, February 3, 2007, and
January 28, 2006, the Company recorded $611, $665, and
$900, respectively, of compensation expense, relating to RSUs
within its consolidated statement of operations.
The number of shares reserved for issuance under the Directors
Plan is 1,060,000. At February 2, 2008, 537,516 shares
were available for future grant under the Directors Plan.
The Company intends to issue shares from exercises of stock
options and future issuances of nonvested stock and restricted
stock units from its unissued reserved shares under its 2003
Plan and Directors Plan.
On January 29, 2006, the Company adopted
SFAS No. 123R which requires all stock-based
compensation to employees to be recognized in the financial
statements at their fair values. The Company elected to use the
modified-prospective application as its transition method and
accordingly, prior period amounts have not been restated. The
Company is recognizing stock-based compensation expense on a
straight-line basis over the requisite service period of the
awards for those awards granted following the adoption of
SFAS No. 123R. For nonvested awards outstanding upon
the adoption of SFAS No. 123R, the Company is
recognizing stock-based compensation expense on a straight-line
basis over the remaining requisite service period of the awards.
Prior to the adoption of SFAS No. 123R, the Company
accounted for share-based compensation using the intrinsic value
method under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
, and the related
interpretations, and provided pro forma disclosures applying the
fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation
, to stock-based
awards. For the year ended February 3, 2007, the effect of
the adoption of SFAS No. 123R was a decrease to
operating income of $12,492 and a decrease to net income of
$7,807.
The consolidated statements of operations for the years ended
February 2, 2008, February 3, 2007, and
January 28, 2006, include the following stock-based
compensation expense related to stock option awards, nonvested
stock awards, and restricted stock unit awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of sales, buying and occupancy
|
|
$
|
1,695
|
|
|
$
|
2,594
|
|
|
$
|
|
|
Selling, general, and administrative
|
|
|
17,547
|
|
|
|
15,402
|
|
|
|
8,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to stock-based awards
|
|
|
19,242
|
|
|
|
17,996
|
|
|
|
8,417
|
|
Less: Income tax benefit
|
|
|
7,699
|
|
|
|
7,200
|
|
|
|
3,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net compensation expense related to stock-based awards
|
|
$
|
11,543
|
|
|
$
|
10,796
|
|
|
$
|
5,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123R requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent
periods if actual forfeiture rates differ from those estimates.
Due to unexpected employee retirements that occurred
F-17
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
during 2007, the Company revised its forfeiture rates. During
2007, the Company recognized $2,482 as a reduction of
stock-based compensation expense as a result of a change to the
estimated forfeiture rates. Additionally, in 2007, the Company
recognized $302 of additional stock-based compensation expense
as a result of a modification that was made to the stock options
held by the former President and Chief Executive Officer upon
his retirement.
Prior to the adoption of SFAS No. 123R, benefits of
tax deductions in excess of recognized compensation costs were
reported as part of cash from operating activities. Under
SFAS No. 123R, approximately $347 and $1,156 of
benefits from tax deductions in excess of recognized
compensation costs were reported as cash from financing
activities for the years ended February 2, 2008 and
February 3, 2007. The Company elected to use the short form
method to calculate the Additional Paid-in Capital
(APIC) pool. The tax benefit of any resulting excess
tax deduction will increase the APIC pool; any resulting tax
deficiency will be deducted from the APIC pool to the extent
available and then income tax expense will be recognized for any
remaining tax deficiency.
The following table illustrates the effect on net income and
earnings per share had the Company applied the fair value
recognition provisions of SFAS No. 123 for the
Companys stock-based compensation plans for the year ended
January 28, 2006:
|
|
|
|
|
|
|
January 28,
|
|
|
|
2006
|
|
|
Net income, as reported
|
|
$
|
93,151
|
|
Add: stock-based compensation included in reported net income,
net of related tax effects
|
|
|
5,266
|
|
Deduct: total stock-based compensation expensed determined under
fair value based method, net of related tax effects
|
|
|
(13,702
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
84,715
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic-as reported
|
|
$
|
1.76
|
|
|
|
|
|
|
Basic-pro forma
|
|
$
|
1.60
|
|
|
|
|
|
|
Diluted- as reported
|
|
$
|
1.72
|
|
|
|
|
|
|
Diluted- pro forma
|
|
$
|
1.56
|
|
|
|
|
|
|
Stock
Options
The Company measures the fair value of stock options on the date
of grant by using the Black-Scholes option-pricing model. The
estimated weighted average fair value of options granted during
2007, 2006, and 2005 were $7.58, $8.85, and $12.14, per option,
respectively. Key assumptions used to apply this pricing model
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average risk-free interest rate
|
|
|
4.5
|
%
|
|
|
4.7
|
%
|
|
|
4.0
|
%
|
Weighted average expected life of option grants
|
|
|
4.6 years
|
|
|
|
4.5 years
|
|
|
|
4.2 years
|
|
Weighted average expected volatility of underlying stock
|
|
|
38.5
|
%
|
|
|
41.8
|
%
|
|
|
47.9
|
%
|
Weighted average expected dividend payment rate, as a percentage
of the stock price on the date of grant
|
|
|
2.4
|
%
|
|
|
2.0
|
%
|
|
|
1.5
|
%
|
The risk-free interest rate represents the implied yield
available on U.S. Treasury zero-coupon bond issues with a
term approximately equal to the expected life of the option. The
expected life of an option is based on the historical
F-18
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
experience for the population of option holders. Expected
volatility is based on the Companys historical realized
volatility over the period that matches the expected life of the
option. Expected dividend yield is based on the expected annual
payment of dividends divided by the exercise price of the option
award. In determining the assumptions to be used, when the
Company has relied on historical data or trends, the Company has
also considered, if applicable, any expected future trends that
could differ from historical results and has modified its
assumptions if applicable.
A summary of stock option activity during the year ended
February 2, 2008 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(In Years)
|
|
|
Value
|
|
|
Outstanding at beginning of year
|
|
|
8,438,930
|
|
|
$
|
28.44
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,695,200
|
|
|
|
23.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(173,720
|
)
|
|
|
10.83
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(384,707
|
)
|
|
|
26.34
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(83,997
|
)
|
|
|
34.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
9,491,706
|
|
|
$
|
27.96
|
|
|
|
5.0
|
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
7,146,058
|
|
|
$
|
28.97
|
|
|
|
3.7
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total grant date fair value of options that vested during
2007 was $12,274. The aggregate intrinsic value of stock options
exercised during 2007, 2006, and 2005 was $945, $2,895, and
$10,535. As of February 2, 2008, there was $10,430 of
unrecognized compensation cost, net of estimated forfeitures,
related to stock options that are expected to vest. These costs
are expected to be recognized over a weighted average period of
1.8 years.
Nonvested
Stock Awards and RSUs
A summary of nonvested stock awards and RSU activity for the
year ended February 2, 2008 is presented below. The fair
value of nonvested stock awards and RSUs granted are based on
the closing traded stock price on the date of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Nonvested at beginning of year
|
|
|
1,204,427
|
|
|
$
|
29.04
|
|
Granted
|
|
|
1,036,336
|
|
|
|
21.04
|
|
Vested
|
|
|
(65,890
|
)
|
|
|
25.28
|
|
Forfeited
|
|
|
(244,575
|
)
|
|
|
28.45
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of year
|
|
|
1,930,298
|
|
|
$
|
24.95
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of nonvested stock awards and RSUs that
vested during 2007 was $1,610.
As of February 2, 2008, there was $22,253 of unrecognized
compensation cost, net of estimated forfeitures, related to
nonvested stock awards and RSUs that are expected to vest. These
costs are expected to be recognized over a weighted average
period of 2.9 years.
|
|
8.
|
Related
Party and Affiliates
|
AEON Co., Ltd. is a related party that owns and operates Talbots
brand stores in Japan through its wholly owned subsidiary,
Talbots Japan Co., Ltd. (Talbots Japan). The Company
provides certain services and purchases merchandise for Talbots
Japan. The Company is reimbursed for expenses incurred and the
cost of merchandise. For
F-19
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
the years ended February 2, 2008, February 3, 2007,
and January 28, 2006, the total charges for services and
merchandise purchases were $14,784, $16,990, and $18,675,
respectively. At February 2, 2008 and February 3,
2007, the Company was owed $3,040 and $5,672, respectively, for
these service costs and for merchandise inventory purchases made
on behalf of Talbots Japan. Interest at a rate equal to the
Internal Revenue Service monthly short-term applicable federal
rate, which was 3.1% and 4.8% at February 2, 2008 and
February 3, 2007, respectively, accrues on amounts
outstanding more than 30 days after the original invoice
date. For the years ending February 2, 2008,
February 3, 2007, and January 28, 2006, the Company
charged Talbots Japan interest of $139, $238, and $280,
respectively.
The Company has an advisory services agreement with AEON USA
under which AEON USA provides advice and services to the Company
with respect to strategic planning and other related issues
concerning the Company. Additionally, AEON USA maintains on
behalf of the Company, a working relationship with Japanese
banks and other financial institutions. AEON USA receives an
annual fee of $250 plus any expenses incurred, which are not
material. At February 2, 2008 and February 3, 2007,
there were no amounts owed under this contract. The Company also
provides routine tax and accounting services to AEON USA which
are immaterial in amount.
Under the Companys stock repurchase authorizations, shares
are repurchased from the open market from time to time.
Concurrently with such open market purchases, the Company has
generally purchased a pro rata number of shares from AEON USA so
as to maintain substantially the same percentage stock ownership
of the Company between AEON USA and the public shareholders. For
each pro rata repurchase program, purchases of shares from AEON
USA are at the weighted average price of the prices paid to the
public shareholders. There were no shares repurchased from AEON
USA during 2007 or 2006. During 2005, a total of
937,030 shares were repurchased from AEON USA at a weighted
average price of $30.04 per share.
Customer accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Due from customers
|
|
$
|
213,553
|
|
|
$
|
206,819
|
|
Less allowance for doubtful accounts
|
|
|
(2,700
|
)
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable, net
|
|
$
|
210,853
|
|
|
$
|
204,619
|
|
|
|
|
|
|
|
|
|
|
Finance charge income (including interest and late fee income)
amounted to $41,815, $42,398, and $40,605 for the years ended
February 2, 2008, February 3, 2007, and
January 28, 2006, respectively.
Changes in the allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance, beginning of year
|
|
$
|
2,200
|
|
|
$
|
2,400
|
|
|
$
|
2,700
|
|
Charges to costs and expenses
|
|
|
3,443
|
|
|
|
1,360
|
|
|
|
2,208
|
|
Charge-offs, net of recoveries
|
|
|
(2,943
|
)
|
|
|
(1,560
|
)
|
|
|
(2,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
2,700
|
|
|
$
|
2,200
|
|
|
$
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
|
|
10.
|
Property
and Equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
22,747
|
|
|
$
|
22,817
|
|
Buildings
|
|
|
89,264
|
|
|
|
88,267
|
|
Fixtures and equipment
|
|
|
458,420
|
|
|
|
435,755
|
|
Software
|
|
|
55,893
|
|
|
|
50,830
|
|
Leasehold improvements
|
|
|
444,189
|
|
|
|
420,046
|
|
Construction in progress
|
|
|
21,096
|
|
|
|
18,132
|
|
|
|
|
|
|
|
|
|
|
Property and
equipment-gross
|
|
|
1,091,609
|
|
|
|
1,035,847
|
|
Less accumulated depreciation and amortization
|
|
|
(604,876
|
)
|
|
|
(502,631
|
)
|
|
|
|
|
|
|
|
|
|
Property and
equipment-net
|
|
$
|
486,733
|
|
|
$
|
533,216
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended February 2, 2008,
February 3, 2007, and January 28, 2006 was $119,875,
$112,934, and $89,938, respectively.
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Gift cards, merchandise credits, sales return reserve and other
customer related liabilities
|
|
$
|
80,635
|
|
|
$
|
74,351
|
|
Employee compensation, related tax and benefits
|
|
|
38,965
|
|
|
|
38,300
|
|
Taxes other than income and withholding
|
|
|
11,427
|
|
|
|
14,329
|
|
Other accrued liabilities
|
|
|
54,708
|
|
|
|
31,783
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
185,735
|
|
|
$
|
158,763
|
|
|
|
|
|
|
|
|
|
|
Changes in the sales return reserve are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Sales return reserve balance, beginning of year
|
|
$
|
11,081
|
|
|
$
|
10,283
|
|
|
$
|
9,184
|
|
Balance acquired from J. Jill at fair value
|
|
|
|
|
|
|
5,561
|
|
|
|
|
|
Provision for merchandise returns
|
|
|
448,005
|
|
|
|
427,311
|
|
|
|
378,697
|
|
Merchandise returned
|
|
|
(445,895
|
)
|
|
|
(432,074
|
)
|
|
|
(377,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales return reserve balance, end of year
|
|
$
|
13,191
|
|
|
$
|
11,081
|
|
|
$
|
10,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
A summary of outstanding long-term debt follows:
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
Acquisition Debt
|
|
$
|
280,000
|
|
|
$
|
360,000
|
|
Revolving Credit Agreements
|
|
|
80,000
|
|
|
|
100,000
|
|
Term Loan
|
|
|
20,000
|
|
|
|
|
|
Tilton Facility Loan
|
|
|
9,027
|
|
|
|
9,643
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
389,027
|
|
|
|
469,643
|
|
Less current maturities
|
|
|
(80,650
|
)
|
|
|
(80,469
|
)
|
|
|
|
|
|
|
|
|
|
Long term-debt, less current portion
|
|
$
|
308,377
|
|
|
$
|
389,174
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt
In February 2006, the
Company entered into a $400,000 bridge loan agreement in
connection with its planned acquisition of J. Jill. On
July 27, 2006, the bridge loan was converted into a term
loan (the Acquisition Debt). Pursuant to the
Acquisition Debt agreement, the Company borrowed $400,000 to be
repaid no later than July 27, 2011. The Acquisition Debt is
a senior unsecured obligation of the Company.
The Acquisition Debt bears interest at a rate per annum equal to
LIBOR plus 0.35%. It is to be repaid in quarterly installments
of $20,000 through July 27, 2011. The Acquisition Debt
agreement contains provisions which define events of default
upon the occurrence of which the repayment of the Acquisition
Debt could be accelerated. The agreement contains covenants
restricting a change in control in which AEON USA is no longer
the majority shareholder, liens and encumbrances, sale and
leaseback transactions, mergers, consolidations, sales of
assets, incurrence of indebtedness and guaranties, investments
and prepayment of subordinated indebtedness. There are no
restrictions on the Companys ability to pay dividends or
purchase its capital stock so long as the Company is not in
default under the agreement. The agreement also includes
financial covenants, including a maximum leverage ratio, a
minimum net worth, and a minimum fixed charge coverage ratio. In
November 2007, the Company entered into an amendment to the
Acquisition Debt agreement with its lenders which changed the
leverage ratio and the fixed charge coverage ratio financial
covenants through the remaining term of the loan, effective
November 3, 2007. For the period from November 3, 2007
through fiscal year 2008, the leverage ratio is not to exceed
4.0 to 1.0. For fiscal year 2009, the leverage ratio is not to
exceed 3.5 to 1.0 and for fiscal year 2010 and thereafter, the
leverage ratio is not to exceed 3.0 to 1.0. Other financial
covenants under the agreement include a minimum net worth,
(calculated as the sum of the par value of the Companys
outstanding common stock, additional
paid-in-capital,
and retained earnings) of $500 million; and a fixed charge
coverage ratio (calculated as consolidated EBITDA plus amounts
paid on operating lease obligations (EBITDAR as
defined in the agreement) divided by net interest expense plus
amounts paid on operating lease obligations). For the period
from November 3, 2007 through fiscal year 2008, the fixed
charge coverage ratio may not be less than 1.25 to 1.0. For
fiscal year 2009, the fixed charge coverage ratio may not be
less than 1.4 to 1.0 and for fiscal year 2010 and thereafter,
the fixed charge coverage ratio may not be less than 1.6 to 1.0.
The Company was in compliance with the revised financial
covenants as of February 2, 2008. As of February 2,
2008, there were $280,000 in borrowings outstanding under the
Acquisition Debt. The interest rate on the Acquisition Debt at
February 2, 2008 was 3.6%.
In addition, as of February 2, 2008, the Company has
revolving credit agreements with three banks (the
Revolving Credit Agreements) that provide for
maximum available borrowings of $80,000, have two-year terms,
and can be extended annually upon mutual agreement. Interest
terms on the unsecured Revolving Credit Agreements are fixed, at
the Companys option, for periods of one, three, or six
months. As of February 2, 2008, the weighted average
interest rate on the loans was 4.8%. None of the outstanding
balance is currently payable. At February 2, 2008, the
Company had $80,000 outstanding under its Revolving Credit
Agreements. Of the $80,000 outstanding, $46,000 is due in April
2009 and $34,000 is due in January 2010, but may be extended
F-22
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
upon approval from the banks. At February 3, 2007, the
Company had $100,000 outstanding under revolving credit
agreements. The Company will need to refinance its debt that
becomes due in fiscal year 2009.
In April 2007, the Company converted $20,000 of revolving credit
borrowings into a term loan (the Term Loan). The
principal on the Term Loan is due in April 2012. Interest on the
Term Loan is due every six months and is fixed at 5.8% for the
first two interest periods from April 2007 through April 2008,
and is fixed at 5.9% for the remaining interest periods through
April 2012. As of February 2, 2008, the Company had $20,000
outstanding under its Term Loan.
As part of the J. Jill acquisition, Talbots assumed a real
estate loan (the Tilton Facility Loan). The Tilton
Facility Loan is collateralized by a mortgage lien on the
operations, fulfillment and distribution center in Tilton, New
Hampshire (the Tilton Facility). Payments of
principal and interest on the Tilton Facility Loan, a
10-year
loan, are due monthly, based on a
20-year
amortization, with a balloon payment of the remaining balance
payable on April 1, 2009. The interest rate on the Tilton
Facility Loan is fixed at 7.3% per annum. As of February 2,
2008, the Company had $9,027 outstanding under its Tilton
Facility Loan.
Line of Credit (Notes payable to banks)
At February 2, 2008, the Company had $140,000
available under its line of credit facilities. The
Companys line of credit facilities are uncommitted and are
maintained at the sole discretion of the banks. At
February 2, 2008 and February 3, 2007, there was $0
and $45,000 respectively, outstanding under these facilities. In
March 2008, the Company increased its available borrowings by
$25,000 from $140,000 to $165,000 under its line of credit
facilities.
Letters of Credit
The Company has
letter of credit agreements totaling $265,000 at
February 2, 2008, which it uses primarily for the purchase
of merchandise inventories. At February 2, 2008 and
February 3, 2007, the Company had $158,365 and $180,533,
respectively, outstanding under these letters of credit. The
Companys letter of credit agreements of $265,000 at
February 2, 2008 are held with two banks in the amounts of
$135,000 and $130,000. Subsequent to year-end, the
Companys letter of credit facility with one of its banks
was reduced from $135,000 to $60,000. The bank also notified the
Company that the revised $60,000 limit would be gradually
reduced to $0 through August of 2008. Also subsequent to
year-end, the Companys letter of credit for the remaining
capacity of $130,000 was not renewed. The bank notified the
Company that it would honor outstanding drawings under the
letter of credit agreement, but that no new drawings under the
agreement would be accepted. Accordingly, the Company will now
purchase inventory from vendors on open account without the
utilization of letters of credit.
The following table summarizes the Companys annual
maturities of long-term debt subsequent to February 2, 2008:
|
|
|
|
|
|
|
Long-Term
|
|
|
|
Debt
|
|
|
2008
|
|
$
|
80,650
|
|
2009
|
|
|
168,377
|
|
2010
|
|
|
80,000
|
|
2011
|
|
|
40,000
|
|
2012
|
|
|
20,000
|
|
|
|
|
|
|
Total
|
|
$
|
389,027
|
|
|
|
|
|
|
F-23
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
Income (loss) before taxes for the years ended February 2,
2008, February 3, 2007, and January 28, 2006, consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Domestic
|
|
$
|
(225,343
|
)
|
|
$
|
44,838
|
|
|
$
|
140,567
|
|
Foreign
|
|
|
4,386
|
|
|
|
5,684
|
|
|
|
8,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(220,957
|
)
|
|
$
|
50,522
|
|
|
$
|
149,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes for the years ended
February 2, 2008, February 3, 2007, and
January 28, 2006, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,562
|
|
|
$
|
32,823
|
|
|
$
|
59,667
|
|
State
|
|
|
|
|
|
|
1,212
|
|
|
|
5,802
|
|
Foreign
|
|
|
1,216
|
|
|
|
1,691
|
|
|
|
3,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total currently payable
|
|
|
7,778
|
|
|
|
35,726
|
|
|
|
68,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(32,335
|
)
|
|
|
(13,695
|
)
|
|
|
(9,650
|
)
|
State
|
|
|
(7,525
|
)
|
|
|
(3,253
|
)
|
|
|
(1,914
|
)
|
Foreign
|
|
|
(34
|
)
|
|
|
168
|
|
|
|
(1,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(39,894
|
)
|
|
|
(16,780
|
)
|
|
|
(12,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(32,116
|
)
|
|
$
|
18,946
|
|
|
$
|
55,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of federal statutory income tax rate to the
Companys effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2008
|
|
|
February 3, 2007
|
|
|
January 28, 2006
|
|
|
|
Tax
|
|
|
Rate
|
|
|
Tax
|
|
|
Rate
|
|
|
Tax
|
|
|
Rate
|
|
|
Tax at federal stautory rate
|
|
$
|
(77,335
|
)
|
|
|
35.0
|
%
|
|
$
|
17,683
|
|
|
|
35.0
|
%
|
|
$
|
52,165
|
|
|
|
35.0
|
%
|
Adjustments resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
(4,802
|
)
|
|
|
2.2
|
|
|
|
1,422
|
|
|
|
2.8
|
|
|
|
2,527
|
|
|
|
1.7
|
|
Foreign tax
|
|
|
|
|
|
|
|
|
|
|
(130
|
)
|
|
|
(0.3
|
)
|
|
|
214
|
|
|
|
0.1
|
|
Officer compensation
|
|
|
1,640
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign income inclusion
|
|
|
3,529
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
46,900
|
|
|
|
(21.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In kind donations
|
|
|
(1,248
|
)
|
|
|
0.5
|
|
|
|
(1,314
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(800
|
)
|
|
|
0.3
|
|
|
|
1,285
|
|
|
|
2.5
|
|
|
|
985
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax (benefit) expense
|
|
$
|
(32,116
|
)
|
|
|
14.5
|
%
|
|
$
|
18,946
|
|
|
|
37.5
|
%
|
|
$
|
55,891
|
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign income tax inclusion represents a cash distribution
from the Companys Canadian operations.
F-24
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
Deferred
tax assets (liabilities)
Components of the net deferred tax assets or liabilities
recognized in the Companys consolidated balance sheets are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2008
|
|
|
February 3, 2007
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Total
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Total
|
|
|
United States:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories
|
|
$
|
15,089
|
|
|
$
|
|
|
|
$
|
15,089
|
|
|
$
|
17,624
|
|
|
$
|
|
|
|
$
|
17,624
|
|
Deferred catalog costs
|
|
|
|
|
|
|
(3,157
|
)
|
|
|
(3,157
|
)
|
|
|
|
|
|
|
(2,286
|
)
|
|
|
(2,286
|
)
|
Accrued vacation pay
|
|
|
6,029
|
|
|
|
|
|
|
|
6,029
|
|
|
|
5,713
|
|
|
|
|
|
|
|
5,713
|
|
Net operating loss carryforward
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,151
|
|
|
|
|
|
|
|
6,151
|
|
Other
|
|
|
9,802
|
|
|
|
(2,752
|
)
|
|
|
7,050
|
|
|
|
4,145
|
|
|
|
(2,668
|
)
|
|
|
1,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
30,920
|
|
|
|
(5,909
|
)
|
|
|
25,011
|
|
|
|
33,633
|
|
|
|
(4,954
|
)
|
|
|
28,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
(49,758
|
)
|
|
|
(49,758
|
)
|
|
|
|
|
|
|
(58,643
|
)
|
|
|
(58,643
|
)
|
Lease commitments
|
|
|
12,179
|
|
|
|
|
|
|
|
12,179
|
|
|
|
12,586
|
|
|
|
|
|
|
|
12,586
|
|
Stock and deferred compensation
|
|
|
41,617
|
|
|
|
|
|
|
|
41,617
|
|
|
|
26,099
|
|
|
|
|
|
|
|
26,099
|
|
Pension liability
|
|
|
9,044
|
|
|
|
|
|
|
|
9,044
|
|
|
|
15,843
|
|
|
|
|
|
|
|
15,843
|
|
Net operating loss carryforward
|
|
|
3,327
|
|
|
|
|
|
|
|
3,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charitable contribution carryforward
|
|
|
2,911
|
|
|
|
|
|
|
|
2,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible
|
|
|
|
|
|
|
(49,300
|
)
|
|
|
(49,300
|
)
|
|
|
|
|
|
|
(59,604
|
)
|
|
|
(59,604
|
)
|
Deferred taxes associated with unrecognized tax benefits
(FIN No. 48)
|
|
|
23,251
|
|
|
|
|
|
|
|
23,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
168
|
|
|
|
|
|
|
|
168
|
|
|
|
1,302
|
|
|
|
|
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent
|
|
|
92,497
|
|
|
|
(99,058
|
)
|
|
|
(6,561
|
)
|
|
|
55,830
|
|
|
|
(118,247
|
)
|
|
|
(62,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
|
|
49
|
|
|
|
|
|
|
|
49
|
|
Other
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
915
|
|
|
|
|
|
|
|
915
|
|
|
|
880
|
|
|
|
|
|
|
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent
|
|
$
|
915
|
|
|
$
|
|
|
|
$
|
915
|
|
|
$
|
880
|
|
|
$
|
|
|
|
$
|
880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 2, 2008, the Company has state net loss
carryforwards which will result in $3,327 of tax benefits. These
state net loss carryforwards will expire in 2012 and beyond.
Additionally, the Company has charitable contribution
carryforwards that will expire in 2012.
As a result of the acquisition of J. Jill in May 2006, a $9,500
tax benefit was generated from the exercise of non-qualified
stock options held by certain J. Jill employees and was recorded
as a reduction to goodwill.
F-25
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
Uncertain
tax positions
Effective February 4, 2007, the Company adopted the
provisions of FIN No 48. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in the
financial statements by prescribing a recognition threshold and
measurement attribute for recognition and measurement of a tax
position taken or expected to be taken in a tax return. In
accordance with FIN No. 48, the Company has classified
uncertain tax positions as non-current income tax liabilities
unless expected to be paid in one year. Upon the adoption of
FIN No. 48, the Company has elected to classify
interest on uncertain tax positions in interest expense,
interest income from income tax refunds in other interest
income, and penalties in selling, general and administrative
expenses. Previously, these amounts were reflected in income tax
expense.
As a result of the adoption of FIN No. 48, as of
February 4, 2007, the Company recognized a $4,674 increase
in its reserve related to uncertain tax positions which was
recorded as a reduction to the February 4, 2007 balance of
retained earnings. Additionally, the Company recorded an
increase in deferred tax assets of $23,996, a corresponding
increase in the reserve related to uncertain tax positions of
$18,555, and an increase in accrued tax related interest of
$5,441 related primarily to the federal tax benefit associated
with certain state tax and interest reserves and temporary
differences.
The following table summarizes the activity related to the
Companys gross unrecognized tax benefits from
February 4, 2007 to February 2, 2008:
|
|
|
|
|
Balance as of February 4, 2007
|
|
$
|
41,545
|
|
Decreases related to prior year tax positions
|
|
|
(3,293
|
)
|
Increases related to current year tax positions
|
|
|
711
|
|
Decreases related to settlements with taxing authorities
|
|
|
(761
|
)
|
Decreases related to lapsing of statutue of limitations
|
|
|
(294
|
)
|
|
|
|
|
|
Balance as of February 2, 2008
|
|
$
|
37,908
|
|
|
|
|
|
|
As of February 2, 2008 and February 4, 2007, the
Company had unrecognized tax benefits of approximately $37,908
and $41,545, respectively, of which $20,858 and $22,991,
respectively, if recognized, would impact the effective tax
rate. As of February 2, 2008, and February 4, 2007,
the total amount of accrued tax-related interest and penalties
included in other liabilities was as follows: tax-related
interest of $17,679 and $13,606, respectively, and penalties of
$3,408 and $3,124, respectively. The amounts of tax-related
interest and penalties accrued during 2007 was $4,073 and $284,
respectively.
The Company is subject to U.S. federal income tax as well
as income tax in multiple state and foreign jurisdictions. The
Company has closed all U.S. federal income tax matters for
years through 2003. Currently, tax years beginning in 1993
remain open to examination by various state and foreign taxing
jurisdictions. The Company does not expect the unrecognized tax
benefits to change materially over the next twelve months as a
result of the completion of any audits or resolution of any
outstanding tax matters.
|
|
14.
|
Segment
and Geographic Information
|
The Company has segmented its operations in a manner that
reflects how its chief operating decision-maker reviews the
results of the operating segments that comprise the consolidated
entity. The Company considers its operating segments to be
similar in terms of economic characteristics, purchasing
processes, and operations, and has aggregated them into two
reporting segments.
The Companys Stores Segment includes the
Companys Talbots and J. Jill brand retail store operations
in the United States and the Talbots brand retail store
operations in Canada and in the United Kingdom. The Company has
announced the expected closing of its three stores located
within the United Kingdom in 2008. The Companys
Direct Marketing Segment includes catalog and
Internet operations for both Talbots and J. Jill brands.
F-26
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
The Companys reporting segments offer similar products;
however, each segment requires different marketing and
management strategies. The Stores Segment derives its revenues
from the sale of womens apparel, accessories and shoes
through its retail stores, while the Direct Marketing Segment
derives its revenues through its approximately 40 distinct
catalog mailings per year, 25 relating to the Talbots brand and
15 relating to the J. Jill brand, and online at www.talbots.com
and www.jjill.com.
The Company evaluates the operating performance of its
identified segments based on a direct profit measure. The
accounting policies of the segments are generally the same as
those described in the summary of significant accounting
policies, except as follows: direct profit is calculated as net
sales less cost of goods sold and direct expenses, such as
payroll, occupancy and other direct costs, including
restructuring charges associated with the closing of the Talbots
Kids and Talbots Mens business concepts. Indirect expenses are
not allocated on a segment basis; therefore, no measure of
segment net income or loss is available. Indirect expenses
consist of general and administrative expenses such as corporate
costs and management information systems and support, finance
charge income, merchandising costs, costs of oversight of the
Companys Talbots charge card operations, certain general
warehousing costs, depreciation related to corporate held
assets, amortization of the Companys intangible assets
other than leasehold interests, impairment charges on the
Companys intangible assets and corporate-wide
restructuring charges. Assets, with the exception of goodwill
and other intangible assets, are not allocated between segments;
therefore, no measure of segment assets is available.
The following is segment information for the years ended
February 2, 2008, February 3, 2007, and
January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 2, 2008
|
|
|
|
Stores
|
|
|
Direct Marketing
|
|
|
Total
|
|
|
Net sales
|
|
$
|
1,861,426
|
|
|
$
|
427,870
|
|
|
$
|
2,289,296
|
|
Direct profit
|
|
|
125,094
|
|
|
|
67,045
|
|
|
|
192,139
|
|
Depreciation and amortization
|
|
|
101,942
|
|
|
|
1,075
|
|
|
|
103,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3, 2007
|
|
|
|
Stores
|
|
|
Direct Marketing
|
|
|
Total
|
|
|
Net sales
|
|
$
|
1,845,647
|
|
|
$
|
385,386
|
|
|
$
|
2,231,033
|
|
Direct profit
|
|
|
202,829
|
|
|
|
71,270
|
|
|
|
274,099
|
|
Depreciation and amortization
|
|
|
94,076
|
|
|
|
875
|
|
|
|
94,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006
|
|
|
|
Stores
|
|
|
Direct Marketing
|
|
|
Total
|
|
|
Net sales
|
|
$
|
1,543,645
|
|
|
$
|
264,961
|
|
|
$
|
1,808,606
|
|
Direct profit
|
|
|
231,572
|
|
|
|
57,807
|
|
|
|
289,379
|
|
Depreciation and amortization
|
|
|
77,635
|
|
|
|
1,282
|
|
|
|
78,917
|
|
The remaining depreciation and amortization of $27,504, $26,252,
and $11,210 was included within indirect expenses for the years
ended February 2, 2008, February 3, 2007, and
January 28, 2006.
Net retail store sales by brand for the years ended
February 2, 2008 and February 3, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2, 2008
|
|
|
February 3, 2007
|
|
|
Talbots brand
|
|
$
|
1,533,762
|
|
|
$
|
1,603,774
|
|
J. Jill brand
|
|
|
327,664
|
|
|
|
241,873
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,861,426
|
|
|
$
|
1,845,647
|
|
|
|
|
|
|
|
|
|
|
F-27
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
The following reconciles direct profit to consolidated net
(loss) income for the years ended February 2, 2008,
February 3, 2007, and January 28, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total direct profit for reportable segments
|
|
$
|
192,139
|
|
|
$
|
274,099
|
|
|
$
|
289,379
|
|
Less: indirect expenses, including impairment charges
|
|
|
378,531
|
|
|
|
199,058
|
|
|
|
137,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(186,392
|
)
|
|
|
75,041
|
|
|
|
152,148
|
|
Interest
expense-net
|
|
|
34,565
|
|
|
|
24,519
|
|
|
|
3,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before taxes
|
|
|
(220,957
|
)
|
|
|
50,522
|
|
|
|
149,042
|
|
Income tax (benefit) expense
|
|
|
(32,116
|
)
|
|
|
18,946
|
|
|
|
55,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net (loss) income
|
|
$
|
(188,841
|
)
|
|
$
|
31,576
|
|
|
$
|
93,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a retailer that sells to the general public, the Company has
no single customer who accounts for greater than 10% of the
Companys consolidated net sales.
The following is geographical information as of and for the
years ended February 2, 2008, February 3, 2007, and
January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,226,356
|
|
|
$
|
2,167,656
|
|
|
$
|
1,749,110
|
|
Foreign
|
|
|
62,940
|
|
|
|
63,377
|
|
|
|
59,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
2,289,296
|
|
|
$
|
2,231,033
|
|
|
$
|
1,808,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
816,930
|
|
|
$
|
1,022,569
|
|
|
$
|
492,669
|
|
Foreign
|
|
|
3,657
|
|
|
|
5,159
|
|
|
|
6,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
820,587
|
|
|
$
|
1,027,728
|
|
|
$
|
498,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The classification Foreign is comprised of the
Companys Canada and United Kingdom retail store operations
and the classification United States is comprised of
the Companys United States retail store operations and the
Companys Direct Marketing operations.
The Company sponsors a non-contributory defined benefit pension
plan (Pension Plan) covering substantially all
Talbots brand and shared service salaried and hourly employees
in the United States of America, hired on or before
December 31, 2007. During 2007, the Company elected to
close participation in the Pension Plan for all associates hired
or rehired after December 31, 2007, however the Company has
chosen not to stop the accrual of future benefits for employees
hired by the Company on or before December 31, 2007.
Employees are enrolled in the pension plan after one year of
service (with at least 1,000 hours worked) and reaching
age 21. Employee benefits vest over five years. The benefit
formula for salaried and hourly corporate employees is a final
average pay benefit formula and the benefit formula for store
employees is a career pay formula. The Companys general
funding policy is to contribute at least the amount required by
law up to the amount that is deductible for federal income tax
purposes. The Company uses December 31st as its
measurement date for obligation and asset calculations. Pension
Plan assets consist principally of equity, fixed income
securities and foreign equity investments.
F-28
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
The Company has two unfunded, non-qualified supplemental
executive retirement plans (collectively, the SERP)
for certain Talbots brand key executives impacted by Internal
Revenue Code limits on benefits and certain Talbots brand
current and former key executives who defer compensation into
the Companys Deferred Compensation Plan. The Company uses
December 31st as its measurement date for obligation
calculations.
Retirees are eligible for certain limited postretirement health
care benefits (Postretirement Medical Plan) if they
have met certain service and minimum age requirements.
Additionally, three Talbots brand, current and former, executive
officers of the Company participate in a separate executive
postretirement medical plan (Executive Postretirement
Medical Plan). Under the Executive Postretirement Medical
Plan, the participants and their eligible dependents are not
required to pay deductible or co-pay amounts or contribute
toward insurance premiums. Each of the participants and their
spouses will continue to be covered under this plan upon
retirement for life. The cost of the benefits under these plans
are accrued during the years in which the employees provide
service. The plans are not funded. The Company uses
December 31st as its measurement date for obligation
calculations. Together, these plans are referred to as the
Postretirement Medical Plans.
During 2006, the Company reviewed its current practice related
to the Companys coverage of costs related to its
Postretirement Medical Plan. The Company concluded that the
original intent of the plan was to charge participants exactly
the expected actuarial cost to the Company. Over the last
several years, the Company was in the practice of charging
participants an amount that was less than the expected actuarial
cost to the Company. As such, beginning in 2006 and over the
following five years, the Company will gradually increase the
amount charged to participants such that by the fifth year, the
Company will be charging its participants an amount that fully
offsets the actuarial projected liability. The impact of this
change is reflected in the table below under change in benefit
obligations as a Plan change in 2006.
The following table sets forth the changes in the benefit
obligations and assets of the Companys Pension Plan, SERP
and Postretirement Medical Plans as of February 2, 2008 and
February 3, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plan
|
|
|
SERP
|
|
|
Medical Plans
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at beginning of year
|
|
$
|
140,418
|
|
|
$
|
137,601
|
|
|
$
|
19,662
|
|
|
$
|
20,765
|
|
|
$
|
1,305
|
|
|
$
|
10,052
|
|
Service cost
|
|
|
9,742
|
|
|
|
10,543
|
|
|
|
478
|
|
|
|
453
|
|
|
|
2
|
|
|
|
378
|
|
Interest cost
|
|
|
8,615
|
|
|
|
7,575
|
|
|
|
1,140
|
|
|
|
1,045
|
|
|
|
82
|
|
|
|
204
|
|
Actuarial loss (gain)
|
|
|
(9,730
|
)
|
|
|
(13,397
|
)
|
|
|
(1,020
|
)
|
|
|
(2,492
|
)
|
|
|
(237
|
)
|
|
|
(1,037
|
)
|
Benefits paid, net
|
|
|
(2,354
|
)
|
|
|
(1,904
|
)
|
|
|
(138
|
)
|
|
|
(109
|
)
|
|
|
(176
|
)
|
|
|
(136
|
)
|
Plan change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
|
|
(8,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at end of year
|
|
$
|
146,691
|
|
|
$
|
140,418
|
|
|
$
|
20,122
|
|
|
$
|
19,662
|
|
|
$
|
1,231
|
|
|
$
|
1,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of year
|
|
$
|
99,660
|
|
|
$
|
84,041
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
12,844
|
|
|
|
5,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
|
|
|
|
12,000
|
|
|
|
138
|
|
|
|
109
|
|
|
|
176
|
|
|
|
137
|
|
Benefits paid
|
|
|
(2,354
|
)
|
|
|
(1,904
|
)
|
|
|
(138
|
)
|
|
|
(109
|
)
|
|
|
(176
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of year
|
|
$
|
110,150
|
|
|
$
|
99,660
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
The following table sets forth the funded status of the
Companys Pension Plan, SERP, and Postretirement Medical
Plans and the amounts recognized in the Companys
consolidated balance sheets as of February 2, 2008 and
February 3, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plan
|
|
|
SERP
|
|
|
Medical Plans
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets (greater)/less than projected benefit obligations
|
|
$
|
36,540
|
|
|
$
|
40,757
|
|
|
$
|
20,084
|
|
|
$
|
19,653
|
|
|
$
|
1,225
|
|
|
$
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in the consolidated balance sheet:
|
|
$
|
36,540
|
|
|
$
|
40,757
|
|
|
$
|
20,084
|
|
|
$
|
19,653
|
|
|
$
|
1,225
|
|
|
$
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in the consolidated balance sheet
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (non-current)
|
|
$
|
|
|
|
$
|
(238
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Other liabilities (non-current)
|
|
|
36,540
|
|
|
|
40,995
|
|
|
|
20,084
|
|
|
|
19,653
|
|
|
|
1,225
|
|
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in the consolidated balance sheets
|
|
$
|
36,540
|
|
|
$
|
40,757
|
|
|
$
|
20,084
|
|
|
$
|
19,653
|
|
|
$
|
1,225
|
|
|
$
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in accumulated other comprehensive
income consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
14,841
|
|
|
$
|
24,419
|
|
|
$
|
1,170
|
|
|
$
|
1,834
|
|
|
$
|
1,030
|
|
|
$
|
1,414
|
|
Prior service cost (credit)
|
|
|
133
|
|
|
|
174
|
|
|
|
39
|
|
|
|
579
|
|
|
|
(3,647
|
)
|
|
|
(4,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in accumulated other comprehensive
income, net of tax
|
|
$
|
14,974
|
|
|
$
|
24,593
|
|
|
$
|
1,209
|
|
|
$
|
2,413
|
|
|
$
|
(2,617
|
)
|
|
$
|
(3,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is a summary of the projected benefit obligation,
accumulated benefit obligation and the fair value of plan assets
for the Companys Pension Plan and SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
|
SERP
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Projected benefit obligation
|
|
$
|
146,691
|
|
|
$
|
140,418
|
|
|
$
|
20,122
|
|
|
$
|
19,662
|
|
Accumulated benefit obligation
|
|
$
|
115,070
|
|
|
$
|
109,169
|
|
|
$
|
17,681
|
|
|
$
|
17,847
|
|
Fair value of plan assets
|
|
$
|
110,150
|
|
|
$
|
99,660
|
|
|
$
|
|
|
|
$
|
|
|
F-30
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
The components of pension expense for the Pension Plan are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service expense-benefits earned during the period
|
|
$
|
9,742
|
|
|
$
|
10,543
|
|
|
$
|
9,923
|
|
Interest expense on projected benefit obligation
|
|
|
8,615
|
|
|
|
7,575
|
|
|
|
7,056
|
|
Expected return on plan assets
|
|
|
(9,331
|
)
|
|
|
(8,160
|
)
|
|
|
(7,105
|
)
|
Net amortization and deferral
|
|
|
2,795
|
|
|
|
4,092
|
|
|
|
4,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
11,821
|
|
|
$
|
14,050
|
|
|
$
|
14,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net SERP expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service expense-benefits earned during the period
|
|
$
|
478
|
|
|
$
|
453
|
|
|
$
|
778
|
|
Interest expense on projected benefit obligation
|
|
|
1,140
|
|
|
|
1,045
|
|
|
|
971
|
|
Net amortization and deferral
|
|
|
960
|
|
|
|
1,596
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net SERP expense
|
|
$
|
2,578
|
|
|
$
|
3,094
|
|
|
$
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of postretirement medical expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service expense-benefits earned during the period
|
|
$
|
2
|
|
|
$
|
378
|
|
|
$
|
767
|
|
Interest expense on accumulated postretirement benefit obligation
|
|
|
82
|
|
|
|
204
|
|
|
|
389
|
|
Net amortization and deferral
|
|
|
(1,090
|
)
|
|
|
(686
|
)
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement medical expense (credit)
|
|
$
|
(1,006
|
)
|
|
$
|
(104
|
)
|
|
$
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
When funding is required for the Pension Plan, the
Companys policy is to contribute amounts that are
deductible for federal income tax purposes. During 2007 and
2006, the Company was not required to make any contributions.
During 2007, the Company did not make any voluntary
contributions and during 2006, the Company made voluntary
contributions of $12,000 to the Pension Plan. Based upon
currently available information, the Company will be required to
make contributions of approximately $12,500 to the Pension Plan
in 2008.
F-31
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
Significant assumptions related to the Companys employee
benefit plans include the discount rate used to calculate the
actuarial present value of benefit obligations to be paid in the
future, the expected long-term rate of return on assets held by
the Pension Plan, the average rate of compensation increase by
Pension Plan and SERP participants, and the health care cost
trend annual rate for the Postretirement Medical Plans. These
actuarial assumptions are reviewed annually based upon currently
available information. The assumptions utilized by the Company
in calculating the projected benefit obligations and periodic
expense of its employee benefit plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Discount rate used to determine projected benefit obligation at
end of year
|
|
|
6.50
|
%
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
Expected long-term rate of return on plan assets
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Rate of future compensation increases
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Rate of future compensation increases used to determine
projected benefit obligation at end of year
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Discount rate used to determine projected benefit obligation at
end of year
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
Rate of future compensation increases
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Rate of future compensation increases used to determine
projected benefit obligation at end of year
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Postretirement Medical Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Discount rate used to determine projected benefit obligation at
end of year
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
|
|
5.50
|
%
|
Initial healthcare cost trend rate-projected benefit obligations
|
|
|
10.00
|
%
|
|
|
11.00
|
%
|
|
|
12.00
|
%
|
Initial healthcare cost trend rate-periodic expense
|
|
|
11.00
|
%
|
|
|
12.00
|
%
|
|
|
8.00
|
%
|
Ultimate health care cost trend rate
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
The assumed discount rate utilized is based, in part, upon a
discount rate modeling process that involves applying a
methodology which matches the future benefit payment stream to a
discount curve yield for the plan. The discount rate is utilized
principally in calculating the actuarial present value of the
Companys obligation and periodic expense pursuant to its
employee benefits plans. To the extent the discount rate
increases or decreases, the Companys Pension Plan, SERP,
and Postretirement Medical Plans obligation is decreased or
increased accordingly.
The assumed expected long-term rate of return on assets is the
weighted average rate of earnings expected on the funds invested
or to be invested to provide for the pension obligation. It is
the Companys current target allocation to invest the
Pension Plan assets in equity securities, including foreign
securities (approximately 70 percent) and fixed income
securities (approximately 30 percent). The Company does not
allow the plan to invest in the Companys stock, AEON Co.,
Ltd.s stock, or in the stock of soft goods retailers. The
Company periodically evaluates the allocation between investment
categories of the assets held by the Pension Plan. The expected
average long-term rate of return on assets is based on an
analysis which considers: actual net returns for the Pension
Plan since inception, Ibbotson Associates historical investment
returns data for the major classes of investments in which
F-32
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
the Company invests (debt, equity, and foreign securities) for
the period since the Pension Plans inception and for the
longer commencing periods when the return data was first
tracked, and expectations of future market returns from outside
sources for the two major classes of investments in which the
Company invests. This rate is utilized primarily in estimating
the expected return on plan assets component of the annual
pension expense. To the extent the actual rate of return on
assets is less than or more than the assumed rate, that
years annual pension expense is not affected. Rather, this
loss or gain adjusts future pension expense over approximately
five years.
The market related value of plan assets is a calculated value
that recognizes the changes in fair value by adjusting the
current market value of plan assets by the difference between
actual investment return versus expected investment return over
the last five years at a rate of twenty percent per year. The
market related value of plan assets is determined consistently
for all classes of assets.
The assumed average rate of compensation increase is the average
annual compensation increase expected over the remaining
employment periods for the participating employees. This rate is
utilized principally in estimating the pension obligation and
annual pension expense.
The Pension Plans weighted average asset allocations at
December 31, 2007 and December 31, 2006 by asset
category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Allocation
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Equity securites, including $12,093 of foreign securities
|
|
|
70
|
%
|
|
$
|
78,070
|
|
|
|
71
|
%
|
|
$
|
72,517
|
|
|
|
73
|
%
|
Debt securities
|
|
|
30
|
%
|
|
|
26,907
|
|
|
|
24
|
|
|
|
23,534
|
|
|
|
24
|
|
Cash and money market
|
|
|
|
|
|
|
5,173
|
|
|
|
5
|
|
|
|
3,609
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
110,150
|
|
|
|
100
|
%
|
|
$
|
99,660
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about the expected cash flow for the Pension Plan,
SERP, and Postretirement Medical Plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
Postretirement
|
|
|
|
Plan
|
|
|
SERP
|
|
|
Medical Plans
|
|
|
Expected benefit payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
2,576
|
|
|
$
|
1,239
|
|
|
$
|
83
|
|
2009
|
|
|
2,947
|
|
|
|
1,258
|
|
|
|
55
|
|
2010
|
|
|
3,409
|
|
|
|
1,280
|
|
|
|
28
|
|
2011
|
|
|
3,962
|
|
|
|
1,311
|
|
|
|
|
|
2012
|
|
|
4,665
|
|
|
|
1,359
|
|
|
|
|
|
2013 to 2017
|
|
|
38,530
|
|
|
|
7,731
|
|
|
|
|
|
The Company expects to contribute $1,239 and $83 to the SERP and
the Postretirement Medical Plans, respectively, during 2008. The
Company is required to contribute approximately $12,500 to the
Pension Plan in 2008. The Company has not determined the
additional amount, if any, that it will voluntary contribute to
the Pension Plan during 2008.
The estimated amount that will be amortized from AOCI into net
periodic benefit cost in 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
Postretirement
|
|
|
Plan
|
|
SERP
|
|
Medical Plans
|
|
Net actuarial loss
|
|
$
|
956
|
|
|
$
|
|
|
|
$
|
480
|
|
Prior service cost
|
|
$
|
69
|
|
|
$
|
28
|
|
|
$
|
(1,696
|
)
|
F-33
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
The Company currently has two qualified defined contribution
401(k) plans, one which covers substantially all employees for
the Talbots brand and one which covers substantially all
employees for the J. Jill brand. Under the Talbots 401(k) plan,
employees make contributions to the plan and the Company makes a
cash contribution that matches 50% of an employees
contribution up to a maximum of 6% of the employees
compensation. Talbots brand employees may elect to invest in the
common stock of the Company at their discretion up to 50% of
their total investment. Company contributions into the Talbots
401(k) plan for the years ended February 2, 2008,
February 3, 2007, and January 28, 2006 were $3,723,
$3,980, and $3,747, respectively.
On January 1, 2008, The J. Jill 401(k) plan was amended.
Under the amended plan, J. Jill brand employees make
contributions to the plan and the Company makes a cash
contribution that matches 50% of an employees contribution
up to a maximum of 6% of the employees compensation.
Additionally, under the amended plan, J. Jill brand employees
may elect to invest in the common stock of the Company at their
discretion up to 50% of their total investment. Prior to the
amendment, J. Jill brand employees made contributions to the
plan and the Company made discretionary matching contributions
of a percent, if any, determined annually based on a percentage
of employee pretax contributions. Company contributions for the
2007 plan year were $355 and were deposited to eligible
participant accounts in March 2008. Company contributions for
the 2006 plan year were $375 and were deposited to eligible
participant accounts in March 2007.
The table below is a summary of the Companys contractual
commitments under non-cancelable operating leases, merchandise
purchases, construction contracts, and service purchase
contracts as of February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
1,110,536
|
|
|
$
|
183,086
|
|
|
$
|
180,025
|
|
|
$
|
171,320
|
|
|
$
|
152,486
|
|
|
$
|
124,456
|
|
|
$
|
299,163
|
|
Equipment
|
|
|
14,094
|
|
|
|
5,678
|
|
|
|
4,991
|
|
|
|
2,890
|
|
|
|
397
|
|
|
|
118
|
|
|
|
20
|
|
Merchandise purchases
|
|
|
470,200
|
|
|
|
470,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction contracts
|
|
|
12,737
|
|
|
|
12,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contractual commitments
|
|
|
41,232
|
|
|
|
27,043
|
|
|
|
12,103
|
|
|
|
2,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments
|
|
$
|
1,648,799
|
|
|
$
|
698,744
|
|
|
$
|
197,119
|
|
|
$
|
176,296
|
|
|
$
|
152,883
|
|
|
$
|
124,574
|
|
|
$
|
299,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
The Company conducts the major
part of its operations in leased premises with lease terms
expiring at various dates through 2024. Most store leases
provide for base rentals plus contingent rentals which are a
function of sales volume and also provide that the Company pay
real estate taxes, maintenance, and other operating expenses
applicable to the leased premises. Additionally, most store
leases provide renewal options and contain rent escalation
clauses. Included in the schedule above are 43 executed leases
related to stores not yet opened at February 2, 2008. Rent
expense for the years ended February 2, 2008,
February 3, 2007, and January 28, 2006, was $176,119,
$163,051, and $126,904 respectively. This includes $2,897,
$1,694, and $1,793, respectively, of percentage rent and
contingent rental expense and $256, $266, and $232, respectively
of sublease rental income. As of February 2, 2008, the
Company expects to receive sublease rental income of $243, $238,
and $61 in the years 2008, 2009, and 2010 under its existing
noncancelable subleases. Additionally, the Company leases both
store computer and other corporate computer equipment with lease
terms generally between three and five years.
Merchandise Purchases
The Company generally
makes purchase commitments up to six to twelve months in advance
of its selling season. The Company does not maintain any
long-term or exclusive commitments or arrangements to purchase
from any vendor.
Construction Contracts
The Company enters
into contracts to facilitate the build-out and renovation of its
stores.
F-34
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
Other Contractual Commitments
The Company
routinely enters into contracts with vendors for products and
services in the normal course of operation. These include
contracts for insurance, maintenance on equipment, services, and
advertising. These contracts vary in their terms but generally
carry 30 day to three-year terms.
|
|
17.
|
Net
(loss) Income Per Share
|
The weighted average shares used in computing basic and diluted
net (loss) income per share are presented below. Options to
purchase 9,491,706 shares of common stock were outstanding
at February 2, 2008, and were not included in the
computation of diluted net loss per share since the effect would
have been antidilutive. Nonvested stock awards and restricted
stock units of 1,930,298 were outstanding at February 2,
2008, and were not included in the computation of diluted net
loss per share since the effect would have been antidilutive.
Options to purchase 5,917,502, and 4,134,014 shares of
common stock were outstanding as of February 3, 2007, and
January 28, 2006, respectively, but were not included in
the computation of diluted net income per share for the periods.
Such options have been excluded because the options
exercise prices were greater than the average market prices of
the common shares, and the effect of including these securities
would have been antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Shares for computation of basic net (loss) income per share
|
|
|
53,006
|
|
|
|
52,651
|
|
|
|
52,882
|
|
Effect of stock compensation plans
|
|
|
|
|
|
|
834
|
|
|
|
1,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for computation of diluted net (loss) income per share
|
|
|
53,006
|
|
|
|
53,485
|
|
|
|
54,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Quarterly
Results (unaudited)
|
The following table shows certain unaudited quarterly
information for the Company during 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 Quarter Ended
|
|
|
|
May 5,
|
|
|
August 4,
|
|
|
November 3,
|
|
|
February 2,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
Net sales
|
|
$
|
573,556
|
|
|
$
|
572,331
|
|
|
$
|
556,012
|
|
|
$
|
587,397
|
|
Gross profit
|
|
|
213,941
|
|
|
|
163,318
|
|
|
|
191,931
|
|
|
|
166,112
|
|
Net income (loss)
|
|
|
5,240
|
|
|
|
(13,316
|
)
|
|
|
(9,387
|
)
|
|
|
(171,378
|
)(1)
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(3.23
|
)
|
Diluted
|
|
$
|
0.10
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(3.23
|
)
|
Weighted average number of sharesof common stock outstanding (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
52,928
|
|
|
|
52,980
|
|
|
|
53,032
|
|
|
|
53,085
|
|
Diluted
|
|
|
53,908
|
|
|
|
52,980
|
|
|
|
53,032
|
|
|
|
53,085
|
|
Cash dividends declared per share
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
Market price data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
26.18
|
|
|
$
|
25.70
|
|
|
$
|
24.97
|
|
|
$
|
16.35
|
|
Low
|
|
$
|
20.95
|
|
|
$
|
19.58
|
|
|
$
|
13.66
|
|
|
$
|
6.96
|
|
|
|
|
(1)
|
|
The net loss in the fourth quarter of 2007 includes an
impairment charge of $149,600 before an income tax benefit of
$5,834, relating to the Companys acquired goodwill and
trademark, as well as pretax restructuring charges of $9,275.
|
F-35
THE
TALBOTS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts
in thousands except share and per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 Quarter Ended
|
|
|
|
April 29,
|
|
|
July 29,
|
|
|
October 28,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(13 weeks)
|
|
|
(14 weeks)
|
|
|
Net sales
|
|
$
|
453,012
|
|
|
$
|
571,377
|
|
|
$
|
568,640
|
|
|
$
|
638,004
|
|
Gross profit
|
|
|
180,812
|
|
|
|
172,128
|
|
|
|
209,973
|
|
|
|
197,556
|
|
Net income
|
|
|
27,356
|
|
|
|
(3,858
|
)
|
|
|
8,061
|
|
|
|
17
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.52
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.15
|
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
0.51
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.15
|
|
|
$
|
0.00
|
|
Weighted average number of shares of common stock outstanding
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
52,620
|
|
|
|
52,222
|
|
|
|
52,854
|
|
|
|
52,892
|
|
Diluted
|
|
|
53,669
|
|
|
|
52,222
|
|
|
|
53,718
|
|
|
|
53,820
|
|
Cash dividends declared per share
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
Market price data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
28.25
|
|
|
$
|
25.58
|
|
|
$
|
30.00
|
|
|
$
|
28.74
|
|
Low
|
|
$
|
23.50
|
|
|
$
|
17.38
|
|
|
$
|
20.00
|
|
|
$
|
23.01
|
|
F-36
Talbots (NYSE:TLB)
Historical Stock Chart
From May 2024 to Jun 2024
Talbots (NYSE:TLB)
Historical Stock Chart
From Jun 2023 to Jun 2024