UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ
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|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended May 2, 2009
or
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|
o
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|
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)
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Delaware
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41-1111318
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
|
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
|
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Smaller reporting company
o
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|
(Do not check if a smaller reporting company)
|
|
|
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.
|
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Class
|
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Outstanding as of June 8, 2009
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Common Stock, $0.01 par value
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55,303,147
|
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Amounts in thousands except per share data
|
|
|
|
|
|
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|
Thirteen Weeks Ended
|
|
|
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May 2,
|
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|
May 3,
|
|
|
|
2009
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|
|
2008
|
|
Net Sales
|
|
$
|
306,175
|
|
|
$
|
414,774
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy
|
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|
211,156
|
|
|
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246,712
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Selling, general and administrative
|
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110,823
|
|
|
|
130,241
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|
Restructuring charges
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|
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6,396
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|
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|
4,580
|
|
Impairment of store assets
|
|
|
19
|
|
|
|
943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income from Continuing Operations
|
|
|
(22,219
|
)
|
|
|
32,298
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
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Interest expense
|
|
|
7,355
|
|
|
|
5,689
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|
Interest income
|
|
|
183
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense net
|
|
|
7,172
|
|
|
|
5,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Taxes from Continuing Operations
|
|
|
(29,391
|
)
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|
26,716
|
|
|
|
|
|
|
|
|
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Income Tax (Benefit) Expense
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|
|
(10,573
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)
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|
|
8,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Continuing Operations
|
|
|
(18,818
|
)
|
|
|
18,506
|
|
|
|
|
|
|
|
|
|
|
Loss from Discontinued Operations, net of taxes
|
|
|
(4,752
|
)
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|
|
(16,864
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net (Loss) Income
|
|
$
|
(23,570
|
)
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|
$
|
1,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share from continuing operations
|
|
$
|
(0.35
|
)
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|
$
|
0.35
|
|
Basic loss per share from discontinued operations
|
|
|
(0.09
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)
|
|
|
(0.32
|
)
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|
|
|
|
|
|
|
Basic (loss) income per share
|
|
$
|
(0.44
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share fron continuing operations
|
|
$
|
(0.35
|
)
|
|
$
|
0.35
|
|
Diluted loss per share from discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.32
|
)
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
$
|
(0.44
|
)
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|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares of
Common Stock Outstanding
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|
|
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|
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|
|
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Basic
|
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53,621
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|
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53,302
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|
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Diluted
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|
53,621
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|
|
|
53,505
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|
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|
|
|
|
|
See notes to consolidated financial statements.
3
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MAY 2, 2009, JANUARY 31, 2009, AND MAY 3, 2008
Amounts in thousands except share data
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May 2,
|
|
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January 31,
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May 3,
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2009
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|
2009
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2008
|
|
ASSETS
|
Current Assets:
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|
|
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|
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|
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|
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Cash and cash equivalents
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$
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39,158
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|
|
$
|
16,718
|
|
|
$
|
31,058
|
|
Customer accounts receivable net
|
|
|
186,555
|
|
|
|
169,406
|
|
|
|
226,911
|
|
Merchandise inventories
|
|
|
190,749
|
|
|
|
206,593
|
|
|
|
252,575
|
|
Deferred catalog costs
|
|
|
4,588
|
|
|
|
4,795
|
|
|
|
5,744
|
|
Due from affiliates
|
|
|
407
|
|
|
|
376
|
|
|
|
1,101
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
23,569
|
|
Income tax refundable
|
|
|
26,646
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|
|
|
26,646
|
|
|
|
|
|
Prepaid and other current assets
|
|
|
50,392
|
|
|
|
35,277
|
|
|
|
41,551
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|
Assets held for sale current
|
|
|
110,919
|
|
|
|
109,966
|
|
|
|
83,427
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
609,414
|
|
|
|
569,777
|
|
|
|
665,936
|
|
Property and equipment net
|
|
|
265,492
|
|
|
|
277,363
|
|
|
|
308,654
|
|
Goodwill
|
|
|
35,513
|
|
|
|
35,513
|
|
|
|
35,513
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|
Trademarks
|
|
|
75,884
|
|
|
|
75,884
|
|
|
|
75,884
|
|
Other assets
|
|
|
13,584
|
|
|
|
12,756
|
|
|
|
21,212
|
|
Assets held for sale non-current
|
|
|
|
|
|
|
|
|
|
|
376,969
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
999,887
|
|
|
$
|
971,293
|
|
|
$
|
1,484,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
136,551
|
|
|
$
|
122,034
|
|
|
$
|
70,164
|
|
Accrued income taxes
|
|
|
109
|
|
|
|
|
|
|
|
1,314
|
|
Accrued liabilities
|
|
|
152,502
|
|
|
|
148,356
|
|
|
|
162,323
|
|
Notes payable to banks
|
|
|
156,500
|
|
|
|
148,500
|
|
|
|
98,625
|
|
Current portion of long-term debt
|
|
|
88,211
|
|
|
|
70,377
|
|
|
|
116,865
|
|
Liabilities held for sale current
|
|
|
104,398
|
|
|
|
94,190
|
|
|
|
42,101
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
638,271
|
|
|
|
583,457
|
|
|
|
491,392
|
|
Long-term debt less current portion
|
|
|
20,000
|
|
|
|
238,000
|
|
|
|
252,000
|
|
Related party debt
|
|
|
250,000
|
|
|
|
20,000
|
|
|
|
|
|
Deferred rent under lease commitments
|
|
|
117,142
|
|
|
|
115,282
|
|
|
|
116,611
|
|
Deferred income taxes
|
|
|
28,456
|
|
|
|
28,456
|
|
|
|
1,210
|
|
Other liabilities
|
|
|
130,872
|
|
|
|
164,195
|
|
|
|
141,589
|
|
Liabilities held for sale non-current
|
|
|
|
|
|
|
|
|
|
|
31,419
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders (Deficit) Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 authorized; 81,442,215
shares, 81,125,526 shares, and 80,705,192 shares issued,
respectively, and 55,338,420 shares, 55,376,371 shares,
and 55,502,184 shares outstanding, respectively
|
|
|
814
|
|
|
|
811
|
|
|
|
807
|
|
Additional paid-in capital
|
|
|
493,746
|
|
|
|
492,932
|
|
|
|
486,890
|
|
Retained (deficit) earnings
|
|
|
(42,848
|
)
|
|
|
(19,278
|
)
|
|
|
560,380
|
|
Accumulated other comprehensive loss
|
|
|
(50,775
|
)
|
|
|
(67,079
|
)
|
|
|
(13,043
|
)
|
Treasury stock, at cost; 26,103,795 shares, 25,749,155 shares,
and 25,203,008 shares, respectively
|
|
|
(585,791
|
)
|
|
|
(585,483
|
)
|
|
|
(585,087
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(184,854
|
)
|
|
|
(178,097
|
)
|
|
|
449,947
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders (Deficit) Equity
|
|
$
|
999,887
|
|
|
$
|
971,293
|
|
|
$
|
1,484,168
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
THE TALBOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Amounts in thousands
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(23,570
|
)
|
|
$
|
1,642
|
|
Loss from discontinued operations, net of tax
|
|
|
(4,752
|
)
|
|
|
(16,864
|
)
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(18,818
|
)
|
|
|
18,506
|
|
Adjustments to reconcile net (loss) income from continuing operations
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,214
|
|
|
|
21,277
|
|
Impairment of store assets
|
|
|
19
|
|
|
|
943
|
|
Amortization of debt issuance costs
|
|
|
891
|
|
|
|
68
|
|
Deferred rent
|
|
|
(290
|
)
|
|
|
(1,834
|
)
|
Compensation expense related to stock-based awards
|
|
|
766
|
|
|
|
240
|
|
Gain on disposal of property and equipment
|
|
|
|
|
|
|
(604
|
)
|
Tax benefit of pension adjustment
|
|
|
(10,760
|
)
|
|
|
|
|
Tax benefit from options exercised
|
|
|
|
|
|
|
74
|
|
Excess tax benefit from options exercised
|
|
|
|
|
|
|
(74
|
)
|
Deferred income taxes
|
|
|
|
|
|
|
5,531
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
(17,115
|
)
|
|
|
(16,084
|
)
|
Merchandise inventories
|
|
|
16,004
|
|
|
|
11,366
|
|
Deferred catalog costs
|
|
|
206
|
|
|
|
505
|
|
Due from affiliates
|
|
|
(31
|
)
|
|
|
1,939
|
|
Prepaid and other current assets
|
|
|
(14,677
|
)
|
|
|
(8,369
|
)
|
Accounts payable
|
|
|
14,913
|
|
|
|
(72,256
|
)
|
Accrued income taxes
|
|
|
109
|
|
|
|
(3,407
|
)
|
Accrued liabilities
|
|
|
106
|
|
|
|
11,094
|
|
Other assets
|
|
|
2,166
|
|
|
|
9,265
|
|
Other liabilities
|
|
|
(6,456
|
)
|
|
|
(3,117
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(13,753
|
)
|
|
|
(24,937
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(7,876
|
)
|
|
|
(8,955
|
)
|
Proceeds from disposal of property and equipment
|
|
|
|
|
|
|
2,549
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,876
|
)
|
|
|
(6,406
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from working capital notes payable, net
|
|
|
|
|
|
|
98,625
|
|
Gross proceeds from working capital notes payable
|
|
|
8,000
|
|
|
|
|
|
Proceeds from related party long-term borrowings
|
|
|
230,000
|
|
|
|
|
|
Payments on long-term borrowings
|
|
|
(200,140
|
)
|
|
|
(20,125
|
)
|
Proceeds from options exercised
|
|
|
|
|
|
|
870
|
|
Excess tax benefit from options exercised
|
|
|
|
|
|
|
74
|
|
Payment of debt issuance costs
|
|
|
(85
|
)
|
|
|
|
|
Cash dividends
|
|
|
|
|
|
|
(7,150
|
)
|
Purchase of treasury stock
|
|
|
(308
|
)
|
|
|
(1,109
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
37,467
|
|
|
|
71,185
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
179
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
9,668
|
|
|
|
(26,814
|
)
|
Investing activities
|
|
|
(375
|
)
|
|
|
(6,640
|
)
|
Effect of exchange rate changes on cash
|
|
|
8
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
9,301
|
|
|
|
(33,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
25,318
|
|
|
|
6,340
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
16,551
|
|
|
|
24,280
|
|
INCREASE IN CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS
|
|
|
(2,921
|
)
|
|
|
(617
|
)
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
38,948
|
|
|
$
|
30,003
|
|
|
|
|
|
|
|
|
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 present a fair
statement of 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 January 31, 2009, 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. MANAGEMENTS PLAN AND RECENT EVENTS
During 2007, 2008, and the first quarter of 2009, we incurred significant net losses
attributable to operations, some of which have been or are in the process of being discontinued.
Also included in our net losses are charges related to impairments of intangible and tangible
assets and restructuring charges. The majority of our impairment charges relate to our J. Jill
business. Our restructuring charges primarily relate to restructuring activities intended to
reduce costs. During the first quarter of 2009 and 2008, our cash flows used in operating
activities from our continuing operations were $13.8 million and $24.9 million, respectively. As
of May 2, 2009, we had a working capital deficit of $28.9 million and a stockholders deficit of
$184.9 million. In addition, as of May 2, 2009, we have substantial debt obligations coming due in
the next twelve months. We believe that the economic recession had a significant impact on our
business during 2008 and the first quarter of 2009.
In
response to the Companys liquidity needs, management undertook several financing
actions during 2008 and the first quarter of 2009 in an effort to improve liquidity. These actions
consisted of the following:
|
|
|
In July of 2008 the Company entered into a $50.0 million subordinated working
capital term loan facility with AEON (U.S.A.), Inc. (AEON (U.S.A.)), our majority
shareholder and a wholly-owned subsidiary of AEON Co., Ltd. (AEON). The facility
matures in 2012 and requires interest-only payments until maturity. As of May 2, 2009,
we are fully borrowed on this facility.
|
|
|
|
|
In February of 2009, the Company obtained a $200.0 million term loan facility from
AEON which was used to repay all outstanding indebtedness under the Acquisition Debt
Agreement related to the 2006 J. Jill acquisition. The Acquisition Debt Agreement had
required quarterly principal payments of $20.0 million and, in addition, the Company
was in default on certain covenants as of January 31, 2009. The $200.0 million loan
from AEON is interest-only until it matures, which is at the Companys option in 2012.
There are no financial covenants associated with this debt.
|
|
|
|
|
During the fourth quarter of 2008 and the first quarter of 2009, the Company
converted all of its working capital lines, amounting to $165.0 million in the
aggregate, to committed lines with maturities in December 2009. Management, with AEON,
plan to engage in discussions with the Companys lenders during 2009 to extend the
commitment expiration dates of these facilities, although there can be no assurance
that this will be achieved.
|
|
|
|
|
In February of 2009, AEON guaranteed the Companys outstanding debt under its
existing working capital facilities totaling $165.0 million, its existing revolving
credit facilities totaling $52.0 million, and its existing $48.0 million term loan
facilities. In April of 2009, AEON also agreed (i) that it would agree to continue to
provide a guaranty for a refinancing of any of that debt, which currently matures at
various dates due on and before April 13, 2012 and (ii) if the lender failed to agree
to refinance that debt on or before the existing maturity date, or if any other
condition occurred that required AEON to make a payment under its existing guaranty,
AEON would make a loan to the Company, due on or after April 16, 2010 and within the
limits of AEONs existing loan guaranty, to avoid any lack of the Companys financial
resources caused by any such failure of refinancing. In April of 2009, AEON also
confirmed its support for the Companys working capital improvements initiatives for
its merchandise payables management and that it will use commercially reasonable effort
to provide the Company with financial support through loan or guarantee up to $25.0
million only if, and to the extent that, the Company may possibly fall short in
achieving its targeted cash flow improvement for fall 2009 merchandise payables.
|
6
|
|
|
In April of 2009 the Company entered into a $150.0 million secured revolving loan
facility with AEON. The facility matures upon the earlier of (i) April 17, 2010 or
(ii) the consummation of one or more securitization programs or structured loans by the
Company or its subsidiaries in an aggregate equivalent principal amount to the
revolving loan commitment amount, approved in advance by AEON and in form and substance
satisfactory to the lender. Amounts may be borrowed, repaid, and reborrowed under the
facility and may be used for working capital and other general corporate purposes. As
of May 2, 2009, the Company had not borrowed any funds under this facility.
|
|
|
|
|
The Company has eliminated all financial covenant ratios from its debt agreements.
|
In addition to the short-term liquidity actions described above, management has formulated
additional responses to address current economic conditions and operating performance. As part of
the Companys continuing strategic initiatives, management took the following actions in 2008 and
to date in 2009:
|
|
|
During the third quarter of 2008 management completed the closing of its Kids, Mens,
and U.K. business concepts. These business concepts were not considered strategic to
ongoing operations.
|
|
|
|
|
During the third quarter of 2008 the Board of Directors approved a plan to sell the
J. Jill business as the business was not considered strategic to ongoing operations,
and in June of 2009 the Company announced that it had entered into an Asset Purchase
Agreement to sell certain assets and liabilities of the J. Jill business, as discussed
further below.
|
|
|
|
|
In June of 2008 management reduced the Companys corporate headcount by
approximately 9% across multiple locations at all levels.
|
|
|
|
|
In February of 2009 management further reduced the Companys corporate headcount by
approximately 17%.
|
|
|
|
|
Management has reduced the planned hours worked in its stores for 2009.
|
|
|
|
|
During 2008 and into 2009, management took a number of actions in an effort to seek
to improve gross margins including (i) changing its promotional cadence to monthly
markdowns rather than its historical four clearance sales events per year; (ii) holding
a leaner inventory position, concentrating on better product flow and content resulting
in decreased planned inventory commitments into 2009; and (iii) adopting a new price
optimization tool.
|
|
|
|
|
During 2008 management eliminated advertising in television and national print,
contributing to $14.8 million less in spending from 2007.
|
|
|
|
|
For 2009, management currently plans to decrease catalog circulation levels, subject
to continuing review.
|
|
|
|
|
In 2008, the Companys gross capital expenditures (excluding construction allowances
received from landlords) were $44.7 million, which was down from 2007 by $12.9 million.
For 2009, management currently plans to further reduce capital expenditures from 2008
levels, subject to continuing review.
|
|
|
|
|
Management has eliminated matching contributions to its 401(k) plan for 2009.
|
|
|
|
|
Management has increased employee health care contributions in 2009.
|
|
|
|
|
Management has eliminated merit increases for 2009.
|
|
|
|
|
Management has frozen its defined benefit pension plans effective May 1, 2009.
|
|
|
|
|
In February of 2009 the Companys Board approved the indefinite suspension of the
quarterly dividend.
|
|
|
|
|
Subsequent to the end of the first quarter, in June of 2009,
the Company announced its plans to further reduce its corporate headcount by approximately 20%, including the
elimination of open positions.
|
Subsequent to May 2, 2009, on June 7, 2009, the Company entered into an Asset Purchase
Agreement (the Purchase Agreement), with Jill Acquisition, LLC (the Purchaser), an affiliate of
Golden Gate Capital, pursuant to which the Purchaser will acquire and assume from the Company
certain assets and liabilities relating to the J. Jill brand business of the Company (the
Transaction) for a cash purchase price of $75.0 million, subject to certain adjustments as
provided in the Purchase Agreement, including an adjustment based on targeted closing date working
capital. The Transaction is subject to customary closing conditions and is currently expected to
close in the second fiscal quarter of 2009.
Under the terms of the Purchase Agreement, the Purchaser will be obligated for liabilities
that arise after the closing under assumed contracts, which include leases for approximately 204 J.
Jill brand stores expected to be assigned to the Purchaser as part of the Transaction, as well as
liabilities that arise after the closing as a result of the ownership or use by the Purchaser of
the purchased assets or otherwise in connection with the Purchasers operation of the purchased
assets.
At the closing, the Purchaser will also acquire, lien-free, the Tilton, NH distribution
facility which supports the J. Jill business, and a subsidiary of the Company will sublease to the
Purchaser at the closing approximately 63,943 square feet of space at its 126,869 square foot
leased office facility in Quincy, MA used for the J. Jill brand business. As part of the
Transaction, J. Jill brand employees located at the Quincy, MA and Tilton, NH facilities and at the
transferred store locations will be offered employment by the Purchaser.
7
Under
the terms of its $200.0 million secured loan agreement with AEON, the Company is subject to certain
mandatory prepayment obligations including payment of net sale proceeds after selling costs and
amounts for other costs related to the J. Jill brand
business.
In connection with the Transaction, the Company currently plans to close approximately 75 J.
Jill brand stores which are not part of the proposed sale of the J. Jill business under the
Purchase Agreement. Prior to the consummation of the transaction,
these stores are held for sale. In connection with the planned closing of the 75 J. Jill stores, the Company
expects to record a pre-tax cash charge of approximately $0.8 million related to severance and
related severance benefits. Total material cash expenditures to settle store lease liabilities will
depend upon the outcome of negotiations with third parties. The Company will also record a
liability related to the remaining contingent obligation of certain
of its subsidiaries on liabilities being assigned to the
Purchaser as part of the Transaction, including those related to leases, assumed contracts and
other obligations transferred as part of the Transaction, as well as
for any remaining office lease
liability, potential inventory liquidation costs related to the above store closings, and other
costs and charges related to the J. Jill business.
The foregoing summary does not purport to be complete and is qualified in its entirety by the
terms and conditions of the Purchase Agreement, a copy of which is filed on form 8-K dated June 8,
2009.
3. SIGNIFICANT ACCOUNTING POLICIES
Recently Adopted Accounting Pronouncements
In September 2006, the 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. The Company has adopted SFAS No. 157 and all of
its provisions as of May 2, 2009. See Note 18, Fair Value Measurements, of our 2008 Annual Report
on Form 10-K for further discussion.
In June 2008, the FASB issued FSP No. EITF 03-6-1,
Determining whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities
(FSP 03-6-1). FSP 03-6-1 clarifies
that unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and are to be included
in the computation of earnings per share under the two-class method described in SFAS No. 128,
Earnings Per Share. FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008.
The adoption of this standard did not impact the loss per share
calculations for the quarter ended May 2, 2009. Certain of the
Companys unvested stock awards have dividend participation
rights and may impact our basic earnings per share calculations in
periods that the Company reports earnings, which is not expected to
have a material impact.
Recently Issued Accounting Pronouncements
In December 2008, the FASB issued FSP Financial Accounting Standard (FAS) No. 132(R)-1,
Employers Disclosures about Postretirement Benefit Plan Assets
(FSP FAS No. 132(R)-1) which
amends SFAS No. 132 (Revised 2003),
Employers Disclosures about Pension and Other Postretirement
Benefits
- an Amendment of FASB Statements No. 87, 88, and 106 (SFAS No. 132 (R)). FSP FAS No.
132 (R)-1 requires more detailed disclosures about the assets of a defined benefit pension or other
postretirement plan and is effective for fiscal years ending after December 15, 2009. The Company
is in the process of evaluating the impact, if any, FSP FAS No. 132 (R)-1 will have on the
Companys consolidated financial statements.
8
In April 2009, the FASB issued three staff positions intended to provide additional
application guidance and enhance disclosures regarding fair value measurements and impairments of
debt securities. The first staff position, FSP No. FAS 157-4,
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
, provides guidelines for determining fair value
measurements consistently with the principles presented in SFAS No. 157 when the volume and level
of activity for the asset or liability has significantly decreased, and provides guidance on
identifying circumstances that indicate that a transaction is not orderly. The second staff
position, FSP No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
, expands the frequency of fair value disclosures for publicly traded entities about the
fair value of certain financial instruments not recognized at fair value in the statement of
financial position to include interim reporting periods. The third staff position, FSP No. FAS
115-2 and 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
, amends the
other-than-temporary impairment guidance for debt securities, and modifies the presentation and
disclosure requirements for all other-than-temporary impairments. The staff positions are effective
for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted
of all three staff positions together. We did not early adopt these FSPs. We do not anticipate that
the adoption of these staff positions will have a material effect on our financial position or
results of operations, though our assessment is ongoing.
4. DISCONTINUED OPERATIONS
In January 2008, the Company announced its decision to exit its Talbots Kids and Mens
businesses. In April 2008 the Company announced its decision to exit its U.K. business. A
strategic review had concluded that these businesses did not demonstrate the potential to deliver
an acceptable long-term return on investment. As of the end of the third quarter of 2008, the
Companys Talbots Kids, Mens, and U.K. businesses had ceased operating and all stores had been
closed. Their operating results have been classified as discontinued operations within the
Companys consolidated statements of operations for all periods presented.
On October 30, 2008, the Companys Board of Directors approved a plan to sell the J. Jill
business. On June 7, 2009, as described in Note 2, the Company entered into an Asset Purchase
Agreement with Jill Acquisition LLC (the Purchaser), an affiliate of Golden Gate Capital,
pursuant to which the Purchaser will acquire and assume from the Company certain assets and
liabilities relating to the J. Jill brand business of the Company. The Transaction is currently
expected to close in the second fiscal quarter of 2009. The Company has classified all
of the assets and liabilities of the J. Jill business as held for sale for all periods presented.
Additionally, the Company classified the results of operations of the J. Jill business as
discontinued operations for all periods presented.
The operating results of the J. Jill business and the results of Talbots Kids, Mens and U.K.
businesses, which have been presented as discontinued operations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Net Sales
|
|
$
|
103,487
|
|
|
$
|
127,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before
income taxes
|
|
|
(4,752
|
)
|
|
|
(25,327
|
)
|
Income tax (benefit)
|
|
|
|
|
|
|
(8,463
|
)
|
|
|
|
|
|
|
|
Loss from Discontinued Operations, net of taxes
|
|
$
|
(4,752
|
)
|
|
$
|
(16,864
|
)
|
|
|
|
|
|
|
|
Discontinued operations in the first quarter of 2009 does not reflect an income tax benefit as
the Company recorded a valuation allowance for substantially all of
its deferred taxes and incurred losses in both continuing and
discontinued operations. Income tax
benefits allocated to discontinued operations in the first quarter of 2008 represent the
incremental effect of tax benefits attributable to these operations.
9
Presented below is a summarized balance sheet for the J. Jill assets and liabilities held for
sale. Since the Company expects to complete the sale of the J. Jill business within one year, all
assets and liabilities held for sale are classified as current within the Companys consolidated
balance sheet as of May 2, 2009 and January 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2,
|
|
|
January 31,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Merchandise inventories
|
|
$
|
44,463
|
|
|
$
|
50,250
|
|
|
$
|
66,761
|
|
Other current assets
|
|
|
15,582
|
|
|
|
9,217
|
|
|
|
16,666
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale current
|
|
|
60,045
|
|
|
|
59,467
|
|
|
|
83,427
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment net
|
|
|
16,274
|
|
|
|
15,899
|
|
|
|
157,057
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
77,977
|
|
Trademarks
|
|
|
30,200
|
|
|
|
30,200
|
|
|
|
63,500
|
|
Other intangible assets net
|
|
|
4,400
|
|
|
|
4,400
|
|
|
|
78,435
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale long-term
|
|
|
50,874
|
|
|
|
50,499
|
|
|
|
376,969
|
|
|
|
|
|
|
|
|
|
|
|
Total assets held for sale
|
|
$
|
110,919
|
|
|
$
|
109,966
|
|
|
$
|
460,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
32,922
|
|
|
$
|
30,262
|
|
|
$
|
14,411
|
|
Accrued liabilities
|
|
|
32,716
|
|
|
|
26,890
|
|
|
|
27,690
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale current
|
|
|
65,638
|
|
|
|
57,152
|
|
|
|
42,101
|
|
|
|
|
|
|
|
|
|
|
|
Deferred rent under lease commitments
|
|
|
37,134
|
|
|
|
35,327
|
|
|
|
29,441
|
|
Other liabilities
|
|
|
1,626
|
|
|
|
1,711
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale long-term
|
|
|
38,760
|
|
|
|
37,038
|
|
|
|
31,419
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities held for sale
|
|
$
|
104,398
|
|
|
$
|
94,190
|
|
|
$
|
73,520
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in assets from the first quarter of 2008 to the first quarter of 2009 is
primarily attributable to impairment charges recorded by the Company during the third and fourth
quarter of 2008 of $318.4 million in the aggregate reflecting the difference between J. Jills
carrying value and its estimated fair value. The Company also included an estimate of direct costs
to sell of $4.2 million as of May 2, 2009. Management determined the estimated fair value of the
J. Jill business as the amount of proceeds expected to be received upon a sale of the business as a
whole in a transaction between market participants as of May 2, 2009. In determining fair value,
the Company made assumptions and estimates including the use of forward looking projections to
estimate the future operating results of the J. Jill business, while also considering current
market conditions. The estimated fair value could be adjusted in the near term if actual results,
including proceeds received and current market conditions, differ
from managements estimates. The carrying value of net assets
held for sale approximates fair value.
5. RESTRUCTURING CHARGES
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 business, 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. During
2008, the Company made continued progress in streamlining its organization, which was a major
initiative of its strategic business plan. In June 2008, the Company reduced its corporate
headcount by 9%. In February 2009 the Company further reduced its corporate headcount by 17%, and
in June of 2009 the Company announced its plans to again reduce its corporate headcount by 20% including the elimination
of open positions. The severance expense related to the June 2009 corporate headcount reduction
was recorded during the thirteen weeks ended May 2, 2009.
10
The
Company has incurred $6.4 million and $4.6 million of
restructuring charges during the thirteen weeks ended May 2,
2009 and May 3, 2008, respectively.
Below is a roll-forward of the restructuring liabilities, which are included within accrued
liabilities within the Companys consolidated balance sheets as of May 2, 2009 and May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate - Wide
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
|
|
|
|
Non-cash
|
|
|
|
|
|
|
Severance
|
|
|
Charges (Income)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance at January 31, 2009
|
|
$
|
10,882
|
|
|
$
|
|
|
|
$
|
10,882
|
|
Charges (income)
|
|
|
7,064
|
|
|
|
(668
|
)
|
|
|
6,396
|
|
Cash payment
|
|
|
(5,641
|
)
|
|
|
|
|
|
|
(5,641
|
)
|
Non-cash items
|
|
|
|
|
|
|
668
|
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 2, 2009
|
|
$
|
12,305
|
|
|
$
|
|
|
|
$
|
12,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate - Wide
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
|
|
|
|
|
|
|
Severance
|
|
|
Consulting
|
|
|
Charges (Income)
|
|
|
Total
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
$
|
678
|
|
|
$
|
1,532
|
|
|
$
|
|
|
|
$
|
2,210
|
|
Charges (income)
|
|
|
3,786
|
|
|
|
2,706
|
|
|
|
(1,912
|
)
|
|
|
4,580
|
|
Cash payment
|
|
|
(369
|
)
|
|
|
(2,049
|
)
|
|
|
|
|
|
|
(2,418
|
)
|
Non-cash items
|
|
|
|
|
|
|
|
|
|
|
1,912
|
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 3, 2008
|
|
$
|
4,095
|
|
|
$
|
2,189
|
|
|
$
|
|
|
|
$
|
6,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-cash items primarily consist of adjustments to stock-based compensation expense
related to stock awards forfeited by terminated employees. Of the $12.3 million remaining balance
of restructuring liabilities at May 2, 2009, $11.7 million is expected to be paid during 2009, and
$0.6 million is expected to be paid in 2010.
6. INCOME TAXES
The Company provides for income taxes at the end of each interim period 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.
A valuation allowance was established during the fourth quarter of 2008 for substantially all
deferred tax assets based on all available evidence including the Companys recent history of
losses. Forming a conclusion that a valuation allowance is not
needed when cumulative losses exist requires a sufficient amount of
positive evidence to support recovery of the deferred tax assets. As
a result of the Companys evaluation, the Company concluded that there was
insufficient positive evidence to overcome the more objective negative evidence
related to its cumulative losses. Accordingly, the Company continues
to provide for a full valuation allowance.
During the first quarter of 2009, the Company allocated a tax benefit of approximately $10.6
million to continuing operations with a corresponding offset to other comprehensive loss. In
accordance with SFAS No. 109 paragraph 140, items included in other comprehensive income which
represent a source of income must be considered when determining the amount of tax benefit that
results from, and should be allocated to, a loss from continuing operations. During the first
quarter of 2009, the Company remeasured its pension obligation due to the Companys decision to
freeze all future benefits under its Pension Plans. The remeasurement resulted in the Company
recording a gain in its other comprehensive loss and the
tax provision on the other comprehensive loss was recognized.
11
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 May 2, 2009 the Company had unrecognized tax benefits of approximately $39.1 million
which if recognized, would impact the effective tax rate. At May 2, 2009 the Company had $63.6
million of unrecognized tax benefits, including accrued interest and penalties, which are
classified in other liabilities in the Companys consolidated balance sheets. The Company
anticipates a reduction in its unrecognized tax benefits of approximately $12.6 million within the
next twelve months due to various expected state audit settlements and appeal decisions.
All deferred tax assets and deferred tax liabilities related to the J. Jill business remain in
continuing operations as these net assets are not expected to be sold with the business.
7.
COMPREHENSIVE (LOSS) INCOME
The
following is the Companys comprehensive (loss) income for the thirteen weeks ended May 2,
2009 and May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
Net (loss) income
|
|
$
|
(23,570
|
)
|
|
$
|
1,642
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
150
|
|
|
|
456
|
|
Change in
pension and postretirement plan liabilities, net of tax expense
(benefit) of 10,760 and
(17), respectively
|
|
|
16,155
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(7,265
|
)
|
|
$
|
2,073
|
|
|
|
|
|
|
|
|
8. 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.
These plans are described in more detail in Note 7 of the Companys 2008 Annual Report on Form
10-K.
The condensed consolidated statements of operations for the thirteen weeks ended May 2, 2009
and May 3, 2008 include the following stock-based compensation expense (income) related to stock
option awards, nonvested stock awards, and restricted stock unit awards:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
Cost of sales, buying, and occupancy
|
|
$
|
159
|
|
|
$
|
(264
|
)
|
Selling, general, and administrative
|
|
|
1,272
|
|
|
|
2,417
|
|
Restructuring charges
|
|
|
(668
|
)
|
|
|
(1,912
|
)
|
|
|
|
|
|
|
|
Compensation expense related to stock-based awards
|
|
$
|
763
|
|
|
$
|
241
|
|
|
|
|
|
|
|
|
Due to actual and anticipated employee terminations, the Company updated its estimated
forfeiture rates for stock-based awards during the thirteen weeks ended May 2, 2009 and May 3,
2008. When the termination is a direct result of its restructuring
actions, the benefit is
recorded within restructuring charges in the Companys condensed consolidated statement of
operations. For the thirteen weeks ended May 2, 2009, the Company recorded a benefit of $2.0
million, including $0.7 million in restructuring charges to account for revisions in estimated
forfeiture rates. For the thirteen weeks ended May 3, 2008, the Company recorded a benefit of $4.4
million, including $1.9 million in restructuring charges to account for the revisions in estimated
forfeiture rates.
12
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 thirteen weeks ended May 2, 2009 and May 3, 2008 was $1.56 and $2.59 per option,
respectively. Key assumptions used to apply this pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
May 2,
|
|
May 3,
|
|
|
2009
|
|
2008
|
Weighted average risk free interest rate
|
|
|
2.0
|
%
|
|
|
2.4
|
%
|
Weighted average expected life of option grants
|
|
4.8 years
|
|
|
4.8 years
|
|
Weighted average expected volatility of
underlying stock
|
|
|
83.6
|
%
|
|
|
45.0
|
%
|
Weighted average expected dividend payment
rate, as a percentage of the stock price on the
date of grant
|
|
|
0.0
|
%
|
|
|
5.3
|
%
|
A summary of stock option activity during the thirteen weeks ended May 2, 2009 is presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
(in years)
|
|
|
Value
|
|
Outstanding at January 31, 2009
|
|
|
9,410,953
|
|
|
$
|
27.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,700,100
|
|
|
|
2.39
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(117,192
|
)
|
|
|
20.66
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(247,837
|
)
|
|
|
12.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 2, 2009
|
|
|
10,746,024
|
|
|
$
|
23.73
|
|
|
|
4.1
|
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 2, 2009
|
|
|
8,247,821
|
|
|
$
|
28.87
|
|
|
|
2.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Stock Awards and RSUs
A summary of nonvested stock awards and RSU activity for the thirteen weeks ended May 2, 2009
is presented below. The fair value of nonvested stock awards and RSUs granted are based on the
closing traded stock price on the date of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
Nonvested at January 31, 2009
|
|
|
2,003,660
|
|
|
$
|
16.28
|
|
Granted
|
|
|
344,689
|
|
|
|
2.62
|
|
Vested
|
|
|
(350,310
|
)
|
|
|
20.61
|
|
Forfeited
|
|
|
(240,025
|
)
|
|
|
19.94
|
|
|
|
|
|
|
|
|
Nonvested at May 2, 2009
|
|
|
1,758,014
|
|
|
$
|
12.24
|
|
|
|
|
|
|
|
|
13
9. NET (LOSS) INCOME PER SHARE
The weighted average shares used in computing basic and diluted net (loss) income per share
are presented in the table below. Options to purchase 10,746,024 and 9,669,951 shares of common
stock were outstanding as of May 2, 2009 and May 3, 2008, respectively, but were not included in
the computation of diluted net (loss) income per share because the options exercise prices were
greater than the average market price of the common shares.
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Shares for computation of basic net (loss) income per share
|
|
|
53,621
|
|
|
|
53,302
|
|
Effect of stock compensation plans
|
|
|
|
|
|
|
203
|
|
|
|
|
|
|
|
|
Shares for computation of diluted net (loss) income per share
|
|
|
53,621
|
|
|
|
53,505
|
|
|
|
|
|
|
|
|
10. DEBT
A summary of outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2,
|
|
|
January 31,
|
|
|
May 3,
|
|
in thousands
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
Acquisition Debt
|
|
$
|
|
|
|
$
|
200,000
|
|
|
$
|
260,000
|
|
Revolving Credit Agreements
|
|
|
52,000
|
|
|
|
80,000
|
|
|
|
80,000
|
|
Term Loans
|
|
|
48,000
|
|
|
|
20,000
|
|
|
|
20,000
|
|
Related Party Debt
|
|
|
250,000
|
|
|
|
20,000
|
|
|
|
|
|
Working Capital Lines of Credit (Notes payable to banks)
|
|
|
156,500
|
|
|
|
148,500
|
|
|
|
98,625
|
|
Tilton Facility Loan
|
|
|
8,211
|
|
|
|
8,377
|
|
|
|
8,865
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
514,711
|
|
|
|
476,877
|
|
|
|
467,490
|
|
Less current maturities
|
|
|
(244,711
|
)
|
|
|
(218,877
|
)
|
|
|
(215,490
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term-debt, less current portion
|
|
$
|
270,000
|
|
|
$
|
258,000
|
|
|
$
|
252,000
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Debt
In February 2006, the Company entered into a $400.0 million bridge loan
agreement in connection with its planned acquisition of J. Jill. On July 27, 2006, the bridge loan
was converted into a term loan (the Acquisition Debt). Pursuant to the Acquisition Debt
agreement, the Company borrowed $400.0 million to be repaid no later than July 27, 2011. The
Acquisition Debt was a senior unsecured obligation of the Company.
In February 2009, the Company entered into a $200.0 million term loan agreement with AEON
(AEON Loan). The funds received from the AEON Loan were used to repay all of the outstanding
indebtedness under the Acquisition Debt agreement in February 2009.
The AEON Loan is an interest-only loan until maturity without any scheduled principal payments
prior to maturity. Interest on the AEON Loan is at a variable rate equal to LIBOR plus 6.00%
(LIBOR is the six month London interbank offer rate expressed as a percentage rate per
annum). Interest on the AEON Loan is payable semi-annually in arrears. No loan facility fee is
payable as part of the AEON Loan. The AEON Loan matures on August 31, 2009, and provides Talbots
with the option to extend the maturity for additional six month periods, up to the third
anniversary of the loan closing date, which is February 27, 2012. The AEON Loan is subject to
mandatory prepayment as follows: (a) 50% of excess cash flow (as defined in the agreement), (b)
100% of net cash proceeds of any sale of J. Jill and 75% of net cash proceeds on any other asset
sales or dispositions, and (c) 100% of net cash proceeds of any non-related party debt issuances
and 50% of net cash proceeds of any equity issuances (subject to such exceptions as to debt or
equity issuances as the lender may agree to). The AEON Loan may be voluntarily prepaid, in whole
or in part, at par plus accrued and unpaid interest and any break funding loss incurred upon not
less than three business days prior written notice, at the option of the Company at any time.
Upon any voluntary or mandatory prepayment, the Company will reimburse the lender for costs
associated with early termination of any currency hedging arrangements related to the loan. Under
the terms of the AEON Loan agreement, the Company may
14
not incur, assume, guarantee or otherwise become or remain liable with respect to any indebtedness
other than permitted indebtedness as defined in the agreement. Written consent of the lender in
its discretion will be required prior to incurrence of indebtedness, liens, fundamental changes
including mergers and consolidations, dispositions of property including sales of stock of
subsidiaries, dividends and other restricted payments, investments, transactions with affiliates
and other related parties, sale leaseback transactions, swap agreements, changes in fiscal periods,
negative pledge clauses, and clauses restricting subsidiary distributions, all on terms set forth
in the agreement. The Company is also limited in its ability to purchase or make commitments for
capital expenditures in excess of amounts approved by AEON as lender. The AEON Loan contains no
financial covenant ratios.
Revolving Credit Agreements
As of May 2, 2009, the Company had revolving credit agreements
with two banks (the Revolving Credit Agreements) that provide for maximum available borrowings of
$52.0 million. Interest on the revolving credit facilities are
at variable rates of LIBOR plus .625% for two $18.0 million loans and Fed Funds plus 0.75% for a $16.0 million loan, and are set at
the Companys option, for periods of one, three, or six months payable in arrears. As of May 2,
2009, the weighted average interest rate on the loans was 3.7%. Of the $52.0 million outstanding
under the Revolving Credit Agreements as of May 2, 2009, $34.0 million is due in January 2010, and
$18.0 million is due in April 2010. These loans may be extended upon approval from the banks.
Term Loans
As of May 2, 2009, the Company had $48.0 million in term loans outstanding with
two banks: a $28.0 million loan which matures in December 2009 and a $20.0 million loan which
matures in April 2012. Interest on the $28.0 million loan is payable monthly and the borrowing rate
is set monthly at a rate determined by the lender to be its effective cost of funds plus 1%. At May
2, 2009 the borrowing rate was 1.5%. Interest on the $20.0 million 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.
Related Party Term Loan with AEON (U.S.A.)
In July 2008, the Company entered into a $50.0
million unsecured subordinated working capital term loan credit
facility with AEON (U.S.A.) (the
AEON Facility). The AEON Facility will mature and AEON
(U.S.A.)s commitment to provide
borrowings under the AEON Facility will expire on January 28, 2012. Under the terms of the AEON
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. The AEON 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 AEON Facility is at a rate equal to three-month LIBOR
plus 5.0% (6.2% at May 2, 2009). The Company was required to pay an upfront commitment fee of 1.5%
(or $0.8 million) to AEON (U.S.A.) at the time of execution and closing of the loan credit facility
agreement. The Company is required to pay a fee of 0.5% per annum on the undrawn portion of the
commitment, payable quarterly in arrears. The AEON Facility had originally included covenants
relating to the Company and its subsidiaries that were substantially the same in all material
respects as under the Acquisition Debt. In March 2009, an amendment was executed between the
Company and AEON (U.S.A.) to remove the financial covenants in their entirety from the facility.
As of May 2, 2009, the Company had $50.0 million in borrowings outstanding under the AEON Facility.
Working Capital Lines of Credit (Notes payable to banks)
The Company has working capital
lines of credit with four banks. In March 2008, the Company increased its availability under its
short-term working capital line of credit facility by $25.0 million, from $140.0 million to $165.0
million. The lines are committed through December 2009. Each borrowing bears interest for
interest periods of six months or less as mutually established by the Company and the respective
lenders, with such interest payable on the last day of each interest period or, in the event that
the interest period exceeds three months, three months after the first day of the interest period.
The interest rate is a rate determined by the respective lenders to be their effective cost of
funds plus an amount not lower than 0.625% and not higher than 1.3%. Amounts may be borrowed under
the above facilities from time to time, subject to satisfaction of all conditions to borrowing set
forth in the respective agreements, including without limitation accuracy of all representations
and warranties, the absence of any material adverse effect or change, no event of default,
compliance with all covenants, and other customary borrowing conditions. At May 2, 2009 and May 3,
2008, the Company had $156.5 million and $98.6 million, respectively, outstanding under these
facilities. In the first quarter of 2009, as a result of the Companys borrowing and repayment
patterns, the maturities on the lines are no longer short term in nature and accordingly have been
shown gross on the statement of cash flows. The weighted average interest rate was 2.4% at May 2,
2009.
Secured Revolving Loan Facility with AEON
In April 2009, the Company entered into a $150.0
million secured revolving loan facility with AEON. Interest under this facility is one month LIBOR
plus 6.0%. Amounts may be borrowed and reborrowed under the facility. The facility matures in April
2010 and does not include any financial covenants. The facility may be used for working capital and
other general corporate purposes, including vendor payments. The facility is secured by the
Companys Talbots charge card receivables, its corporate
facility in Hingham, MA, and its Lakeville, MA
distribution facility. The Company has agreed to keep the mortgaged properties in good repair,
reasonable wear and tear expected, and will ensure that at least $135.0 million of Talbots charge
card receivables are owed to the Company and that at least 90% of such Talbots charge card
receivables are eligible receivables as defined in the agreement, and arise in the ordinary course
of business, and
15
are owed free and clear of all liens, except permitted liens, measured as of the last day of
any calendar month. The Company will need to obtain AEONs written consent as lender prior to,
among other things, incurring indebtedness, fundamental changes (including mergers, consolidation,
etc.), disposing of property (including sales of stocks of subsidiaries), payments or investments,
undertaking transactions with affiliates and other related parties, consummating sale leaseback
transactions, swap agreements, negative pledges, and clauses restricting subsidiary distributions
and lines of business, all set forth in the agreement. The facility contains an upfront fee of
1.0% of the commitment prior to borrowing. The facility also provides for prepayment and loan
maturity in the event the Company was to consummate certain qualified transactions, such as
securitization or sale of its Talbots charge card portfolio or certain asset collateralizations.
This facility has no financial covenants. As of May 2, 2009, the Company has not borrowed any
funds under this facility.
AEON Guarantees
In February 2009, AEON guaranteed the Companys outstanding debt under its
existing working capital facilities totaling $165.0 million, and under its revolving credit and
term loan facilities totaling $100.0 million. In April 2009, AEON also agreed (i) that it would
agree to continue to provide a guaranty for a refinancing of any of that debt, which currently
matures at various dates on and before April 13, 2012 and (ii) if the lender failed to agree to
refinance that debt on or before the existing maturity date, or if any other condition occurred
that required AEON to make a payment under its existing guaranty, AEON would make a loan to the
Company, due on or after April 16, 2010 and within the limits of AEONs existing loan guaranty.
Tilton Loan Facility
As part of the J. Jill acquisition, the Company 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 June 1, 2009. The interest rate on the Tilton Facility Loan was fixed at 7.3% per
annum. The loan balance of approximately $8.2 million was paid in full on June 1, 2009.
Letters
of Credit
The Companys letter of credit agreements of $265.0 million held at
February 2, 2008, which were used primarily for the purchase of merchandise inventories, were
canceled during 2008. In July 2008, the Company executed an addendum to its financing agreement
with one bank, allowing the Company to utilize its existing $75.0 million short term working
capital line of credit facility with the bank for letters of credit. The $75.0 million short term
working capital line of credit facility will continue to be available for working capital
borrowings; however, the capacity will be reduced by any letters of credit outstanding.
At May 2, 2009, January 31, 2009 and May 3, 2008, the Company
held $5.4 million, $14.8 million and $51.8 million outstanding, respectively, of letters of credit.
11. 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. On February 1, 2009, we adopted SFAS No. 157 for nonrecurring nonfinancial assets and
nonfinancial liabilities that had been delayed by FSP 157-2. The effect of our adoption of SFAS
No. 157 for nonrecurring nonfinancial assets and nonfinancial liabilities did not have a material
effect on our financial position or results of operations.
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 financial assets or liabilities carried
at fair value as of May 2, 2009 that are subject for disclosure within the three-tier hierarchy.
The Company has recorded its investments in life insurance policies at their cash surrender value.
The Companys pension plan assets are disclosed in accordance with SFAS No. 132 (R) within Note 15,
Benefit Plans, of our 2008 Annual Report on Form 10-K.
16
Fair Value Measurements on a Nonrecurring Basis
The following table summarizes assets measured at fair value on a nonrecurring basis
subsequent to initial recognition:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
|
|
|
|
Three months
|
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Significant
|
|
|
ended
|
|
|
|
May 2,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Unobservable Inputs
|
|
|
May 2, 2009
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total Losses
|
|
|
|
in thousands
|
|
Long-lived assets
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company records impairment losses on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be generated by those assets
are less than the carrying amount. The amount of impairment loss is based upon the fair value of
the long-lived asset compared to the carrying value.
12. 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 core Talbots retail store operations in
the United States and Canada. The Companys Direct Marketing Segment includes the Companys core
Talbots catalog and Internet 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 womens apparel, accessories and shoes
through its catalog mailings and online at www.talbots.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. 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 charge card operations, certain
general warehousing costs, depreciation related to corporate held assets as well as corporate-wide
restructuring charges. Assets, with the exception of goodwill and other intangible assets, are not
allocated between segments; therefore, no measure of segment assets is available. For purposes of
assessing impairment on an annual basis, the Company is required to allocate its goodwill and
indefinite lived intangible assets to its reporting segments. The Company has allocated its entire
$35.5 million of goodwill to its Stores Segment. The Company has allocated $64.5 million of
indefinite lived trademarks to its Stores Segment and $11.4 million to its Direct Marketing
segment. There have been no changes to the Companys goodwill and trademark balances during the
first quarter of 2009 and 2008.
17
The following is the Stores Segment and Direct Marketing Segment information for the thirteen
weeks ended May 2, 2009 and May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
May 2, 2009
|
|
May 3, 2008
|
|
|
|
|
|
|
Direct
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
|
|
Stores
|
|
Marketing
|
|
Total
|
|
Stores
|
|
Marketing
|
|
Total
|
Net sales
|
|
$
|
256,364
|
|
|
$
|
49,811
|
|
|
$
|
306,175
|
|
|
$
|
345,103
|
|
|
$
|
69,671
|
|
|
$
|
414,774
|
|
Direct profit
|
|
|
16,017
|
|
|
|
4,167
|
|
|
$
|
20,184
|
|
|
|
62,638
|
|
|
|
16,315
|
|
|
$
|
78,953
|
|
The following reconciles direct profit to consolidated net income for the thirteen weeks ended
May 2, 2009 and May 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
Total direct profit for reportable segments
|
|
$
|
20,184
|
|
|
$
|
78,953
|
|
Less: indirect expenses, excluding restructuring
|
|
|
36,007
|
|
|
|
42,075
|
|
Less: restructuring indirect expenses
|
|
|
6,396
|
|
|
|
4,580
|
|
|
|
|
|
|
|
|
Operating (loss) income from continuing operations
|
|
|
(22,219
|
)
|
|
|
32,298
|
|
Interest expense, net
|
|
|
7,172
|
|
|
|
5,582
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(29,391
|
)
|
|
|
26,716
|
|
Income tax
(benefit) expense
|
|
|
(10,573
|
)
|
|
|
8,210
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
$
|
(18,818
|
)
|
|
$
|
18,506
|
|
|
|
|
|
|
|
|
13. EMPLOYEE BENEFIT PLANS
During 2007, the Company elected to close participation in the Pension Plan for all associates
hired or rehired after December 31, 2007, with the following exception: eligible employees as of
December 31, 2007 who were terminated on or after January 1, 2008 due to a job elimination and
rehired by the Company within 12 months of the termination date were eligible to participate in the
Plan. Those employees eligible to participate in the Plan as of December 31, 2007 continued to
accrue benefits under the Plan. In February of 2009, the Company announced its decision to
discontinue future benefits being earned under the defined benefit Pension and SERP Plans effective
May 1, 2009. As a result of this significant event, the assets and
liabilities under the plans were remeasured as of February 28, 2009. The remeasurement resulted in
a decrease to other liabilities of $25.9 million and $1.1 million for the Pension and SERP plans
respectively, and an increase to other comprehensive income of $15.5 million and $0.6 million, net
of tax, for the Pension and SERP plans respectively.
18
The components of the Companys Pension Plan expense are as follows:
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|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Service expense earned during the period
|
|
$
|
|
|
|
$
|
2,359
|
|
Interest expense on projected benefit obligation
|
|
|
2,206
|
|
|
|
2,363
|
|
Expected return on plan assets
|
|
|
(1,914
|
)
|
|
|
(2,476
|
)
|
Curtailment loss
|
|
|
124
|
|
|
|
|
|
Prior service cost net amortization
|
|
|
2
|
|
|
|
17
|
|
Net amortization of loss
|
|
|
232
|
|
|
|
239
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
650
|
|
|
$
|
2,502
|
|
|
|
|
|
|
|
|
The components of the Companys SERP expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Service expense earned during the period
|
|
$
|
|
|
|
$
|
135
|
|
Interest expense on projected benefit obligation
|
|
|
291
|
|
|
|
305
|
|
Curtailment gain
|
|
|
(393
|
)
|
|
|
|
|
Prior service cost net amortization
|
|
|
0
|
|
|
|
7
|
|
Net amortization of loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net SERP
(credit) expense
|
|
$
|
(102
|
)
|
|
$
|
447
|
|
|
|
|
|
|
|
|
The components of the Companys Postretirement Medical Plans expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
Service expense earned during the period
|
|
$
|
0
|
|
|
$
|
1
|
|
Interest expense on accumulated postretirement
benefit obligation
|
|
|
2
|
|
|
|
4
|
|
Curtailment gain
|
|
|
(442
|
)
|
|
|
|
|
Prior service cost net amortization
|
|
|
(375
|
)
|
|
|
(424
|
)
|
Net amortization of loss
|
|
|
110
|
|
|
|
120
|
|
|
|
|
|
|
|
|
Net postretirement medical credit
|
|
$
|
(705
|
)
|
|
$
|
(299
|
)
|
|
|
|
|
|
|
|
As a result of the decision to discontinue future benefits being earned under the Pension and
SERP Plans, there was no service expense recorded during the first quarter of 2009.
In 2006, the Company changed its reimbursement rates under its Postretirement Medical Plans
and remeasured the related liability. The Company is amortizing the benefit into income over a
five year period.
During the thirteen weeks ended May 2, 2009, the Company was required to make contributions of
$1.9 million to the Pension Plan. The Company expects to make required contributions of $6.5
million to the Pension Plan during the remainder of 2009. During the thirteen weeks ended May 3,
2008, the Company was required to make contributions of $2.4
19
million to the Pension Plan. The Company did not make any voluntary contributions to the Pension
Plan during the thirteen weeks ended May 2, 2009 and May 3, 2008.
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 2008 Annual Report on Form 10-K.
We conform to the National Retail Federations fiscal calendar. The thirteen weeks ended May
2, 2009 and May 3, 2008 are referred to herein as the first quarter of 2009 and 2008.
Operating results discussed below are from continuing operations, which include our Talbots
Misses, Petites, Womans, Collection, and Accessories & Shoes concepts. Results from our Talbots
Kids, Mens, and U.K. businesses and our J. Jill business have been classified as discontinued
operations for all periods presented and are discussed separately below.
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.
Recent Developments
Our industry has historically been impacted by economic recessions. Our results are dependent
on a number of factors impacting consumer spending such as but not limited to the general economic
outlook, consumer confidence, the level of customer traffic in our stores, wages and unemployment
rates, the housing market, consumer debt levels, availability of consumer credit, and fuel and
energy costs. The current volatility of the U.S. economic environment reached unprecedented levels
in 2008 and into 2009 and has significantly adversely impacted economic conditions, resulting in
significant recessionary pressures, declines in employment levels, lower disposable income, and
declines in consumer confidence. The current economic environment has been characterized by a
significant decline in consumer discretionary spending and has particularly affected the fashion
apparel industry. We expect these economic conditions to continue throughout 2009 and possibly
beyond. This could lead to continued declines in consumer spending over the foreseeable future and
will likely continue to have a material adverse impact on our business, liquidity, financial
condition, and results of operations.
During 2008, our sales declined by 12.5% from the prior year. During the fourth quarter of
2008, our comparable store sales were down 24.6% and our total sales were down 23.3%. During the
first quarter of 2009, our comparable store sales were down 26.9% and our total sales were down
26.2%. We believe we will continue to see weak sales performance throughout 2009 and possibly
beyond, although we do expect to see improvement in the second half of 2009 over our expected first
half results. We have taken actions to reduce spending and tightly manage inventory in an effort to
offset the decline in sales and to realign our business accordingly. However, there can be no
assurance that our actions will be sufficient to produce operating profits or positive operating
cash flows. See further discussion of managements plan in the
Liquidity and Capital Resource
section below.
Progress on our strategic plan
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 plan. In April 2008 we announced our strategic plan for long-term growth and
significant productivity improvement.
Given that the retail industry continues to face unprecedented uncertainty and volatility, we
are focusing on what is within our control to best manage the business and at the same time we are
staying the course in moving forward with the implementation of our strategic plan. We are still
in the early stages of implementation, given that this is a three-year plan, and we have
accomplished a great deal in redefining our business. During 2008 and the first quarter of 2009,
we focused on implementing strategic initiatives that we believe will have the most impact on the
performance of our business, including streamlined operations, improved inventory management,
improved product content and flow, and innovative marketing and customer contact programs, as
outlined in our 2008 Annual Report on Form 10-K.
20
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items in
our condensed consolidated statements of earnings for the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
May 2,
|
|
May 3,
|
|
|
2009
|
|
2008
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy expenses
|
|
|
69.0
|
%
|
|
|
59.5
|
%
|
Selling, general and administrative expenses
|
|
|
36.2
|
%
|
|
|
31.4
|
%
|
Restructuring charges
|
|
|
2.1
|
%
|
|
|
1.1
|
%
|
Impairment of store assets
|
|
|
0.0
|
%
|
|
|
0.2
|
%
|
Operating (loss) income from continuing operations
|
|
|
-7.3
|
%
|
|
|
7.8
|
%
|
Interest expense, net
|
|
|
2.3
|
%
|
|
|
1.3
|
%
|
(Loss) Income before taxes
|
|
|
-9.6
|
%
|
|
|
6.5
|
%
|
Income tax (benefit) expense
|
|
|
-3.5
|
%
|
|
|
2.0
|
%
|
Net (loss) income from continuing operations
|
|
|
-6.1
|
%
|
|
|
4.5
|
%
|
The Thirteen Weeks Ended May 2, 2009 Compared to the Thirteen Weeks Ended May 3, 2008 (First
Quarter)
Continuing Operations
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 and
net direct marketing sales for the thirteen weeks ended May 2, 2009 and May 3, 2008 (in millions).
|
|
|
|
|
|
|
|
|
|
|
May 2,
|
|
|
May 3,
|
|
|
|
2009
|
|
|
2008
|
|
Net retail store sales
|
|
$
|
256.4
|
|
|
$
|
345.1
|
|
Net direct marketing sales
|
|
|
49.8
|
|
|
|
69.7
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
306.2
|
|
|
$
|
414.8
|
|
|
|
|
|
|
|
|
Net sales in the first quarter of 2009 were $306.2 million compared to $414.8 million in the
first quarter of 2008, a decrease of $108.6 million, or 26.2%.
Retail Store Sales
Retail store sales in the first quarter of 2009 decreased by $88.7 million, or 25.7%, compared
to the first quarter of 2008. Reflected in retail store sales was an $84.1 million, or 26.9%,
decline in comparable store sales for the period. We believe that our negative sales results were
impacted by the continued effects from the economic crisis and the pressures on consumer spending
as evidenced by the declines that we saw in customer traffic, number of transactions, and units per
transaction. Additionally, we believe that our decline in sales was impacted by our consumers
proclivity during the quarter to purchase merchandise that was marked-down or selling at a lower price
point than our other merchandise. This trend translated to lower average unit retail values during
the quarter. The weak customer demand, decline in customer traffic, and consumer spending behavior
required us to be more promotional than planned which negatively affected our margins.
As of May 2, 2009, we operated a total of 586 retail stores with gross and selling square
footage of approximately 4.2 million square feet and 3.2 million square feet, respectively. This
represents a decrease of approximately 1% in gross and selling square footage from May 3, 2008 when
we operated a total of 590 retail stores with gross and selling square footage of approximately 4.2
million square feet and 3.3 million square feet, respectively.
21
Direct Marketing Sales
Direct marketing sales in the first quarter of 2009 decreased by $19.9 million, or 28.5%,
compared to the first quarter of 2008. The decline in direct marketing sales was primarily due to
the effects of the economic environment. Internet sales during the first quarter of 2009
represented 68% of the total direct marketing sales, compared to 55% during the first quarter of
2008. Our reinvigorated brand image continues to be aligned across all marketing components and
channels. The percentage of our net sales derived from direct marketing decreased from 16.8%
during the first quarter of 2008 to 16.3% during the first quarter of 2009.
Cost of Sales, Buying, and Occupancy Expenses
Cost of sales, buying and occupancy expenses increased as a percentage of net sales to 69.0%
in the first quarter of 2009, from 59.5% in the first quarter of 2008. This increase can be
attributed to a 420 basis point deterioration in pure product gross margin and a 410 basis point
deterioration in occupancy costs. Pure product gross margin was negatively impacted by an increase
in markdowns required to clear slow moving merchandise. Occupancy costs are primarily fixed costs,
therefore the increase in costs as a percentage of net sales was almost entirely due to the 26.9%
comparable store decrease in sales in the first quarter of 2009 compared to sales in the first
quarter of 2008. Our cost of sales, buying, and occupancy expenses for the first quarter of 2009
were down $35.6 million, or 14%, from the first quarter of 2008 as we reduced our inventory levels
in anticipation of the decline in sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of net sales increased to 36.2%
in the first quarter of 2009, compared to 31.4% in the first quarter of 2008. This represents a
480 basis point increase in selling, general, and administrative expenses as a percentage of net
sales over the prior year. We believe that we have made continued progress in executing our
strategic initiatives, including reducing expenses and decreasing our overall Company cost
structure as evidenced by a decline in expenses of $19.4 million, or 15%, from the prior year.
However, our cost savings during the quarter were offset by negative leverage from the decline in
sales in the quarter. Our savings during the first quarter of 2009 in comparison with the first
quarter of 2008 were mainly due to reduced store direct expenses and savings realized from cost
savings actions taken related to employee benefits.
Restructuring Charges
We incurred $6.4 million of charges relating to our strategic business plan in the
first quarter of 2009, and $4.6 million in the first quarter of 2008, and have included these costs
as restructuring charges within our condensed consolidated statement of operations. The $6.4
million of charges in 2009 primarily relate to severance costs due to the corporate headcount
reductions announced in June of 2009. The $4.6 million of charges in 2008 primarily relate to
severance and consulting costs.
Impairment of Store Assets
Impairment of stores assets was insignificant in the first quarter of 2009 compared to $0.9 in
the first quarter of 2008. As part of our strategic initiatives, we are closely monitoring stores
in our core concepts to identify stores that are underperforming and are closing stores when
appropriate. When we determine that a store is to be closed or is underperforming, we reassess the
expected future cash flows of the store which in some cases results in an impairment charge.
Net Interest Expense
Net interest expense increased to $7.2 million in the first quarter of 2009 compared to $5.6
million in the first quarter of 2008. This increase was due to higher levels of borrowings and
higher interest rates. The average level of debt outstanding, including short-term and long-term
borrowings, was $513.8 million in the first quarter of 2009 compared to $510.7 million in the first
quarter of 2008. The average interest rate on short-term and long-term borrowings during the first
quarter of 2009 was 4.3% compared to 3.8% in the first quarter of 2008.
Income Tax (Benefit) Expense
Income tax benefit for the first quarter of 2009 was $10.6 million, compared to income tax
expense of $8.2 million for the first quarter of 2008. The effective tax rate was 36.0% and 30.7%,
respectively for the first quarter of 2009 and 2008.
22
A valuation allowance was established during the fourth quarter of 2008 for substantially all
deferred tax assets based on all available evidence including the Companys recent history of
losses. Forming a conclusion that a valuation allowance is not
needed when cumulative losses exist requires a sufficient amount of
positive evidence to support recovery of the deferred tax assets. As
a result of the Companys evaluation, the Company concluded that there was
insufficient positive evidence to overcome the more objective
negative evidence related to its cumulative losses. Accordingly, the
Company continues to provide for a full valuation allowance.
During the first quarter of 2009, the Company allocated a tax benefit of approximately $10.6
million to continuing operations with a corresponding offset to other comprehensive loss. In
accordance with SFAS No. 109 paragraph 140, items included in other comprehensive income which
represent a source of income must be considered when determining the amount of tax benefit that
results from, and should be allocated to, a loss from continuing operations. During the first
quarter of 2009, the Company remeasured its pension obligation due to the Companys decision to
freeze all future benefits under its Pension Plans. The remeasurement resulted in the Company
recording a gain in its other comprehensive loss and the tax provision on the other comprehensive loss was recognized.
DISCONTINUED OPERATIONS
In January 2008, we announced our decision to discontinue our Talbots Kids, Mens, and UK
businesses as a result of our comprehensive strategic review. As of the end of the third quarter
of 2008, all Talbots Kids, Mens, & UK businesses ceased operations and all stores were closed.
Their operating results for all periods presented have been classified as discontinued operations
in our consolidated financial statements.
On October 30, 2008, our Board of Directors approved a plan to sell the J. Jill business. On
June 7, 2009, we entered into an Asset Purchase Agreement with Jill Acquisition, LLC (the
Purchaser), pursuant to which the Purchaser will acquire and assume from the Company certain
assets and liabilities relating to the J. Jill brand business of the Company. The Transaction
currently is expected to close in the second fiscal quarter of 2009.
Under the terms of the Purchase Agreement, the Purchaser will be required to satisfy
liabilities and obligations that arise after the closing under assumed contracts, which include
leases for approximately 204 J. Jill brand stores to be assigned to the Purchaser as part of the
transaction and a sublease of approximately 63,943 square feet of space at our 126,869 square foot
leased office facility in Quincy, MA used for the J. Jill brand business. Assuming consummation of
the transaction, certain subsidiaries of the Company will remain contingently liable for
obligations and liabilities transferred to the Purchaser as part of the transaction including those
related to leases and other obligations transferred to and to be assumed and satisfied by the
Purchaser, as to which obligations and liabilities the Company will rely on the Purchasers
creditworthiness as a counterparty.
Under
the terms of our $200.0 million secured loan agreement with AEON, we are subject to certain
mandatory prepayment obligations including payment of net sale proceeds after selling costs and
amounts for other costs related to the J. Jill
brand business.
Operating results of the J. Jill business for all periods presented have been classified as
discontinued operations in our consolidated financial statements. The assets and liabilities of
the J. Jill business are stated at estimated fair value less estimated direct costs to sell and are
classified in our condensed consolidated balance sheets as assets and liabilities held for sale for
all periods presented.
Liquidity and Capital Resources
Current Liquidity Position
We finance our working capital needs, operating costs, capital expenditures, funding for our
strategic initiatives and restructurings, and debt and interest payment requirements through cash
generated by operations, access to working capital and other credit facilities, and credit from our
vendors under open account purchases. The substantial deterioration in the U.S. economy and decline
in consumer discretionary spending had a significant impact on our sales, operating profits and
cash flows in 2008. During the first quarter of 2009, we continued to incur net operating losses
and our continuing operations are not generating positive cash flows. A continuation or further
deterioration in global economic conditions will continue to have a negative impact on our
business. We expect that the current conditions in the global economy will continue during 2009
and possibly beyond. We believe that our operating results depend on our ability to adjust to an
extremely difficult economic environment, execute on our strategic initiatives and cost reduction
programs, design and deliver merchandise that is accepted by our customers, and source our products
on a competitive and cost efficient basis. As consumer confidence significantly impacts our
operating results, we cannot assure that our initiatives will be achieved and whether we will be
successful in achieving improved operating performance in 2009.
23
During 2007, 2008, and the first quarter of 2009, we incurred significant net losses
attributable to operations, some of which have been or are in the process of being discontinued.
Included in our net losses are charges related to impairments of intangible and tangible
assets and restructuring charges. The majority of our impairment charges relate to our J. Jill
business. Our restructuring charges primarily relate to restructuring activities intended to
reduce costs. During the first quarter of 2009 and 2008, our cash flows used in operating
activities from our continuing operations were $13.8 million and $24.9 million, respectively. As
of May 2, 2009, we had a working capital deficit of $28.9 million and a stockholders deficit of
$184.9 million. In addition, as of May 2, 2009, we have substantial debt obligations coming due in
the next twelve months. We believe that the economic recession had a significant impact on our
business during 2008 and the first quarter of 2009.
In response to our short-term liquidity needs, we took the following actions during 2008 and
the first quarter of 2009 in an effort to improve our liquidity:
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In July of 2008, we entered into a $50.0 million subordinated working capital term loan
facility with AEON (U.S.A.) which matures in 2012 and is interest-only until maturity. As
of May 2, 2009, we are fully borrowed on this facility.
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In February of 2009, we obtained a $200.0 million term loan facility from AEON which was
used to repay all of our outstanding indebtedness under our Acquisition Debt Agreement
related to the 2006 J. Jill acquisition. The Acquisition Debt Agreement required quarterly
principal payments of $20.0 million. The new $200.0 million loan from AEON is
interest-only until maturity. The term loan facility matures on August 31, 2009, and
provides for an option to extend the maturity for additional six month periods, up to the
third anniversary of the loan closing date, which is February 27, 2012. There are no
financial covenants associated with this debt.
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During the fourth quarter of 2008 and the first quarter of 2009, we converted all of our
working capital lines, amounting to $165.0 million in the aggregate, to committed lines
with maturities in December 2009. We, with AEON, plan to engage in discussions with our
lenders during 2009 to extend the commitment expiration dates of these facilities, although
there can be no assurance that this will be achieved.
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In February of 2009, AEON guaranteed our outstanding debt under our existing working
capital facilities totaling $165.0 million and under our revolving credit facilities and term
loan facilities totaling $100.0 million. In April of 2009, AEON also agreed (i) that it
would agree to continue to provide a guaranty for a refinancing of any of that debt, which
currently matures at various dates on and before April 13, 2012 and (ii) if the lender
failed to agree to refinance that debt on or before the existing maturity date, or if any
other condition occurred that required AEON to make a payment under its existing guaranty,
AEON would make a loan to us, due on or after April 16, 2010 and within the limits of
AEONs existing loan guaranty. In April of 2009, AEON also confirmed its support for our
working capital improvements initiatives for our merchandise payables management and that
it will use commercially reasonable effort to provide us with financial support through
loan or guarantee up to $25.0 million only if, and to the extent that, we may possibly fall
short in achieving our targeted cash flow improvement for fall 2009 merchandise payables.
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In April of 2009, we entered into a $150.0 million secured revolving loan facility with
AEON. The facility matures upon the earlier of (i) April 17, 2010 or (ii) the consummation
of one or more securitization programs or structured loans by the Company or its
subsidiaries in an aggregate equivalent principal amount to the revolving loan commitment
amount, approved in advance by AEON as lender and in form and substance satisfactory to the
lender. Amounts may be borrowed, repaid, and reborrowed under the facility and may be used
for working capital and other general corporate purposes. As of May 2, 2009, we had not
borrowed any funds under this facility.
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We have eliminated all financial covenant ratios from our debt agreements.
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We are also actively in discussions regarding the securitization of our
Talbots charge card portfolio and we are exploring the availability and feasibility of
collateralization of certain of our other assets as potential replacement financing to our $150.0
million secured revolving loan facility with AEON. While we currently believe that we will be able
to obtain a securitization of our Talbots charge card portfolio, there can be no assurance that
these efforts will be successful. If economic conditions persist or further deteriorate, it may
also make these or other sources of liquidity more expensive or available only on terms that we may
not find acceptable.
In addition to the short-term liquidity actions described above, we have formulated additional
responses to address current economic conditions and operating performance. As part of our
continuing strategic initiatives, we took the following actions in 2008 and to date in 2009:
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During the third quarter of 2008 we completed the closing of our Kids, Mens, and U.K.
business concepts. These business concepts were not considered strategic to ongoing
operations.
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During the third quarter of 2008 the Board of Directors approved a plan to sell the J.
Jill business as the business was not considered strategic to ongoing operations, and in
June of 2009 the Company announced that it had entered
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24
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into an Asset Purchase Agreement to sell certain assets and liabilities of the J. Jill
business, as discussed further below.
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In June of 2008 we reduced our corporate headcount by approximately 9% across multiple
locations at all levels.
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In February of 2009 we further reduced our corporate headcount by approximately 17%.
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We have reduced the planned hours worked in our stores for 2009.
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During 2008 and 2009, we took the following actions in an effort to seek to improve our
gross margins: changed our promotional cadence to monthly markdowns rather than our
historical four clearance sales events per year, held a leaner inventory position,
concentrated on better product flow and content, and adopted a new price optimization tool.
We have decreased our planned inventory commitments for 2009.
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During 2008 we eliminated advertising in television and national print, contributing to
$14.8 million less in spending from 2007. We currently do not plan to resume advertising
in television and national print in 2009.
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For 2009, we plan to decrease catalog circulation to approximately 34 million catalogs,
down from approximately 55 million in 2008.
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In 2008, our gross capital expenditures (excluding construction allowances received from
landlords) were $44.7 million, which was down from 2007 by $12.9 million. For 2009, we
plan to further reduce our capital expenditures by approximately 40%. We currently expect
to spend approximately $27.0 million in gross capital expenditures in 2009.
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We have eliminated our matching contributions to our 401(k) plan for 2009.
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We have increased employee health care contributions in 2009.
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We have eliminated merit increases for 2009.
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We have frozen our defined benefit pension plans effective May 1, 2009.
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In February of 2009 our Board approved the indefinite suspension of our quarterly
dividend.
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Subsequent to the end of the first quarter, in June of 2009, the Company announced its plan to further reduce its corporate headcount by approximately 20%, including the elimination of open positions.
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Under our 2009 financial plan we have forecasted substantial cost savings from many of these
initiatives which are based on a number of significant assumptions and which if achieved would
improve our cash flow. Assuming that we are successful in executing these strategic and
realignment initiatives, there can be no assurance that our assumptions or expectations will prove
to be accurate or that the results achieved will be sufficient to negate the impact of the current
poor economic conditions or of our operating results.
In addition, in April of 2009 we announced that we are in preliminary discussions with Li &
Fung, a global sourcing and trading consumer product firm based in Hong Kong, to mutually explore a
potential outsourcing relationship. While we cannot assure that an agreement will be entered into,
we currently believe that a partnership with Li & Fung could potentially create significant
benefits by simplifying our sourcing processes, reducing operating expenses, potentially further
reducing our cost of goods sold by leveraging Li & Fungs extensive and diverse network of vendors,
and potentially continuing our account payable management by extending payment terms with certain
vendors and working with other vendors to maintain extended payment terms.
Because economic conditions and discretionary consumer spending have not improved in the near
term, we expect to continue to consider further realignment and rationalization initiatives and
actions to further reduce and adjust our costs relative to our sales and operating results. We
also currently plan to close approximately 16 underperforming Talbots stores in 2009, some of which
relate to store leases that expire during 2009 and some of which are pursuant to existing early
termination right provisions. We also continue to review store performance and expect to continue
to close underperforming stores. While we endeavor to negotiate the amount of remaining lease
obligations on store closings, there is no assurance we will reach acceptable negotiated lease
settlements, particularly in the current economic environment. As a result, costs to close
underperforming stores can be expected to be significant and may vary materially from forecasts.
Our 2009 financial plan also includes projected store lease expense reductions through discussions
and negotiations with our landlords, although there can be no assurance that these efforts will be
successful.
We have the following payments due in the near term under our revolving credit facilities and
term loans, unless extended:
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$28.0 million in December 2009
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$34.0 million in January 2010, and
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$18.0 million in April 2010.
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We also have third party working capital facilities, totaling $165.0 million, with commitment
expiration dates in December 2009, unless extended. Together with AEON, we plan to engage in
discussions with our lenders during 2009 to extend the terms of each of the above credit
facilities. Payment of all of the above indebtedness has been guaranteed to each lender by AEON.
25
On June 1, 2009, we paid our remaining obligation of approximately $8.2 million on our term
loan secured by our Tilton, NH facility.
On June 7, 2009, the Company entered into an Asset Purchase Agreement (the Purchase
Agreement), with Jill Acquisition LLC (the Purchaser), pursuant to which the Purchaser will
acquire and assume from the Company certain assets and liabilities relating to the J. Jill brand
business of the Company (the Transaction) for a purchase
price of $75.0 million, subject to certain
adjustments as provided in the Purchase Agreement including an adjustment based on targeted closing
date working capital. The Transaction is subject to customary closing conditions and is currently
expected to close in the second fiscal quarter of 2009.
In connection with the Transaction, the Company currently plans to close approximately 75 J.
Jill brand stores which are not part of the proposed sale of the J. Jill business under the
Purchase Agreement. In connection with the planned closing of the 75 J. Jill stores, the Company
expects to record a pre-tax cash charge of approximately $0.8 million related to severance and
related severance benefits. Total material cash expenditures to settle store lease liabilities will
depend upon the outcome of negotiations with third parties. The Company will also record a
liability related to the remaining contingent obligation on liabilities being assigned to the
Purchaser as part of the Transaction, including those related to leases, assumed contracts and
other obligations transferred as part of the Transaction, as well as
for any remaining office lease
liability, potential inventory liquidation costs related to the above store closings, and other
costs and charges related to the J. Jill business.
Based on our current assumptions and forecast for 2009, we believe that we have developed a
fiscal 2009 financial plan that, if successfully executed, will provide sufficient liquidity to
finance our anticipated working capital and other currently expected non-debt maturity cash needs
for the next twelve months. While we expect to experience significant short term working capital
shortfalls in 2009, we believe that our $150.0 million secured revolving loan facility entered into
with AEON, together with our April 2009 financial support letters from AEON referred to above as
well as achieving our targeted cost reduction and cash flow improvements for fiscal 2009, should
address this shortfall. Due to the uncertainty in economic conditions, there can be no assurance
that the current economic downturn and our sales trends and operating results may not continue
longer than we expect or may not take longer to recover than we have planned or that we may not
achieve such targeted cost savings and cash improvement goals, and as a result there can be no certainty
our cash needs may not be greater than we anticipate or have planned for. Our ability to meet cash
needs and to satisfy our operating and other non-operating costs will depend upon our future
operating performance as well as general economic conditions. Additional matters that could impact
our liquidity include any further deterioration in the global economy, lower than expected sales,
unforeseen cash or operating requirements, and any inability to access any necessary additional
financing.
We will need financing or other liquidity sources to replace or refinance our existing working
capital, revolving credit and term loan facilities which are due to expire at various dates in 2009
and 2010, unless further extended or refinanced by the existing lenders or by AEON pursuant to its
refinancing support letter. We will also need to replace or refinance the AEON secured revolving
loan facility which matures in 2010 as well as any other financing provided by Aeon under its
refinancing support letter. Our ability to obtain additional financing depends upon many factors,
including our financial projections and our prospects and creditworthiness, as well as external
economic conditions and general liquidity in the credit markets. There can be no assurance that any
of these refinancing efforts will be successful or if successful will be sufficient in the amounts
or at the time needed.
Debt Facilities
We currently have working capital line of credit facilities with four banks with maximum
available short-term capacity of $165.0 million in the aggregate. These lines are committed
through December of 2009. During the first quarter of 2009, our average level of borrowings
outstanding on these lines was $153.6 million. In the fourth quarter of 2008, as a result of the
Companys borrowing and repayment patterns, the maturities on the lines are no longer short term in
nature and accordingly have been shown gross on the statement of cash flows for the first quarter
of 2009. Since November of 2008, we have been fully drawn on our availability under our working
capital lines. A portion of our working capital lines is at times not available for borrowing as
it is allocated to letters of credit for merchandise and other vendors. We expect that we will
continue to be fully drawn on these working capital line of credit facilities through all of fiscal
2009. Interest on the line of credit facilities is at a variable rate based on the lenders cost
of funds plus an amount not lower than 0.625% and not higher than 1.3%. As of May 2, 2009, the
weighted average interest rate on these working capital borrowings outstanding was 2.4%. During
fiscal 2009, we will pay interest on our working capital borrowings as it comes due, generally in
interest periods that range from one to three months. In February of 2009 AEON guaranteed each of
these working capital facilities.
26
In April of 2009 we entered into a $150.0 million secured revolving loan facility with AEON.
The facility matures upon the earlier of (i) April 17, 2010 or (ii) the consummation of one or more
securitization programs or structured loans by the Company or its subsidiaries in an aggregate
equivalent principal amount to the revolving loan commitment amount, approved in advance by AEON as
lender and in form and substance satisfactory to the lender. Amounts may be borrowed, repaid, and
reborrowed under the facility and may be used for working capital and other general corporate
purposes. Interest on outstanding borrowings is at a variable rate at one month LIBOR plus 6.0%
payable monthly in arrears. The facility contains an upfront fee of 1.0% of the commitment prior
to borrowing. The facility is secured by our Talbots charge card accounts receivable, our Hingham,
Massachusetts owned corporate headquarters, and our Lakeville, Massachusetts owned distribution
facility. We have agreed to keep the mortgaged properties in good repair, reasonable wear and tear
expected, and will ensure that at least $135.0 million of Talbots charge card receivables are owed
to us and that at least 90% of such Talbots charge card receivables are eligible receivables as
defined in the agreement, arise in the ordinary course of business, and are owed free and clear of
all liens, except permitted liens, measured as of the last day of any calendar month. As of May 2,
2009, we had not borrowed any funds under this facility.
In February of 2006, we entered into a $400.0 million bridge loan agreement in connection with
our acquisition of J. Jill. In July of 2006, the bridge loan was converted into a term loan (the
Acquisition Debt). Pursuant to the Acquisition Debt agreement, we borrowed $400.0 million to be
repaid no later than July of 2011. Interest on the Acquisition Debt was LIBOR plus 0.35%, and the
principal was due to be repaid in quarterly installments of $20.0 million through July of 2011. In
February of 2009, we entered into a $200.0 million term loan agreement with AEON. The proceeds
from the loan were used in February of 2009 to repay the remaining $200.0 million balance
outstanding on the Acquisition Debt. The $200.0 million term loan with AEON matures in February of
2012. We do not expect to repay any outstanding principal under this facility during 2009, except
as would be required under the agreement for any excess cash flows, net proceeds from the sale of J
Jill or other assets, or non-related party debt or equity financings, in each case, at the
prepayment percentage levels as defined in the agreement. Interest on the $200.0 million AEON term
loan is at a variable rate equal to six month LIBOR plus 6.0%. Interest is due semi-annually, in
August and February, in arrears. The loan does not contain any financial ratio covenants.
In July of 2008 we entered into a $50.0 million unsecured subordinated working capital term
loan debt facility with our majority shareholder, AEON (U.S.A.). We borrowed $20.0 million on this
facility in January of 2009 and we borrowed the remaining $30.0 million in February of 2009. These
borrowings were utilized for working capital needs. We do not expect to repay any amounts on this
facility during 2009. The debt facility matures in January of 2012. Interest on outstanding
principal under the facility is at a variable rate equal to three-month LIBOR plus 5.0%. As of May
2, 2009, the interest rate on this facility was 6.2%. During 2009, we will pay interest on the
$50.0 million as it comes due, which will be in quarterly increments. In March of 2009, the
agreement was amended to remove the financial ratio covenants. We expect to be fully borrowed on
this facility in 2009.
We have revolving credit facilities with two banks with outstanding borrowings of $52.0
million in the aggregate. Of the $52.0 million, $34.0 million is due in January 2010, and $18.0
million is due in April 2010. Interest on the revolving credit facilities are at variable rates of
LIBOR plus .625% for two $18.0 million loans and Fed Funds plus 0.75% for a $16.0 million loan, and
are set at the Companys option, for periods of one, three, or six months payable in arrears. In
April of 2009 AEON guaranteed each of these revolving credit facilities. We expect to engage in
discussions with our lenders during 2009 to extend the maturity dates of these facilities, although
there can be no assurance that this will be achieved.
We have $48.0 million in term loans outstanding with two banks: a $28.0 million loan which
matures in December 2009 and a $20.0 million loan which matures in April 2012. Interest on the
$28.0 million loan is payable monthly and the borrowing rate is set monthly at a rate determined by
the lender to be its effective cost of funds plus 1%. At May 2,
2009 the borrowing rate was 1.5%.
Interest on the $20.0 million 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, we assumed a real estate loan (the Tilton Facility
Loan). Payments of principal and interest on the Tilton Facility Loan were due monthly with a
balloon payment of $8.2 million that was originally due on April 1, 2009. In April of 2009, we
extended the maturity date of the loan to June 1, 2009. The interest rate on the Tilton Facility
Loan was fixed at 7.3% per annum. The Tilton Facility Loan was paid in full on June 1, 2009.
All of our merchandise is manufactured to our specifications by third-party suppliers and
intermediary vendors, most of whom are located outside the United States. Historically, a
significant portion of our merchandise purchases had been pursuant to and secured by letter of
credit arrangements in favor of our foreign suppliers and vendors and their credit sources.
Beginning more than a year ago we moved substantially all of our merchandise vendors to open
account purchase terms with payments approximately 45 days after shipment. In order to more
effectively manage our accounts payable and cash positions due to our sales trends and cash needs,
during the second half of 2008 and into 2009 we extended many of our accounts payable terms to
approximately 60 days. This has improved our cash position and accounts payable management
27
and we currently intend to continue to closely monitor and manage our accounts payable and
cash management going forward, but this has increased pressure from vendors for payment in
accordance with terms. While these extended payment terms have not to date resulted in material
interruption in merchandise supply, there can be no assurance that one or more of our vendors may
not slow or cease shipments or require or condition their sale or shipment of merchandise on more
stringent payment terms.
Cash Flows
We finance our working capital needs, operating costs, capital expenditures, funding for our
strategic initiatives and restructurings, and debt and interest payment requirements through cash
generated by operations, access to working capital and other credit facilities, and credit from our
vendors under open account purchases. The substantial deterioration in the U.S. economy and decline
in consumer discretionary spending had a significant impact on our sales, operating profits and
cash flows during 2008 and the first quarter of 2009.
The
following is a summary of our cash flows from continuing operations (in thousands) for
the thirteen weeks ended May 2, 2009 and May 3, 2008:
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May 2,
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May 3,
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2009
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2008
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Net cash used in operating activities
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$
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(13,753
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$
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(24,937
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)
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Net cash used in investing activities
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(7,876
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)
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(6,406
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Net cash provided by financing activities
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37,467
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71,185
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Cash (used in) operating activities
Our primary source of operating cash flows is the sale of merchandise to customers, while the
primary use of cash in operations is to fund the purchase of our merchandise inventories. Cash
used in operating activities was $13.8 million during the first quarter of 2009 compared to cash
used in operating activities of $24.9 million during the first quarter of 2008, a decrease in cash
usage of $11.1 million. This decrease in cash used in operating activities was primarily due to
changes in accounts payable levels. In the first quarter of 2008, our accounts payable levels
declined by approximately $72.3 million from our year-end levels. In the first quarter of 2009,
our accounts payable levels increased by approximately $14.9 million. This change in accounts
payable levels was driven by our continued management of our accounts payable via extension of
timing of payments to our vendors. Also, in the first quarter of 2008, we borrowed $98.6 million
under our $165.0 million working capital facilities that allowed us to bring down our payable
levels. In the first quarter of 2009, we borrowed $8.0 million under our $165.0 million working
capital lines, and we borrowed $30.0 million under our AEON (U.S.A.) $50.0 million facility, which
served to partially fund our losses and did not allow for declines in accounts payable levels. In
the first quarter of 2009, we did not borrow on our AEON $150.0 million facility, although we did
have the capacity to do so. Partially offsetting the improvement in operating cash flows that was
driven by accounts payable levels was our loss from continuing operations of $18.8 million during
the first quarter of 2009 which compared to income from continuing operations for the first quarter
of 2008 of $18.5 million. Our continued weak sales performance during the first quarter of 2009
led to our substantial first quarter loss.
Cash used in investing activities
Cash flows used in investing activities is primarily used for purchases of property and
equipment. Cash used in investing activities was $7.9 million in the first quarter of 2009
compared to $6.4 million in the first quarter of 2008, an increase of $1.5 million. During the
first quarter of 2008 we received proceeds of $2.5 million from the disposal of property and
equipment. On a gross basis, cash used for purchases of property and equipment during the first
quarter of 2009 was $7.9 million compared to cash used of $9.0 million during the first quarter of
2008. This $1.1 million decline in expenditures was a result of our planned decline in spending on
new store openings, store renovations, and information technology due to the uncertain economic
environment of late 2008 continuing into the first quarter of 2009. In the first quarter of 2009,
we opened one new Talbots brand store, and closed two others. In an effort to further improve
liquidity, we have decided to further reduce our capital spending in 2009. We expect to spend
approximately $22.5 million in net capital expenditures in fiscal 2009 primarily to support the
expected rollout of our new 12 upscale outlet stores which commenced opening in May of 2009, a
platform refresh of our e-commerce site, and renovation and refurbishment of certain of our
existing store bases. This would reflect a decrease of 46% in net capital expenditures from fiscal
year 2008 expenditures.
28
Cash provided by financing activities
Cash provided by financing activities was $37.5 million during the first quarter of 2009
compared to cash provided by financing activities of $71.2 million during the first quarter of
2008, a decrease of $33.7 million. Our primary source of funds during the first quarter of 2008 was
proceeds from our short-term working capital facilities. During the first quarter of 2008, we
borrowed $98.6 million under our $165.0 million working capital facilities. During the first
quarter of 2009, we borrowed $8.0 million under our $165.0 working capital facilities and we
borrowed $30.0 million under our AEON (U.S.A.) $50.0 million facility. These borrowings partially
funded our losses. Also during the first quarter of 2009, we paid down the remaining balance of
approximately $200.0 million on our Acquisition Debt which was fully offset with proceeds received
from the $200.0 million term loan facility from AEON. In February of 2009 our Board of Directors
approved the suspension of our quarterly dividend payment. In the first quarter of 2008 we paid
$7.2 million in dividends. The dividends were paid at a rate of $0.13 per share.
Critical Accounting Policies
In the Companys 2008 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. We have reviewed our policies and determined that these remain
critical accounting policies for the quarter ended May 2, 2009.
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 2008 Annual Report on Form 10-K.
There were no material changes to our contractual obligations during the first quarter of 2009.
Recently Adopted Accounting Pronouncements
In September 2006, the 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. The Company has adopted SFAS No. 157 and all of
its provisions as of May 2, 2009. See Note 18, Fair Value Measurements, of our 2008 Annual Report
on Form 10-K for further discussion.
In June 2008, the FASB issued FSP No. EITF 03-6-1,
Determining whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities
(FSP 03-6-1). FSP 03-6-1 clarifies
that unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and are to be included
in the computation of earnings per share under the two-class method described in SFAS No. 128,
Earnings Per Share. FSP 03-6-1 is effective for fiscal years beginning after December 15, 2008.
The adoption of this standard did not impact the loss per share
calculations for the quarter ended May 2, 2009. Certain of the
Companys unvested stock awards have dividend participation
rights and may impact our basic earnings per share calculations in
periods that the Company reports earnings, which is not expected to
have a material impact.
Recently Issued Accounting Pronouncements
In December 2008, the FASB issued FSP Financial Accounting Standard (FAS) No. 132(R)-1,
Employers Disclosures about Postretirement Benefit Plan Assets
(FSP FAS No. 132(R)-1) which
amends SFAS No. 132 (Revised 2003)
Employers Disclosures about Pension and Other Postretirement
Benefits
an Amendment of FASB Statements No. 87, 88, and 106 (SFAS No. 132 (R)). FSP FAS No.
132 (R)-1 requires more detailed disclosures about the assets of a defined benefit pension or other
postretirement plan and is effective for fiscal years ending after December 15, 2009. The Company
is in the process of evaluating the impact, if any, FSP FAS No. 132 (R)-1 will on the Companys
consolidated financial statements.
29
In April 2009, the FASB issued three staff positions intended to provide additional
application guidance and enhance disclosures regarding fair value measurements and impairments of
debt securities. The first staff position, FSP No. FAS 157-4,
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
, provides guidelines for determining fair value
measurements consistently with the principles presented in SFAS No. 157 when the volume and level
of activity for the asset or liability has significantly decreased, and provides guidance on
identifying circumstances that indicate that a transaction is not orderly. The second staff
position, FSP No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial
Instruments
, expands the frequency of fair value disclosures for publicly traded entities about the
fair value of certain financial instruments not recognized at fair value in the statement of
financial position to include interim reporting periods. The third staff position, FSP No. FAS
115-2 and 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
, amends the
other-than-temporary impairment guidance for debt securities, and modifies the presentation and
disclosure requirements for all other-than-temporary impairments. The staff positions are effective
for interim and annual reporting periods ending after June 15, 2009 with early adoption permitted
of all three staff positions together. We did not early adopt these FSPs. We do not anticipate that
the adoption of these staff positions will have a material effect on our financial position or
results of operations, though our assessment is ongoing.
30
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, should, potential or similar statements or variations of such terms. All of the
information concerning our future financial performance results or conditions, future access to
credit facilities, future merchandise purchases, future cash flow and 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, are not guarantees of future results or performance, and involve substantial
risks and uncertainty, assumptions and projections concerning our internal plan, including
assumptions and projections concerning our regular-price and markdown selling, operating cash
flows, liquidity, and funds available under our credit facilities for all forward periods. Our
business and our forward-looking statements involve substantial known and unknown risks and
uncertainties, including the following risks:
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the material impact on our business, continuing operations and financial results
of the significant deterioration in the U.S. economic environment, including
continued substantial negative impact on consumer discretionary spending and
consumer confidence, substantial loss of household wealth and savings, the
disruption and significant tightening in the U.S. credit and lending markets, the
expectations of deepening and long-term recessionary pressures, significantly
increasing unemployment levels, and fluctuations in the value of the U.S. dollar,
all of which continue to exert significant pressure on our business, continuing
operations, liquidity and results of operations and which, if such macro-economic
conditions continue or worsen, can be expected to continue to have an increasing
impact on our business, continuing operations, liquidity, and results of operations;
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our ability to access on satisfactory terms or at all adequate additional
financing and sources of liquidity necessary to fund our business and continuing
operations and to obtain further increases in our credit facilities as may be needed
from time to time;
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satisfaction of all conditions to funding under our new secured credit facility;
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our ability to generate sufficient liquidity whether through additional debt
financing or other liquidity generating transactions to meet our near term and
longer term cash needs;
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consummation of any asset securitization, asset collateralization or other
similar financing transaction or transactions;
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consummation of any sourcing transaction;
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ability to obtain extensions of commitment expiration dates and maturity dates of
our existing credit facilities;
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satisfaction of all borrowing conditions under our credit facilities including
accuracy of all representations and warranties, no events of default, absence of
material adverse effect or change, and all other borrowing conditions;
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ability to successfully execute, fund, and achieve the benefits from our
strategic initiatives including supply chain initiatives, 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;
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future store closings and success of and necessary funding for closing
underperforming stores;
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ability to reduce spending as needed;
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ability to achieve our 2009 financial plan for operating results, working capital
and cash flows;
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any negative publicity concerning the specialty retail business in general or our
business in particular;
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risk of ability to continue to purchase merchandise on open account purchase
terms at existing or future expected levels and risks and uncertainties in
connection with any need to source merchandise from alternate vendors;
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any disruption in our supply of merchandise;
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our decision concerning, and the risks and uncertainties associated with, the
decision to pursue a sale or disposition of the J. Jill brand business, including
the timing and consummation;
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the risk that estimated or anticipated costs, charges and liabilities to settle
and complete the exit from and disposal of the J. Jill brand business, including
both retained obligations and contingent risk for assigned obligations, may differ
from or be greater than anticipated;
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ability to accurately estimate and forecast future regular-price and markdown
selling, operating cash flows and other future financial results and financial
position;
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the success and customer acceptance of our new merchandise offerings including
our spring, summer and other seasonal fashions and merchandise offerings;
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risk of impairment of goodwill and other intangible and long-lived assets;
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the risk of continued compliance with NYSE continued listing conditions,
including thirty day average $1 trading price and $75 million market capitalization
and stockholders equity, and other continued listing conditions; and
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the impact of the deterioration in investment return and net asset values in the
capital markets and the impact on increased expense and funding for pension and
other postretirement obligations.
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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. An
occurrence of or any material adverse change in one or more of the risk factors or risks and
uncertainties referred to in this Report could materially and adversely affect our continuing
operations and our future financial results, cash flows, prospects, and liquidity. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our financial instruments and in our financial position represents
the potential loss arising from adverse changes in interest rates. We do not enter into financial
instruments for trading purposes.
As of May 2, 2009, we had outstanding variable rate borrowings of $200.0 million under our
$200.0 million term loan facility with AEON, $52.0 million under our revolving credit facilities,
$48.0 million under term loans with other third party lenders, $50 million under a term loan from
AEON (U.S.A.), and $156.5 million under our $165.0 million working capital facilities. The impact
of a hypothetical 10% adverse change in interest rates for this variable rate debt would have
caused an additional interest expense charge of $0.5 million for the quarter ended May 2, 2009.
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 21 stores in Canada as of May 2, 2009. We
believe that our foreign currency translation risk is immaterial, 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.
32
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 of 1934, as
amended is recorded, processed, summarized, and reported within the time periods specified in the
SECs 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 May 2, 2009. Management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily applies its judgment
in evaluating the cost-benefit relationship of possible controls and procedures. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were not effective at the reasonable assurance level as of May
2, 2009 because of the existence of the material weakness identified during the Companys assessment of internal
control over financial reporting as of January 31, 2009 and reported in our fiscal 2008 Annual
Report on Form 10-K.
We plan to remediate this material weakness through the following actions:
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Expand training for tax, accounting and finance personnel to further develop the knowledge base
resident within the Company and ensure the adequacy of qualified, trained staff to address complex,
non routine transactions;
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Further enhance procedures to help ensure that the proper accounting for all complex, non routine
transactions is researched, detailed in memoranda and reviewed by senior management prior to
recording;
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Strengthen the communication and collaboration amongst the various departments within the Company; and
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Supplement the Companys internal resources with external advisors with specialized expertise as non
routine or complex issues arise.
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Accordingly,
this material weakness is not remediated as of May 2, 2009. No material weakness will be
considered remediated until the remedial procedures have operated for an appropriate period, have
been tested, and management has concluded that they are operating effectively.
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 May 2, 2009 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 2008 Annual Report on Form
10-K, which could materially affect our business, financial position, or future results. The risks
described in our 2008 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 2008 Annual Report on Form 10-K.
33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
A summary of our repurchase activity under certain equity programs for the thirteen weeks
ended May 2, 2009 is set forth below:
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Approximate Dollar
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Value of Shares that
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Total Number
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Average Price
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may yet be Purchased
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of Shares
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Paid per
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under the Equity
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Period
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Purchased (1)
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Share
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Award Programs (2)
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February 1, 2009 through February 28, 2009
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73,775
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$
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0.01
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$
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18,683
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March 1, 2009 through April 4, 2009
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123,099
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0.39
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16,733
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April 5, 2009 through May 2, 2009
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157,766
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1.65
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16,220
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Total
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354,640
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$
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0.87
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$
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16,220
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1.
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We repurchased 236,025 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. In
addition to these shares, we also repurchased 4,000 shares from a certain employee who
voluntarily forfeited a stock award, at an acquisition price of $0.01 per share.
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We also repurchased 114,615 shares of common stock from certain employees to cover tax
withholding obligations from the vesting of stock, at a weighted average acquisition price
of $2.67 per share.
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2.
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As of May 2, 2009, there were 1,622,014 shares of nonvested stock that were subject to
buyback at $0.01 per share, or $16,220 in the aggregate, that we have the option to repurchase
if employment is terminated prior to vesting.
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34
Item 6. Exhibits
.
10.1
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Commitment Letter and Summary of Proposed $200,000,000 Loan Facility Agreement between The
Talbots, Inc. (as Borrower) and AEON Co., Ltd. (as Lender), dated February 5, 2009.(1)
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10.2
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Term Loan Facility Agreement between The Talbots, Inc. and AEON Co., Ltd., dated as of
February 25, 2009.(2)
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10.3
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Revolving Credit Agreement, dated as of February 26, 2009, between The Talbots, Inc. and The
Bank of Tokyo-Mitsubishi
UFJ,
Ltd.(2)
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10.4
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Amendment, dated as of February 5, 2009, to Revolving Credit Agreement between The Talbots,
Inc. and Sumitomo Mitsui Banking Corporation.(3)
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10.5
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First Amendment, dated as of March 12, 2009, to the Term Loan Agreement between The Talbots,
Inc. and AEON (U.S.A.), Inc., dated as of July 16, 2008.(4)
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10.6
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Secured Revolving Credit Agreement dated as of April 10, 2009 between Talbots and Aeon Co., Ltd.(5)
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10.7
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Form of Option Agreement pursuant to The Talbots, Inc. Restated Directors Stock Plan.(6)
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10.8
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Director Compensation Arrangements, adopted September 25, 2008.(6)
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10.9
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Change in Control Agreement between The Talbots, Inc. and Gregory I. Poole, dated June 5,
2008 (filed to correct clerical error in previously filed agreement).(6)
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10.10
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Letter Agreement between The Talbots, Inc. and Michelle M. Mandell, dated April 10, 2009.(6)
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10.11
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Offer Letter between The Talbots, Inc. and Benedetta I. Casamento, dated March 6, 2009.(6)
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10.12
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Severance Agreement between The Talbots, Inc. and Benedetta I. Casamento, dated April 6, 2009.(6)
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10.13
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Change in Control Agreement between The Talbots, Inc. and Benedetta I. Casamento, dated April 6, 2009.(6)
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10.14
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Support Letters from Aeon Co., Ltd., dated April 9, 2009.(6)
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10.15
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Short Term Loan Agreement by and between The Talbots, Inc. and The Norinchukin Bank, dated
as of April 17, 2009.(7)
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10.16
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Amendments to Compensation Arrangement of Richard T. OConnell, Jr. effective April 30,
2009.(8)
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31.1
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Certification of Trudy F. Sullivan, President and Chief Executive Officer of the Company,
pursuant to Securities Exchange Act Rule 13a-14(a).(9)
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31.2
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Certification of Michael Scarpa, Chief Operating Officer, Chief Financial Officer and
Treasurer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a).(9)
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32.1
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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 Michael Scarpa, Chief Operating Officer, Chief Financial Officer and Treasurer of
the Company.(9)
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(1)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on February 5,
2009.
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(2)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on March 2, 2009.
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(3)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on March 9, 2009.
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(4)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on March 18,
2009.
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(5)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on April 14,
2009.
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(6)
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Incorporated by reference to the Companys Annual Report on Form 10-K filed April 16, 2009.
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(7)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on April 23,
2009.
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(8)
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Incorporated by reference to the Companys Current Report on Form 8-K filed on May 6, 2009.
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(9)
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Filed with this Form 10-Q.
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35
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: June 11, 2009
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THE TALBOTS, INC.
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By
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/s/ Michael Scarpa
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Michael Scarpa
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Chief Operating Officer
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Chief Financial Officer and Treasurer
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36
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