UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended August 2, 2008
or
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 1-12552
THE TALBOTS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
41-1111318
|
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
One Talbots Drive, Hingham, Massachusetts 02043
(Address of principal executive offices)
Registrants telephone number, including area code
781-749-7600
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.
þ
Yes
o
No
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):
Large accelerated filer
o
|
Accelerated filer
þ
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o
Yes
þ
No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
|
|
|
|
|
Class
|
|
Outstanding as of September 4, 2008
|
Common Stock, $0.01 par value
|
|
|
55,355,980
|
|
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 2008 AND AUGUST 4, 2007
Amounts in thousands except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
528,014
|
|
|
$
|
572,331
|
|
|
$
|
1,070,452
|
|
|
$
|
1,145,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy
|
|
|
378,011
|
|
|
|
409,013
|
|
|
|
714,904
|
|
|
|
768,628
|
|
Selling, general and administrative
|
|
|
175,012
|
|
|
|
175,539
|
|
|
|
361,420
|
|
|
|
372,166
|
|
Restructuring charges
|
|
|
9,324
|
|
|
|
|
|
|
|
20,432
|
|
|
|
|
|
Impairment of store assets
|
|
|
220
|
|
|
|
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
(34,553
|
)
|
|
|
(12,221
|
)
|
|
|
(27,467
|
)
|
|
|
5,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,975
|
|
|
|
8,681
|
|
|
|
10,789
|
|
|
|
18,332
|
|
Interest income
|
|
|
83
|
|
|
|
451
|
|
|
|
200
|
|
|
|
819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense net
|
|
|
4,892
|
|
|
|
8,230
|
|
|
|
10,589
|
|
|
|
17,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Taxes
|
|
|
(39,445
|
)
|
|
|
(20,451
|
)
|
|
|
(38,056
|
)
|
|
|
(12,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit
|
|
|
(14,437
|
)
|
|
|
(7,135
|
)
|
|
|
(14,690
|
)
|
|
|
(4,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(25,008
|
)
|
|
$
|
(13,316
|
)
|
|
$
|
(23,366
|
)
|
|
$
|
(8,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.47
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.47
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares of
Common Stock Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,442
|
|
|
|
52,980
|
|
|
|
53,372
|
|
|
|
52,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
53,442
|
|
|
|
52,980
|
|
|
|
53,372
|
|
|
|
52,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Paid Per Share
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AUGUST 2, 2008, FEBRUARY 2, 2008, AND AUGUST 4, 2007
Amounts in thousands except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
February 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,034
|
|
|
$
|
25,476
|
|
|
$
|
8,160
|
|
Customer accounts receivable net
|
|
|
199,533
|
|
|
|
210,853
|
|
|
|
192,122
|
|
Merchandise inventories
|
|
|
259,908
|
|
|
|
329,104
|
|
|
|
332,340
|
|
Deferred catalog costs
|
|
|
7,972
|
|
|
|
11,420
|
|
|
|
9,693
|
|
Due from affiliates
|
|
|
150
|
|
|
|
3,040
|
|
|
|
3,465
|
|
Deferred income taxes
|
|
|
32,859
|
|
|
|
25,084
|
|
|
|
26,449
|
|
Prepaid and other current assets
|
|
|
59,339
|
|
|
|
46,870
|
|
|
|
43,029
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
575,795
|
|
|
|
651,847
|
|
|
|
615,258
|
|
Property and equipment net
|
|
|
452,565
|
|
|
|
486,733
|
|
|
|
508,812
|
|
Goodwill
|
|
|
113,490
|
|
|
|
113,490
|
|
|
|
247,490
|
|
Trademarks
|
|
|
139,384
|
|
|
|
139,384
|
|
|
|
154,984
|
|
Other intangible assets net
|
|
|
75,906
|
|
|
|
80,980
|
|
|
|
86,273
|
|
Deferred income taxes
|
|
|
3,530
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
24,001
|
|
|
|
30,545
|
|
|
|
30,812
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,384,671
|
|
|
$
|
1,502,979
|
|
|
$
|
1,643,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
135,720
|
|
|
$
|
171,830
|
|
|
$
|
107,816
|
|
Accrued liabilities
|
|
|
163,899
|
|
|
|
185,735
|
|
|
|
142,357
|
|
Accrued income taxes
|
|
|
|
|
|
|
4,829
|
|
|
|
|
|
Notes payable to banks
|
|
|
34,000
|
|
|
|
|
|
|
|
12,800
|
|
Current portion of long-term debt
|
|
|
116,705
|
|
|
|
80,650
|
|
|
|
80,632
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
450,324
|
|
|
|
443,044
|
|
|
|
343,605
|
|
Long-term debt less current portion
|
|
|
232,000
|
|
|
|
308,377
|
|
|
|
348,705
|
|
Deferred rent under lease commitments
|
|
|
147,720
|
|
|
|
144,569
|
|
|
|
135,090
|
|
Deferred income taxes
|
|
|
544
|
|
|
|
5,646
|
|
|
|
29,160
|
|
Other liabilities
|
|
|
141,118
|
|
|
|
146,564
|
|
|
|
160,197
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 authorized; 80,886,892
shares, 79,755,443 shares, and 79,028,017 shares issued, respectively,
and 55,348,605 shares, 54,921,777 shares, and 54,329,676 shares
outstanding, respectively
|
|
|
809
|
|
|
|
797
|
|
|
|
790
|
|
Additional paid-in capital
|
|
|
490,434
|
|
|
|
485,629
|
|
|
|
473,460
|
|
Retained earnings
|
|
|
521,022
|
|
|
|
565,805
|
|
|
|
760,587
|
|
Accumulated other comprehensive loss
|
|
|
(13,926
|
)
|
|
|
(13,474
|
)
|
|
|
(23,989
|
)
|
Treasury stock, at cost; 25,538,287 shares, 24,833,666 shares, and
24,698,341 shares, respectively
|
|
|
(585,374
|
)
|
|
|
(583,978
|
)
|
|
|
(583,976
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
412,965
|
|
|
|
454,779
|
|
|
|
626,872
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
1,384,671
|
|
|
$
|
1,502,979
|
|
|
$
|
1,643,629
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 2008 AND AUGUST 4, 2007
Amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(23,366
|
)
|
|
$
|
(8,076
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
67,839
|
|
|
|
65,910
|
|
Impairment of store assets
|
|
|
1,163
|
|
|
|
|
|
Amortization of debt issuance costs
|
|
|
152
|
|
|
|
136
|
|
Deferred rent
|
|
|
3,019
|
|
|
|
1,981
|
|
Compensation expense related to stock options
|
|
|
2,441
|
|
|
|
5,243
|
|
Compensation expense related to issuance of nonvested stock awards
and other stock transactions
|
|
|
1,575
|
|
|
|
3,010
|
|
(Gain) loss on disposal of property and equipment
|
|
|
(101
|
)
|
|
|
275
|
|
Tax benefit from options exercised
|
|
|
74
|
|
|
|
141
|
|
Excess tax benefit from options exercised
|
|
|
(96
|
)
|
|
|
(141
|
)
|
Deferred income taxes
|
|
|
(16,713
|
)
|
|
|
(6,447
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
11,282
|
|
|
|
12,593
|
|
Merchandise inventories
|
|
|
69,088
|
|
|
|
20,823
|
|
Deferred catalog costs
|
|
|
3,448
|
|
|
|
1,913
|
|
Due from affiliates
|
|
|
2,890
|
|
|
|
2,207
|
|
Prepaid and other current assets
|
|
|
(13,184
|
)
|
|
|
9,549
|
|
Accounts payable
|
|
|
(35,890
|
)
|
|
|
(5,244
|
)
|
Accrued income taxes
|
|
|
(4,676
|
)
|
|
|
(1,863
|
)
|
Accrued liabilities
|
|
|
(30,261
|
)
|
|
|
(16,349
|
)
|
Other assets
|
|
|
7,142
|
|
|
|
(2,397
|
)
|
Other liabilities
|
|
|
(3,319
|
)
|
|
|
11,674
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
42,507
|
|
|
|
94,938
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(32,627
|
)
|
|
|
(37,439
|
)
|
Proceeds from disposal of property and equipment
|
|
|
2,549
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(30,078
|
)
|
|
|
(37,439
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds (repayments) on notes payable to banks, net
|
|
|
34,000
|
|
|
|
(32,200
|
)
|
Payments on long-term borrowings
|
|
|
(40,248
|
)
|
|
|
(40,232
|
)
|
Proceeds from options exercised
|
|
|
872
|
|
|
|
370
|
|
Excess tax benefit from options exercised
|
|
|
96
|
|
|
|
141
|
|
Debt issuance costs
|
|
|
(750
|
)
|
|
|
|
|
Cash dividends
|
|
|
(14,366
|
)
|
|
|
(14,145
|
)
|
Purchase of treasury stock
|
|
|
(1,396
|
)
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(21,792
|
)
|
|
|
(86,585
|
)
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(79
|
)
|
|
|
1,323
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(9,442
|
)
|
|
|
(27,763
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
25,476
|
|
|
|
35,923
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
16,034
|
|
|
$
|
8,160
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
THE TALBOTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amounts in thousands except share and per share data
1. BASIS OF PRESENTATION
With respect to the unaudited condensed consolidated financial statements set forth herein,
all adjustments, which consist only of normal recurring adjustments, necessary to fairly present
the results for the interim periods, have been included. These financial statements should be read
in conjunction with the Companys audited consolidated financial statements and the notes thereto
for the fiscal year ended February 2, 2008, included in the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission. All material intercompany accounts and
transactions have been eliminated in consolidation.
2. SIGNIFICANT ACCOUNTING POLICIES
Recently Adopted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS No. 157), which
clarifies the principle that fair value should be based on the assumptions market participants
would use when pricing an asset or liability, establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions, and expands the related disclosure requirements.
Under the standard, fair value measurements are to be separately disclosed by level within the fair
value hierarchy. SFAS No. 157 applies under other accounting pronouncements that require or permit
fair value measurements. SFAS No. 157 defines fair value based upon an exit price model. The FASB
also issued FASB Staff Position (FSP) 157-2 in February 2008. FSP 157-2 delays the effective date
of the application of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial
statements on a nonrecurring basis. The Company adopted SFAS No. 157 as of February 3, 2008, with
the exception of the application of the statement to nonrecurring nonfinancial assets and
nonfinancial liabilities. See Note 10 below for further discussion.
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 applied to all employers who offer defined benefit postretirement plans.
As permitted, the Companys adoption of SFAS No. 158 was in two phases. The Company adopted the
first phase, the recognition provisions, as of February 3, 2007. The second phase of SFAS No. 158
requires measurement of plan assets and benefit obligations as of the date of the employers fiscal
year end. This provision is effective for the Company for the fiscal year ending January 31, 2009.
SFAS No. 158 provides two approaches that a company can follow to transition to a fiscal year-end
measurement date. The Company has made the decision to utilize the second approach which allows a
company to continue using the measurements determined for the prior fiscal year-end reporting to
estimate the effects of the SFAS No. 158 change at January 31, 2009. The Company used a December 31
measurement date in 2007 and prior years and will transition to a fiscal year-end measurement date
at January 31, 2009. This transition is expected to result in an increase to accumulated other
comprehensive loss of approximately $8, net of tax, a decrease to retained earnings of $538, net of
tax, and an increase to other liabilities of $546, net of tax, which will represent approximately
one month of the net periodic benefit cost.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
(SFAS No. 159). SFAS No. 159 provides entities with an option to report
selected financial assets and liabilities at fair value, with the objective to reduce both the
complexity in accounting for financial instruments, and the volatility in earnings caused by
measuring related financial assets and liabilities differently. Unrealized gains and losses on
items for which the fair value option is elected would be reported in earnings. The Company adopted
SFAS No. 159 as of February 3, 2008, and has elected not to measure any additional financial
instruments and other items at fair value. Therefore, material financial assets and liabilities not
carried at fair value, such as the Companys short-term and long-term debt obligations, accounts
receivable, and accounts payable, are still reported at their historical carrying values. Any
future transacted financial asset or liability will be evaluated for the fair value election as
prescribed by SFAS No. 159.
6
3. RESTRUCTURING CHARGES, INCLUDING THE CLOSING OF THE TALBOTS KIDS, MENS, AND U.K. BUSINESSES
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 business plan to strengthen and grow the business.
The Company has incurred $9,324 of pre-tax expense relating to its strategic business plan
during the thirteen weeks ended August 2, 2008, and has included these costs as restructuring
charges within the Companys consolidated statement of operations. Of the $9,324, $5,096 relates to
the closing of the Companys Talbots Kids, Mens, and U.K. businesses, and $4,228 relates to the
execution of other corporate-wide strategic initiatives to streamline operations and rationalize
its cost structure, including $2,431 of severance, $1,377 of consulting services, and $250 of
non-cash stock-based compensation. The Company has incurred $20,432 of pre-tax expense relating to
its strategic business plan during the twenty-six weeks ended August 2, 2008. Of the $20,432,
$11,042 relates to the closing of the Companys Talbots Kids, Mens, and U.K. businesses, and $9,390
relates to the execution of other corporate-wide strategic initiatives, including $6,724 of
severance, $4,083 of consulting services, and non-cash benefits of $1,663 relating to stock-based
compensation.
As part of the strategic plan, the Company made the decision to exit its Talbots Kids, Mens,
and U.K. businesses. The strategic review concluded that these businesses did not demonstrate the
potential to deliver an acceptable long-term return on investment. During the thirteen weeks ended
August 2, 2008, the Company closed 20 Kids stores, seven Mens stores, and all three U.K. stores.
During the twenty-six weeks ended August 2, 2008, the Company closed 31 Kids stores, nine Mens
stores, and all three U.K. stores. The remaining 35 Kids and Mens stores are expected to be closed
by the end of the third quarter of 2008. At that time, their results will be reclassified to
discontinued operations.
Below is a rollforward of the restructuring liabilities, which are included within accrued
liabilities within the Companys consolidated balance sheets as of August 2, 2008 and February 2,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing of Talbots Kids,
|
|
|
|
|
|
|
Corporate Wide
|
|
|
Mens, and U.K. Businesses
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
Lease
|
|
|
Accelerated
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Consulting
(a)
|
|
|
Other
|
|
|
Severance
|
|
|
Exit
|
|
|
Depreciation
|
|
|
Other
|
|
|
Total
|
|
Balance at February
2, 2008
|
|
$
|
678
|
|
|
$
|
1,532
|
|
|
$
|
|
|
|
$
|
609
|
|
|
$
|
377
|
|
|
$
|
|
|
|
$
|
375
|
|
|
$
|
3,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges (income)
|
|
|
6,724
|
|
|
|
4,083
|
|
|
|
(1,417
|
)
(b)
|
|
|
2,128
|
|
|
|
2,980
|
(c)
|
|
|
5,095
|
|
|
|
839
|
(d)
|
|
|
20,432
|
|
Cash payment
|
|
|
(2,571
|
)
|
|
|
(5,139
|
)
|
|
|
(13
|
)
|
|
|
(1,453
|
)
|
|
|
(3,306
|
)
|
|
|
|
|
|
|
(554
|
)
|
|
|
(13,036
|
)
|
Non-cash items
|
|
|
|
|
|
|
|
|
|
|
1,430
|
|
|
|
|
|
|
|
2,664
|
|
|
|
(5,095
|
)
|
|
|
87
|
|
|
|
(914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August
2, 2008
|
|
$
|
4,831
|
|
|
$
|
476
|
|
|
$
|
|
|
|
$
|
1,284
|
|
|
$
|
2,715
|
|
|
$
|
|
|
|
$
|
747
|
|
|
$
|
10,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Consulting services are a direct result of executing the Companys strategic
plan to streamline operations and rationalize its cost structure.
|
|
(b)
|
|
Amount includes $2,408 of income relating to previously granted stock awards
that will not vest as a result of workforce reductions; offset by $644 of additional
expense related to accelerated vesting terms and $101 of additional expense related to
the increase in value of stock awards as a result of a modification to the original
awards, both triggered by terminations. See Note 7 for further discussion.
|
|
(c)
|
|
Amount includes $2,664 of income related to non-cash deferred credits
associated with terminated leases.
|
7
|
|
|
(d)
|
|
Amount includes $113 of income relating to previously granted stock awards that
will not vest as a result of workforce reductions; offset by $26 of additional expense
related to the increase in value of stock awards as a result of a modification to the
original awards triggered by terminations. See Note 7 for further discussion.
|
Of the $10,053 remaining balance of restructuring liabilities at August 2, 2008, $7,837 is
expected to be paid during 2008 and the remaining $2,216 is expected to be paid in 2009 and 2010.
The Company expects to incur additional restructuring costs related to the closure of its
Kids, Mens, and U.K. businesses of approximately $7,000 during the remainder of 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
extend through 2020.
4. INCOME TAXES
The Company provides for income taxes for interim periods based on the estimated effective tax
rate for the full fiscal year. Cumulative adjustments to the Companys estimate are recorded in the
interim period in which a change in the estimated annual effective rate is determined.
The Company has assessed its income tax positions and recorded uncertain tax positions in
accordance with FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN No.
48). At August 2, 2008, the Company had unrecognized tax benefits of approximately $38,212 of
which $17,192, if recognized, would impact the effective tax rate. At August 2, 2008, the Company
had $60,842 of unrecognized tax benefits, including accrued interest and penalties, which are
classified in other liabilities in the Companys consolidated balance sheets. 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.
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
February 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores segment
|
|
$
|
100,066
|
|
|
$
|
100,066
|
|
|
$
|
195,966
|
|
Direct Marketing segment
|
|
|
13,424
|
|
|
|
13,424
|
|
|
|
51,524
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
113,490
|
|
|
$
|
113,490
|
|
|
$
|
247,490
|
|
|
|
|
|
|
|
|
|
|
|
8
Trademarks and other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
February 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks indefinite lives
|
|
$
|
139,384
|
|
|
$
|
139,384
|
|
|
$
|
154,984
|
|
Customer relationships, non-compete
agreements, and leasehold interests
|
|
|
95,024
|
|
|
|
95,285
|
|
|
|
100,561
|
|
|
|
|
|
|
|
|
|
|
|
Total trademarks and other intangible assets
|
|
|
234,408
|
|
|
|
234,669
|
|
|
|
255,545
|
|
Less accumulated amortization
|
|
|
(19,118
|
)
|
|
|
(14,305
|
)
|
|
|
(14,288
|
)
|
|
|
|
|
|
|
|
|
|
|
Trademarks and other intangible assets net
|
|
$
|
215,290
|
|
|
$
|
220,364
|
|
|
$
|
241,257
|
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes its intangible assets over periods ranging from eight years to fourteen
years, with a weighted average useful life of twelve years. Amortization expense relating to
intangible assets was recorded within the consolidated statements of operations for the thirteen
and twenty-six weeks ended August 2, 2008 and August 4, 2007 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying, and occupancy
|
|
$
|
427
|
|
|
$
|
409
|
|
|
$
|
870
|
|
|
$
|
831
|
|
Selling, general and administrative
|
|
|
2,102
|
|
|
|
2,467
|
|
|
|
4,204
|
|
|
|
4,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,529
|
|
|
$
|
2,876
|
|
|
$
|
5,074
|
|
|
$
|
5,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense related to intangible assets is as follows:
|
|
|
|
|
|
|
Amount
|
|
Remaining twenty-six weeks in 2008
|
|
$
|
5,209
|
|
2009
|
|
|
10,196
|
|
2010
|
|
|
10,446
|
|
2011
|
|
|
9,648
|
|
2012
|
|
|
8,752
|
|
2013
|
|
|
7,810
|
|
Thereafter
|
|
|
23,845
|
|
|
|
|
|
Total
|
|
$
|
75,906
|
|
|
|
|
|
6. COMPREHENSIVE LOSS
The following is the Companys comprehensive loss for the thirteen and twenty-six weeks ended
August 2, 2008, and August 4, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,008
|
)
|
|
$
|
(13,316
|
)
|
|
$
|
(23,366
|
)
|
|
$
|
(8,076
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment,
net of tax
|
|
|
(1,287
|
)
|
|
|
565
|
|
|
|
(831
|
)
|
|
|
1,355
|
|
Change in pension and postretirement
plan liabilities, net of tax
|
|
|
405
|
|
|
|
516
|
|
|
|
380
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(25,890
|
)
|
|
$
|
(12,235
|
)
|
|
$
|
(23,817
|
)
|
|
$
|
(5,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans where the Companys common stock has been
made available for stock option awards, nonvested stock awards, and restricted stock unit awards
(RSUs). These plans are described in more detail in Note 7 of the Companys 2007 Annual Report on
Form 10-K.
The condensed consolidated statements of operations for the thirteen and twenty-six weeks
ended August 2, 2008 and August 4, 2007 include the following stock-based compensation expense
(income) related to stock option awards, nonvested stock awards, and RSUs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying, and occupancy
|
|
$
|
341
|
|
|
$
|
265
|
|
|
$
|
95
|
|
|
$
|
776
|
|
Selling, general, and administrative
|
|
|
3,102
|
|
|
|
2,317
|
|
|
|
5,671
|
|
|
|
7,477
|
|
Restructuring charges
|
|
|
162
|
|
|
|
|
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense related to stock-based awards
|
|
$
|
3,605
|
|
|
$
|
2,582
|
|
|
$
|
4,016
|
|
|
$
|
8,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to greater than expected terminations that occurred in the thirteen weeks ended August 2,
2008 and August 4, 2007, the Company revised its estimate of expected forfeiture of stock-based
awards. During the thirteen weeks ended August 2, 2008 and August 4, 2007, the Company recognized
$192 and $2,148, respectively, as a reduction of stock compensation expense as a result of the
change in forfeiture rates. During the twenty-six weeks ended August 2, 2008 and August 4, 2007,
the Company recognized $2,752 and $2,148, respectively, as a reduction of stock compensation
expense as a result of the change in forfeiture rates.
Additionally, as a result of the actual and expected impact of the Companys restructuring
activities in accordance with its strategic business plan, the Company has updated its estimate of
expected forfeitures of stock-based awards. When the termination is a direct result of the
Companys strategic business plan, the benefit is recorded within restructuring charges in the
Companys condensed consolidated statements of operations. For the thirteen and twenty-six weeks
ended August 2, 2008, the Company recorded a benefit of $472 and $2,520, respectively, in
restructuring charges to account for the revisions in estimated forfeiture rates.
10
During the thirteen and twenty-six weeks ended August 2, 2008, the Company recorded additional
compensation expense of $508 and $644, respectively, related to the accelerated vesting of stock
awards as a result of terminations. Additionally, the Company
recorded compensation expense of $126 during
the thirteen weeks ended August 2, 2008 to account for the increase in value of stock awards
relating to a modification to the original stock awards that occurred as a result of terminations.
The additional compensation expense was recorded within restructuring charges.
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 the twenty-six weeks ended August 2, 2008 and August 4, 2007 was $2.76 and $8.05 per option,
respectively. Key assumptions used to apply this pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
August 2,
|
|
August 4,
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Weighted average risk free interest rate
|
|
|
2.6
|
%
|
|
|
4.6
|
%
|
Weighted average expected life of option grants
|
|
4.8 years
|
|
|
4.6 years
|
|
Weighted average expected volatility of
underlying stock
|
|
|
45.9
|
%
|
|
|
38.7
|
%
|
Weighted average expected dividend payment
rate, as a percentage of the stock price on the
date of grant
|
|
|
5.2
|
%
|
|
|
2.2
|
%
|
A summary of stock option activity during the twenty-six weeks ended August 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 February 3, 2008
|
|
|
9,491,706
|
|
|
$
|
27.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
449,650
|
|
|
|
10.14
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(70,334
|
)
|
|
|
7.41
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(379,478
|
)
|
|
|
20.80
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(94,916
|
)
|
|
|
31.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 2, 2008
|
|
|
9,396,628
|
|
|
$
|
27.51
|
|
|
|
4.0
|
|
|
$
|
1,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 2, 2008
|
|
|
8,019,718
|
|
|
$
|
28.82
|
|
|
|
3.2
|
|
|
$
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Nonvested Stock Awards and RSUs
A summary of nonvested stock award and RSU activity for the twenty-six weeks ended August 2,
2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
Nonvested at February 3, 2008
|
|
|
1,930,298
|
|
|
$
|
24.95
|
|
Granted
|
|
|
1,081,115
|
|
|
|
10.08
|
|
Vested
|
|
|
(388,914
|
)
|
|
|
22.89
|
|
Forfeited
|
|
|
(567,475
|
)
|
|
|
22.44
|
|
|
|
|
|
|
|
|
Nonvested at August 2, 2008
|
|
|
2,055,024
|
|
|
$
|
18.05
|
|
|
|
|
|
|
|
|
8. NET LOSS PER SHARE
The weighted average shares used in computing basic and diluted net loss per share are
presented below. Options to purchase 9,396,628 shares of common stock were outstanding during the
thirteen and twenty-six weeks ended August 2, 2008, respectively, and were not included in the
computation of diluted net loss per share for the periods since the Company recorded a net loss
during the periods and the effect would have been antidilutive. Options to purchase 9,508,360
shares of common stock were outstanding during the thirteen and twenty-six weeks ended August 4,
2007, and were not included in the computation of diluted net loss per share for the periods since
the Company recorded a net loss during the periods and the effect would have been antidilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
August 2,
|
|
August 4,
|
|
August 2,
|
|
August 4,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
(in thousands)
|
|
(in thousands)
|
Shares for computation of
basic net loss per share
|
|
|
53,442
|
|
|
|
52,980
|
|
|
|
53,372
|
|
|
|
52,954
|
|
Effect of stock compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for computation of
diluted net loss per share
|
|
|
53,442
|
|
|
|
52,980
|
|
|
|
53,372
|
|
|
|
52,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. DEBT
A summary of outstanding long-term debt follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
February 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Debt
|
|
$
|
240,000
|
|
|
$
|
280,000
|
|
|
$
|
320,000
|
|
Revolving Credit Agreements
|
|
|
80,000
|
|
|
|
80,000
|
|
|
|
80,000
|
|
Term Loan
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Tilton Facility Loan
|
|
|
8,705
|
|
|
|
9,027
|
|
|
|
9,337
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
348,705
|
|
|
|
389,027
|
|
|
|
429,337
|
|
Less current maturities
|
|
|
(116,705
|
)
|
|
|
(80,650
|
)
|
|
|
(80,632
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term-debt, less current portion
|
|
$
|
232,000
|
|
|
$
|
308,377
|
|
|
$
|
348,705
|
|
|
|
|
|
|
|
|
|
|
|
12
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. In July 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 (U.S.A.), a wholly-owed subsidiary of Aeon Co., Ltd.
and the majority shareholder of the Company (Aeon), 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 which are calculated under the agreement as of the end of each fiscal quarter
which the Acquisition Debt is outstanding, 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)). For the period 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 $500,000; 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
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
interest rate on the Acquisition Debt at August 2, 2008 was 3.1%.
As of August 2, 2008, the Company had revolving credit agreements with three banks (the
Revolving Credit Agreements) that provide for maximum available borrowings of $80,000, 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
August 2, 2008, the weighted average interest rate on the loans was 3.7%. Of the $80,000
outstanding under the Revolving Credit Agreements at August 2, 2008, $28,000 is due in April 2009
and has not been further extended; $34,000 is due in January 2010 and $18,000 is due in April 2010,
but may be extended upon approval from the banks.
The principal on the Companys Term Loan of $20,000 is due in April 2012. Interest on the
Term Loan is due every six months and was fixed at 5.8% through April 2008, and is fixed at 5.9%
for the remaining interest periods through April 2012.
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.
Lines of Credit (Notes payable to banks)
In March 2008, one of the Companys lenders
increased their availability under their short-term working capital line of credit facility by
$25,000, increasing the Companys total lines of credit available from $140,000 to $165,000. During
the first half of 2008, the Company had an average of $106,100 outstanding under its working
capital facilities.
13
Working Capital Term Loan Facility
In July 2008, the Company finalized the terms of a
$50,000 unsecured subordinated working capital term loan credit facility with Aeon. The new
$50,000 credit facility supplements the Companys currently existing working capital lines of
credit of $165,000 and increases the Companys total working capital borrowing capacity to $215,000
as of August 2, 2008. The working capital term loan credit facility (the facility) will mature
and Aeons commitment to provide borrowings under the facility will expire on January 28, 2012.
Under the terms of the facility, the financing is the unsecured general obligation of the Company
and is subordinated to the Companys other financial institution indebtedness existing as of the
closing date, including under the existing Acquisition Debt. The facility is available for use by
the Company and its subsidiaries for general working capital and other appropriate general
corporate purposes. Interest on outstanding principal under the facility will be at a rate equal
to three-month LIBOR plus 5.0%. The Company was required to pay an upfront commitment fee of 1.5%
(or $750) to Aeon at the time of execution and closing of the loan facility agreement. Going
forward, the Company is required to pay a fee of 0.50% per annum on the undrawn portion of the
commitment, payable quarterly in arrears. The facility includes covenants relating to the Company
and its subsidiaries that are substantially the same in all material respects as under the
Acquisition Debt.
Letters of Credit
At August 2, 2008, the Company had a letter of credit agreement with a bank
totaling $20,000, which was used primarily for the purchase of merchandise inventories. This
letter of credit expired on August 8, 2008. On July 31, 2008, the Company executed an addendum to
its financing agreement with one bank, allowing the Company to utilize its existing $75,000 short
term line of credit facility with the bank for letters of credit. The $75,000 short term line of
credit facility will continue to be available for working capital borrowings; however, the capacity
will be reduced by any commercial letters of credit outstanding. As of August 2, 2008, there were
not any letters of credit outstanding against the $75,000 short term line of credit facility.
At February 2, 2008 and August 4, 2007, the Company had letter of credit agreements with two
banks totaling $265,000 and $280,000, respectively. These facilities have since been cancelled by
the banks. At August 2, 2008, February 2, 2008, and August 4, 2007, the Company held $4,377,
$158,365, and $172,222, respectively, in outstanding letters of credit.
10. FAIR VALUE MEASUREMENTS
The Company adopted SFAS No. 157 as of February 3, 2008, with the exception of the application
of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities that was delayed
by FSP 157-2. Nonrecurring nonfinancial assets and nonfinancial liabilities for which the Company
has not applied the provisions of SFAS No. 157 include those that were measured at fair value for
the purpose of impairment testing for goodwill, indefinite lived intangible assets, and long-lived
assets.
SFAS No. 157 establishes a three-tier fair value hierarchy, which classifies the inputs used
in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted
prices for identical instruments in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore requiring an entity to
develop its own assumptions. The Company did not have any assets or liabilities carried at fair
value as of August 2, 2008.
11. SEGMENT INFORMATION
The Company has determined its operating segments in a manner that reflects how its chief
operating decision-maker reviews the results of operations and allocates resources for the
consolidated entity. The Company considers certain of its operating segments to be similar in
terms of economic characteristics, purchasing processes, and operations, and have 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 Companys Direct Marketing Segment includes catalog and Internet operations
for both Talbots and J. Jill brands.
14
In accordance with the Companys strategic business plan, the Company has made the decision to
exit its non-core operations, Talbots Kids, Mens, and U.K. businesses. As of August 2, 2008, the
Company has successfully closed 31 Kids stores, nine Mens stores, and all three stores in the U.K.
The remaining 35 stores are expected to be closed in the third quarter of 2008. At that time, the
Company will report results from these businesses in discontinued operations.
The Companys reportable 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 from the sale of apparel, accessories and shoes through its
approximately 35 distinct catalog mailings per year, 21 relating to the Talbots brand and 14
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,
Mens, and U.K. businesses. Direct expenses of $5,062 and $10,745 associated with the closing of
the Talbots Kids, Mens, and U.K. businesses were allocated to the Stores segment during the
thirteen and twenty-six weeks ended August 2, 2008, respectively. 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,
corporate-wide restructuring charges, and certain restructuring charges associated with the closing
of the Talbots Kids, Mens, and U.K. businesses. Indirect costs of $34 and $297 relating to the
closing of the Talbots Kids, Mens, and U.K. businesses were recorded during the thirteen and
twenty-six weeks ended August 2, 2008, respectively. 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 the Stores Segment and Direct Marketing Segment information for the Company
for the thirteen and twenty-six weeks ended August 2, 2008 and August 4, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
August 2, 2008
|
|
August 4, 2007
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
Stores
|
|
Marketing
|
|
Total
|
|
Stores
|
|
Marketing
|
|
Total
|
Net sales
|
|
$
|
426,224
|
|
|
$
|
101,790
|
|
|
$
|
528,014
|
|
|
$
|
472,090
|
|
|
$
|
100,241
|
|
|
$
|
572,331
|
|
Direct profit
|
|
|
5,492
|
|
|
|
17,276
|
|
|
|
22,768
|
|
|
|
25,148
|
|
|
|
13,602
|
|
|
|
38,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
August 2, 2008
|
|
August 4, 2007
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
Stores
|
|
Marketing
|
|
Total
|
|
Stores
|
|
Marketing
|
|
Total
|
Net sales
|
|
$
|
860,991
|
|
|
$
|
209,461
|
|
|
$
|
1,070,452
|
|
|
$
|
940,090
|
|
|
$
|
205,797
|
|
|
$
|
1,145,887
|
|
Direct profit
|
|
|
52,743
|
|
|
|
39,347
|
|
|
|
92,090
|
|
|
|
81,120
|
|
|
|
32,073
|
|
|
|
113,193
|
|
15
The following reconciles direct profit to consolidated net loss for the thirteen and
twenty-six weeks ended August 2, 2008 and August 4, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct profit for reportable segments
|
|
$
|
22,768
|
|
|
$
|
38,750
|
|
|
$
|
92,090
|
|
|
$
|
113,193
|
|
Less: indirect expenses
|
|
|
57,321
|
|
|
|
50,971
|
|
|
|
119,557
|
|
|
|
108,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(34,553
|
)
|
|
|
(12,221
|
)
|
|
|
(27,467
|
)
|
|
|
5,093
|
|
Interest expense, net
|
|
|
4,892
|
|
|
|
8,230
|
|
|
|
10,589
|
|
|
|
17,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(39,445
|
)
|
|
|
(20,451
|
)
|
|
|
(38,056
|
)
|
|
|
(12,420
|
)
|
Income tax benefit
|
|
|
(14,437
|
)
|
|
|
(7,135
|
)
|
|
|
(14,690
|
)
|
|
|
(4,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss
|
|
$
|
(25,008
|
)
|
|
$
|
(13,316
|
)
|
|
$
|
(23,366
|
)
|
|
$
|
(8,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. EMPLOYEE BENEFIT PLANS
Net periodic benefit cost is comprised of the following components for the thirteen and
twenty-six weeks ended August 2, 2008 and August 4, 2007.
During 2007, the Company elected to close participation in the Pension Plan for all associates
hired or rehired after December 31, 2007. Those employees that were hired prior to December 31,
2007 continue to accrue benefits under the plan. The components of the Companys Pension Plan
expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,359
|
|
|
$
|
2,511
|
|
|
$
|
4,718
|
|
|
$
|
5,022
|
|
Interest cost
|
|
|
2,363
|
|
|
|
2,090
|
|
|
|
4,726
|
|
|
|
4,180
|
|
Expected return on plan assets
|
|
|
(2,475
|
)
|
|
|
(2,386
|
)
|
|
|
(4,951
|
)
|
|
|
(4,772
|
)
|
Net amortization and deferral
|
|
|
256
|
|
|
|
898
|
|
|
|
512
|
|
|
|
1,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,503
|
|
|
$
|
3,113
|
|
|
$
|
5,005
|
|
|
$
|
5,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys Supplemental Executive Retirement Plan (SERP) expense are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
92
|
|
|
$
|
122
|
|
|
$
|
227
|
|
|
$
|
244
|
|
Interest cost
|
|
|
320
|
|
|
|
286
|
|
|
|
624
|
|
|
|
572
|
|
Net amortization and deferral
|
|
|
27
|
|
|
|
254
|
|
|
|
35
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
439
|
|
|
$
|
662
|
|
|
$
|
886
|
|
|
$
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The components of the Companys Postretirement Medical Plan expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Service cost
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
|
|
4
|
|
|
|
22
|
|
|
|
8
|
|
|
|
44
|
|
Net amortization and deferral
|
|
|
(304
|
)
|
|
|
(295
|
)
|
|
|
(608
|
)
|
|
|
(590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit credit
|
|
$
|
(299
|
)
|
|
$
|
(272
|
)
|
|
$
|
(598
|
)
|
|
$
|
(544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2006, the Company changed its reimbursement rates under its Postretirement Medical Plan and
remeasured the related liability. The Company is amortizing the benefit into income over a five
year period.
During the thirteen and twenty-six weeks ended August 2, 2008, the Company was required to
make contributions of $3,125 and $5,510, respectively, to the Pension Plan. The Company expects to
make required contributions of $6,250 to the Pension Plan during the remainder of 2008. During the
thirteen and twenty-six weeks ended August 4, 2007, the Company was not required to make any
contributions to the Pension Plan. The Company did not make any voluntary contributions to the
Pension Plan during the thirteen and twenty-six weeks ended August 2, 2008 and August 4, 2007.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our condensed
consolidated financial statements and the notes thereto appearing elsewhere in this document, as
well as our 2007 Annual Report on Form 10-K.
We conform to the National Retail Federations fiscal calendar. The thirteen weeks ended
August 2, 2008 and August 4, 2007 are referred to as the second quarter of 2008 and 2007,
respectively. The twenty-six weeks ended August 2, 2008 and August 4, 2007 are referred to as the
first half of 2008 and 2007, respectively.
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. When a new J. Jill
store is opened adjacent or in close proximity to an existing Talbots Misses store, such Talbots
Misses store is not excluded from the computation of comparable store sales. The calculation of
comparable store sales for the second quarter and first half of 2008 and 2007 exclude the results
of our non-core operations (Talbots Kids, Mens, and U.K. stores).
When reference is made to a store location, we are considering adjacent multiple concept
stores as one location. We feel that this count is an appropriate representation of our real
estate portfolio and consistent with industry practices.
Progress on Implementing Our Strategic Plan
In April 2008, we announced our strategic plan for long-term growth and significant
productivity improvement. During the first half of 2008, we focused on implementing the strategic
initiatives that we believe will drive stronger performance of the business in the short and long
term. Such initiatives included: improved inventory management, tight expense control, streamlining
operations, and innovating marketing and promotional programs. Based on the results of the first
half of 2008, we are encouraged with the progress to date, particularly in the Talbots brand, where
we achieved a significant improvement in merchandise gross margin compared to the prior year,
validating many elements of our strategic plan.
17
Highlights from the first half of 2008 include:
|
|
Improved inventory management at the Talbots brand, together with a leaner inventory
position, and the change in the Talbots brand promotional cadence to monthly markdowns,
contributed to significantly improved merchandise gross margin. For the first half of 2008,
the Talbots brand realized a 280 basis point improvement in gross margin (including a 355
basis point improvement from its core operations offset by a 75 basis point decline from its
non core operations) over the prior year. The improvement in the Talbots brand merchandise
gross margin was partially offset by the decline of 235 basis points in the J. Jill brand
merchandise gross margin which was significantly impacted by deep markdowns taken during our
end-of-season clearance event for the brand in June 2008. On a total Company basis,
merchandise gross margin improved approximately 179 basis points. The Talbots brand average
unit retail value, or the average sales price per unit of markdown inventory sold, in the
first half of 2008 increased by 17% compared to the prior year.
|
|
|
Significant progress was made in closing the Talbots Kids, Mens, and U.K. businesses. In
the first half of 2008, we closed a total of 43 stores, which included 31 Talbots Kids, nine
Talbots Mens, and all three Talbots U.K. stores. We expect to complete the closing of our
Talbots Kids and Mens businesses in the third quarter of 2008.
|
|
|
Entering the third quarter of 2008, the Talbots and J. Jill inventories are appropriately
lean and we are currently planning for continued improvement in merchandise gross margin. We
are starting the fall season with a more focused merchandise presentation, leaner inventory,
and a fresh look across both brands. Further, for the Talbots brand, in June 2008, we began
introducing updated visual concepts that reflect a more modern classic image, illustrated
throughout our Talbots brand catalogs and which are aligned with the Talbots brand stores and
Internet. We experienced an increase in selling trends in July especially for the Talbots
brand, which achieved positive comparable store sales, which we attribute mainly to better
flow of merchandise, monthly markdown selling, and stronger visual presentation across all
channels.
|
|
|
For our J. Jill brand, while disappointed with our performance during the first half of
2008, we took a critical step to aggressively liquidate our spring/summer merchandise in
preparation for a leaner start to the fall. This impacted the brands and the total Companys
operating results. However, we continue to believe in the growth potential of the J. Jill
brand. We will remain focused during the remainder of 2008 on initiatives to improve the J.
Jill product offering, inventory management, and an enhanced look of the J. Jill stores, as we
seek to build greater brand awareness. J. Jill has also adopted the Talbots brand inventory
management model, which we expect will begin to improve inventory management and merchandise
gross margin. The brand experienced positive customer response to its new product deliveries,
under its new creative team, for the month of July.
|
|
|
Beginning in June 2008, as part of our strategic plan to streamline operations and
rationalize our cost structure, we executed our plan to reduce our corporate headcount by
approximately 9% across multiple locations and at all levels. This is in addition to other
initiatives we are implementing will enable us to achieve our cost reduction goal of $50
million in 2008 and $100 million by the end of 2009.
|
For the balance of 2008, we will remain focused on executing against our strategic plan, as we
continue to make progress in key areas across our business, including inventory management and
expense control, and joining the benefits of the operational initiatives with improved visual
presentations and product offerings under our new creative and merchandise teams at both brands.
18
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items in
the Companys condensed consolidated statements of operations for the fiscal periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
August 2,
|
|
August 4,
|
|
August 2,
|
|
August 4,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy expenses
|
|
|
71.6
|
%
|
|
|
71.5
|
%
|
|
|
66.8
|
%
|
|
|
67.1
|
%
|
Selling, general and administrative expenses
|
|
|
33.1
|
%
|
|
|
30.7
|
%
|
|
|
33.8
|
%
|
|
|
32.5
|
%
|
Restructuring charges
|
|
|
1.8
|
%
|
|
|
0.0
|
%
|
|
|
1.9
|
%
|
|
|
0.0
|
%
|
Impairment of store assets
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
Operating (loss) income
|
|
|
-6.5
|
%
|
|
|
-2.2
|
%
|
|
|
-2.6
|
%
|
|
|
0.4
|
%
|
Interest expense, net
|
|
|
0.9
|
%
|
|
|
1.4
|
%
|
|
|
1.0
|
%
|
|
|
1.5
|
%
|
Loss before taxes
|
|
|
-7.4
|
%
|
|
|
-3.6
|
%
|
|
|
-3.6
|
%
|
|
|
-1.1
|
%
|
Income tax benefit
|
|
|
-2.7
|
%
|
|
|
-1.3
|
%
|
|
|
-1.4
|
%
|
|
|
-0.4
|
%
|
Net loss
|
|
|
-4.7
|
%
|
|
|
-2.3
|
%
|
|
|
-2.2
|
%
|
|
|
-0.7
|
%
|
The Thirteen Weeks Ended August 2, 2008 Compared to the Thirteen Weeks Ended August 4, 2007 (Second
Quarter)
Net Sales
Net sales consist of retail store sales and direct marketing sales. Direct marketing sales
include our catalog and Internet channels. The following table shows net retail store sales by
brand and net direct marketing sales in total for the thirteen weeks ended August 2, 2008 and
August 4, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net retail store sales: Talbots brand
|
|
$
|
351.7
|
|
|
$
|
392.1
|
|
Net retail store sales: J. Jill brand
|
|
|
74.5
|
|
|
|
80.0
|
|
Net direct marketing sales: total Company
|
|
|
101.8
|
|
|
|
100.2
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
528.0
|
|
|
$
|
572.3
|
|
|
|
|
|
|
|
|
Net sales in the second quarter of 2008 were $528.0 million compared to $572.3 million in the
second quarter of 2007, a decrease of $44.3 million, or 7.7%. J. Jill brand net sales represented
approximately 21.4% and 20.4% of total net sales during the second quarter of 2008 and 2007,
respectively.
Overall, the second quarter was a challenge to drive top line sales, primarily due to the
change in the Talbots brand markdown strategy, a weak response to both brands semi-annual sale,
coupled with a difficult macro-environment and customers cautious purchasing behavior. Comparable
store sales for the period decreased by 12.0% in the quarter, but average unit retail increased by
6.4%, reflecting an evolved approach to markdowns.
Talbots Brand Retail Stores
Talbots brand retail store sales in the second quarter of 2008 decreased by $40.4 million, or
10.3%, compared to the second quarter of 2007. Reflected in Talbots brand retail store sales was a
$39.7 million, or 11.7%, decline in comparable store sales for the period. The brand experienced a
difficult June, which we believe was negatively impacted by the shift in the start of the
season-end sale event. We elected to move the brands June end-of-season clearance event to one
week later versus the prior year, and extended the event through labor day, compared to offering
the event just one day in August in the prior year. In addition, with the change to monthly
19
markdowns, our sale event was greatly impacted by much lower levels of clearance inventory compared
to prior years. We believe that the lower levels of clearance inventory as well as the change in
timing of the clearance event
has had an adverse effect on our brands second quarter sales; however, the extension of the
clearance event through labor day is expected to benefit third quarter sales. We experienced an
improvement in selling trends for the brand in July, yielding positive comparable store sales
during the month, driven by markdowns and revamped fresh creative product offerings. We continue
to communicate our new fresh creative merchandise offerings consistently through all channels,
including floor sets, signage, catalog design, and website visuals. We believe that this
initiative ensures that our customer receives a consistent message about our product offerings no
matter which channel she chooses to shop.
Additionally, the decline in Talbots brand retail store sales was partially a result of the
decrease in the number of Talbots brand retail stores. As of August 2, 2008, we operated a total of
1,109 Talbots brand stores, or 592 locations, with gross and selling square footage of 4.3 million
square feet and 3.3 million square feet, respectively. This represents a decrease of approximately
4% in gross and selling square footage from August 4, 2007 when we operated a total of 1,134
Talbots brand stores, or 590 locations, with gross and selling square footage of approximately 4.5
million square feet and 3.4 million square feet, respectively. In connection with our strategic
initiative to evaluate store productivity on an ongoing basis and to close underperforming stores,
as well as the exit of Talbots Kids, Mens, and U.K. businesses, we expect our store count to be
lower at the end of 2008 in comparison to the end of 2007.
J. Jill Brand Retail Stores
J. Jills brand retail store sales in the second quarter of 2008 decreased by $5.5 million, or
6.9%, compared to the second quarter of 2007. Reflected in J. Jill brand retail store sales was a
$9.8 million, or 13.2%, decline in comparable store sales. The brand experienced a difficult May
and June. Due to the heavy inventory position at the start of the second quarter, we took an
aggressive approach to liquidation during the June mid-season clearance event. This affected both
our sales for the quarter and our merchandise gross margin for the brand. We are comfortable with
our inventory position at the end of the quarter. We did experience improved selling trends in the
month of July, which we believe is attributed to the customers positive response to the first
delivery of the brands new creative product offerings under its new creative team. We remain
focused on strengthening the brands product offering and building brand awareness to drive
improved performance for the brand.
The decline in comparable store sales was partially offset by an increase in store sales
driven by the increase in the number of J. Jill brand retail stores. As of August 2, 2008, we
operated 281 retail stores, or 277 locations, with gross and selling square footage of
approximately 1.1 million square feet and 0.9 million square feet, respectively. This represents
an increase of approximately 8% in gross and selling square footage from August 4, 2007, when we
operated 255 J. Jill brand retail stores, or 251 locations, with gross and selling square footage
of approximately 1.0 million square feet and 0.8 million square feet, respectively. Since the date
of the acquisition, May 3, 2006, the Company has opened 78 J. Jill brand stores and has increased
its gross and selling square footage by 28%.
Direct Marketing Sales
The $1.6 million, or 1.6%, increase in direct marketing sales is primarily attributable to
sales for the J. Jill brand. J. Jill brand direct marketing sales for the second quarter of 2008
increased by $1.5 million, or 4.1%, in comparison to the second quarter of 2007, primarily due to a
combination of creative, product, and email activity used to assist
in driving sales in the
catalog and Internet channels. Talbots brand direct marketing sales for the second quarter of 2008
were relatively flat in comparison to the second quarter of 2007. Both brands continue to
experience solid growth in Internet sales, with Internet representing 65% of direct business in
comparison with 59% for the second quarter of the prior year. Our reinvigorated Talbots brand
image, commencing with our June catalog, is fully aligned across all marketing components and
channels and has had positive customer response. Currently, we are in the process of enhancing
our Talbots brand website, offering greater ease of use and expanded functionality. Together with
our stores and the consistency with which we present merchandise across all brand channels, we hope
to drive increased multi-channel business. The percentage of our net sales derived from direct
marketing increased from 17.5% during the second quarter of 2007 to 19.3% during the second quarter
of 2008.
Cost of Sales, Buying, and Occupancy Expenses
Cost of sales, buying and occupancy expenses increased as a percentage of net sales to 71.6%
in the second quarter of 2008 from 71.5% in the second quarter of 2007. This represents a 10 basis
point increase in cost of sales, buying, and occupancy expenses as a percentage of net sales over
the prior year. This increase was primarily a
20
result of an approximate 129 basis point increase in
occupancy costs as a percentage of net sales almost entirely offset by an approximate 125 basis
point improvement in pure merchandise gross margin. Occupancy costs are
primarily fixed costs, therefore the increase in costs as a percentage of net sales was mainly
due to the decrease in sales in the second quarter of 2008 compared to sales in the second quarter
of 2007.
The Talbots brand merchandise gross margin represented an approximate 290 basis point
improvement (including a 380 basis point improvement from its core operations offset by a 90 basis
point decline from its non core operations) over the prior year. We attribute this improvement in
gross margin to better inventory management at the Talbots brand with leaner inventories, the
change to a monthly markdown cadence, and improved initial mark-up. The strategic change to a
monthly markdown cadence has enabled us to smooth out Talbots brand markdown selling, sell the
brands markdown goods at higher average unit retail values, and flow new product across channels
on a more regular basis. Offsetting this improvement in merchandise gross margin was a decrease in
the J. Jill brands merchandise gross margin of an approximate 540 basis points in comparison to the
prior year. This decline is primarily due to our aggressive approach to clear out excess inventory
for the brand at deeper discounts during the end-of-season clearance event. We expect to improve
our merchandise gross margin during the balance of this year with the implementation of a new
markdown optimization tool to be used by both brands and a more consistent flow of updated
merchandise assortments from both brands across all channels.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales increased to 33.1%
in the second quarter of 2008, compared to 30.7% in the second quarter of 2007. This represents a
240 basis point increase in selling, general and administrative expenses as a percentage of net
sales over the prior year. While we believe that we have made continued progress in executing our
strategic initiatives, including reducing expenses and our overall Company cost structure in an
effort to streamline our organization, our cost savings during the quarter were offset by negative
leverage from the decline in comparable stores sales in the quarter.
Restructuring Charges
In October 2007, we initiated a comprehensive strategic review of our business and engaged a
leading global consulting firm to assist us 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 we developed a three-year
strategic business plan to strengthen and grow the business. We incurred $9.3 million of pre-tax
expense relating to our strategic business plan in the second quarter of 2008 and have included
these costs as restructuring charges within our condensed consolidated statement of operations for
the thirteen weeks ended August 2, 2008. Of the $9.3 million of restructuring charges, $5.1
million relates to the closing of the Talbots Kids, Mens, and U.K. businesses, and $4.2 million
relates to the execution of other corporate-wide strategic initiatives associated with our ongoing
core operations.
As part of our strategic plan, we made the decision to exit our Talbots Kids, Mens, and U.K
businesses. The strategic review concluded that these businesses did not demonstrate the potential
to deliver an acceptable long-term return on investment. In the second quarter of 2008, we were
successful in closing 20 Talbots Kids stores, seven Talbots Mens stores, and all three Talbots U.K.
stores. The remaining 35 Talbots Kids and Mens stores are expected to be closed in the third
quarter of 2008. The $5.1 million of costs incurred during the second quarter of 2008 consisted of
lease exit costs of $5.3 million, professional services of $0.6 million, and non-cash charges for
accelerated depreciation on store assets of $0.9 million, offset by non-cash deferred credit
reversals of $1.3 million associated with terminated leases and adjustments to severance of $0.4
million. We expect to incur additional restructuring costs of approximately $7.0 million in
exiting these businesses during the remainder of 2008, primarily related to lease exit costs.
Lease exit costs are recorded when we negotiate a settlement with the landlord or vacate the
existing space. If we are successful in negotiating settlements with the respective landlords, we
anticipate that the lease exit costs will be paid by the end of the third quarter of 2008. In the
event that we are not successful in negotiating settlements, cash payments may be paid over the
various remaining lease terms, which extend through 2020. In the third quarter of 2008, as we
close all remaining stores, the results of operations from the Talbots Kids, Mens, and U.K.
businesses will be reclassified to discontinued operations.
21
In June 2008, as part of our strategic plan to streamline operations and rationalize our cost
structure, we announced and began to execute our plan to reduce our corporate headcount by
approximately 9% across multiple locations and at all levels. Substantially all affected employees
were notified on or immediately prior to the date of the announcement. We recorded approximately
$2.8 million of pre-tax expense in the second quarter of 2008 relating to this workforce reduction,
primarily consisting of severance, professional services, and non-cash expenses relating to
accelerated vesting of stock awards.
Impairment of Store Assets
Impairment of store assets was $0.2 million in the second quarter of 2008 compared to $0.0 in
the second quarter of 2007. As part of our strategic initiatives, we are closely monitoring stores
in our core concepts to identify stores that are underperforming and we are closing stores when
appropriate. When we determine that a store is underperforming or is to be closed, the Company
reassesses the expected future cash flows of the store, which in some cases results in an
impairment charge.
Net Interest Expense
Net interest expense decreased to $4.9 million in the second quarter of 2008 compared to $8.2
million in the second quarter of 2007. This decrease was due to lower levels of gross borrowings
as well as lower interest rates. The average level of debt outstanding, including short-term and
long-term borrowings, was $456.2 million in the second quarter of 2008 compared to $514.4 million
in the second quarter of 2007. The average interest rate on short-term and long-term borrowings
during the second quarter of 2008 was 3.5% compared to 5.8% in the second quarter of 2007. The
average level of working capital borrowings outstanding was $88.9 million in the second quarter of
2008 compared to $67.4 in the second quarter of 2007.
Income Tax Benefit
The income tax benefit for the second quarter of 2008 was $14.4 million, compared to an income
tax benefit of $7.1 million for the second quarter of 2007. The effective tax rate was 36.6% and
34.9% for the second quarters of 2008 and 2007, respectively.
The Twenty-Six Weeks Ended August 2, 2008 Compared to the Twenty-Six Weeks Ended August 4, 2007
(First Half)
Net Sales
Net sales consist of retail store sales and direct marketing sales. The following table shows
net retail store sales by brand and net direct marketing sales in total for the twenty-six weeks
ended August 2, 2008 and August 4, 2007 (in millions).
|
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
|
August 4,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net retail store sales: Talbots brand
|
|
$
|
715.1
|
|
|
$
|
779.4
|
|
Net retail store sales: J. Jill brand
|
|
|
145.9
|
|
|
|
160.7
|
|
Net direct marketing sales: total Company
|
|
|
209.5
|
|
|
|
205.8
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,070.5
|
|
|
$
|
1,145.9
|
|
|
|
|
|
|
|
|
Net sales for the first half of 2008 were $1,070.5 million compared to $1,145.9 million for
the first half of 2007, a decrease of $75.4 million, or 6.6%. J. Jill brand net sales represented
approximately 20.5% and 20.4% of total net sales during the first half of 2008 and 2007,
respectively. Overall, we experienced a decline in comparable stores sales of 10.9% for the
period.
22
Talbots Brand Retail Stores
Talbots brand retail store sales in the first half of 2008 decreased by $64.3 million, or
8.2%, compared to the first half of 2007. Reflected in Talbots brand retail store sales was a
$64.9 million, or 9.5%, decline in comparable store sales for the period. We believe that the
brands negative sales results were impacted by a weak customer response to the brands
merchandise, timing of promotional events, especially the shift in the June season end clearance
event, coupled with the effects from macroeconomic pressures and uncertainties, particularly in
discretionary consumer spending. July did experience a pick up in selling trends, with positive
comparable store sales, which we believe is related to increased markdown selling and the
introduction of revamped and reinvigorated product offerings which are communicated consistently
through all channels. Additionally, the decline in Talbots brand retail store sales was partially
a result of the decrease in the number of Talbots brand retail stores from August 4, 2007 to August
2, 2008.
J. Jill Brand Retail Stores
J. Jill brand retail store sales in the first half of 2008 decreased by $14.8 million, or
9.2%, compared to the first half of 2007. Reflected in J. Jill brand retail store sales was a
$25.8 million, or 16.8%, decline in comparable store sales for the period. Although the brand
continued to experience negative comparable store sales throughout the first half of 2008, the
brand has seen some improvement in selling trends in the second quarter in comparison to the first
quarter. We believe that our early spring product did not resonate well with the customer as it
may have been too similar to the prior years offerings. The brand experienced weakness in some
key volume classifications and fabrications, as well as casual basics. Due to the poor first
quarter performance, we aggressively liquidated the excess inventories in the second quarter. We
are comfortable with our inventory position going into the third quarter. Additionally, July
reflected an improvement in selling trends, which we believe is a result of a positive response to
our new merchandise offerings under a new creative team from our customers. The decline in
comparable store sales was partially offset by an increase in store sales driven by the increase in
the number of J. Jill brand retail stores opened from during the period from August 4, 2007 to
August 2, 2008.
Direct Marketing Sales
The $3.7 million, or 1.8%, increase in direct marketing sales is primarily attributable to
higher sales within the Internet channel across both brands. Internet sales during the first half
of 2008 represented 59% of the total direct marketing sales, compared to 54% during the first half
of 2007. The Talbots brand experienced an increase in direct marketing sales of approximately 2.4%
over the same period of the prior year, which we believe is primarily due to the successful April
best customer event in the first quarter. The J. Jill brand experienced a slight increase in
direct marketing sales of approximately 0.6% mainly due to the combination of creative, product,
and email activity used to drive sales across the catalog and Internet channels. The percentage of
our net sales derived from direct marketing increased from 18.0% during the first half of 2007 to
19.6% during the first half of 2008.
Cost of Sales, Buying, and Occupancy Expenses
Cost of sales, buying and occupancy expenses decreased as a percentage of net sales to 66.8%
in the first half of 2008, from 67.1% in the first half of 2007. This represents a 30 basis point
improvement in cost of sales, buying, and occupancy expenses as a percentage of net sales over the
prior year with pure merchandise gross margin increasing by approximately 180 basis points. The
Talbots brand merchandise gross margin represented an approximate 280 basis point improvement over
the prior year (including a 355 basis point improvement from its core operations offset by a 75
basis point decline from its non core operations). We attribute this improvement in gross margin
to better inventory management at the Talbots brand with leaner inventories, the change to a
monthly markdown cadence, and improved initial mark-on. Largely offsetting this improvement was
an approximate 235 basis point decrease in the J. Jill brands merchandise gross margin
percentage of net sales in comparison to the prior year. This decline is primarily due to our aggressive
approach in the second quarter to clear out excess inventory for the brand at deeper discounts
during the end-of-season clearance event that began in June.
Offsetting the improvement in merchandise gross margin was an approximate 136 basis point
increase in occupancy costs as a percentage of net sales in comparison to the prior year.
Occupancy costs are primarily fixed costs, therefore the increase in costs as a percentage of net
sales was mainly due to the decrease in sales in the first half of 2008 compared to sales in the
first half of 2007.
23
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales increased to 33.8%
in the first half of 2008, compared to 32.5% in the first half of 2007. This represents a 130
basis point increase in selling, general and administrative expenses as a percentage of net sales
over the prior year. While we believe that we have made continued progress in executing our
strategic initiatives, including reducing expenses and our overall Company cost structure in an
effort to streamline our organization, our savings during the first half of 2008 was offset by
negative leverage from the decline in comparable stores sales during the period. Due to our
decision to eliminate television and national print advertising in 2008, we have spent $13.1
million less, or approximately 105 basis points, during the first half of 2008 for marketing
programs in comparison to the first half of 2007, accounting for the majority of the savings
between the periods.
Restructuring Charges
We incurred $20.4 million of pre-tax expense relating to our strategic business plan during
the first half of 2008 and have included these costs as restructuring charges within our condensed
consolidated statement of operations for the twenty-six weeks ended August 2, 2008. Of the $20.4
million of restructuring charges, $11.0 million relates to the closing of the Talbots Kids, Mens,
and U.K. businesses, and $9.4 million relates to the execution of other corporate-wide strategic
initiatives associated with our ongoing core operations.
As part of our strategic plan, we made the decision to exit our Talbots Kids, Mens, and U.K
businesses. The strategic review concluded that these businesses did not demonstrate the potential
to deliver an acceptable long-term return on investment. In the first half of 2008, we were
successful in closing 31 Talbots Kids stores, nine Talbots Mens stores, and all three Talbots U.K.
stores. The remaining 35 Talbots Kids and Mens stores are expected to be closed in the third
quarter of 2008. The $11.0 million of costs incurred during the first half of 2008 consisted of
severance of $2.1 million, professional services of $0.9 million, lease exit costs of $5.6 million,
and non-cash charges for accelerated depreciation on store assets of $5.1 million, offset by
non-cash deferred credit reversals of $2.7 million associated with terminated leases.
In June 2008, as part of our strategic plan to streamline operations and rationalize our cost
structure, we announced and began to execute our plan to reduce our corporate headcount by
approximately 9% across multiple locations and at all levels. We recorded approximately $5.0
million of pre-tax expense in the first half of 2008 relating to this workforce reduction, primarily
consisting of severance and professional services, offset by non-cash credits relating to stock awards
that will not vest.
Impairment of Store Assets
Impairment of store assets was $1.2 million in the first half of 2008 compared to $0.0 in the
first half of 2007. As part of our strategic initiatives, we are closely monitoring stores in our
core concepts to identify stores that are underperforming and closing stores when appropriate. When
we determine that a store is underperforming or is to be closed, the Company reassesses the
expected future cash flows of the store, which in some cases results in an impairment charge.
Net Interest Expense
Net interest expense decreased to $10.6 million in the first half of 2008 compared to $17.5
million in the first half of 2007. This decrease was due to lower levels of gross borrowings as
well as lower interest rates. The average level of debt outstanding, including short-term and
long-term borrowings, was $483.5 million during the first half of 2008 compared to $542.8 million
during the first half of 2007. The average interest rate on short-term and long-term borrowings
during the first half of 2008 was 3.7% compared to 5.8% during the first half of 2007.
Income Tax Benefit
The income tax benefit for the first half of 2008 was $14.7 million, compared to an income tax
benefit for the first half of 2007 of $4.3 million. The effective tax rate for the first half of
2008 and 2007 was 38.6% and 35.0%, respectively.
24
Liquidity and Capital Resources
Our primary sources of capital are generally from cash flows from operating activities and
working capital line of credit facilities from four banks and Aeon
(U.S.A), (Aeon), with maximum available
short-term borrowings of $215.0 million as of August 2, 2008. In July 2008, we finalized the terms
of our previously announced $50.0 million unsecured subordinated working capital term loan credit
facility with Aeon. The new $50.0 million credit facility, which matures on January 28,
2012, increased our total working capital borrowing capacity to $215.0 million from $165.0 million.
In March 2008, our availability under our short-term working capital line of credit facilities was
increased by $25.0 million, from $140.0 million to $165.0 million. Of our $215.0 million of
working capital availability, $165.0 million is uncommitted and is available at the discretion of
the banks. At August 2, 2008, February 2, 2008, and August 4, 2007, we had $34.0 million, $0.0
million, and $12.8 million, respectively, outstanding under our working capital facilities. During
the first half of 2008, we had an average of $106.1 million outstanding under our working capital
facilities. While we continue to believe we have sufficient liquidity to meet our working capital
needs and to fund the turnaround of our business, the new $50.0 million credit facility will
provide us with an additional level of assurance and even greater flexibility to address the
continued uncertainty in the credit markets.
The new $50.0 million working capital term loan credit facility (the facility) will mature
and Aeons commitment to provide borrowings under the facility will expire on January 28,
2012. Under the terms of the facility, the financing is the unsecured general obligation of the
Company and is subordinated to our other financial institution indebtedness existing as of the
closing date, including under the existing Acquisition Debt Agreement, as amended, dated as of July
24, 2006 (the Acquisition Debt). The facility will be available for use by the Company and its
subsidiaries for general working capital and other appropriate general corporate purposes.
Interest on outstanding principal under the facility will be at a rate equal to three-month LIBOR
plus 500 basis points. We were required to pay an upfront commitment fee of 1.5% (or $750,000) to
Aeon at the time of execution and closing of the loan facility agreement. Going forward, we
are required to pay a fee of 50 basis points per annum on the undrawn portion of the commitment,
payable quarterly in arrears. The facility includes covenants relating to the Company and its
subsidiaries that are substantially the same in all material respects as under the Acquisition
Debt. At August 2, 2008, we did not have any amounts outstanding under our facility.
Our ability to borrow under our working capital facilities is limited by financial covenants
related to our Acquisition Debt, including our leverage ratio which is impacted by total borrowings
(see discussion on financial covenants below).
Our 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 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 our ability to pay dividends or
purchase our capital stock so long as we are 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)). For the period 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 $500.0
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 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 financial covenants are required to be calculated at the end of each of our fiscal
quarters for as long as the Acquisition Debt is outstanding. As of August 2, 2008, we were in
compliance with our financial covenants. Our 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. There can be no assurance that we will satisfy our
financial covenants as of each determination date. In addition, any failure by us to meet our
sales plan at the Talbots brand or J. Jill brand at any time would cause reduced sales or likely
increased markdowns, which could negatively impact gross margin and profitability and our ability
to meet our financial covenants. If we determine
25
that it is likely that we will not satisfy any of our financial covenants, either as a result of
our expected operating results or borrowing needs, we would expect to seek a waiver or an amendment
of such financial covenants. In the event that we do not satisfy one or more financial covenants
as of the determination date and, in addition, we are unable to obtain a waiver or further
amendment of such financial covenants, the Acquisition Debt as well as other indebtedness could be
accelerated.
At August 2, 2008, we had a letter of credit agreement with a bank totaling $20.0 million,
which we used primarily for the purchase of merchandise inventories. On August 8, 2008 this letter
of credit expired. On July 31, 2008, we executed an addendum to a financing agreement with one of
our banks, allowing us to utilize our existing $75.0 million short term line of credit facility
with the bank for letters of credit. The $75.0 million short term line of credit facility will
continue to be available to us for working capital borrowings; however, the capacity will be
reduced by any commercial letters of credit outstanding. As of August 2, 2008, we did not have any
letters of credit outstanding against our $75.0 million short term line of credit facility. At
February 2, 2008 and August 4, 2007, we had letter of credit agreements with two banks totaling
$265.0 million and $280.0 million, respectively. These facilities have since been cancelled by the
banks. At August 2, 2008, February 2, 2008, and August 4, 2007 we held $4.4 million, $158.4
million, and $172.2 million, respectively, in outstanding letters of credit.
We have successfully negotiated open account terms, with improved payment terms, with those
vendors that currently represent a substantial majority of our merchandise purchases, and we 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. We are currently in the process of ordering late fall and early spring
2009 goods with our vendors under open account payment terms. However, there can be no assurance
that we will at all times be able to purchase all of our 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 twenty-six weeks ended August 2, 2008 and August 4, 2007:
|
|
|
|
|
|
|
|
|
|
|
August 2,
|
|
August 4,
|
|
|
2008
|
|
2007
|
Net cash provided by operating activities
|
|
$
|
42,507
|
|
|
$
|
94,938
|
|
Net cash used in investing activities
|
|
|
(30,078
|
)
|
|
|
(37,439
|
)
|
Net cash used in financing activities
|
|
|
(21,792
|
)
|
|
|
(86,585
|
)
|
Cash and cash equivalents, end of period
|
|
$
|
16,034
|
|
|
$
|
8,160
|
|
During the first half of 2008, cash and cash equivalents decreased $9.4 million compared to a
decrease of $27.8 million during the first half of 2007. Cash flow from operating activities and
short term borrowings in the first half of 2008 allowed us to execute our strategic plan, purchase
inventory on open account, invest in property and equipment, pay our scheduled principal and
interest on our Acquisition Debt, and pay quarterly dividends. We believe that we have sufficient
resources to fund our operations. This new facility provided by Aeon provides greater
flexibility during a period where credit markets are exceptionally tight and unstable.
Cash provided by operating activities
Cash provided by operating activities was $42.5 million during the first half of 2008 compared
to cash provided by operating activities of $94.9 million during the first half of 2007, a decrease
of $52.4 million. This decrease was primarily due to changes in accounts payable levels and a
decrease in net income of $15.3 million, offset by the change in inventory levels.
At February 2, 2008, we received better payment terms from our vendors which allowed us to
defer the payment for operating expenses and merchandise shipments. During the first half of 2008,
we paid these deferrals as well as what became due during the quarter, significantly decreasing our
accounts payable balance and cash flow from operations.
26
The change in inventory levels was a result of our strategy to maintain leaner inventories to
improve our gross margins. Total consolidated inventories at August 2, 2008 were $259.9 million,
down $72.4 million or 21.8% from August 4, 2007. On a per-square-foot basis, inventories for our
Talbots brand womens apparel stores were down 19% on average compared to last year and our J. Jill
brand inventories were down 22% on average from the prior year. We are comfortable with our
planned apparel inventory levels across brands for the fall season with our improved product flow
enabling us to operate on a lower inventory level compared to last year.
Cash used in investing activities
Cash used in investing activities was $30.1 million in the first half of 2008 compared to
$37.4 million in the first half of 2007. Additions to property and equipment during the quarter
primarily consisted of expenditures related to the opening of new stores and expanding and
renovating existing stores. During the first half of 2008, we opened 11 new Talbots brand stores
(three new locations), and 12 new J. Jill brand stores (11 new locations) and spent approximately
$26.7 million on new store openings and expansions and renovations of existing stores. During the
first half of 2007, we opened 13 new Talbots brand stores and 16 new J. Jill brand stores and spent
approximately $29.6 million on new store openings and expansions and renovations of existing
stores. Our current store expansion plan is to open approximately 19 additional Talbots brand
stores (eight locations) with expansion primarily in the Misses and Woman business concepts, and
approximately seven additional J. Jill brand stores (seven locations) during the remainder of 2008.
This level of store expansion is significantly down from our historical levels and will enable us
to preserve more capital for information technology enhancements, specifically for the growth of
our brands websites, and store conversions. We expect to spend approximately $75.0 million in
capital expenditures during 2008, down from $85.0 million in 2007. The actual amount of such
capital expenditures will depend on a number of factors, including the schedule of such activity
during the remainder of 2008 and the number, type, and timing of stores being opened, expanded,
renovated and relocated.
Cash used in financing activities
Cash used in financing activities was $21.8 million during the first half of 2008 compared to
$86.6 million during the first half of 2007. During the first half of 2008 we received net
proceeds of $34.0 million under working capital lines of credit. During the first half of 2007 we
made net payments of $32.2 million in working capital borrowings. During the first half of 2008,
we had an average of $106.1 million outstanding under our working capital facilities, in comparison
to $85.5 million outstanding during the first half of 2007. Our primary use of funds during the
first half of 2008 and 2007 was to pay down $40.0 million of our 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.
Additionally, during the first half of 2008 and 2007, we paid $14.4 million and $14.1 million,
respectively, in dividends. The dividends were paid at a rate of $0.13 per share per quarter. On
July 29, 2008, we announced that our Board of Directors approved the payment of a quarterly
dividend of $0.13 per share payable on or before September 15, 2008 to shareholders of record as of
September 2, 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.
Future cash flows
Our 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),
the repayment of debt, capital expenditures for new Talbots brand and J. Jill brand stores, the
expansion and renovation of existing stores and facilities, payments associated with our strategic
initiatives such as lease termination costs, information technology and other infrastructure needs,
and the payment of any dividends that may be declared from time to time.
In August 2008, we made the strategic decision to postpone the purchase of the J. Jill charge
card receivables. Instead, we have negotiated with the existing third party administrator for an
extension of our current service agreement that would preserve our ability to purchase
the receivables in the future when we feel the timing is more appropriate. In light of the
continued uncertainty in the credit environment, we believe it is prudent to preserve our working
capital line of credit and postpone investing in the J. Jill portfolio at this time. We are
focused on our turnaround plan and at the appropriate time in the future we will reconsider the
purchase of the J. Jill charge card receivables.
27
For at least the next twelve months, we believe our cash flows from operating activities and
funds that are expected to be available under our current credit facilities and credit from vendors
will be sufficient to meet our anticipated needs.
Our
operating cash flows are dependent upon and impacted by many factors, including achieving
our sales and gross margin plans, the macro-economic environment, our ability to purchase
merchandise on open account payment terms at expected levels, and 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, Mens, and U.K. businesses and other
underperforming stores).
Critical Accounting Policies
In the Companys 2007 Annual Report on Form 10-K, we identified the critical accounting
policies upon which the consolidated financial statements were prepared as those relating to the
inventory markdown reserve, sales return reserve, customer loyalty program, retirement plans,
impairment of long-lived assets, impairment of goodwill and other intangible assets, income taxes,
and stock-based compensation. There have been no changes to our critical accounting policies for
the quarter ended August 2, 2008.
Contractual Obligations
For a discussion of our contractual obligations, see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations in our 2007 Form 10-K. There were no
material changes to our contractual obligations during the first half of 2008.
Recently Adopted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair
Value Measurements
(SFAS No. 157), which clarifies the principle that fair value should be based
on the assumptions market participants would use when pricing an asset or liability, establishes a
fair value hierarchy that prioritizes the information used to develop those assumptions, and
expands the related disclosure requirements. Under the standard, fair value measurements are to be
separately disclosed by level within the fair value hierarchy. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements. SFAS No. 157 defines
fair value based upon an exit price model. The FASB also issued FASB Staff Position (FSP) 157-2
in February 2008. FSP 157-2 delays the effective date of the application of SFAS No. 157 to fiscal
years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities
that are recognized at fair value in the financial statements on a nonrecurring basis. We have
adopted SFAS No. 157 as of February 3, 2008, with the exception of the application of the statement
to non-recurring nonfinancial assets and nonfinancial liabilities.
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 applied to all employers who offer defined benefit postretirement plans.
As permitted, the Companys adoption of SFAS No. 158 was in two phases. We adopted the first
phase, the recognition provisions, as of February 3, 2007. The second phase of SFAS No. 158
requires measurement of plan assets and benefit obligations as of the date of the employers fiscal
year end. This provision is effective for us for the fiscal year ending January 31, 2009. SFAS
No. 158 provides two approaches that a company can follow to transition to a fiscal year-end
measurement date. We have made the decision to utilize the second approach which allows a company
to continue using the measurements determined for the prior fiscal year-end reporting to estimate
the effects of the SFAS No. 158 change at January 31, 2009. We used a December 31 measurement date
in 2007 and prior years and will transition to a fiscal year-end measurement date at January 31,
2009. This transition is expected to result in a decrease to retained earnings of $0.5 million, net of tax, and
an increase to other liabilities of $0.5 million, net of tax, which will represent approximately
one month of the net periodic benefit cost.
28
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
(SFAS No. 159). SFAS No. 159 provides entities with an option to report
selected financial assets and liabilities at fair value, with the objective to reduce both the
complexity in accounting for financial instruments, and the volatility in earnings caused by
measuring related financial assets and liabilities differently. Unrealized gains and losses on
items for which the fair value option is elected would be reported in earnings. We adopted SFAS No.
159 as of February 3, 2008, and have elected not to measure any additional financial instruments
and other items at fair value. Therefore, material financial assets and liabilities not carried at
fair value, such as our short-term and long-term debt obligations, accounts receivable, and
accounts payable, are still reported at their historical carrying values. Any future transacted
financial asset or liability will be evaluated for the fair value election as prescribed by SFAS
No. 159.
Forward-looking Information
This 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, achieve, plan, look, believe, anticipate, outlook, will,
would, or similar statements or variations of such terms. All of the information concerning our
future financial performance results or conditions, future credit facilities, future merchandise
purchases, future cash needs, and other future financial performance or financial position
constitutes forward-looking information. Our forward-looking statements are based on a series of
expectations, assumptions, estimates and projections about the Company which involve substantial
risks and uncertainty, assumptions and projections concerning our internal plan including our
budget for regular-price and markdown selling and operating cash flow for forward periods. Our
forward-looking statements involve substantial known and unknown risks and uncertainties as to
future events which may or may not occur, including the following risks: the impact of the
continued deterioration in the U.S. economic environment, including continued negative impact on
consumer discretionary spending, the disruption and significant tightening in the U.S. credit and
lending markets, recessionary and inflationary pressures, high energy prices, and declining value
of the U.S. dollar; the success and customer acceptance of our new merchandise offerings; our
ability to accurately estimate and forecast future regular-price and markdown selling and operating
cash flow; achieving our sales plan for the year for each of the Talbots and J. Jill brands;
achieving our operating cash flow plan for the year; continued ability to purchase merchandise on
open account purchase terms at expected levels; ability to replace the Companys letter of credit
facilities for merchandise purchases from vendors who require such facilities; our ability to
obtain any necessary increases in our credit facilities as may be needed from time to time to fund
cash needs; our ability to reduce any cash spending if needed; successfully executing our strategic
initiatives, including anticipated lower inventory levels, expected operating expense 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, Talbots Mens, and
U.K. businesses and closing of other underperforming stores; and our ability to continue to satisfy
the financial covenants under our existing debt agreements. All of our forward-looking statements
are as of the date of this Report only. In each case, actual results may differ materially from
such forward-looking information. We can give no assurance that such expectations or
forward-looking statements will prove to be correct. Certain other factors that may cause actual
results to differ from such forward-looking statements are included in periodic reports that we
have filed with the Securities and Exchange Commission including our Annual Report on Form 10-K
(under Item 1A. Risk Factors), and are available on the Talbots website at www.thetalbotsinc.com
under Investor Relations and you are urged to carefully consider all such factors. Except as
required by law, we do not undertake or plan to update or revise any such forward-looking
statements to reflect actual results, changes in plans, assumptions, estimates or projections, or
other circumstances affecting such forward-looking statements occurring after the date of this
Report, even if such results, changes or circumstances make it clear that any forward-looking
information will not be realized. Any public statements or disclosures by us following this Report
which modify or impact any of the forward-looking statements contained in this Report will be
deemed to modify or supersede such statements in this Report.
29
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risks inherent in our financial instruments and in our financial position represent
the potential loss arising from adverse changes in interest rates. We do not enter into financial
instruments for trading purposes.
As of August 2, 2008, we had variable rate borrowings of $240.0 million under our $400.0
million term loan facility, $80.0 million under our revolving credit facility and $34.0 million
under our short term line of credit facilities, which approximate fair market value. 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 $0.3 million for the quarter ended August 2, 2008.
We enter into certain purchase obligations outside the United States which are predominately
settled in U.S. dollars and, therefore, we have only minimal exposure to foreign currency exchange
risks. We do not hedge against foreign currency risks and believe that the foreign currency
exchange risk is not material. In addition, we operated 28 stores in Canada as of August 2, 2008.
In June 2008, we ceased operations in the U.K. closing all three retail stores. We believe our
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 our results
of operations or cash flow.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that information
required to be disclosed in the reports that we file or submit 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 Quarterly Report on Form 10-Q, an evaluation was
performed under the supervision, and with the participation of, our management, including our
principal executive officer and principal financial officer, of the effectiveness of the design and
operation of our 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 August 2, 2008. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective as of August 2, 2008.
Changes in Internal Control over Financial Reporting
Our Chief Executive Officer and Chief Financial Officer have also concluded that there have
been no changes in our internal control over financial reporting during the quarter ended August 2,
2008 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1A. Risk Factors.
In addition to the other information set forth in this report, careful consideration should be
given to the factors discussed in Part I, Item 1A. Risk Factors in our 2007 Annual Report on Form
10-K, which could materially affect our business, financial position, or future results. The risks
described in our 2007 Annual Report on Form 10-K are not intended to be exhaustive and are not the
only risks facing the Company. There have been no material changes to Part I, Item 1A. Risk
Factors in our 2007 Annual Report on Form 10-K.
30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
A summary of the repurchase activity under certain equity programs for the thirteen weeks
ended August 2, 2008 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
|
|
Value of Shares
|
|
|
|
|
|
|
|
|
|
|
|
that may yet be
|
|
|
|
Total Number of
|
|
|
|
|
|
|
Purchased under the
|
|
|
|
Shares Purchased
|
|
|
Average Price Paid
|
|
|
Equity Award
|
|
Period
|
|
(1)
|
|
|
per share
|
|
|
Programs (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 4, 2008 through May 31, 2008
|
|
|
7,499
|
|
|
$
|
5.25
|
|
|
$
|
21,533
|
|
June 1, 2008 through July 5, 2008
|
|
|
275,267
|
|
|
|
0.24
|
|
|
|
19,596
|
|
July 6, 2008 through August 2, 2008
|
|
|
52,513
|
|
|
|
3.46
|
|
|
|
19,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
335,279
|
|
|
$
|
0.86
|
|
|
$
|
19,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
We repurchased 308,450 shares in connection with stock forfeited by employees prior to
vesting under our equity compensation plan, at an acquisition price of $0.01 per share.
|
|
|
|
We also repurchased 26,829 shares of common stock from certain employees to cover tax
withholding obligations from the vesting of stock, at a weighted average acquisition price
of $10.58 per share.
|
|
2.
|
|
As of August 2, 2008, there were 1,947,024 shares of nonvested stock that were subject to
buyback at $0.01 per share, or $19,470 in the aggregate, that we have the option to repurchase
if employment is terminated prior to vesting.
|
31
Item 4. Submission of Matters to a Vote of Security Holders.
On May 22, 2008, we held our Annual Meeting of Shareholders. At the Annual Meeting, the
following persons were elected to serve as directors of the Company for a term of one year or until
their successors are elected: Tsutomu Kajita, John W. Gleeson, Motoya Okada, Gary M. Pfeiffer,
Yoshihiro Sano, Susan M. Swain, Trudy F. Sullivan, and Isao Tsuruta, constituting all of the
members of the Board of Directors as of the Annual Meeting date. The election of directors was
based on the following vote:
|
|
|
|
|
|
|
|
|
|
|
Votes
Cast For
|
|
Authority
Withheld
|
|
|
|
|
|
|
|
|
|
Tsutomu Kajita
|
|
|
46,556,221
|
|
|
|
5,442,512
|
|
John W. Gleeson
|
|
|
51,508,563
|
|
|
|
490,170
|
|
Motoya Okada
|
|
|
46,501,918
|
|
|
|
5,496,815
|
|
Gary M. Pfeiffer
|
|
|
51,223,215
|
|
|
|
775,518
|
|
Yoshihiro Sano
|
|
|
48,249,601
|
|
|
|
3,749,132
|
|
Susan M. Swain
|
|
|
51,228,341
|
|
|
|
770,392
|
|
Trudy F. Sullivan
|
|
|
48,220,082
|
|
|
|
3,778,651
|
|
Isao Tsuruta
|
|
|
48,187,358
|
|
|
|
3,811,375
|
|
The proposal to amend and re-approve under Internal Revenue Code Section 162(m) the material
terms of performance-based awards under the 2003 Executive Stock Based Incentive Plan was approved
based on the following vote:
|
|
|
45,768,323 votes for
|
|
|
|
|
6,017,286 votes against
|
|
|
|
|
213,124 abstentions
|
The proposal to ratify the appointment of Deloitte & Touche LLP to serve as the Companys
independent registered public accounting firm for the 2008 fiscal year was approved based on the
following vote:
|
|
|
51,884,673 votes for
|
|
|
|
|
100,189 votes against
|
|
|
|
|
13,871 abstentions
|
32
Item 6. Exhibits.
10.1
|
|
Summary of proposed $50,000,000 Term Loan Credit Facility between the Talbots, Inc. (as
Borrower) and one or more subsidiaries of Aeon Co., Ltd, (as Lender). (1)
|
|
10.2
|
|
Term Loan Credit Facility between The Talbots, Inc. (as Borrower) and Aeon (U.S.A.), Inc. (as
Lender). (2)
|
|
10.3
|
|
Annex I, dated July 31, 2008, to the General Financing Agreement between The Talbots, Inc.
and Mizuho Corporate Bank, Ltd., dated as of August 24, 2007. (3)
|
|
10.4
|
|
Offer Letter between The Talbots, Inc. and Gregory I. Poole, dated June 5, 2008. (3)
|
|
10.5
|
|
Change in Control Agreement between The Talbots, Inc. and Gregory I. Poole, dated June 5, 2008. (3)
|
|
10.6
|
|
Severance Agreement between The Talbots, Inc. and Gregory I. Poole, dated June 5, 2008. (3)
|
|
31.1
|
|
Certification of Trudy F. Sullivan, President and Chief Executive Officer of the Company,
pursuant to Securities Exchange Act Rule 13a-14(a). (3)
|
|
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). (3)
|
|
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. (3)
|
|
|
|
(1)
|
|
Incorporated by reference to the Companys Current Report on Form 8-K filed June 11, 2008.
|
|
(2)
|
|
Incorporated by reference to the Companys Current Report on Form 8-K filed July 18, 2008.
|
|
(3)
|
|
Filed with this Form 10-Q.
|
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: September 10, 2008
|
|
|
|
|
|
THE TALBOTS, INC.
|
|
|
By:
|
/s/ Edward L. Larsen
|
|
|
|
Edward L. Larsen
|
|
|
|
Senior Vice President, Finance
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
|
34
Talbots (NYSE:TLB)
Historical Stock Chart
From May 2024 to Jun 2024
Talbots (NYSE:TLB)
Historical Stock Chart
From Jun 2023 to Jun 2024